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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P BOAZ
Per N.V. Vasudevan, Vice President This is an appeal by the assessee against the order dated 13/7/2018 of CIT(A)-11, Bengaluru relating to the asst. year 2012-13.
In this appeal by the assessee there are 4 issues which need to be adjudicated.
The first issue is as to whether the gain on sale of shares of M/s Nephrolife Care India Pvt. Ltd., (Nephrolife) gives rise to long term capital gains (LTCG) or short term capital gains (STCG). This issue is projected by the assessee in grounds No.3 to 12 raised before the Tribunal which reads as follows:-
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“3. Under the facts of the present case, the learned CIT (A) has erred, in law and on facts, by re-characterizing the long-term capital gains of Rs 261 909,090, realized by the Appellant on sale of shares of Nephrolife, as short- term capital gains without appreciating the detailed factual/ technical submissions furnished in support of the claim.
The learned CIT(A) has erred, in law and on facts, by arbitrarily disregarding the gift of shares made by M!s ROl Capital Advisors Pvt. Ltd (ROl') without appreciating the fact that there are no provisions under the Act which prohibits gift of shares by a company to its shareholders.
The learned CIT(A) has erred, in law and on facts, by stating that the Memorandum of Association ("MOA") of ROI does not have any clause for gifting of shares without appreciating the fact that the relevant clauses in the MCA covers all modes/ manner of disposal of shares.
The learned CIT(A) has erred, in law and on facts, in arbitrarily holding that there is a consideration received by ROl in return for gift of shares of Nephrolife.
The learned CIT(A) has erred in laws and facts, in holding that even if the unsecured loan granted by the Appellant was later converted into equity by ROI, it is the benefit of interest free loan that is available to ROl which is the consideration received for gifting of shares, without appreciating the fact that grant of interest free loan by a Director to a Company is not prohibited under the Companies Act, 1956. 8. The learned CIT(A) has failed to appreciate that ROI is a body corporate which is a separate/ distinct legal entity independent of its members/ shareholders, and arbitrarily held that there is an unduly influence to gift the shares to the Appellant. 9. The learned CIT(A) has erred, in law and on facts, by questioning the intention of ROl to gift the shares to the Appellant by arbitrarily stating that this was not a
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voluntary act, the ROI could have complied with the RBI regulations and there was no compulsion to gift the shares, without appreciating the legality/ privity of contract and bona-fide/ prudent business decisions.
The learned CIT(A) has erred, in law and on facts, by arbitrarily attributing motives to the transaction of gift on mere presumptions by stating that the Appellant considered the transaction as a 'gift' with the intention to avail the benefit of section 54F of the Act, without appreciating the contemporaneous documents filed in respect of the transactions undertaken. 11. The learned CIT(A) has erred, in law and on facts, by disregarding the fact that the Appellant has offered the gift of shares received from ROl for taxes under "income from other sources" at a highest tax rate of 30% under Section 56(2)(vii)(c) of the Act, thus ignoring the fact that the intention was never to evade the taxes. 12. Notwithstanding above, the learned CIT(A) has erred in law and facts by stating that the Appellant, being 99.99% shareholder unduly influenced ROI to transfer the shares and reflect the same as gift. If the ROI and the Appellant are sought to be construed as the same person, then the learned CIT(A) ought to have considered the period of holding in the hands of the Appellant to be from the date of investment made in Nephrolife shares by ROI.”
The second issue to be adjudicated is that if the gain on sale of shares of Nephrolife is regarded as giving rise to LTCG, then whether the revenue authorities were justified in denying the benefit of deduction u/s 54F of the Act to the assessee. The grievance of the assesse on issue of misc. assessment is brought forward from Sl Nos. 13 to 18 of the grounds of appeal, it reads as follows:-
“13. Based on the facts and circumstances, the learned CT(A) has erred, in law and on facts, by denying
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exemption of Rs 134,139,988 claimed by the Appellant under section 54F of the Act without appreciating the detailed factual/ technical submissions furnished in support of the claim.
The learned CIT(A) has failed to appreciate the fact that as on the date of transfer of the shares of Nephrolife, the Appellant co-owned only one residential house in India and that the co-owned property should not be construed as one house property for the purpose of claiming benefit under section 54F of the Act.
The learned CIT(A) has erred in law and in facts, by stating that even if section 54F benefit was available, then the same would be restricted to Rs 27,338,196, being the amount incurred on the construction of residential house after the date of transfer of shares, ignoring any expenditure incurred on such property prior to date of transfer. 16. The learned CIT(A) has erred, in law in not appreciating that section 54F of the Act does not stipulate nor indicate that the construction of the residential property must begin after the date of sale of the original asset, the sole and important consideration as per the section is that the construction should be completed within the specified period.
The learned CIT(A) has erred, in law and in facts, in not appreciating the fact that the Appellant has provided details of all residential house property 'owned' by him and the learned CIT(A) has inadvertently considered a leased property outside India as a property owned by the Appellant.
