Stamp Duty on Gift of Shares

At the outset, I would like to mention that there is no need to execute Gift Deed for gift of Shares, only transfer instrument in Form SH-4 under the Companies Act 2013 and rules made thereunder is sufficient. In case Gift Deed executed in addition to Form SH-4, the Gift Deed does not attract stamp duty under any law, i.e. State Act or Union Act.

Let us discuss this in detail.

For the ease of discussion, let us consider Maharashtra Stamp Act 1958 as state act.

Moving forward let us discuss the rules of interpretation which are relevant here for discussion.

Literal Rule of Interpretation:

This is the rule of interpretation which shall be applied first.

The rule of interpretation states that when language of the law is clear and unambiguous which shows intensions of the legislators, there is no need to go beyond the words stated therein and their natural and grammatical meaning to be taken into consideration and accordingly to be complied with. Further, no word to the provisions to be added or removed and each and every word has significance for the interpretation.

No judge can deviate from the meaning of the statute though decision maybe unjust. The words of a statute must prima facie be given their ordinary meaning.

The literal rule accepts supremacy of the Parliament: the right to make laws, even though sometimes, they seem absurd. In the literal rule of interpretation, there is no contrary meaning within the statute.

R v. Harris (1863) 7C

In this case, the defendant bit the plaintiff’s nose. The statute made it an offence ‘to stab cut or wound’ the court held that under the literal rule the act of biting did not come within the meaning of stab cut or wound as these words implied an instrument had to be used. Therefore the defendant was acquitted.

Fisher v. Bell (1961) 1 QB 394

In this case, the defendant displayed flick knife with price tag in his shop. The statute made it a criminal offence to ‘offer’ such flick knives for sale. His conviction was quashed as goods on display in shops are not ‘offers’ in the technical sense but an invitation to treat. The court applied the literal rule of statutory interpretation in this case.

CIT v. T. V Sundaram Iyyengar (1975) 101 I.T.R 764 SC

The meaning of Literal Rule was given in this case as, “If the language of the statute is clear and unambiguous, the Court cannot discard the plain meaning, even if it leads to an injustice.”

Keshavji Ravji and Co. v. CIT (1990) Taxmann 87 SC

The meaning of literal rule is stated that, as long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible.

Thus, it is understood that, according to this rule of interpretation, the words are given their ordinary and natural meaning and if the meaning of such words is clear they should be given effect to whatever is their consequence. So, the ordinary, natural popular or literal meaning of the words has to be taken into consideration. It is the general rule of interpretation that judges are not at liberty to add to or to take away from the letters of law. They have to be limited to the language of the law.

In Municipal board v State transport authority, Rajasthan, the location of a bus stand was changed by the Regional Transport Authority. An application could be moved within 30 days of receipt of order of regional transport authority according to section 64 A of the Motor vehicles Act, 1939. The application was moved after 30 days on the contention that statute must be read as “30 days from the knowledge of the order”. The Supreme Court held that literal interpretation must be made and hence rejected the application as invalid.

Lord Atkinson stated, ‘In the construction of statutes their words must be interpreted in their ordinary grammatical sense unless there be something in the context or in the object of the statute in which they occur or in the circumstances in which they are used, to show that they were used in a special sense different from their ordinary grammatical sense.’

Rule of Harmonious Construction:

When there is a conflict between two or more statues or two or more parts of a statute then the rule of harmonious construction needs to be adopted. The rule follows a very simple premise that every statute has a purpose and intent as per law and should be read as a whole. The interpretation consistent of all the provisions of the statute should be adopted. In the case in which it shall be impossible to harmonize both the provisions, the court’s decision regarding the provision shall prevail.

The rule of harmonious construction is the thumb rule to interpret any statute. An interpretation which makes the enactment a consistent whole, should be the aim of the Courts and a construction which avoids inconsistency or repugnancy between the various sections or parts of the statute should be adopted. The Courts should avoid “a head on clash”, in the words of the Apex Court, between the different parts of an enactment and conflict between the various provisions should be sought to be harmonized. The normal presumption should be consistency and it should not be assumed that what is given with one hand by the legislature is sought to be taken away by the other. The rule of harmonious construction has been tersely explained by the Supreme Court thus, “When there are, in an enactment two provisions which cannot be reconciled with each other, they should be so interpreted, that if possible, effect should be given to both”. A construction which makes one portion of the enactment a dead letter should be avoided since harmonization is not equivalent to destruction.

It is a settled rule that an interpretation which results in hardship, injustice, inconvenience or anomaly should be avoided and that which supports the sense of justice should be adopted. The Court leans in favour of an interpretation which conforms to justice and fair play and prevents injustice (Union of India vs. B.S. Aggarwal) (AIR 1998 S.C. 1537).

When there are two provisions in a statute, which are in apparent conflict with each other, they should be interpreted such that effect can be given to both and that construction which renders either of them inoperative and useless should not be adopted except in the last resort.

This principle is illustrated in the case of Raj Krishna vs Binod AIR 1954. In this case, two provisions of Representation of People Act, 1951, which were in apparent conflict, were brought forth. Section 33 (2) says that a Government Servant can nominate or second a person in election but section 123(8) says that a Government Servant cannot assist any candidate in election except by casting his vote. The Supreme Court observed that both these provisions should be harmoniously interpreted and held that a Government Servant was entitled to nominate or second a candidate seeking election in State Legislative assembly. This harmony can only be achieved if Section 123(8) is interpreted as giving the govt. servant the right to vote as well as to nominate or second a candidate and forbidding him to assist the candidate in any other manner.

