Gift” by company to subsidiary appears to be “Dubious tax avoidance scheme”

The Applicant, a Singapore company, “gifted” the shares of Bharath Wind Farm Ltd, an Indian company, to its 99.61% subsidiary Orient Green Power Ltd, another Indian company. As the gift was made prior to the enactment of s. 56(2)(viia) and there was no consideration received, it was claimed that there was no taxable income and that the transfer pricing provisions did not apply. The department opposed the applicant on the ground that it did not appear to be genuine. HELD by the AAR:

U/s 82 of the Companies Act, shares in a company is moveable property transferable in the manner provided by its Articles of Association. The applicant has not shown the gift was authorized by its Articles. It is difficult to imagine the Articles of Association of a company providing for gifting away of the assets in the form of shares in another company by what is attempted to be described as oral gift. A “gift” by one company to another company of shares in a public company appears to be strange, unless it be one which has been set up for some purpose. The revenue’s contention that the purpose of the gift is to avoid tax and s. 56(2)(viia) is not far-fetched. Also, s. 47(i) & (iii) appear to apply to gifts by individuals and HUFs and not by companies. The Authority has the right & the duty to consider the reality of the transaction and genuineness of the transaction, in addition to its validity. When such transactions are entered into involving substantial assets the applicant has to prove to the hilt the factum, genuineness and validity of the transaction, the right to enter into the transaction and the bona fides of the transaction. 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 AO is in a better position to make a proper enquiry into the question of the genuineness and validity of the transaction. Hence, a ruling is declined.