Notwithstanding the above, the learned CIT(A) has erred in law and in facts, by not appreciating that income from residential house other than the one residential house owned on the date of transfer of original asset could not have been said to be chargeable under the head "Income from House Property".
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The third issue to be adjudicated is with regard to set off of capital loss on sale of painting against the LTCG on sale of shares of Nehprolife. The assessee sold a painting in UK and on such sale incurred a capital loss of Rs.27,25,693/-. The assessee claimed set off of loss on sale of painting (LTCG) against the gain that arose on sale (Nephrolife share). This was denied by the Revenue authorities for the reason that the assessee was ‘resident’ but ‘not ordinary resident’ and, therefore, it is only income which accrues or arises in India that can be brought to tax. Since the loss in question did not accrue or arise in India, the Revenue authorities did not allow the claim of deduction on account of LTCG loss and consequently the plea of set off of such loss against LTCG on sale of shares of Nehprolife. The assessee has challenged the action of the Revenue authorities in this regard and raised ground Nos.18 to 22, which reads as follows:- “18. Notwithstanding the above, the learned CIT(A) has erred in law and in facts, by not appreciating that income from residential house other than the one residential house owned on the date of transfer of original asset could not have been said to be chargeable under the head "Income from House Property". Denial of long-term capital loss of Rs 2,725,693 on sale of a painting
The learned CIT(A) has erred, in law and on facts, by denying the claim of long-term capital loss on sale of a painting of Rs 2,725,693 without appreciating the submissions furnished by Appellant in support of its claim. 20. The learned CIT(A) has failed to appreciate that the painting was held by the Appellant for more than 36 months prior to its date of sale and therefore is a long- term capital asset under the provisions of section 2(29A) read with section 2(42A) of the Act. 21. The learned CIT(A) has erred in facts in stating that the money from sale of painting has been received by the
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Appellant outside through an agent located outside India and the capital gain/ loss has arisen outside India, disregarding the fact that the amount was actually received in India by the Appellant's selling agent located in India. 22. Under the facts and circumstances, the learned CIT(A) has erred, in law and on facts, in denying the benefit of set-off of the aforesaid long-term capital loss against the long-term capital gains realized by him on sale of shares.”
The 4th issue that arise for consideration in this appeal is as to 7. whether the Revenue authorities were justified in not allowing credit for tax deducted at source to the extent of Rs.1,62,000/-.
As far as issue Nos.1 and 2 are concerned, both can be decided together. The facts relevant for adjudication of the aforesaid issues are that the assessee is an individual. On 11/4/2011, the assessee received 28 lakhs equity shares of Nephrolife as gift from a company by name M/s ROI Capital Advisors Pvt. Ltd., (‘ROI’). It is not disputed that ROI acquired the shares in the year 2009. The assessee sold Rs.17,27,508/- equity shares of Nephrolife to Davita Kent. On such sale of shares, the assessee computed long term capital gain (LTCG).
We have already noticed that the assessee received 28 lakhs equity shares from Nephrolife as gift from ROI. Under the provision of sec. 56(2)(vii)(c) of the Act, where an individual receives in any previous year, from any person, any property other than immovable property, without consideration, the aggregate fair market value which exceeds of Rs.50,000/-, the whole of the aggregate fair market value of such property will be regarded as income in the hands of the individual receiving the property. The assessee in the return of income filed for asst. year 2012-13
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offered to tax aggregate fair market value of the shares received as gift to tax as income u/s 56(2)(vii)(c) of the Act. A Sum of Rs.1,04,25,518/- was offered as income in this regard.
The assessee sold the shares 17,26,508 equity shares of Nephrolife out of the 28 lakhs equity shares which he received as gift from ROI. The shares were sold by the Assessee to one entity by name “Da vita Care”. The Assessee computed long term capital gain on sale of shares by adopting the cost of acquisition of shares u/s 49(4) of the Act which provides that where the capital gain arises from transfer of property the value of which has been subject to Income-tax u/s 56(2)(vii) of the Act, the cost of acquisition of such property shall be deemed to be the value which has been taken in to account for the purpose of the said provisions.
We have already seen that the income declared by the assessee on receipt of gift was at a sum of Rs.1,04,25,518/- which is in respect of receipt of gift of 28 lakhs equity shares, the assessee sold only 17,27,508 equity shares and, therefore, the assessee adopted the cost of acquisition of shares sold proportionately and computed the cost of acquisition at Rs.64,32,202/- and computed LTCG as follows:-
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The assessee claimed that the gain on sale of Nephrolife shares gave rise to long term capital gain because as per the provision of Explanation 1(b) of sec. 2(42A) of the Act which defines short term capital based on the period for which the capital asset held by the assessee. If the capital asset becomes the property of the assessee by way of gift as mentioned in sec.49(1) of the Act, the period for which the asset was held by the previous owner should also be included. Since the shares were acquired by ROI in 2009, the assessee claimed that the period of holdings by the assessee should be considered from the year 2009 when the shares were acquired by ROI. Thus, the assessee made a claim that again on sale of share was a long term capital gain and that the assessee was entitled to claim deduction u/s 54F of the Act.
