Taxmen must probe inter-corporate gifts: Authority for Advance Ruling

29 OCT, 2012, 07.17AM IST, M PADMAKSHAN,ET BUREAU 

MUMBAI: Gifts given by one company to another need to be probed into by the tax authorities, according to the Authority for Advance Ruling, a quasi-judicial body for deciding tax disputes involving foreign companies. 

In a recent ruling in an application filed by Singapore company Orient Green Power, AAR held that a "gift" by a corporate to another corporate deserved to be inquired into by the income-tax department as the intentions of such transactions are always under a cloud. 

In this case, Orient Green Power "gifted" the shares of Indian company Bharath Wind Farm, to its subsidiaryOrient Green Power Ltd India , another Indian company. 

Since no consideration was paid in return for the "gift", the Singapore company claimed tax is not liable to be paid in India. 

The company also argued that the transfer of shares was effected before the section 56 (2) (viia) of the Income-tax Act, that stipulated such transfers are liable to be taxed, became operational. 

The income-tax department objected to this claim on the ground that the "gift" was a ploy for avoiding paying tax in India. 


The AAR observed that though the provisions of the Companies Act provide for transfer of shares, the taxpayer company did not prove that the transfer was in accordance with the provisions of the Companies Act, the AAR pointed out. AAR further observed that a gift of shares by one company to another appears to be a strange transaction. 

Therefore the tax authorities' contention that the "gift" was a ploy to avoid tax cannot be construed farfetched. 

The AAR pointed out that gifts are usually given by individuals and Hindu Undivided Family and not by companies. 

"A gift by a corporation to another corporation (through a subsidiary or an associate enterprise, which is always claimed to be independent for tax purposes) is a strange transaction," AAR observed. 

The AAR further observed that whenever such transactions involving substantial assets take place, the company concerned is liable to prove the genuineness and validity of the transaction by presenting all relevant facts. 

"To postulate that a corporation can give away its assets free to another, even orally, can only be aiding dubious attempts at avoidance of tax payable under the Act," the AAR held. 

The AAR held that the tax authorities are in a better position to investigate the genuineness and validity of the transaction and therefore declined to give an order to the taxpayer's application.