Company Can Receive Gifts Other Than Share Without Any Tax Implication !

A company raises funds primarily by issue of shares or accepting  loans  from various parties. When a private limited or closely held company issues shares , it has a risk of taxation of the amount of premium which is more than the  fair market value  of the shares. If the company receives loan from parties, then again the tax problem of so called “unexplained cash credit” erupts if unfortunately your case is selected for scrutiny. This post is specially meant for the private limited companies who desires to raise funds from

1. Individuals who are related to major share holders of company .
2. Other closely held companies

Whether company law allows receipt of gift by a company ?

There is no prohibition under companies law for receiving gift by a company in any form. But the real authorization for a company to receive or give the gift comes from the Memorandum and Articles of Associations. Therefore, if the company is authorized by its MoA or AoA about receipt of the gift, the transaction is completely legal as far as the Companies Act is concerned.

What About Other Laws ?

The other law that is very relevant in case of gift is Transfer of Property Act. It is seen that the expression ‘transfer of property’ defined by section 5 of the TPA means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, or to himself and one or more other living persons;

Company is included in the definition of  ‘living person’ .

Further ,section 122 of the Transfer of Property Act, 1882 defines  gift as the transfer of certain existing movable or immovable property made voluntarily and without consideration by a person called the donor to another called the donee, and accepted by or on behalf of the donee.

It is clear that TPA , legalizes the gift transactions by a company .

In case of Redington India (P) Ltd vs JCIT [2014] 49 taxmann.com 146 (Chennai – Trib.) , the question before ITAT was whether in view of provisions of Transfer of Property Act, 1882 and Gift-tax Act, 1958, a company can make a valid gift within meaning of Act , to which ITAT answered yes  and therefore held that transfer of shares made by assessee company without consideration was a valid gift and in absence of any income element involved, transaction in question could not be subjected to transfer pricing provisions.

Is the Gift Received by A Company Taxable ?

The gift ( although this words is not used in the Income Tax Act ) is taxable in case of company only if the transaction falls under the provision of section 56(2)(viia) and sub-clause(viib) of the I.T.Act  which are given below :

(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested,—

  (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;

  (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration :

Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47.

Explanation.—For the purposes of this clause, “fair market value” of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);

(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:

Provided that this clause shall not apply where the consi-deration for issue of shares is received—

   (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or

  (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

Explanation.—For the purposes of this clause,—

  (a) the fair market value of the shares shall be the value—

  (i) as may be determined in accordance with such method as may be prescribed; or

 (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature,

whichever is higher;

 (b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) ofExplanation to clause (23FB) of section 10;

Under section 56(2)(viia) , only gift of shares if Fair Market Value (FMV) exceeds Rs 50,000 is taxable in hand of company or firm recipient.

Under section 56(2)(viib) , only premium in excess of FMV charged as consideration of shares is taxable 

Is Mutual Love & Affection Necessary for Gift  in case of Companies?

This is very interesting , because in case of human being, one can not think of the gift without love and affection between donor and donee. But can love and affection exist between companies to justify the  gift . Not really as per the recent judgment of ITAT , Mumbai in case of CIT v. KDA Enterprises (P.) Ltd. [2015] 57 taxmann.com 284/68 SOT 349 which relates to assessment year 2009-10 , the ITAT agreed with the contention of the assessee that for gift between companies , there need not be any need for love and affection. The facts related to the case was

The assessee had received  gifts from four companies who explained the source of gift amount from dividend received from another company. The was claimed in the Balance Sheet as capital receipt. The transaction of gift was authorized  by the  Memorandum and Articles of Association of the donors as well as the donee . Further the resolutions to this effect had also been passed by the Board of Directors and shareholders of the Companies.

On the ground that the said gift is capital receipt and not taxable under I.T.Act , the assessee claimed it as tax free income. However ,the tax authorities assessed the said amount as income under the normal provisions of the Act and also effectuated an addition to the book profits under section 115JB of the Act.

