Shares got through corporate actions are not gift

Arnav PandyaIndividual taxpayers have a relief when they experience some specific changes with respect to their investments because till now they had to pay tax on several transactions where they had no hand in any transaction yet it was considered as a taxable one by the tax authorities. This led to a strange situation with the individual having little control over the extent of taxation but with a clarification now this worry has gone and there is going to be similar treatment for all kinds of taxpayers. The main issue relates to what constitutes a gift and whether some transactions would be covered under the provision. Here is a detailed look at the changes and the impact that this will have on the taxpayer.Nature of giftThe provisions of the Income tax Act state that if an amount or a gift is received from a person who is not a relative and that too in conditions that are not specifically exempted like that at the time of marriage and so on then this would be taxed if the amount crosses a specific limit. This limit is Rs 50,000 in a year and this would thus include a whole host of receipts that are not specifically excluded. Since the coverage of the section is wide it brings under the ambit transactions that cover both immovable property as well as other property. This also includes a situation where there is allotment of shares post demerger or amalgamation of a company.Actual situationIn a situation where there is a demerger of a company what happens is that the existing company will separate out its business. For this separation the existing shareholders will receive shares in the new demerged companies. In addition where there is an amalgamation two or more companies would come together and they would form another company. In this case too, the investors who hold shares in the old company would be compensated by giving them shares in the new company. In both these cases the consideration that is received by the individual is classified as being in the nature of gift and at the same time there will have to be inclusion of the amount for the purpose of calculation of tax. If the total amount of such shares is more than Rs 50,000 then the individual would have to pay tax on this amount.DistinctionThere is a distinction that had to be made when there was allotment of shares following a demerger or an amalgamation because if the recipient was a firm or a company this process would not be considered as a transfer for them and hence there would be no inclusion for the purpose of taxation as a gift. Individuals and Hindu Undivided Family were out of this ambit. The new change now brings the situation on an equal footing with a clear detail that if the shares are received by an individual too then this would not be considered as a gift for the purpose of tax calculation.This is a logical step that has been taken because there are two things that need attention. The first is that the process of allotment of shares post a demerger or amalgamation is not an additional benefit but it is just a change in the existing holdings which are undergoing a new form as this is in order to keep up with the overall development related to the company. The other thing is that exempting firms and companies while taxing individuals was also not fair as the tax treatment has to be equal for everyone and the extension of the benefit to individuals will mean that a lot of investors will not be troubled by these types of corporate movements. Such changes are happening in a large number of cases and this will now be a matter of relief for the individual.