By Tarun Jain*
This author in the article titled as ‘Taxability of Corporate Gift of Shares’ [See note (i)] had examined the ruling of AAR in Dana Corporation, In Re [See note (ii)] and others. In those rulings the AAR had, inter alia, held that no capital gains implications arose in case of gift of shares of subsidiary by holding company as ‘consideration’ in such cases of transfer could not be computed. This author in the said article had also commented that this position required to be considered by the legislature as it was leading to avoidance of tax and the interpretation was leading to absurdity. The Government, in the Budget for 2012-13 has sought to cure this anomaly. In this article the author examines whether the proposals made in the recently presented Budget actually cater to the issue.
In the Finance Bill, 2012 it has been proposed to introduce a new provision [Section 50D] in the Income Tax Act, 1961 which provides that “where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.”
The rationale given for the amendment, as explained in the Memorandum [See note (iii)], is as under:
"Fair Market Value to be full value of consideration in certain cases: Capital gains are calculated on transfer of a capital asset, as sale consideration minus cost of acquisition. In some recent rulings, it has been held that where the consideration in respect of transfer of an asset is not determinable under the existing provisions of the Income-tax Act, then, as the machinery provision fails, the gains arising from the transfer of such assets is not taxable.
It is, therefore, proposed that where in the case of a transfer, consideration for the transfer of a capital asset(s) is not attributable or determinable then for purpose of computing income chargeable to tax as gains, the fair market value of the asset shall be taken to be the full market value of consideration.
Accordingly, it is proposed to insert a new provision (section 50D) in the Income-tax Act to provide that fair market value of the asset shall be deemed to be the full value of consideration if actual consideration is not attributable or determinable. This amendment will take effect from 1st day of April, 2013 and will accordingly apply to assessment year 2013-14 and subsequent assessment years."
Thus the reasoning of the AAR in Dana Corporation [See note (iv)] and other cases that the full value of consideration could not be computed in case of corporate gift of shares and thus no capital gains tax could be levied, is sought to be legislatively overruled by providing that in such circumstances the consideration for capital gains tax would be the on the fair market value of the shares sought to be gifted. This amendment, though prospectively applicable from 01.04.2013, is aimed at ensuring that gift of shares does not lead to avoidance of capital gains tax. The question is, however, whether this amendment actually attains the objective which it proposes?
It is to be noted that in almost all the cases before the AAR [See note (v)] it was argued that the transaction of gift was not liable to capital gain also in view of Section 47(iii), which is a non-obstante provision to the effect that the levy of capital gains tax under Section 45 does not apply to “any transfer of a capital asset under a gift”. However, since the AAR concluded on non-ascertainment of consideration that the corporate gift of shares was not taxable, the applicability of Section 47(iii) was left unexamined. The AAR in Goodyear Tire & Rubber Co., In re [See note (vi)] specifically observed that “we need to mention that as we have found the answer to the questions raised within the realm of Sections 45 and 48 of the Act, there is no necessity to discuss whether Section 47(iii) of the Act is also attracted.”
Therefore, despite the introduction of Section 50D it is still open to the assessee to contend that “transfer of property made voluntarily and without consideration” (being the definition of ‘gift’ under Section 122 of Transfer of Property Act, 1882) continues to be outside the purview of capital gains tax. This is so even if the proposed Section 50D becomes law after enactment of the Finance Bill, 2012 as Section 50D would apply only in the event that the consideration “is not ascertainable or cannot be determined”. The non-obstante provision under Section 47 will continue to apply and transfer “without consideration” will continue to be outside the scope of capital gains tax.
The amendment would apply to cases where it is not possible to ascertain the ‘quantum’ of consideration. However reading Section 47(iii) and Section 50D together it emerges that the amendment will not apply to cases where the consideration is not ascertainable or cannot be determined. In cases where ‘quantum’ of consideration is not ascertainable, in view of the amendment, the fair market value of the asset would become the consideration. Thus if the assessee wants to reduce the capital gains liability (the actual consideration being less than the fair market value of the asset), the assessee would be bound to disclose the reciprocal consideration received on in such cases of transfer. However in the considered view of this author corporate gift of shares, in view of Section 47(iii) will continue to remain outside the liability from capital gains tax despite the proposed Section 50D.
[The author is Principal Associate, Lakshmikumaran & Sridharan, New Delhi]
End notes
* The author acknowledges the contribution of Mr. Sumeet Khurana, Joint Partner, Lakshmikumaran & Sridharan, New Delhi
[i] (2012) 247 CTR (Articles) 53.
[ii] (2009) 227 CTR (AAR) 441.
[iii] (2012) 342 ITR (Statutes) 293.
[iv] Supra.
[v] See Amiantit International Holding Ltd., In re (2010) 230 CTR (AAR) 19; Goodyear Tire & Rubber Co., In re (2011) 240 CTR (AAR) 209; and Deere & Company, In re (2011) 241 CTR (AAR) 497.
