Taxability on Gift of Capital asset by a Company

Last updated: 10 September 2024

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Gifting a capital asset from a company is generally considered a taxable transfer, unlike gifts made by individuals or Hindu Undivided Families (HUFs). While Section 47(iii) of the Income Tax Act previously exempted gifts from individuals and HUFs, recent amendments effective from AY 2025-26 clarify that this exemption does not extend to companies. This distinction is crucial for understanding capital gains tax liabilities on corporate gifts.

1. Sec. 47 on transfers not regarded as transfers states as follows:

(iii) any transfer of a capital asset by an individual or a Hindu undivided family, under a gift or will or an irrevocable trust;

2. The aforesaid clause (iii) of Section 47 of the Income Tax Act specifically states that any gift of a capital asset by an individual or HUF shall be considered an exempted transfer.

Company Gifts of Capital Assets: Tax Implications Explained

Thus it is evident that a gift of a capital entity by any person other than an individual or a HUF shall be a taxable transfer liable to capital gains tax.

3. The aforesaid inclusion of an individual and HUF specifically in Sec. 47(iii) was made by Finance Act No. (2) 2024 in the backdrop of the following explanation (Page 47 of Memorandum to Finance Bill 2024):

Section 47 of the Act provides exclusion to certain transactions not regarded as transfers for the purposes of chargeability under 'Capital Gains' under Section 45.

2. Clause (iii) of Section 47 provides that nothing contained in Section 45 shall apply to any transfer of a capital asset under a gift or will or an irrevocable trust. …….

3. ……………………… However, in multiple cases, taxpayers have argued before judicial fora that a transaction of a gift of shares by a company is still not liable to capital gains tax, in view of the provisions of Section 47(iii) of the Act. The matter thus remains a litigated issue, leading to:

a) tax avoidance and

b) erosion of the Indian tax base.

4. Further, a gift is given out of natural love and affection, and accordingly it is proposed to substitute clause (iii) of section 47 and its proviso to provide that nothing contained in section 45 shall apply to the transfer of a capital asset, under a gift or will or an irrevocable trust, by an individual or a Hindu undivided family.

5. This amendment is proposed to be made effective from AY 2025-26.

4. Thus, it is evident from the aforesaid explanation in the memorandum that a gift of a capital asset by a company to any person would be a taxable transfer.

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