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Tax Publishers Manjula Finance Ltd. v. ITO [I.T.A. No. 3727/Del/2018, dt. 18-12-2020] : 2020 TaxPub(DT) 5487 (Del-Trib) Shares held as stock-in-trade and gifted to another corporate -- Taxability at fair value as business income -- Whether corporate can make gift -- Corporate can it be part of family settlement *Facts:* Assessee was a part of OP Jindal group of companies more so an investment and a financing entity. They had applied for an NBFC licence to RBI which was rejected. Consequentially whatever investment in shares of the group companies they held was confirmed as stock-in-trade. This OP Jindal group made a family settlement to rearrange the affairs amongst the 4 brothers of the family. Arising out of this family settlement the shares held in the group companies by the assessee were gifted to 4 other newly formed companies. There was no provision to gift shares in the articles of association of the assessee and accordingly prior to the gifting the articles were amended. The assessee claimed that this was gifting of shares which was held as stock-in-trade and since there was no consideration and it was part of the family settlement there cannot be any tax implications. Alternatively, they took a plea that the shares though were held as stock-in-trade prior to gifting assumed the character of investments; a capital asset and since it was a gifting of a capital asset it fell in the scope of section 47(iii) and thus was exempt. There being no consideration no imputed/deemed capital gains cannot be also taxed as computation section also would fail. The assessing officer noting that no such family settlement agreement was produced held that the market value of the shares gifted was Rs. 230 crores and their cost in books was 11 crores thus held that this gain was not shown in the books thus the books are worthy of rejection and thus taxed and assessed the difference of Rs. 219 crores as business income. On appeal the Commissioner (Appeals) upheld the same. On further appeal by the assessee -- Held in favour of the assessee that there was no income which arose in the hands of the assessee. The following key takeaway points make it an one off decision -- 1. A corporate can gift this is no longer res integra. There was a valid gift by the assessee in the realm of section 122 of Transfer of Property Act, 1882. The requirements of the gift have been well met by the company viz. (1) the absence of consideration, (2) the existence of donor, (3) the existence of donee, (4) to be voluntary, (5) the subject matter, (6) the transfer, (7) the acceptance. 2. A company cannot be part of a family settlement nor a family either as the corporate identity would thwart it being thus. This is no longer res integra either as held in B.A. Mohota Textiles Traders Pvt. Ltd. v. Dy. CIT & Anr. (2017) 397 ITR 616 : 2017 TaxPub(DT) 1734 (Nag-Trib) and in CIT & Anr. v. Sea Rock Investments Ltd (2009) 317 ITR 253 (Kar) : 2009 TaxPub(DT) 0200 (Karn-HC). 3. The articles being amended and the transferee all being new companies are not things which can stand in the way. 4. There is no provision to tax conversion of stock-in-trade into capital asset under the act until 1-4-2019 where in sections 28(via), 2(24)(xiia), 49(9) and 2(42A) clause (ba) under Explanation 1 of (i) all have been inserted to handle the situation of the assessee. The year of assessment is 2014-15 so none of these sections can be applied either in this case. 5. Section 45(2) talks of conversion of capital asset into stock-in-trade and not the vice versa case. There are cases which have dealt transfer of stock-in-trade into capital asset but those have involved "transfer" in some form but not as "gift" without consideration in this case. 6. There is no income received by the assessee. There is no provision to tax notional income either as chapter X-A (GAAR provisions) is also not into effect for the assessment year of appeal. 7. The family settlement agreement whether produced or not is inconsequential to decide the case of the assessee especially given the fact a corporate cannot be part of a family settlement as held by courts. 8. The case of the donee's not being held as taxable for these transfers under the family settlement also is irrelevant to decide this case and has no impact. 9. Rejection of books simply because there was no disclosure of the gifting is also incorrect as the said annual accounts have shown this in the notes the board resolutions etc. produced. There being no consideration it was not warranted to disclose the same as there was no financial implication either. 10. The revenue has not controverted that the stock-in-trade was converted into capital asset thus application of section 47(iii) is also not warranted. 11. The decision of Supreme Court Kika Bhai Premchand v. CIT (1953) 24 ITR 506 (SC) : 1953 TaxPub(DT) 0121 (SC) will need to be applied where in it was held one cannot make profit out of oneself. This case of the assessee is one where the shares were held as stock-in-trade and the same was given as a gift, thus there being no external party sale, no one can profit out of oneself has to apply with no tax being fastened notionally on the assessee on the gifting of the shares. A notional income cannot be taxed on real income principles. *Editorial Note:* A contrary verdict but on certain facts slightly being different can also be seen in the decision of PCIT v. Redington (India) Limited [TCA Nos. 590 & 591 of 2019, dt. 10-12-2020]. The decision in Soni Sonu Mirchandani v. ACIT [ITA No. 1286/Del/2020, dt. 28-9-2020] : 2020 TaxPub(DT) 3874 (Del-Trib) may also be referred to strictly not on the same dimension of this case but on slight remotely related parts.