The AO however, noticed that the assessee was 99.9% share holder and Director of ROI. The AO also noticed that the business activity of ROI was to act as angel Investor and financial advisor, but did not do any business activity. The AO also noticed that shares in question were acquired by ROI from interest free loan given by the assessee. The first observation of the AO was that ROI, a corporate entity, was a tool and it was being employed by the assessee to manage its own investments. The AO was of the view that a company is an artificial person and it is governed by the Article of Association. In the Article of Association of ROI there was no clause to make gifts. The second observations of the AO was that an interest free loan of Rs.5.58 crores was given by the assessee to ROI and those funds were used for acquiring the share of Nephrolife by ROI. Therefore, in effect the so called gift of shares by ROI to the assesee has to be regarded as sale of shares by ROI to the assesee and, therefore, period of holding of the assessee has to be reckoned from 11/4/2011 when the shares were transferred from ROI to the assessee as a gift which in
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the opinion to AO was not a gift but a sale. The third observations of the AO was that for a gift to be valid it should be voluntary and since the assessee held 99.99% of the shares of the ROI, the gift by ROI to the assessee cannot be said to be voluntary. The fourth observation of the AO was that a company is an artificial person and cannot make a gift out of love and affection. The last observation of the AO was that the intention of making the gift was nothing but a tax planning devise. In this regard the AO observed as follows:- “5. Intention: Intention to gift is an a important component of the act of gifting. Merely giving something arid claiming the transfer to be a gift does not make it a gift. The gift giver (donor) must understand the nature of the act and have a voluntary Intent to make a gift, called donative intent in the present case, there is no voluntary element to the gift as discussed above. The intent to gift is also absent. Rather there is an intent of tax planning; an intent to colour the transfer as gift so as to save taxes. Foreign company Davita Care Pte Ltd was in talks with various stakeholders for acquisition of Nephrolife. Fresh shares were issued by Nephrolife to Davita Care Pte Ltd at high premium in 2011. Later in December 2011 Davita Care Pte Ltd purchased off the shares of all major shareholders at a high premium.
Assessee also sold his shares. (the shares which it had received from ROl. Capital) to: Davita Care Pte Ltd in Décèmber 2011. On .ànalysis of thé sequence of events it is clear that assessee formed a strategy to minimize his tax liability arising from the Davita transaction. He did not have significant shares of Nephrolife but his company ROI Capital had. Assessee had a property using which he could claim exemption u/s 54F So he transferred the shares of Nephrollfe from ROE Capital to his personal head, termed it 'gift', and claimed exemption on it. A clear intention to minimize tax liability from Davita deal is seen here. Intention to gift is anyways absent as assessee is 99.99% owner of ROI capital. He cannot have any intention (of love or affection) to gift these shares to himself.”
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When the assessee was confronted with the above conclusions of the AO and when the assessee was asked to explain as to why ROI made gift of shares to the assesee. The assessee in its reply to the AO submitted that ROI was set up to hold shares and give financial advice to other companies. However, with the numerous RBI circulars regarding Core Investment Companies in 2011 and culminating in circular R131/2,1011-12/31 DNBS (PD) CC No. 237/03.02.001/ 201112 there were professional advices given to ROI to wind down the holdings in ROl as the regulatory burden was expected to be very onerous. The Gift and the registration of the shares was done at the same time. The Assessee pointed out that ROl was an ongoing concern that intended to give financial and startup advice once the Assessee establishes another venture by name “FitKids”. Based on professional advice ( copy of which was given along with Assessee’s reply) in light of the new guidelines on core investment companies issued by the Reserve Bank of India (RBI), it was decided to divest the shares held in Nephrolife to avoid being classified as a core investment company or such other classifications requiring any regulatory compliances and effort. However, it was noticed that Nephrolife was a party to a shareholder’s agreement dated 19.06.2009 with other shareholders of Nephrolife, according to which the other shareholders were keen that either the Company i.e. ROI or Dev Kumar Roy ,who was party to the Share Holders Agreement in his individual capacity, hold shares of Nephrolife so as to avoid any major re-negotiations/amendments to the existing shareholders agreement. Since the investment in M/s. Nephrolife was a downstream investment by M/s ROl Capital Advisors Private Limited it became important to divest this investment as getting investor to M/s Nephrolife would have been more cumbersome due to regulatory restrictions regarding downstream investment. In the circumstances it was
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decided by ROI that it was in the best interest of Nephrolife, the shareholders of ROI as well as shareholders of Nephrolife, that ROI transfers by way of gift, the shares held in Nephrolife to and in favour of Dev Kumar Roy, who was the 99% shareholder in ROI and to avoid falling into core investment company classification or such other classification requiring significant regulatory compliances and effort.
