Share transfer pursuant to family arrangement is not considered as gift

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Recently, the Ahmedabad Bench of the Income-tax Appellate Tribunal in the case of Bilakhia Holdings P. Ltd. held that transfer of shares pursuant to a family arrangement is not considered as gift. The family disputes are being settled in monetary terms by resorting to family arrangement which leads to a conclusion that the said transfer is with consideration.

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Share transfer pursuant to family arrangement is not considered as gift

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG in INDIA Share transfer pursuant to family arrangement is not considered as gift 7 July 2014 22 21 February 2013 Background Recently, the Ahmedabad Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Bilakhia Holdings P. Ltd 1 (the taxpayer) held that transfer of shares pursuant to a family arrangement is not considered as gift. The family disputes are being settled in monetary terms by resorting to family arrangement which leads to a conclusion that the said transfer is with consideration. Facts of the case  The three brothers of the Bilakhia family, by way of a family arrangement deed dated 16 February 2001, agreed to transfer shares in various companies held by them to the taxpayer with a view to consolidate and equalise holdings in order to avoid further disputes. __________________ 1 ACIT v. Bilakhia Holdings P. Ltd. (ITA Nos. 981 to 985/Ahd/2009) – Taxsutra.com  The three brothers were also directors of the taxpayer. Each of the brothers held equal stake in the taxpayer.  The three brothers also transferred loans of INR141.7 million to the taxpayer which were given by them to others. The taxpayer had recorded such loan by credit to the capital reserve account.  The taxpayer sold part of such shares received by it pursuant to the family arrangement. For the purpose of calculating capital gains on sale of aforesaid shares and securities, the taxpayer considered the shares to have been received by way of gift, and therefore took into account the cost and holding period of the previous owner, the three brothers, and offered long term capital gain of INR4.6 million.  In the accounts, gain on sale of share was transferred to capital reserve instead of being routed through the profit and loss account.
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The Assessing officer (AO) taxed the gain of INR4.6 million as short term capital gain and considered loans of INR141.7 million as income. The AO also made additions of INR4.6 million in the computation of the book of profit (MAT Computation) under Section 115JB of the Income-tax Act, 1961 (the Act).  The Commissioner of Income-tax (Appeals) [CIT(A)] deleted the addition of INR141.7 million and held capital gains of INR4.6 million to be long term capital gains. In MAT computation the CIT(A) confirmed the addition of INR4.6 million. Issues before the Tribunal  Whether the transfer of shares is without consideration and can it be considered as gift?  Whether a loan of INR141.7 million transferred by the three brothers was without consideration, and therefore is a gift not liable to tax?  Whether the CIT(A) has erred in confirming the addition under Section 115JB, which was without jurisdiction and contrary to the decision of the Supreme Court in the case of Apollo Tyres Ltd 2 . Taxpayer’s contentions  There is no requirement for natural love and affection to exist in a gift 3 .  The taxpayer relied on the decision of the Supreme Court in the case of Km. Sonia Bhatia 4 where it was held that consideration should not be confused with motive (i.e. love and affection).  The consideration, referred in Section 122 of Transfer of Property Act, 1882 is contemplated to mean something valuable and capable of being expressed in either money or money’s worth. In the present case, it could not be disputed that no consideration in money or money’s worth has been paid by the taxpayer.  The family arrangement was entered into by the three brothers voluntarily and by their own free will. The transfer of shares to the taxpayer is only in continuation of the agreement. Therefore, the binding nature of an agreement cannot make such transfer involuntary.  The decision in the case of HH Vijayaba 5 is distinguishable on facts and in law. _______________________ 2 Apollo Tyres Ltd v. DCIT [2002] 255 ITR 273 (SC) 3 As defined in Section 122 of Transfer or Property Act, 1882 4 Km. Sonia Bhatia v. State of UP (AIR 1981 SC 1274) 5 CWT v. HH Vijayaba, Dowger Mahrani Saheb of Bhavnagar Palace [1979] 117 ITR 784 (SC)  All the members who have transferred their shares have reflected it as a gift in their accounts and return of income.  Alternatively, the cost of acquisition is not capable of being determined in monetary terms, in that case the computation provisions fail and there cannot be a charge of capital gains 6 .  Shares received as a gift do not constitute investment and hence, gains on sale of these shares were not required to be routed through the profit and loss account. Tax department’s contentions  Natural love and affection is a prerequisite for a gift. A company is inanimate in nature, and therefore incapable of receiving gifts.  The consideration for such transfer being ‘to attain peace and harmony’, was a good consideration, and hence the transfer under family arrangement could not be said to be without consideration as held in the case of HH Vijayaba.  Also, such transfer was not ‘voluntary’ in nature as the same was binding and enforceable pursuant to the family arrangement.  Therefore, both the necessary ingredients of a gift, i.e. voluntary transfer and without consideration were missing, and the transaction cannot be considered to be a gift.  In fact the shares were purchased at cost to the previous owner.  Since the transfer under the family arrangement was not by way of a gift, the taxpayer would not be entitled to take the period of holding of the previous owner, and hence the gains arising on sale of shares were short-term capital gains.  The receipt of shares by the taxpayer was nothing but a purchase of shares at a discounted price. Tribunal’s ruling  It is an admitted position that the family arrangement was enforceable and binding, the transfer of shares pursuant to family arrangement cannot be regarded as being without consideration. ______________ 6 CIT v. B C Srinivasa Setty [1981] 128 ITR 294 (SC)
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The family arrangement was done to equalise the holdings between the three brothers, therefore, it cannot be said that consideration for transfer cannot be measured in money or money’s worth. The equalisation of wealth has only monetary connotation.  Family disputes being settled in monetary terms by resorting to family arrangement leads to a conclusion that the said transfer is with consideration.  The transfer was not voluntary as the family arrangement was enforceable and binding on the parties.  The transfer pursuant to a family arrangement cannot be considered to be ‘without consideration’ and ‘voluntary’, and therefore held that it is not gift as held by the CIT(A).  On similar basis it was held that the assignment of loans of INR141.7 million also was not a gift and was taxable.  On similar arguments, the addition of INR4.6 million in MAT computation was held to be correct. Our comments The Tribunal has held that the transfer under a family arrangement is not without consideration. The Tribunal observed that consideration as defined under Section 122 of the Transfer of Properties Act, 1882 contemplates something valuable and capable of being expressed in either money or money’s worth. Therefore, transfer of shares pursuant to a family arrangement is not considered as gift.
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