Capital Gains Tax on Share Transfers as Gifts: Bombay High Court Clarifies Rules

Mumbai, 11 May, 2024: The Bombay High Court has recently clarified whether or not Capital Gains Tax (CGT) applies in instances of share transfers as gifts. This was seen as necessary owing to some people transferring shares to others close to them without necessarily considering the tax consequences, which at times led to surprise income tax notices. This judgment gives some important lessons on how such deals are taxed; therefore, it is going to serve as a landmark decision in future cases of its kind.

The case in question is about Narayan Murthy, the man who founded the famous Infosys Information Technology Corporation, who gifted shares worth approximately 240 crores to his grandson, Rohan Murthy. Later, Rohan received dividends amounting to 4.2 crore from these shares. While transferring these stocks as gifts brings up questions about whether he ought to be taxed for capital gains on these assets or not.

According to the Bombay High Court, shares that are transferred as gifts do not attract CGT. In this significant pronouncement in the case of Jay Trust versus the Central Government, the court made it clear as to the taxation in respect of gifts made through the transfer of shares.

In the opinion of the court, a gift transaction entails the giving up of property without receiving anything in return, thereby not being liable to CGT, from which tax the court said it is free. In this regard, the court ruled out any possibility of evasion on the part of Jay Trust through gifts made out in the form of shares.

Moreover, the court made it clear that no profits or gains may be imputed unless there is an exchange. Given that a gift is made out of generosity without any form of payment, its value cannot be assessed for taxation reasons.

Jay Trust’s transfer of listed companies’ shares, namely United Phosphorus Limited (UPL) and Uniphos Enterprises Limited (UEL), into NERKA Chemicals Private Limited (NCPL), as gifts, is what the whole matter is about. It is worth noting that no monetary consideration was involved in this transfer.

Jay Trust did not disclose any income or revenue that was acquired from the transaction and claimed that the trust had no profits. Consequently, a notice was issued by the tax department in order to commence the assessment. However, when Jay Trust contested this reassessment, the authorities later ruled out the reassessment. The trust then approached the court, seeking justice in this matter.

The ruling of the Bombay High Court puts emphasis on the point that one gets profit from selling property or capital goods only when there is consideration involved in the transaction. However, giving away presents is more of a personal choice where no profit is earned, hence no reason for taxing any income realized from it.

When a share, gold, real estate, such as land or buildings, etc., is sold for more money than was paid relatively for it, then the money that has been earned on this profit is called capital gain. Short-term capital gains tax rates are payable at individual income tax slab rates for assets sold within a year after their purchase, while long-term capital gains tax rates are payable at a flat rate with indexation benefits adjusting for inflation.