Tribunal upholds the sanctity of corporate gifts made pursuant to an internal restructuring exercise; quashes revisionary proceedings

In a recent decision in the case of M/s Direct Media Distribution Ventures Private Limited v Principal Commissioner of Income Tax (ITA No: 2211/Mum/2019), the Mumbai bench of the Income Tax Appellate Tribunal (Tribunal) while deciding on the issue of invocation of revisionary proceedings by the Commissioner of Income Tax (CIT) dealt with the taxability of a gift of shares between corporates. The Tribunal held that there is nothing in law which estops corporates from making a gift of shares to each other, more so when the intention of the parties is supported by an internal restructuring exercise, which was driven by commercial reasons. Per Section 263 of the Income Tax Act, 1961 (IT Act), a CIT has the power to invoke revisionary proceedings by modifying/enhancing an order of the tax officer if the same is erroneous and prejudicial to the interests of the revenue.

Background

The facts relating to the case are as follows: Direct Media Distribution Ventures Private Limited (Taxpayer) was engaged in the business of media distribution, including the distribution of television channels via cable network. For the relevant Financial Year (FY) 2013-14, the Taxpayer filed its return of income and disclosed that it had transferred equity shares of Dish TV India Limited (Shares) to its related party, Direct Media Solution Private Limited, as a gift pursuant to a corporate restructuring exercise.

It is to be noted that the above Shares had been acquired by the Taxpayer earlier, at Nil consideration from its group companies, under another restructuring exercise.

The return of income of the Taxpayer was accepted and the Tax Officer passed an order, accordingly. However, the CIT invoked its revisionary powers under the IT Act and sought to revise the Tax Officer’s order treating it to be erroneous. The CIT revised the order to hold that the Taxpayer would be required to pay capital gains tax on the transfer of Shares by deeming the fair market value of such Shares as the sale consideration. 

The Taxpayer being aggrieved by the order of CIT, filed an appeal before Tribunal. The Tribunal observed that:

Taking the above into consideration, the Tribunal held that given that the Tax Officer had made due enquires and had taken a possible view on the transaction – which cannot be construed as erroneous, it was not open to the CIT to initiate a revision proceeding against the Taxpayer. Accordingly, the Tribunal held in favour of the Taxpayer.

Comments

This is a welcome ruling of the Tribunal reiterating that there is no prohibition under Indian law on the corporate gifting of shares or otherwise; and hence the donor company will be eligible to claim exemption from capital gains tax accorded under the IT Act. However, it is interesting to note that the Tribunal has also given due credence to the fact that the gift of shares by the Taxpayer was in furtherance of an internal restructuring exercise and hence, the transaction was driven by commercial expediency. In an era where general anti avoidance rules and fair value rules have been incorporated into the IT Act, it is of paramount importance to ensure that there is a sound commercial rationale and substance for undertaking corporate actions involving the transfer of any right and/or interest.

-          Shabnam Shaikh (Principal Associate) and Dhruv Kapadia (Associate)

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