[vi] Supra.
This author in the article titled as ‘Taxability of Corporate Gift of Shares’ [See note (i)] had examined the ruling of AAR in Dana Corporation, In Re [See note (ii)] and others. In those rulings the AAR had, inter alia, held that no capital gains implications arose in case of gift of shares of subsidiary by holding company as ‘consideration’ in such cases of transfer could not be computed. This author in the said article had also commented that this position required to be considered by the legislature as it was leading to avoidance of tax and the interpretation was leading to absurdity. The Government, in the Budget for 2012-13 has sought to cure this anomaly. In this article the author examines whether the proposals made in the recently presented Budget actually cater to the issue.
In the Finance Bill, 2012 it has been proposed to introduce a new provision [Section 50D] in the Income Tax Act, 1961 which provides that “where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.”
The rationale given for the amendment, as explained in the Memorandum [See note (iii)], is as under:
"Fair Market Value to be full value of consideration in certain cases: Capital gains are calculated on transfer of a capital asset, as sale consideration minus cost of acquisition. In some recent rulings, it has been held that where the consideration in respect of transfer of an asset is not determinable under the existing provisions of the Income-tax Act, then, as the machinery provision fails, the gains arising from the transfer of such assets is not taxable.
It is, therefore, proposed that where in the case of a transfer, consideration for the transfer of a capital asset(s) is not attributable or determinable then for purpose of computing income chargeable to tax as gains, the fair market value of the asset shall be taken to be the full market value of consideration.
Accordingly, it is proposed to insert a new provision (section 50D) in the Income-tax Act to provide that fair market value of the asset shall be deemed to be the full value of consideration if actual consideration is not attributable or determinable. This amendment will take effect from 1st day of April, 2013 and will accordingly apply to assessment year 2013-14 and subsequent assessment years."
Thus the reasoning of the AAR in Dana Corporation [See note (iv)] and other cases that the full value of consideration could not be computed in case of corporate gift of shares and thus no capital gains tax could be levied, is sought to be legislatively overruled by providing that in such circumstances the consideration for capital gains tax would be the on the fair market value of the shares sought to be gifted. This amendment, though prospectively applicable from 01.04.2013, is aimed at ensuring that gift of shares does not lead to avoidance of capital gains tax. The question is, however, whether this amendment actually attains the objective which it proposes?
It is to be noted that in almost all the cases before the AAR [See note (v)] it was argued that the transaction of gift was not liable to capital gain also in view of Section 47(iii), which is a non-obstante provision to the effect that the levy of capital gains tax under Section 45 does not apply to “any transfer of a capital asset under a gift”. However, since the AAR concluded on non-ascertainment of consideration that the corporate gift of shares was not taxable, the applicability of Section 47(iii) was left unexamined. The AAR in Goodyear Tire & Rubber Co., In re [See note (vi)] specifically observed that “we need to mention that as we have found the answer to the questions raised within the realm of Sections 45 and 48 of the Act, there is no necessity to discuss whether Section 47(iii) of the Act is also attracted.”
Therefore, despite the introduction of Section 50D it is still open to the assessee to contend that “transfer of property made voluntarily and without consideration” (being the definition of ‘gift’ under Section 122 of Transfer of Property Act, 1882) continues to be outside the purview of capital gains tax. This is so even if the proposed Section 50D becomes law after enactment of the Finance Bill, 2012 as Section 50D would apply only in the event that the consideration “is not ascertainable or cannot be determined”. The non-obstante provision under Section 47 will continue to apply and transfer “without consideration” will continue to be outside the scope of capital gains tax.
The amendment would apply to cases where it is not possible to ascertain the ‘quantum’ of consideration. However reading Section 47(iii) and Section 50D together it emerges that the amendment will not apply to cases where the consideration is not ascertainable or cannot be determined. In cases where ‘quantum’ of consideration is not ascertainable, in view of the amendment, the fair market value of the asset would become the consideration. Thus if the assessee wants to reduce the capital gains liability (the actual consideration being less than the fair market value of the asset), the assessee would be bound to disclose the reciprocal consideration received on in such cases of transfer. However in the considered view of this author corporate gift of shares, in view of Section 47(iii) will continue to remain outside the liability from capital gains tax despite the proposed Section 50D.
[The author is Principal Associate, Lakshmikumaran & Sridharan, New Delhi]
End notes
* The author acknowledges the contribution of Mr. Sumeet Khurana, Joint Partner, Lakshmikumaran & Sridharan, New Delhi
[i] (2012) 247 CTR (Articles) 53.
[ii] (2009) 227 CTR (AAR) 441.
[iii] (2012) 342 ITR (Statutes) 293.
[iv] Supra.
[v] See Amiantit International Holding Ltd., In re (2010) 230 CTR (AAR) 19; Goodyear Tire & Rubber Co., In re (2011) 240 CTR (AAR) 209; and Deere & Company, In re (2011) 241 CTR (AAR) 497.
[vi] Supra.