GIFT OF IMMOVABLE PROPERTY BETWEEN COMPANIES OR WHERE ONE OF THE PARTIES IS A COMPANY

A gift is something given out of love and affection, it can happen between two natural persons. In case of a company, being an artificial judicial person, there cannot be any natural love & affection. It comes to mind that a transaction of gift cannot be said to be valid or legally tenable between companies or where one of the parties is a company.

Selling assets subject to conditions generally requires shareholder approval via a special resolution under Section 180(1)(a) of the Companies Act, 2013, as it’s considered selling “substantially the whole of the undertaking,” triggering compliance for asset sales (like potential capital gains tax under Income Tax laws) and board resolutions.

Contribute to bona fide and charitable funds, etc. requires shareholders assent under Section 181 of Co Act if the amount is beyond a specified limit.

Any profit (capital gain) from gifting the asset is taxable in the hands of the recipient under Section 56 (2)(x) of the Income Tax Act, 1961 at normal rates.

We need to analyze provisions in different prevailing Act for a broader perspective on the subject matter. This article is going to help to ensure transactions are compliant with the prevailing law.
 
(A) Transfer of Property Act 1882

1. Gifts are covered under Chapter VII of the TP Act,
2. Section 122, “Gift” is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee.

Such acceptance must be made during the lifetime of the donor and while he is till capable of giving, If the donee dies before acceptance, the gift is void”.

• Section 123, “For the purpose of making a gift of immoveable property, the transfer must be effected by a registered instrument signed by or on behalf of the donor, and attested by at least two witnesses.

For the purpose of making a gift of moveable property, the transfer may be effected either by a registered instrument signed as aforesaid or by delivery.

Such delivery may be made in the same way as goods sold may be delivered”.

• The TP Act, allows gift of immoveable property by a registered instrument, voluntarily made without consideration by the donor to the donee during their life time and the same is accepted by the donee.

(B) The Gift Tax Act 1958 [Abolished w.e.f. October 1, 1998]

The Act was abolished, for the sake of definitions we are considering the same here,

1. Section 2 deals withs the definition wherein:

“donee” means any person who acquires any property under a gift, and, where a gift is made to a trustee for the benefit of another person, includes both the trustee and the beneficiary;

“donor” means any person who makes a gift;

(C) The Registration Act 1908

1. Documents of which registration is compulsory is covered under Part III of RA Act.
2. Section 17(1), deals with documents of which registration is compulsory, “The following documents shall be registered, if the property to which they relate is situate in a district, (a) instruments of gift of immovable property;

(D) Indian Contract Act 1972

1. Section 25 of the IC Act, deals with, “Agreement without consideration, void, unless it is in writing and registered, or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law.

An agreement made without consideration is void, unless:

(1) it is expressed in writing and registered under the law for the time being in force for the registration of documents, and is made on account of natural love and affection between parties standing in a near relation to each other; or unless

(2) it is a promise to compensate, wholly or in part, a person who has already voluntarily done

something for the promisor, or something which the promisor was legally compellable to do; or unless;

(3) it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

In any of these cases, such an agreement is a contract.

Explanation 1, Nothing in this section shall affect the validity, as between the donor and donee, of any gift actually made.

Explanation 2, An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.

(E) Income Tax Act 1961

1. Section 2(31) of IT Act defines “person” which includes, (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses.
2. Income from Capital Gains is covered under Chapter IV-E of the IT Act,
3. Section 45(1), “Any profits or gains arising from the transfer of a capital asset effected in previous year shall, be chargeable to T Tax under the head “Capital gains”, and shall be deemed to be the income of the PY in which the transfer took place.
4. Section 47 deals with Transactions not regarded as transfer, “Nothing contained in section 45 shall apply to the following transfers, (i) any distribution of capital assets on the total or partial partition of a Hindu undivided family; (iii) any transfer of a capital asset under a gift or will or an irrevocable trust, [Sub. by Act No. 15 of 2024, w.e.f. 1-4-2025].
5. It is clear from reading section 45(1) with 47 that only gifts made by individuals or HUFs will not be taken as transfer.
6. The memorandum explaining the provisions of the Finance Bill 2024, “Further, a gift is given out of natural love and affection and accordingly it is proposed to substitute clause (iii) of section 47 and its proviso, to provide that nothing contained in section 45 shall apply to transfer of a capital asset, under a gift or will or an irrevocable trust, by an individual or a Hindu undivided family”.
7. Under IT Act companies being artificial person cannot act out of natural love and affection, hence cannot gift land or other assets to charitable or religious institutions unless they pay taxes as applicable for capital gains.

(F) TAXABLE IN HANDS OF DONEE

1. Section 56 (x) (b) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017 any immovable property,

(A) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;

(B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:

(i) the amount of fifty thousand rupees; and

(ii) the amount equal to five per cent. of the consideration:

Provided that where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purposes of this sub-clause:

• First, any immovable property, which could be land and buildings or both, received without consideration has a stamp duty value exceeding Rs. 50,000. The full stamp duty value of such property will be taxable in the hands of the beneficiary.
• Second, any immovable property is received for consideration and the difference between the stamp duty value and the consideration of such property exceeds 10% of the consideration and such a difference is more than Rs. 50,000, then the stamp duty value in excess of the consideration will be taxable as income in the hands of the buyer.