The Assessee further explained that the Gift of shares was done in April 2011 and subsequently DaVita a fortune 200 company from the US and a financial investor NEA invested into Nephrolife in June 2011. The reason was that DaVita the second largest Dialysis provider in the US market had tried to enter the Indian market with no success and saw Nephrolife as a young and dynamic company that could show them the way in India. Subsequently only in August 2011, in fact the exact date is 13th of August the CEO of DaVita flew into India and asked Nephrolife if they would be allowed to get to 51 % shareholding in Nephrolife, as they had larger plans for India earlier than envisaged as they hired an Asia Pacific Head a month earlier and they wanted to make a large push in Asia and India in particular. This deal was consummated in December of 2011 and new Share Holders Agreement (SHA) was signed at that point. In this background, the Assessee submitted that there is no way that he could have known the outcomes of receipt of shares as gift and their subsequent sale in April 2011, and the events that took place in December 2011. The following list of dates and events were given by the Assessee:
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On the question of the voluntary nature of the gifts, the Assessee submitted that the term "voluntary", in its ordinary/ popular sense, denotes an action driven by one's own free will. The Assessee submitted that because of the legal/ regulatory and other reasons ROl had voluntarily (i.e., out of its own free will) agreed to gift the shares to the Assessee. The Assessee also submitted that the revenue cannot challenge validity of gift on grounds not germane to the ingredients of a gift.
The AO was not convinced with the aforesaid reasons given by the assessee. He held that there was no valid gift by ROI to the assesse and, therefore, the period of holding by the assessee has to be reckoned from 11/4/2011 when the alleged gift of shares were made by ROI to the
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assesee. Since the shares were sold on 16/12/2011 within a period of less than 12 months from the date on which it acquired, the AO held that gain of share was short term capital gain and, therefore, liable to be taxed at 30% and not eligible for deduction u/s 54F of the Act.
Since the gain in question was regarded as short term capital gain, the AO without prejudice to the above stand also examined the claim of the assessee for deduction u/s 54F of the Act. As far as deduction u/s 54F of the Act is concerned, the facts are that the assessee purchased the property in his name and in the name of his wife. The assessee owned a property being 4th floor bearing plot No.4B in No.31, Kasturabha Road, Bangalore-1. This property was purchased on 4/6/2007 in joint names of the assessee and asseessee’s wife Mrs. Neelanjana Mohan Rao. The assessee invested in purchase of another property on 5/4/2013 for Rs.4.54 crores for undivided share of land and construction of an apartment at a cost of Rs.6,84,84,000/- as per the following shares.
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This property was also purchased and agreed to be constructed in the joint names of the assessee and his wife. Apart from the above, the assessee has property which is lease hold property for over 12 years period which is situated at London U.K. Under the provisions of sec. 54F of the Act, to claim deduction u/s 54F of the Act, the assessee should not own more than one residential house, other than the new asset and the income from such residential house should not be chargeable to tax under the head ‘income from house property’. The statutory provision reads as follows:-
“Section:54F: (1) Subject to the provisions of sub- section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one
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year before 1two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-- (a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45: (b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45: Provided that nothing contained in this sub-section shall apply where- (a)the assessee,-
(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset ; or
(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset ; or
(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and (b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head ''Income from house property''.
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Both the above conditions mentioned in proviso (a) (i) and (b) to Section 54F(1) of the Act have to be cumulatively satisfied.
According to the AO since the assessee owned more than one residential house, a flat at Kasturaba Nagar, Bengaluru and property at UK and the new house (yet to be constructed) was 3rd house property, therefore, deduction u/s 54F of the Act will not be allowed. The assessee has contended that the house property in UK should not be considered because he was ‘resident’ but ‘not ordinarily resident’ and, therefore, property at UK and income from that property does not accrue or arise in India and, therefore, income from such property is not chargeable to tax under the head ‘income from house property’. The Assessee pointed out that the income from property already owned by the Assessee according to proviso (b) to Sec.54F(1) of the Act should be chargeable to tax under the head “Income from House Property”. Since the Income from the property held in UK is not chargeable to tax in India much less under the head “income from House Property”, the said property should be ignored for the purpose of applying the proviso to Sec.54F(1) of the Act. The AO however, held that it does not matter as to whether the properties are held in India or Abroad for the purpose of deduction u/s 54F of the Act. The AO made an addition of Rs.13,41,39,988/- claimed by the assesse as deduction u/s 54F of the Act.
Aggrieved by the aforesaid addition made by the AO, the assessee preferred appeal before the CIT(A) who confirmed the order of the AO.