Tax Publishers

Manjula Finance Ltd. v. ITO [I.T.A. No. 3727/Del/2018, dt. 18-12-2020] : 2020 TaxPub(DT) 5487 (Del-Trib)

Shares held as stock-in-trade and gifted to another corporate -- Taxability at fair value as business income -- Whether corporate can make gift -- Corporate can it be part of family settlement

Facts:

Assessee was a part of OP Jindal group of companies more so an investment and a financing entity. They had applied for an NBFC licence to RBI which was rejected. Consequentially whatever investment in shares of the group companies they held was confirmed as stock-in-trade. This OP Jindal group made a family settlement to rearrange the affairs amongst the 4 brothers of the family. Arising out of this family settlement the shares held in the group companies by the assessee were gifted to 4 other newly formed companies. There was no provision to gift shares in the articles of association of the assessee and accordingly prior to the gifting the articles were amended. The assessee claimed that this was gifting of shares which was held as stock-in-trade and since there was no consideration and it was part of the family settlement there cannot be any tax implications. Alternatively, they took a plea that the shares though were held as stock-in-trade prior to gifting assumed the character of investments; a capital asset and since it was a gifting of a capital asset it fell in the scope of section 47(iii) and thus was exempt. There being no consideration no imputed/deemed capital gains cannot be also taxed as computation section also would fail. The assessing officer noting that no such family settlement agreement was produced held that the market value of the shares gifted was Rs. 230 crores and their cost in books was 11 crores thus held that this gain was not shown in the books thus the books are worthy of rejection and thus taxed and assessed the difference of Rs. 219 crores as business income. On appeal the Commissioner (Appeals) upheld the same. On further appeal by the assessee --

Held in favour of the assessee that there was no income which arose in the hands of the assessee. The following key takeaway points make it an one off decision --

1. A corporate can gift this is no longer res integra. There was a valid gift by the assessee in the realm of section 122 of Transfer of Property Act, 1882. The requirements of the gift have been well met by the company viz. (1) the absence of consideration, (2) the existence of donor, (3) the existence of donee, (4) to be voluntary, (5) the subject matter, (6) the transfer, (7) the acceptance.

2. A company cannot be part of a family settlement nor a family either as the corporate identity would thwart it being thus. This is no longer res integra either as held in B.A. Mohota Textiles Traders Pvt. Ltd. v. Dy. CIT & Anr. (2017) 397 ITR 616 : 2017 TaxPub(DT) 1734 (Nag-Trib) and in CIT & Anr. v. Sea Rock Investments Ltd (2009) 317 ITR 253 (Kar) : 2009 TaxPub(DT) 0200 (Karn-HC).

3. The articles being amended and the transferee all being new companies are not things which can stand in the way.

4. There is no provision to tax conversion of stock-in-trade into capital asset under the act until 1-4-2019 where in sections 28(via), 2(24)(xiia), 49(9) and 2(42A) clause (ba) under Explanation 1 of (i) all have been inserted to handle the situation of the assessee. The year of assessment is 2014-15 so none of these sections can be applied either in this case.

5. Section 45(2) talks of conversion of capital asset into stock-in-trade and not the vice versa case. There are cases which have dealt transfer of stock-in-trade into capital asset but those have involved "transfer" in some form but not as "gift" without consideration in this case.

6. There is no income received by the assessee. There is no provision to tax notional income either as chapter X-A (GAAR provisions) is also not into effect for the assessment year of appeal.

7. The family settlement agreement whether produced or not is inconsequential to decide the case of the assessee especially given the fact a corporate cannot be part of a family settlement as held by courts.

8. The case of the donee's not being held as taxable for these transfers under the family settlement also is irrelevant to decide this case and has no impact.

9. Rejection of books simply because there was no disclosure of the gifting is also incorrect as the said annual accounts have shown this in the notes the board resolutions etc. produced. There being no consideration it was not warranted to disclose the same as there was no financial implication either.

10. The revenue has not controverted that the stock-in-trade was converted into capital asset thus application of section 47(iii) is also not warranted.

11. The decision of Supreme Court Kika Bhai Premchand v. CIT (1953) 24 ITR 506 (SC) : 1953 TaxPub(DT) 0121 (SC) will need to be applied where in it was held one cannot make profit out of oneself. This case of the assessee is one where the shares were held as stock-in-trade and the same was given as a gift, thus there being no external party sale, no one can profit out of oneself has to apply with no tax being fastened notionally on the assessee on the gifting of the shares. A notional income cannot be taxed on real income principles.

Editorial Note: A contrary verdict but on certain facts slightly being different can also be seen in the decision of PCIT v. Redington (India) Limited [TCA Nos. 590 & 591 of 2019, dt. 10-12-2020].

The decision in Soni Sonu Mirchandani v. ACIT [ITA No. 1286/Del/2020, dt. 28-9-2020] : 2020 TaxPub(DT) 3874 (Del-Trib) may also be referred to strictly not on the same dimension of this case but on slight remotely related parts.