2016 (8) TMI 1419 - AT - Income Tax

Tribunal allows appeal on maintenance charges, gifted shares taxability

Ultima Search Versus ACIT, Central Circle-38, (Af ter restructuring new jurisdiction DCIT, CC 6 (3) ), Mumbai.

The Tribunal allowed the assessee's appeal regarding maintenance charges, taxability of gifted shares under section 45(4), and fair market value under ... Gift of shares to company - transfer of capital - gift transaction - Applicability of provisions of section 56(vii)(a) - HELD THAT:- Equity interests are transferred by the assessee without consideration and it was a voluntary act. AO has not brought any adverse material against the above to conclude that the transactions involve the payment of consideration to the firm and the transfer of shares is not a voluntary act. In that sense, we find that the impugned Agreement dated 26.2.2010 has the required ingredients of the 'gift' agreement. This view gets strength from the finding of Honble Ahmedabad High Court in the case of M/s. Prakriya Pharmachem vs. ITO [2016 (1) TMI 946 - GUJARAT HIGH COURT] and the related transfer of shares constitutes an exempt transfer under the provisions of section 47(iii) of the Act. We have also perused the order of Honble Bombay High Court in the case of the recipient company NECL [2014 (4) TMI 480 - BOMBAY HIGH COURT] during the Stay Petition related proceedings and find that the assessee's claim of gift agreement is prima facie approved. - assessee grounds are allowed. Gift transaction is done only between the biological persons and not the firms and the companies - HELD THAT:- The decision of the Tribunal in the case of DP World (P) Ltd [2012 (10) TMI 444 - ITAT MUMBAI] KDA Enterprises [2015 (4) TMI 9 - ITAT MUMBAI] are relevant for the legal proposition that the gifts transferred by the Indian company to the foreign company constitutes a valid gift and the transfer is an exempt transfer u/s 47(iii) of the Act. Further, we accept the Counsel‟s proposition that share transfer by way of gift is allowable u/s 56(2)(viia) & 56(2)(viib) - assessee grounds are allowed. Applicability of provisions of section 28(iv) of the Act. - HELD THAT:- These provisions imply the arising of any benefit / perquisite to the assessee-firm. On facts of the present case, we find, there is no such any benefit or perquisite to the assessee firm by transfer of shares of UPL and UEL to NCPL. Assessee is the transferor and gained nothing in the process. It is the finding of the CIT (A) that the assessee did not receive any consideration - assessee grounds are allowed. Disallowing maintenance charges claimed as a deduction while computing income under the head income from house property - Municipal Taxes and maintenance charges and claimed deduction - HELD THAT:- Tribunal in the case of Sharimila Tagore [2004 (6) TMI 591 - ITAT MUMBAI] considered the non-occupation charges paid to the society has the 'depressing effect' on the ALV in the hands of the land lord of the property. Assessee now wants similar deduction at the time of calculating the ALV and not the deduction u/s 24. This appears to be a new argument raised by the Ld AR for the assessee. CIT (A) adjudicated this issue only from the point of view of section 24 and allowable deductions. In one view, this issue need re-adjudciation in the light of the new argument and the decision of the Tribunal (supra). Considering the above, we are of the opinion, this part of the ground needs to the remanded to the file of the AO for fresh adjudication. - Decided in favour of assessee for statistical purposes. Issues Involved:1. Disallowance of maintenance charges as a deduction under the head income from house property.2. Taxability of the gift of shares under section 45(4) read with section 48 of the Act.3. Violation of principles of natural justice by not issuing a show cause notice.4. Taxability of the fair market value of gifted shares under section 28(iv) of the Act.5. Applicability of the Supreme Court decision in McDowell & Co Ltd regarding the transaction as a colorable device to avoid tax.Issue-wise Detailed Analysis:1. Disallowance of Maintenance Charges:The assessee claimed a deduction of Rs. 76,116/- for maintenance charges while computing income under the head income from house property. The CIT (A) upheld the AO's disallowance of this deduction. The assessee argued that maintenance charges incurred by the landlord should be reduced for arriving at the Annual Letting Value (ALV) of the property as per section 23 of the Act, relying on the Tribunal's decision in Sharmila Tagore vs. JCIT. The Tribunal found the claim allowable, as non-occupancy charges have a depressing effect on the ALV of the property. The issue was remanded to the AO for fresh adjudication in light of this decision.2. Taxability of Gift of Shares under Section 45(4):The assessee transferred shares of UPL and UEL to NCPL without consideration, claiming it as a gift transaction covered under section 47(iii) of the Act. The AO treated it as a taxable transfer of capital assets under section 45, considering the purchase value of shares at NIL and the market value at Rs. 30,37,69,312/-. The CIT (A) confirmed the addition under section 45(4), stating it was a transfer of capital assets by way of distribution for the ultimate benefit of partners. The Tribunal, however, found no dissolution of the firm or transfer of assets to partners, thus section 45(4) was not applicable. The Tribunal reversed the CIT (A)'s decision, holding that the transaction was indeed a gift exempt under section 47(iii).3. Violation of Principles of Natural Justice:The assessee contended that the CIT (A) violated principles of natural justice by not issuing a show cause notice and not providing an adequate opportunity of being heard. The Tribunal did not specifically address this issue in detail, focusing instead on the substantive tax issues.4. Taxability under Section 28(iv):The CIT (A) held that the fair market value of gifted shares was taxable as a benefit arising in the course of business under section 28(iv). The Tribunal disagreed, stating that section 28(iv) deals with benefits or perquisites arising from business, which was not applicable as the assessee, being the transferor, did not gain any benefit from the transfer. The Tribunal reversed the CIT (A)'s decision on this ground.5. Applicability of McDowell & Co Ltd Decision:The CIT (A) applied the Supreme Court decision in McDowell & Co Ltd, treating the transaction as a colorable device to avoid tax. The Tribunal found no evidence of tax evasion or any consideration involved in the transfer, thus the McDowell decision was inapplicable. The Tribunal upheld the assessee's claim that the transaction was a genuine gift.Conclusion:The Tribunal allowed the assessee's appeal on the grounds of maintenance charges, applicability of section 45(4), and section 28(iv), and reversed the CIT (A)'s findings. The matter of maintenance charges was remanded to the AO for fresh adjudication. The appeal was allowed for statistical purposes.