The taxability of gifts by companies has always been a vexed question. Generally, the tendency to provide gifts arises out of human traits of love and affection. However, there have been instances where corporates have indulged in gifting of assets as a tool to implement family settlements or engage in estate planning. Such transactions are on the radar of the ITA and are frequently subjected to rigorous scrutiny. While transactions involving inter-corporate gifts have been upheld by Courts on several occasions, the matter is yet to be settled finally.^[1]

In this context, the recent case of Balaji Trust^[2] is worth noting. The patriarch of the Ruia family, Mr. Shashikant Ruia had settled a private discretionary trust (‘Trust’) for the sole and exclusive benefit of the members of the Ruia Family (‘Essar Group’). As the brand was settled without any consideration, the Trust did not recognize this transaction in its financial statements. Thereafter, M/s Essar Investments Limited contributed the brand ‘Essar’ to the corpus of the Trust as a voluntary gift. The Trust entered into brand licensing agreements with the Essar Group for the grant of a non-exclusive license to use the ‘Essar’ brand in India, in consideration for a license fee. Such fee was accounted as income in the Trust’s financial statements for the financial year 2012-13 onwards, under the cash system of accounting.

The Assessing Officer (‘AO’), however, alleged that the definition of income under Section 2(24) of the IT Act, was an inclusive definition and was wide enough to encompass receipt of trademark and copyright. The AO computed the value of the trademark and the copyright by applying the discounted cash flow method and taxed the same as “income from other sources” under Section 56(1) of the IT Act, which provides for taxation of residual income, i.e., receipts which cannot be brought to tax under any other head of income. The AO also held that as the ‘Essar’ brand was registered as an “artistic work” under the Copyright Act, 1957, it should be taxed as a “work of art” under Section 56(2)(vii) of the IT Act. Alternatively, the receipt could also be taxed under Section 28(iv) of the IT Act. ^[3]

The Commissioner of Income-tax (Appeals) (‘Commissioner’), however, reversed the findings given by the AO holding that: (i) the receipt of the ‘Essar’ brand by the Trust was a capital receipt and could not be brought to tax under Section 56 of the IT Act; (ii) the ‘Essar’ brand could not be classified as a “work of art” for the purposes of Section 56(2)(vii) of the IT Act; and (iii) as the Trust was not carrying out any business on the date of receipt of the ‘Essar’ brand, the same cannot be taxed under Section 28(iv) of the IT Act.

On appeal by the Revenue before the Income Tax Appellate Tribunal (‘Tribunal’), the Tribunal echoed the findings given by the Commissioner and further made the following favorable observations:-

(i)   the ‘Essar’ brand received by the Trust neither carries any element of profit nor falls within any category of income prescribed under Sections 2(24), 56(1) or 56(2)(vii) of the IT Act;

(ii)   in all cases in which a receipt is sought to be taxed as income, the burden lies upon the Revenue to establish that the same falls within the ambit of a taxing provision. In the present case, the Revenue had failed to establish the receipt of brand partook the nature of “income”;

(iii)  the definition of “income” will not include capital transactions unless specifically provided for;

(iv)   a brand cannot be classified as “work of art” for purposes of Section 56(2)(vii) of the IT Act;

(v)   capital receipts do not fall within the purview of Section 28(iv) of the IT Act; and

(vi)   the valuation of a brand has to be done in accordance with the methods prescribed under Rule 11UA(1)(b) of the IT Act.

The above ruling is not only beneficial for the assessee involved in the matter, but is likely to aid assessees who might be keen to use such inter-corporate gifts as a measure of estate planning. Such assessees, should however, carefully analyse the restructuring transaction to avoid any possible fallouts with the Revenue, particularly, where a gift is challenged as a “device”, including by invocation of General Anti-Avoidance Rules by ITA.

[1] See as an example, DCIT vs. DP World Pvt Ltd, 140 ITD 694 (Mumbai Tribunal); DCIT vs. KDA Enterprises Ltd, 68 SOT 349 (Mumbai Tribunal); DCIT vs Nerka Chemicals, order dated August 31, 2018 in ITA No. 4423/Mum/2014 (Mumbai Tribunal); Redington (India) Ltd. v. Joint Commissioner of Income-tax, Company Range-V (3), Chennai, [2014] 49 taxmann.com 146 (Chennai Tribunal); Goodyear Tire and Rubber Co., In re [2011] 334 ITR 69 (AAR), affirmed by Delhi High Court vide order dated February 27, 2013 in W.P.(C) 8295/2011 (Delhi High Court); Deere & Co., In re 11 taxmann.com 388 (AAR); Amiantit International Hondings Ltd., In re [2010] 322 ITR 678 (AAR) and Dana Corpn., In re [2010] 321 ITR 178 (AAR). However, please also see the observations in Orient Green Power Pte. Ltd., In re, [2012] 24 taxmann.com 137 (AAR).

[2] ACIT vs. M/s Balaji Trust, order dated November 25, 2021 in ITA No. 5139/2017(Mumbai Tribunal).

[3] Section 28(iv) of the I.T. Act, seeks to tax “the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of any profession”.