2020 (12) TMI 731 - AT - Income Tax

Capital gain on Transfer of share - whether the appellant company has transferred those shares as part of O P Jindal Group family settlement? - gift of share - HELD THAT - As the assessee has gifted the share, there is no accrual of any revenue to the assessee. According to accounting standard (9) of Revenue Recognition, Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. As there is no sale of security by the assessee, there is not any inflow of cash, receivables or other consideration, there is no question of accrual of any consideration to the assessee. Even otherwise we hold that according to the Section 122 of The Transfer Of Property Act, 1882 there is an absence of consideration in case of a gift. It is an undisputed fact that the assessee being the absolute owner of the shares gifted , had full enjoyment rights including to alienate, discard and even demolish, unless prohibited by some statutory provisions, it is within the powers of the assessee to make gift at its free will. Further the shares were credited in the books of account of the donor. The gift is also authorised by articles of association, approved by Board of Directors and Shareholders. We have carefully considered the facts of that case and found that those facts are distinct with the case before us. In that particular case there was no addition in the hands of the appellant donee company but the appeal was merely against a direction by the learned assessing officer to tax the above sum in the hands of the beneficiary by applying the provisions of Section 2 (24) (iv) of the income tax act in the hands of one Ms Arti Jindal while assessing the case of the appellant company. The only grievance in that appeal was that despite no addition was made in the hands of that appellant company, the learned assessing officer s jurisdiction was challenged wherein it has been held that benefit arose to the shareholder of the appellant company by invoking the above provisions of the income tax act. Here we do not have any issue about the taxability of sum in the hands of the donee companies. In fact those have been assessed and there is no addition in the hands of those companies, even otherwise we are not concerned with that /and issue before us is only about taxation of gift in the hands of the donor company. In the present case what have been transferred are stock in trade and not a capital asset. Further, in the present case there is a provision in the articles of association of making the gift thus, it meets the provisions of the companies act also. As asked the learned departmental representative to specifically show us any provision in the Income tax Act which provides for taxation of gift of stock in trade in the hand sof the Donor by imputing market value. No such specific references to section were made. No such provision was shown to us by the ld DR. The issue before us is prior to insertion of Chapter X- A in The Income Tax Act. Gift made by a corporate entity, appellant to 4 different corporate entities, in absence of any consideration, no business income can be charged to tax in the hands of Donor appellant. Accordingly ground number 3 and 4 of the appeal of the assessee is allowed.

Issues Involved:
1. Addition of ?219,55,29,009/- as business income on transfer of shares.
2. Violation of principles of natural justice by not affording adequate opportunity of being heard.
3. Validity of the gift of shares as part of internal family realignment.
4. Rejection of books of accounts by the assessing officer.
5. Levy of interest under section 234B of the Income Tax Act.

Detailed Analysis:

1. Addition of ?219,55,29,009/- as Business Income on Transfer of Shares:
The assessee, Manjula Finance Ltd, contested the addition of ?219,55,29,009/- made by the assessing officer (AO) as business income from the transfer of shares held in O.P. Jindal Group companies. The AO argued that the transfer of shares, claimed as gifts, was not voluntary and lacked consideration, thus constituting business income. The AO noted that the shares were transferred as part of a family realignment, which he did not consider a valid gift. Consequently, he assessed the market value of these shares as business income.

2. Violation of Principles of Natural Justice:
The assessee argued that the CIT(A) dismissed their appeal without providing an adequate opportunity to be heard, violating the principles of natural justice. However, the tribunal did not find substantial arguments or evidence to support this claim, leading to the dismissal of this ground.

3. Validity of the Gift of Shares as Part of Internal Family Realignment:
The assessee claimed that the transfer of shares was a gift made as part of the internal family realignment of the O.P. Jindal Group. The tribunal examined whether such a gift could be considered valid under Section 122 of the Transfer of Property Act, which requires the absence of consideration, voluntary action, and acceptance by the donee. The tribunal noted that the corporate entities involved could not be considered part of a family for tax purposes. Despite this, the tribunal found that the transfer met the criteria for a valid gift, as it was voluntary, without consideration, and accepted by the donee companies. The tribunal also referred to the amendment in the articles of association of the assessee company, allowing for the making of gifts, and noted that no real income accrued from the transfer, as required by accounting standards.

4. Rejection of Books of Accounts by the Assessing Officer:
The AO rejected the books of accounts of the assessee, arguing that the business income from the transfer of shares was not disclosed. The tribunal found no basis for rejecting the books of accounts, as the transfer was a gift and did not result in any real income. The tribunal emphasized that only real income can be taxed, and hypothetical income cannot be considered.

5. Levy of Interest under Section 234B of the Income Tax Act:
The tribunal noted that the levy of interest under Section 234B is consequential and dependent on the outcome of the main issues. Since the tribunal decided in favor of the assessee on the primary grounds, this ground was dismissed as it became irrelevant.

Conclusion:
The tribunal concluded that the gift of shares by the assessee to other corporate entities was valid and did not constitute business income. The addition of ?219,55,29,009/- as business income was reversed, and the rejection of the books of accounts was not justified. The appeal was partly allowed, with the tribunal dismissing the grounds related to the violation of natural justice and the levy of interest under Section 234B.

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