On the question whether the gain in question was STCG/LTCG, the CIT(A) held as follows:-
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“4.5 To determine the nature of transfer it is pertinent to look into following issues: • Whether the transfer is voluntary i.e. whether the transfer was without any particular cause, without undue influence and without consideration? • Whether there was any intention of the donor to make the gift? • Whether a company could make a gift without there being a specific provision in its MOA or AOA? 4.6 A perusal of the material available on record shows that legally there was no compulsion on ROI Capital to transfer the shares as it could have very well met the RBI regulations by taking necessary steps to meet the requisite conditions. Thus the ROl Capital had the option to retain the shares but then it was required to comply with various RBI Regulations related to NBFCs. The purpose of ROI capital was also served by mere transfer of shares to the appellant. However the appellant being the 99.99% shareholder unduly influenced the company to transfer shares to it and reflect the same as gift in the minutes of Board meeting to serve his own purpose.
4.7 The purpose of transferring shares from ROl Capital to the appellant was to evade tax by showing the transaction as a gift and then claim benefits which are available on LTCG to an individual and not to a company as and when the shares were sold. 4.8 In the case under consideration, the appellant has submitted that the transfer of shares by ROI to the appellant was a compulsion due to the RBI regulations. The appellant has submitted that the transfer was on account of certain legal/regulatory and commercial reasons. Thus even if it is accepted as such. ROI Capital would never had transferred the shares to the appellant if it was not required to meet the RBI regulations. So the presence of such reasons itself shows that the transfer was not made voluntarily.
4.9 This is also an admitted fact that ROI Capital was obliged to transfer the shares to the appellant due to existing shareholder agreement with other shareholders of Nephrolife who were keen that either ROl or the appellant should only hold the shares of Nephrolife so as to provide major negotiations/amendments to the existing shareholders agreements. So as such there was no intention on the part of ROl Capital to donate the shares to the appellant. However since the appellant himself was 99.99% shareholder in the company,
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the same influenced RO1 to transfer shares in his name rather than to a third party. The appellant has argued that the decision of the Board of 1(01 Capital and approval of board of Nephroiife was a valid one and as such the transaction needs to be considered as a gift. However this argument of the appellant is without any merit as decision of board of ROl Capital cannot change the true character of a transaction.
4.10 In view of above, the transfer made by ROI Capital to the appellant is not a gift. Without prejudice to above there is nothing in MOA of ROl Capital which allows it to make a gift. So the decisions relied upon by the appellant do not help him. Further even if the claim of the appellant that the unsecured loan was later converted into equity is accepted, the benefit of interest free loan available to ROI capital can be considered as a consideration for transfer. Such a benefit preceded the transfer and as such the same has direct link with the same.
4.11 In view of above, the nature of capital gains in the hands of the appellant would be STCG and the appellant will not be eligible for the benefit of Section 54F of the Act on the same.
4.12 Considering above the related grounds of appeal of the appellant are dismissed.”
On the question of deduction u/s 54F of the Act, the CIT(A) held that the Assessee was co-owner of the house at Kasturba Nagar, Bangalore and house and UK and also the new asset. Since the Assessee owned more than one house other than the new asset, the CIT(A) held that the Assessee was not entitled to deduction u/s.54F of the Act. He held that co- ownership of the house at Kasturba Nagar, Bangalore was also to be regarded as house owned by the Assessee. In coming to the aforesaid conclusion, the CIT(A) relied on decision of ITAT Hyderabad in the case of ITO vs. Apsara Bhavana Sai (2013) 40 taxmann.com 528 (Hyderabad- Trib), wherein the ITAT held that the assessee would not be eligible for deduction under Section 54F of the Act even if other residential house is owned by assessee wholly or partially. The CIT(A) also relied on decision
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of Karnataka High Court High Court in the case of Commissioner of Income-tax, central Circle, Bangalore v. MJ Siwani [2014] 46 taxmann.com 170 (Karnataka) laying down identical proposition.
Aggrieved by the order of the CIT(A), the assessee has raised grounds 3 to 18 before the Tribunal which we have already set out in the earlier para of this order.
We have heard the rival submissions. The arguments of the learned counsel for the Assessee were identical to the grounds raised before the Tribunal and the submissions made before the Revenue authorities. The learned DR relied on the order of the revenue authorities.