CIT (Appeal) however deleted the addition.

When matter was agitated before ITAT, it confirmed the order of CIT (A) holding as under :

1. All receipts are not taxable under I.T.Act. But only those receipt which are revenue in nature and fall under the definition of income as given u/s 2(24) are taxable.
2. Only those capital receipts which are specifically made taxable under sec. 2(24) is taxable.
3. It is settled position of law that gits are capital receipts in hand of recipients.
4. Where capital receipts not in the nature of income are intended to be taxed, the Legislature has specifically made provisions for tax ability of such receipts in the statute itself such as section 45, section 56(v), 56(vi), 56(vii), etc.
   1. ITAT relied on its own judgment in case DP World (P.) Ltd. v. Dy. CIT [2013] 140 ITD 694/[2012] 26 taxmann.com 163 that held that gifts received by company  are capital receipts and they are not taxable either under the head income from other sources or section 28(iv) of Income Tax Act.
5. If the said gift is considered capital reserve and was not included in the P & L account that was prepared as per Part II and III of Schedule VI of the Companies Act , the A.O has no power to add the same u/s 115JB of the Income Tax Act . For this , tribunal relied on Supreme Court judgment in  Apollo Tyres Ltd. vs. CIT 255 ITR 273 (SC)
6. There is no need for mutual love and affection for the gift between companies. Tribunal agreed with the argument of the assessee that
   1. There is no definition of gift under I.T.Act

   2. section 5 of the Transfer of Property Act defines the term “Transfer of Property” as under:

      “5. “Transfer of Property” defined – In the following sections “transfer of property” means an act by which a living person conveys property, in present or ill future, to one or more other living person or to himself and one or more other living persons; and “to transfer property” is to perform such act.

      In this section “living person” includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals .

   3. Section 122 of the Transfer of Property Act provides for making of a gift and permits transfer of moveable or immovable property but without any consideration. In other words, Transfer of Property Act permits a company to gift or donate movable or immovable property.
   4. Nowhere in aforesaid provisions , mutual love and affection is a conditions for a gift transaction.

Another authority on the proposition for love not required for gift to take place is the ruling by Authority on Advance Ruling in Deere & Co [2011] 11 taxmann.com 388 (AAR) in which the AAR agreed with submission of the applicant that meaning of gift reflect no element of love and affection. The relevant portion is reproduced below “

The definition of ‘gift’ given in section 122 of the Transfer of Property Act, 1882, ‘Gift’ is the transfer of certain existing movable or immovable property made voluntarily and without consideration by one person called the donor to another called donee, and accepted by or on behalf of the donee. The meaning of gift reflect no element of love and effection and, therefore, the contention of the department in this regard is without substance. [Para 4]

Can individual give gift to company ?

The closely held companies are generally have few share holders and there would be cases wherein the family members of the founders or majority shareholders are ready to help the company. In my considered opinion, after going through all the case law on subject, individual can gift money to the company . There is no bar from any legislation at this point of time and such gift is also not taxable in hand of company.

Conclusion on Gift Received by A Company

1. It is permissible under Companies Act, Transfer of Property Act and also Income Tax Act
2. Gift received by a company is capital received and not taxable under any provision of Income Tax Act
3. MAT can can not applied if company treats the gift directly as capital reserve and does not pass through the P & L account.
4.  For a valid gift to happen between companies , following are the requirements
   1. Gift deed is not necessary , but Memorandum of Association and Article of Association must authorizes company to receive or give gifts.
   2. The money sent through banking channel is proof of delivery
   3. Donor & Donee companies ( if both are companies ) should get approval through  Board resolution about donating gift and the acceptance of gift
   4. If any individual is making gift to a closely held company, question about the extraordinary reason for such gift arise and rightly so. Therefore , a gift deed explaining the relationship with director or major shareholder will clear the doubt.