We are pleased to
release a Tax Alert which summarizes a recent ruling of the Mumbai Income Tax
Appellate Tribunal (Tribunal), in the case of KDA Enterprises Pvt. Ltd.
(Taxpayer), on the issue of possibility of an Indian company making a
transaction of a gift and the tax consequences in the hands of the recipient
Taxpayer. In this case, the Taxpayer received, as gift from four companies
(Donors), their entitlement to receive dividends from Reliance Industries Ltd.
(RIL). The Tribunal agreed that the governing Indian laws regulating corporate
entities and the transaction under consideration recognize that a valid gift
transaction can be entered into between two Indian corporate entities.
Furthermore, the provisions of the Indian Tax Laws (ITL) subject only receipts
in the nature of “income” to tax, unless expressly provided otherwise in the
ITL. Therefore, the amount of gift so received by the Taxpayer, being a capital
receipt, is not taxable under any provisions of the ITL, as no specific
provisions are present in the ITL to tax the same.
This well-reasoned decision of the Tribunal has expounded various principles for determining whether a gift transaction is valid. The Tribunal has referred to various laws governing gift transactions between corporate entities and has accepted that, for a valid gift, natural love and affection is not a prerequisite. The Tribunal has reiterated the principles explained by the Chennai Tribunal in the case of Redington (India) Ltd., and has upheld that a gift between corporate entities is a valid and legal transaction. Furthermore, the Tribunal has reiterated the principle on taxability of income that every item of receipt is not, by default, taxable in the hands of the recipient. It has to first satisfy the requirement of being in the nature of “income” or be covered under a specific provision to tax the receipt under the provisions of the ITL. The Tribunal also reiterated the principles laid down in the SC’s decision in the case of Apollo Types that the Tax Authority has no power to make adjustments to book profits computed for the purpose of MAT if the books of account are in conformity with the provisions of the Companies Act
This well-reasoned decision of the Tribunal has expounded various principles for determining whether a gift transaction is valid. The Tribunal has referred to various laws governing gift transactions between corporate entities and has accepted that, for a valid gift, natural love and affection is not a prerequisite. The Tribunal has reiterated the principles explained by the Chennai Tribunal in the case of Redington (India) Ltd., and has upheld that a gift between corporate entities is a valid and legal transaction. Furthermore, the Tribunal has reiterated the principle on taxability of income that every item of receipt is not, by default, taxable in the hands of the recipient. It has to first satisfy the requirement of being in the nature of “income” or be covered under a specific provision to tax the receipt under the provisions of the ITL. The Tribunal also reiterated the principles laid down in the SC’s decision in the case of Apollo Types that the Tax Authority has no power to make adjustments to book profits computed for the purpose of MAT if the books of account are in conformity with the provisions of the Companies Act
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