We have considered the rival submissions. On the question whether the gift by ROI to assessee can be considered as gift or sale, identical issue as is raised in this appeal as to whether a company make gift of shares, had come up for consideration before the Hon’ble ITAT, Chennai Bench in the case of Redington (India) Ltd., Vs. JCIT (2014) 49 taxmnn.com 146. The Chennai Bench held as follows:- “71. MIs. RGF Gulf is the wholly owned subsidiary of the assessee company. The assessee company has transferred its shares in M/s. RGF Gulf to M/s. RIHL Cayman, which is a step down subsidiary. It is a fact that the transfer of shares was made without consideration. It is for this reason that the assessee company contends that the transfer is a gift. As it is a gift, it is the case of the assessee, that if at all it is treated as a transfer of capital asset for the purpose of capital gains taxation, it is exempt under sec.47(iii) of the IT Act, 1961. The case of the Revenue is that a company cannot make a gift and also seen if it is treated as a gift, it is not eligible for exemption provided under sec.47(iii), as correct provision of law applies to the case of the assessee is
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sec.47(iv) of which the condition has not been satisfied by the assessee company. 72. Gift is definitely a transfer of property. The mother law governing the subject matter of transfer of property is Transfer of Property Act, 1882. Sec.5 of the Transfer of Property Act, 1882, defines the term transfer of property", as an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, or to himself and one or more other living persons; and "to transfer property" is to perform such act. This is the master definition of "transfer of property". Other forms of transfers like gift are subject to this master provision. The law provides in the same sec.5 of the TP Act.. 1882 that "living person" includes a company or association or body of individuals, whether incorporated or not. Thus, TP Act, 1 882 considers a company not only as a person but literally speaking as a living person"; a person with life. The same expression "person" provided in sec.5 is transplanted in sec. 122 of the TP Act, which defines a "gift'. "Gift" is the transfer of certain existing movable or immovable property made voluntarily and without consideration by one person, called the donor, to another, called the donee and accepted by or on behalf of the donee. When the provisions of law contained in sections 5 & 122 of the TP Act read together, it emerges that a company being a living person can transfer property by way of gift. 73. As per sec. 122 of the TP Act, 1882 the following are the ingredients of a gift valid in law: Transfer of existing movable or immovable property Transfer made voluntarily Without consideration By donor to the donee Accepted by the donee.
The essential ingredients of a valid gift are the existence of the property, voluntary nature of the transfer and absence of consideration. As a pre-condition for
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making a valid gift, the law does not prescribe any attributes like "love and affection". 75. Transfer of property as the general law contemplates is the transfer of both existing property and future property. But in a gift, the transfer must be of an existing property. The meaning given to the expression "gift" in the erstwhile Gift Tax Act, 1958 is the same. A gift is defined in the said Act in sec.2(xii), as the transfer by one person to another person of any existing movable or immovable property made voluntarily and without consideration in money or money's worth. The "gift" for the purpose of Gift Tax Act, 1958, is further qualified, as a property in money or monies worth. Sec.2(xviii) of the Gift Tax Act, 1958 defines a person which includes a company, as well. In the Gift Tax Act also, there is no attributes like "love and affection". 76. In the light of the law explained above, there is nothing against a company making gift of its property to another company. A transfer without consideration when claimed as a gift is always a gift. It is not possible to give any other colour. There is nothing anywhere in law, which prescribes that only natural persons can make gift on the ground of "love and affection". Therefore, we find that the lower authorities have erred in law in concluding that the assessee being a corporate body cannot make a gift.
Traditionally, in majority of the gift deeds, it is a common recital usually found that a person is making the gift "out of love and affection". Therefore, the lower authorities in their capacity as Assessing Officers while dealing with a number of cases falling under the Gift Tax Act, 1958 might have gone through a number of such documents, and they developed an inherent impression that the gift is to be made only by natural persons and that too, out of love and affection. This long lasting impression might have influenced the lower authorities to come to their conclusion.
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The ITAT, Mumbai in the case of DP World (P.) Ltd. v. Dy. CIT [2013] 140 lTD 694/[2012] 26 taxmann.com 163 had considered a similar issue. The Tribunal held that corporate body can make a gift. There is no requirement in the TP Act, 1882, that a gift can be made only between natural persons out of love and affection. The Tribunal held that as long as the donor company permits by its Articles of Association, it can do so under sec.82 of the Companies Act, 1956. The Tribunal held that gift of shares of an Indian Company to a foreign company without consideration has to be treated as gift within the meaning of sec.47(iii) of the IT Act. The Hon'ble Supreme Court in the case of Ku. Sonia Bhatia v. State of UP [1981] 2 SCC 585 has held that one should not try to confuse the purpose of making a gift with consideration. Love, affection, spiritual benefits and many other factors may be the intention of the donor to make a gift. But, these filial considerations cannot be called or held to be legal considerations, as understood by law. The Hon'ble High Court of Delhi in the case of Vodafone Essar Ltd., In re [2011 107 SCL 51, has held that there is no legal impediment to a company transferring property to another company, by gift. The Hon'ble AAR in rulings given in the case of Deere & Co. (supra) have held that "love and affection" are not required to make a gift. They held that a corporate body construed as not having natural love and affection can also make a valid gift.
The learned senior counsel, appearing for the assessee has also referred to various other enactments in which contextual reference has been made to show that a company can make gift to another person. He has referred to sec.115(WB)(2)(0) of the IT Act, pertaining to Fringe Benefits Tax and sec.540 of the Companies Act, 1956. We are not going deep into those incidental provisions available in other enactments. The term "gift" is not defined in the Income-tax Act, 1961. Therefore, the nearest enactments, that may be relied on for the purpose of deciding the issue under the Income-tax Act, is the Transfer of Property Act, 1882 and the erstwhile Gift Tax Act, 1958. As reflected in the discussions already made, it is clear that a company is a person both
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for the purpose of TP Act, 1882 and GT Act, 1958 and a company can make a gift to another company, which is valid in law. Accordingly, we accept the legal capacity of the assessee company to gift its shares in RGF Gulf to Rh-IL Cayman.”
