Actionable claim can be validly gifted, and investment shares yield capital gains rather than business income.

An actionable claim in the nature of an unsecured debt, not a genuine issue of optionally fully convertible debentures, was treated as the subject of the gift because the asset must be characterised on the date of transfer. That asset was capable of being gifted as movable property, and the board resolution, acceptance by the donee and deed of confirmation were sufficient; the absence of a registered gift deed did not invalidate the transfer. Shares later held as investments were not stock-in-trade, so any profit on sale was chargeable under the head "Capital gains" and not as business income. Computation of capital gain required fresh examination.

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Issues: (i) what was actually gifted by the donor; (ii) whether the gift was valid in law; (iii) whether the profit on sale of shares was chargeable under the head "Capital gains" or as business income; (iv) how the capital gain was to be computed.

Issue (i): what was actually gifted by the donor

Analysis: The surrounding facts showed that no real issue of optionally fully convertible debentures had been established and the amount standing in the books was, in substance, a loan / recoverable debt. The legal character of the asset had to be determined as on the date of the gift, not by its later conversion into debentures or shares. The asset transferred was therefore an actionable claim in the nature of an unsecured debt having nil book value in the hands of the donor.

Conclusion: The subject of the gift was an actionable claim comprising the recoverable debt, not OFCDs.

Issue (ii): whether the gift was valid in law

Analysis: An actionable claim is movable property capable of being gifted. The donor had passed a board resolution, the donee had accepted the transfer, and a deed of confirmation supported the transaction. For movable property, the transfer may be effected either by registered instrument or by delivery. The absence of a registered gift deed did not invalidate the transfer, and the fact that the asset had little or no value did not prevent it from being the subject of a valid gift.

Conclusion: The gift was valid in law under Sections 122 and 123 of the Transfer of Property Act, 1882.

Issue (iii): whether the profit on sale of shares was chargeable under the head "Capital gains" or as business income

Analysis: The assessee had not carried on share-trading business and had reflected the shares as investments. On the facts, the shares were not stock-in-trade but capital assets held as investment. The sale proceeds were therefore not assessable as business income merely because the chain of transactions began with a gifted debt and its subsequent conversion into debentures and shares.

Conclusion: The profit, if any, on sale of shares was assessable only under the head "Capital gains".

Final Conclusion: The Revenue succeeded only to the limited extent that the computation of capital gain required fresh examination by the Assessing Officer, while the findings on the nature of the gifted asset, the validity of the gift, and the head of income were upheld in substance.

Ratio Decidendi: An actionable claim is movable property capable of valid gift by delivery and acceptance, and where shares are held as investment rather than trading asset, the resulting gain is chargeable under the head "Capital gains".

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