2024 (3) TMI 732 - HC - Income Tax

Reopening of assessment - shares were transferred by way of a gift - Admittedly is respondents case that petitioner had transferred those shares without consideration - Whether transfer of shares by way of gift is an exempt transfer under Section 47(iii) and accordingly, not liable to capital gains as defined u/s 45 of the Act? - HELD THAT - We are conscious that in this case return was accepted u/s 143(1) of the Act. Even in that case, the principle requirement that the AO has reason to believe that income chargeable to tax had escaped assessment would still survive. Though this formation of belief by the AO must be prima facie and at the stage when the Court is testing validity of such a notice, it would not be necessary for the Assessing Officer to conclusively establish that the income chargeable to tax had escaped assessment, for various reasons we are convinced that the reasons for reopening lack validity. In this case, Section 45 read with Section 47 read with Section 48 of the Act makes it clear that the AO could not have any tangible material to form a belief that income has escaped assessment. On scrutiny of the statutory provisions as the transaction in question does not invite any tax liability, we cannot accept revenue submission that there is some tangible material to form a belief that there is an escapement of income. Section 47 (1)(iii) of the Act, which deals with transactions not regarded as transfer, expressly provides nothing contained in Section 45 shall apply to any transfer of a capital asset under a gift or will or an irrevocable trust. The case in hand, therefore, would be governed by the main body of sub-clause (iii) of Section 47 of the Act. Therefore, even if there is a transfer of a capital asset under a gift, which admittedly in the case herein, it shall not amount to a transfer under Section 45 of the Act. If it does not amount to a transfer under Section 45 of the Act, no capital gains will be payable because Section 45 is the only taxing provision for capital gains. A gift is commonly known as voluntary transfer of property by one to another without any consideration. A gift does not require a consideration and if there is a consideration for the transaction, it is not a gift. Since in the reason to believe it is admitted that shares were transferred by assessee to NCPL without consideration, certainly it is a gift. Infact it is not even respondents case that is it not a gift. Mr. Sharma submitted, as an after thought, that assessee being a Trust it can be reasonably presumed that the transfer was for a consideration because anything a Trust does is for the benefit of its beneficiaries. It is not the case of the Revenue in the reasons to believe or in the order disposing objections or even in the affidavit in reply. Therefore, this submission cannot be even considered. We cannot proceed on hypothesis and deal with such presumptuous argument. Moreover, if the transfer is not valid, the property still remains with the Trust and in such a situation, there can be no capital gain. Decided in favour of assessee.

Issues Involved:

1. Legality and validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Reopening of assessment for Assessment Year 2010-2011.
3. Transfer of shares by way of gift and its tax implications under Section 45, Section 47(iii), and Section 48 of the Act.
4. Jurisdictional preconditions for initiating proceedings under Section 148.
5. Consideration of market value as the consideration for computing capital gains.

Summary:

1. Legality and Validity of Notice under Section 148:
The petitioner challenged the notice dated 12th March 2015 issued under Section 148 of the Income Tax Act, 1961, seeking to reopen the assessment for Assessment Year 2010-2011. The notice alleged that there was reason to believe that income had escaped assessment due to the transfer of shares without consideration.

2. Reopening of Assessment:
The petitioner argued that no income accrues from the transfer of shares by way of gift, as such transfers are exempt under Section 47(iii) and not liable to capital gains tax under Section 45. The petitioner also cited a previous court ruling in a similar case involving a group company, Nivi Trading Limited, where reopening proceedings were quashed.

3. Transfer of Shares by Way of Gift:
The petitioner had transferred shares of United Phosphorus Limited and Uniphos Enterprises Limited to Nerka Chemicals Private Limited by way of a gift without consideration. The petitioner argued that such a transfer is exempt from capital gains tax under Section 47(iii) of the Act.

4. Jurisdictional Preconditions:
The petitioner contended that the jurisdictional preconditions for initiating proceedings under Section 148 were not met, as there was no reason to believe that income had escaped assessment. The petitioner emphasized that the transfer of shares without consideration does not result in any taxable income.

5. Consideration of Market Value:
The petitioner argued that there is no provision in the Act enabling the Assessing Officer to adopt the market value as the consideration for the transfer of shares for computing capital gains. The court noted that the reasons recorded for issuing the notice did not indicate any tangible material to form a belief that income had escaped assessment.

Court's Observations:
The court observed that Section 45 read with Section 47 and Section 48 of the Act makes it clear that the transfer of shares by way of gift does not attract capital gains tax. The court also noted that the Assessing Officer could not have any tangible material to form a belief that income had escaped assessment, as the transaction in question does not invite any tax liability.

Judgment:
The court quashed the notice dated 12th March 2015 issued under Section 148 and the order dated 18th August 2015 rejecting the petitioner's objections. The court ruled that the reasons for reopening the assessment lacked validity and that the transfer of shares by way of gift is exempt from capital gains tax under Section 47(iii) of the Act. The Rule issued on 11th February 2016 was made absolute in terms of prayer clause (a).

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