Chennai ITAT rules that gift by corporates is valid in law and exempt from capital gain tax

This Tax Alert summarizes a recent ruling of Chennai Income Tax Appellate Tribunal (ITAT) in the case of Redington (India) Ltd. (Taxpayer) on the issue whether transfer of shares of subsidiary to its step down subsidiary by way of gift is valid and whether the same is taxable under the provisions of the Indian Tax Laws (ITL). The ITAT ruled that gift by corporates is valid in law and presence of “love and affection” is not a pre-requite of valid gift. Accordingly, transfer by way of gift is eligible for exemption under the provisions of the ITL, even in the hands of the company. Further, the ITAT held that, even otherwise in absence of consideration, computation mechanism will fail and, therefore, gift transaction is not liable for capital gains tax. In the absence of income chargeable to tax under the provisions of the ITL, the transfer pricing (TP) provisions cannot be invoked or applied.

The ITL specifically provides that a transfer of a capital asset under a “gift” would not be regarded as a transfer for the purpose of capital gains tax. While the term “gift” is not defined in the ITL, it is generally understood that a voluntary transfer by one person to another for no consideration could constitute a gift. Furthermore, there does not appear to be a requirement that gift can take place only between natural persons. This ruling supports that the corporate taxpayers are also covered by exemption provision. The ITAT also has reaffirmed that there can be no tax trigger in the absence of consideration and the computation mechanism of capital gains chapter fails. Further, the ITAT has echoed the principle that in the absence of income component, the TP provisions should not be applicable.