The Hon’ble Karnataka High Court in the case of CIT Vs. Nadatur Holdings and Investments Pvt. Ltd., (2012) 26 taxmann.com 224 (Kar) took the view that there is no bar on gift of equity shares to a company. Similarly Mumbai Bench of the Tribunal in the case of DP World Pvt. Ltd., Vs. DCIT 140 ITD 694 (Bom) held that company can gift shares as such gifts are not treated as benami transactions.
We find that the Articles of Association of ROI provides that the company can acquire, hold, dispose of shares for any objects mentioned in the MOA and also sell, improve or otherwise deal with any part of the property both movable and immovable. The expression “to hold” will include power to alienate in any manner whatsoever. So also the expression “otherwise deal with any part of the property” will empower ROI to alienate its properties movable and immovable in any manner it deems fit. Therefore the power of ROI to make gift of shares is enshrined in the Articles of Association of ROI. We are also of the view that there have been valid reasons for ROI to make gift to the assessee which has been explained as owing to the RBI circulars, though it may not be necessary that there should exist reasons for making a gift.
Considering the legal position as explained in the aforesaid decisions, we are of the view that the Revenue authorities were not justified in coming to the conclusion that there was no valid gift on equity share of
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ROI to the assessee. In this regard, we also notice that the Revenue authorities accepted the validity of the gift by ROI to the assessee by taking fair market as income of the assessee u/s 56(2)(vii)(c) of the Act. Another reason given by the Revenue authorities was that ROI used funds given by assessee as unsecured loan to acquire shares of Nephrolife and, therefore, the assessee had paid consideration for acquiring the shares which cannot be treated as gift. In our view this conclusion of the AO/CIT(A) is also erroneous because the loan given by the assessee to ROI is shown as outstanding liability by ROI in its books and also as receivable by the assessee. In other words there was no squaring off of the loan given by the Assessee consequent to gift of shares by ROI to the assessee. In these circumstances, the assumption of the Revenue authorities cannot be held to be correct. Since the shares in question were acquired by ROI in the year 2009 and the assessee got shares as gift, the period of holding by the previous new owner to be regarded in the light of the provisions of Explanation I (b) to sec.42A r.w.s 49(1)(b) of the Act. Consequently, the gain in question on sale of share received as gift has to be regarded as long term capital gain. We hold accordingly.
With regard to the deduction u/s 54F of the Act as contended by the ld counsel for the assessee, the assessee was ‘resident’ but ‘not ordinary resident’ and, therefore, income which accurse and arise in India alone can be brought to tax. Admittedly the property in UK was lease hold property and income from such property cannot be brought to tax in India, as such income cannot be said to have accrued or arisen in India. Consequently, the aforesaid property cannot be considered as any other property owned by the assessee for the purpose of proviso to sec. 54F (1) of the Act. We have already discussed that under proviso (b) to sec. 54F(i) one of the condition is that the property should be assessable to tax under the head
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‘income from house property’. Since the UK property is not assessable to tax under the head ‘income from house property’ in India in the hands of the assessee, the same cannot be regarded as house property held by the assesee. If the UK property is excluded then the assessee would own one house property at Kasturba Nagar, Bangalore (other than the UK property) and the property which he acquired by investing the capital gain.
Another aspect considered by the CIT(A) is that the assessee had
claimed deduction u/s 54F of the Act for Rs.13,41,39,988/-. Shares in question which gave rise to LTCG were transferred on 16/12/2011. Out of
Rs.13,41,39,988/-, Rs.10,6,01,792/- were invested in acquiring the new
asset prior to the date of sale of shares. Therefore, the CIT(A) was of the view even if sec. 54F is allowed it cannot be in respect of the investments
made prior to the transfer of the capital asset. On this issue there is a decision of the Hon’ble High Court of Karnataka in the case of CIT v. J.R.
Subramanya Bhat, 165 ITR 571 (Kar). The Hon’ble High Court in the
aforesaid judgment after referring to the conditions for grant of deduction u/s. 54 of the Act, allowed the claim of assessee for deduction by observing
as follows:-
“4. The Tribunal has held that the ground or land appurtenant to the building was in the occupation of the assessee. It has further held that though the commencement of the new building was earlier to the sale of the old building, the new building was completed in March, 1977, which was within the two-year period contemplated by section 54. So stating, the Tribunal allowed the relief claimed by the assessee.