(G) VIEW OF INCOME TAX APPELLATE TRIBUNAL (ITAT)

1. Hon’ble ITAT in the case of M/s. DP World Pvt/ Ltd. v. DCIT-2 2012 SCC OnLine ITAT 13225, upon a perusal of section 122 of the TPA, 1882, observed that there appears to be no restriction on the corporate transfer of shares by gift as long as it is done voluntarily and without consideration. In other words, there is no requirement in the TPA, 1882 that a ‘gift’ be made only between natural persons out of natural love and affection, which means that a donor company can make a ‘gift’ as long as its Articles of Association allow it to section 82 of the Companies Act of 1956, now section 44 of the Companies Act, 2013, also states that shares in a company are movable property transferable in accordance with the company’s Articles of Association.
2. Hon’ble ITAT in the case of DCIT v. KDA Enterprises Pvt. Ltd. 2015 SCC OnLine ITAT 3673, where the Hon’ble ITAT held that companies can receive and make gifts, and no natural love or affection is required for making or receiving a gift by companies. The ITAT highlighted that companies can make and receive gifts and natural love and affection are not a necessary requirement. The only sine qua non for companies is to make gifts in furtherance of the memorandum of association and articles of association.

(H) COMPANIES ACT 2013

1. Authorised by its Articles of Association to gift immovable property: AOA must contain clauses allowing the company to gift assets for charitable, educational, or other authorized objects, as per the Memorandum of Association.
2. The Board of Directors must pass a resolution approving the gift.
3. Section 180 of Co Act deals with Restrictions on powers of Board:

(1) The Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution, namely:

(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.

Explanation- For the purposes of this clause:

(i) “undertaking” shall mean an undertaking in which the investment of the company exceeds twenty per cent. of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates twenty per cent. of the total income of the company during the previous financial year;

(ii) the expression “substantially the whole of the undertaking” in any financial year shall mean twenty per cent. or more of the value of the undertaking as per the audited balance sheet of the preceding financial year;

(4) Any special resolution passed by the company consenting to the transaction as is referred to in clause (a) of sub-section (1) may stipulate such conditions as may be specified in such resolution, including conditions regarding the use, disposal or investment of the sale proceeds which may result from the transactions:

• Section 114 of Co Act defines Ordinary and special resolutions:

(2) A resolution shall be a special resolution when—

(a) the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution;

(b) the notice required under this Act has been duly given; and (c) the votes cast in favour of the resolution, whether on a show of hands, or electronically or on a poll, as the case may be, by members who, being entitled so to do, vote in person or by proxy or by postal ballot, are required to be not less than three times the number of the votes, if any, cast against the resolution by members so entitled and voting.

In simple words, a special resolution under the Companies Act, 2013 is a formal decision by a company’s shareholders that requires a supermajority vote, specifically at least 75% of the votes cast, to pass.

• Section 181 of Co Act Company to contribute to bona fide and charitable funds, etc.

The Board of Directors of a company may contribute to bona fide charitable and other funds:

Provided that prior permission of the company in general meeting shall be required for such contribution in case any amount the aggregate of which, in any financial year, exceed five per cent. of its average net profits for the three immediately preceding financial years.

This provision ensures that while companies have the flexibility to support philanthropic causes, their financial contributions remain within reasonable limits and are subject to oversight. While the Board of Directors has the authority to approve charitable contributions, there is a financial limit beyond which shareholder approval becomes mandatory.

(H) PROCEDURE TO BE ADOPTED

1. Board Meeting: Convene a board meeting to pass a resolution to approve the sale of the specific asset.
2. Shareholder Meeting: Convene an extraordinary general meeting (EGM) of shareholders to pass a special resolution approving the sale, if required.
3. File with Registrar of Companies: File a copy of the special resolution with the RoC.
4. Drafting the Transfer Deed: Draft transfer deed keeping in view nature of transaction.
5. Payment of Stamp Duty: Pay stamp duty as per rates prevailing in respective State.
6. Registration: Register the deed with the Registrar.
7. Calculation of Capital Gains: Calculate capital gains treating income from other sources.
8. Payment of Taxes: Pay Income Taxe as per prevailing rate considering type of person.
9. Filing of ITR: Disclosing the transfer in the ITR at the time of its filing.

(I) Bibliography with word of Thanks

Grateful, for the hard work by all the writers who have done marvellous presentation on the subject matter whether brief or broad, this article is no doubt a threading collecting flowers together from gardens of many generous writers who have floated their ideas on digital platform to present the issue remarkably in either way.

• Can Company donate out all their assets? https://vinodkothari.com/2022/01/can-companies-donate-out-all-their-assets-2/
• Gift by Companies: An analysis of Amendment to Section 47(iii) of the IT Act https://www.taxmann.com/research/income-tax/top-story/105010000000024477/gift-by-companies-an-analysis-of-amendment-to-section-47iii-of-the-it-act-experts-opinion
• Budget 2024: Companies can no longer make Gifts for Public Causes to Charitable or Religious Trust https://www.taxmann.com/research/income-tax/top-story/105010000000024305/budget-2024-companies-can-no-longer-make-gifts-for-public-causes-to-charitable-or-religious-trust-experts-opinion
• Gift by a Company: Valid or Void? https://taxguru.in/company-law/section-180-companies-act-2013-corporate-powers-limits.html#:~:text=Instead%20such%20decisions%20should%20undergo,in%20the%20Company’s%20significant%20transactions
• Section 180 of Companies Act, 2013: Corporate Powers & Limits https://taxguru.in/company-law/section-180-companies-act-2013- corporate-powers-limits.html#:~:text=Instead%20such%20decisions%20should%20undergo,in%20the%20Company’s%20significant%20 transactions.