Shares given as gift may escape capital gains tax

If shares are transferred as a gift, there may not be capital gains tax on them, provided a recent Bombay High Court ruling sets a precedent.

In a case related to Mumbai-based Jai Trust versus Union government, the court ruled that a gift is a consideration-less transaction, and hence, not liable for capital gains tax.

It quashes the reassessment notice issued by the tax authorities alleging that a specific income has escaped assessment on transfer of shares as gift by the trust.

The court held that a gift is a voluntary transfer and does not require a consideration, and when there is a consideration received, only then can the profit or gain be measured.

The assessee being a trust, had filed a ‘zero’ return of income, which was accepted and processed.

The assessee had transferred shares of United Phosphorus (UPL) and Uniphos Enterprises Limited (UEL), both public listed companies, to one Nerka Chemicals Private Limited (NCPL). It was by way of a gift without any consideration.

Thereafter, the trust received notice and filed its objections against reopening of assessment, which the assessing officer had rejected.

The assessee challenged it through a writ petition in the court.

Manish Garg, transfer pricing and litigation expert at AKM Global, said the judgment is likely to provide clarity on transactions where capital assets are transferred without consideration.

He said the tax department often views these transactions as tax planning tools and tries to plug the underlying evasion.