Gift of stock in trade

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varun.v (Querist)
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01 August 2014 what is the chargeability of transferring stock in trade as gift,whether it is chargeable in the hands of the transferor or the transferee.

Rupesh Jain

Rupesh Jain (Expert)
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01 August 2014 gift amount will reduce the capital of proprietor or partner. and make gift to relative is not taxable.

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varun.v

varun.v (Querist)
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06 August 2014 could you please give me a detailed explaination

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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25 July 2024 The chargeability of transferring stock in trade as a gift depends on several factors under Indian income tax laws. Here’s a detailed explanation:

1. **Transferor (Donor) Perspective**:
- When stock-in-trade (goods held for sale in the ordinary course of business) is transferred as a gift, the transferor needs to consider the tax implications:
- **Capital Gains Tax**: Under Section 45 of the Income Tax Act, any transfer of a capital asset, which includes stock-in-trade, is deemed to be a transfer and may trigger capital gains tax liability.
- **Calculation of Capital Gains**: The capital gains are computed as the difference between the fair market value (FMV) of the stock-in-trade on the date of transfer and the cost of acquisition.
- **Tax Rate**: Depending on whether the asset qualifies as short-term or long-term, applicable capital gains tax rates will apply.

2. **Transferee (Donee) Perspective**:
- The recipient of the gift (donee) generally inherits the cost of acquisition and the holding period of the donor for determining future capital gains tax liability.
- If the donee subsequently sells the stock-in-trade, capital gains tax will be computed based on the sale proceeds less the cost of acquisition (which is the same as the donor’s cost).

3. **Specific Conditions**:
- **Specified Relatives**: If the transfer of stock-in-trade is between specified relatives (as defined under Section 56 of the Income Tax Act, which includes spouse, siblings, lineal ascendants/descendants), then no income tax implications arise for the donee. However, the transferor may still be liable for capital gains tax.
- **Business Purpose**: If the transfer of stock-in-trade is not for a genuine business purpose or is considered as a tax avoidance measure, the tax authorities may scrutinize the transaction under anti-avoidance provisions.

4. **Documentation and Compliance**:
- The transfer of stock-in-trade should be properly documented with a gift deed or agreement to establish the gift transaction.
- Compliance with company law and other regulatory requirements related to the transfer of business assets should be ensured.

5. **Tax Planning and Advice**:
- It’s advisable to seek advice from a tax professional or chartered accountant to ensure proper tax planning and compliance with applicable laws.
- Professional advice can help in minimizing tax liabilities and ensuring that all legal requirements are met during the transfer of stock-in-trade as a gift.

In summary, while the transferee generally does not face immediate tax liability upon receiving stock-in-trade as a gift (especially if they are specified relatives), the transferor may be liable for capital gains tax on the transfer based on the fair market value of the stock-in-trade at the time of transfer.