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There is no dispute that the building has been constructed within two years from the date of sale of the old building. The old building was sold in February, 1977. The new building was completed in March, 1977, the construction of which had commenced in 1976. Section 54 of the Income-tax Act so far as it is relevant provides : "Where a capital gain arises from the transfer of a capital asset to which the provisions of section 53 are not applicable, being buildings or lands appurtenant thereto the income of which is chargeable under the head 'Income from house property', which in the two years immediately preceding the date on which the transfer took place, was being used by the assessee or a parent of his mainly for the purposes of his own or the parent's own residence, and the assessee has within a period of one year before or after that date purchased, or has within a period of two years after that date constructed, a house property for the purposes of his own residence, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,......." Under this section, if the assessee has within a period of one year after the date on which the transfer took place purchased or has within a period of two years after that date constructed a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the other provisions set out in the said section. The Tribunal on an appreciation of the evidence has firstly found that the building was used by the assessee mainly for his residential purpose. Taking into consideration the area of the building under the occupation of the assessee, it has stated that the ground floor occupied by the assessee including the garage was 1, 330 sq. ft. The land appurtenant to the ground floor excluding the land occupied by the house was 4,795 sq. ft. that was also held to be under the occupation of the assessee. This building with the land has been sold. It was only the first floor that was let out. The Tribunal took into consideration the extent of the building used mainly for the residential purpose of the assessee and found that the major portion of the building was under the
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occupation of the assessee. The Tribunal, therefore, concluded that the first condition prescribed under section 54 was satisfied. This finding, it may be seen, has been arrived at by the Tribunal upon appreciation of the evidence and the factual aspects of the case. 6. So too was the next conclusion reached by the Tribunal. The date of the sale of the old building was February 9, 1977. The completion of the construction of the new building was in March, 1977, although the commencement of the construction started in 1976. It is immaterial, as the Tribunal, in our opinion, has rightly observed, about the date of commencement of the construction of the new building. Since the assessee has constructed the building within two years from the date of sale of the old building, he was entitled to relief under section 54 of the Act. 7. Both the conclusions reached by the Tribunal are on an appraisal of the evidence on record and they are not shown to be unreasonable or perverse. 8. We, therefore, answer the question in the affirmative and against the Revenue. In the circumstances of the case, we make no order to costs.” 29. Provisions of Sec.54 of the Act and 54F of the Act are identical and
there is no dispute on this aspect. As we have already seen, deduction u/s.
54F of the Act is allowed if a property being residential house is transferred and long term capital gain is derived by the assessee. If the assessee, one
year before the transfer of old asset or one year thereafter purchased a new asset, he is entitled to deduction u/s.54 of the Act. If the Assessee
constructs a new house, then the construction should be completed within a period of two years after the transfer of old asset. In the present case,
the expenses for constructing the new residential house, is partly incurred
one year before the transfer and within two years after the transfer of the
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old asset. It is not disputed that the construction has been completed within a period of two years after the date of transfer. In such
circumstances, the assessee is entitled to deduction u/s. 54F of the Act for the entire sum invested in purchase of flat by getting it constructed through
the builder. The facts are identical to the facts of the case of the decision of the Hon’ble High Court of Karnataka in the case of J.R. Subramanya
Bhat (supra). We are therefore of the view that the assessee is entitled to
deduction on the sum invested prior to sale of the capital asset giving raise to capital gain, u/s. 54F of the Act. We direct the AO to allow the deduction
as claimed by the assessee.
In the light of the discussion above, we are of the view that the assessee is entitled to deduction u/s 54F of the Act as claimed by the assessee. We hold and direct accordingly.
The third issue that arises for consideration in this appeal is with regard to the deduction on account of loss on sale of painting. As far as this issue of sale of painting is concerned, we noticed that the sale of painting in question and the consequent loss is shows in UK and not in India. The sec.5(1)(c) of the Act provides that in the case of ‘resident’ but ‘not ordinary resident’ income which accrues or arise to him outside India shall not be included in the total income. Loss in question accrued or arose to the assessee outside India’ therefore’ such loss should also be ignored. In other words what is applicable to income is equally applicable to loss. Consequently, we are of the view that the Revenue authorities were fully justified in not allowing long term capital loss on sale of painting.
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The last issue is with regard to the credit for TDS gain. On this aspect we are of the view that there is a clash between the method of accounting followed by the assessee and that followed by the person making payment to the Assessee. We are of the view that in the light of the proviso to sec. 199 of the Act, the credit should be allowed on income which is offered to tax. It would meet ends of justice if direction is given to AO to allow tax credit in accordance with sec. 199 of the Act, we hold accordingly.
In the result, appeal of the assessee is partly allowed.
Pronounced in the open court on 8th February, 2019.
Sd/- Sd/-
( JASON P BOAZ) ( N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated, 8th February, 2019. / vms / Copy to : 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.
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Date of Dictation ……………………………………… 2. Date on which the typed draft is placed before the dictating Member ……………………. 3. Date on which the approved draft comes to Sr. P.S .……………………………. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ………………….. 9. Date on which order goes for Xerox & endorsement…………………………………… 10. Date on which the file goes to the Head Clerk ……………………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ………………………………. 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order …………………………. 13. Date of Despatch of Order. ……………………………………………..