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Issues: (i) Whether the transfer of shares held as stock in trade by a corporate donor to other group companies as a gift in the course of family realignment gave rise to taxable business income in the hands of the donor. (ii) Whether rejection of the books of account under section 145 of the Income-tax Act, 1961 was justified.
Issue (i): Whether the transfer of shares held as stock in trade by a corporate donor to other group companies as a gift in the course of family realignment gave rise to taxable business income in the hands of the donor.
Analysis: A corporate entity is a separate juridical person and cannot, merely because its shareholders belong to a family group, be treated as a member of a family arrangement for tax purposes. The gift was authorised by the articles of association, approved by the board and shareholders, and was found to be completed without any receipt of money, assets, or other consideration in the donor's hands. In the absence of any statutory provision charging the notional market value of gifted stock-in-trade to tax, and applying the principle that only real income can be taxed, the transfer could not be assessed as business income. The decision in Kikabhai Premchand was treated as supporting the assessee's case that withdrawal of stock from business for such transfer does not generate taxable income.
Conclusion: The transfer did not result in taxable business income in the hands of the assessee and this issue was decided in favour of the assessee.
Issue (ii): Whether rejection of the books of account under section 145 of the Income-tax Act, 1961 was justified.
Analysis: Once the foundational premise of taxable income on the alleged transfer was rejected, the basis for treating the books as unreliable on account of non-credit of any supposed sale proceeds also failed. The accounts reflected the gift transaction and the debit to reserves and surplus, and no independent defect warranting rejection was sustained on the facts accepted in the final decision.
Conclusion: Rejection of the books of account was not sustained and this issue was decided in favour of the assessee.
Final Conclusion: The assessee succeeded on the core dispute concerning taxability of the share transfer, while the ancillary accounting challenge also fell with that finding, resulting in a partial allowance of the appeal in substance.
Ratio Decidendi: In the absence of any consideration and in the absence of a charging provision covering the notional value of gifted stock in trade, a corporate donor's transfer by way of gift does not give rise to taxable business income; real income alone can be brought to tax.
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