The important aspects of this principle are –

1. The courts must avoid a head on clash of seemingly contradicting provisions and they must construe the contradictory provisions so as to harmonize them.

2. The provision of one section cannot be used to defeat the provision contained in another unless the court, despite all its effort, is unable to find a way to reconcile their differences.

3. When it is impossible to completely reconcile the differences in contradictory provisions, the courts must interpret them in such as way so that effect is given to both the provisions as much as possible.

4. Courts must also keep in mind that interpretation that reduces one provision to a useless number or a dead lumbar, is not harmonious construction.

5. To harmonize is not to destroy any statutory provision or to render it loose.

PROVISIONS UNDER STATUTES WHICH ARE RELEVANT IN THIS MATTER:

What is Share Capital?

The word share capital is defined under the provision of Section 43 (1) of the Companies Act, 2013 as:

The share capital of a company limited by shares shall be of two kinds, namely:

(a) equity share capital

(i) with voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and

(b) preference share capital’

Whether shares are movable property?

As per Section 2 (26) of the General Clause Act, 1897

“immovable property” shall include land, benefits to arise out of the land, and things attached to the earth, or permanently fastened to anything attached to the earth.

As per Section 2 (36) of the General Clause Act, 1897

“movable property” shall mean property of every description, except immovable property.

Further, the provision of Section 2(7) of the Sales of Goods Act, 1930 defines the term ‘goods’ as follow:

“goods” means every kind of moveable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

What is gift?

The term Gift is not defined under the Companies Act 2013, but as per the provisions of Section 122 of the Transfer of Property Act, 1882 defined “Gift” as:

“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.

What is Transfer of Property?

Section 122 of the Transfer of Property Act, 1882 defined as:

“Transfer of property” defined.—In the following sections “transfer of property” 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; 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.]

Whether act of Gifting is Transfer of Property?

One thing is notable here that; considering above definition of transfer of property and Gift defined as act of voluntary transfer without consideration; it can be concluded that transfer of property can take place without consideration and hence the act of gift is also called “Transfer of Property”.

Rule 11 of the Companies (Share Capital and Debentures) Rules 2014 Read with Section 56 of the Companies Act 2013

(1) An instrument of transfer of securities held in physical form shall be in Form No.SH.4 and every instrument of transfer with the date of its execution specified thereon shall be delivered to the company within sixty days from the date of such execution.

Whether word Security/Securities include Shares?

Section 2 (81) of the Companies Act 2013 defines Securities As:

“securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

In turn the clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 defines Securities as:

“securities”— include

• shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

Schedule VII of the Indian Constitution:

Article 91 of the List I – Union List:

Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts.

Article 63 of the List II – State List:

Rates of stamp duty in respect of documents other than those specified in the provisions of List I with regard to rates of stamp duty.

By virtue of Article 246 of the Indian Constitution, the Union and State have exclusive powers to make laws on the matters as enumerated in respective lists.

Section 9B of the Indian Stamp Act 1899

9B. Instruments chargeable with duty for transactions otherwise than through stock exchanges and depositories.—Notwithstanding anything contained in this Act,—

(a) when any issue of securities is made by an issuer otherwise than through a stock exchange or depository, the stamp-duty on each such issue shall be payable by the issuer, at the place where its registered office is located, on the total market value of the securities so issued at the rate specified in Schedule I;

(b) when any sale or transfer or reissue of securities for consideration is made otherwise than through a stock exchange or depository, the stamp-duty on each such sale or transfer or reissue shall be payable by the seller or transferor or issuer, as the case may be, on the consideration amount specified in such instrument at the rate specified in Schedule I.]

Maharashtra Stamp Act 1958

Section 2(l) defines “Instrument”:

(l) “ instrument ” includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded, but does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of share, debenture, proxy and receipt ;

Explanation.—The term “document ” also includes any electronic record as defined in clause (t) of sub-section (1) of section 2 of Information Technology Act, 2000 ;

Section 2(la) defines “Instrument of Gift”:

(la) “instrument of gift ” includes, where the gift is of any moveable or immoveable property but has not been made in writing, any instrument recording whether by way of declaration or otherwise the making or acceptance of such oral gift;

Article 34 of the First Schedule to the Act:

GIFT, Instrument of—not being a Settlement (Article 55) or Will or Transfer (Article 59).

The same duty as is leviable on a Conveyance under clause (a), (b), or (c) as the case may be, of Article 25, on the market value of the property which is the subject matter of the gift.

Here, the word “Property” is employed and in its grammatical meaning includes both movable and immovable property.

Article 25 of the First Schedule provides stamp duty at the rate of 3% on market value.

Transfer of Shares with or without consideration is a Contract under the Indian Contract Act 1872 and hence legally enforceable. Due to paucity of space, here I avoid discussion over its applicability.

In light of the above rules of interpretations and statutory provisions, let us discuss the posed questions one by one:

Q.1 Whether Gift Deed for gifting of Shares is necessary to be executed for gifting of Shares in addition to Form SH-4 under the Companies Act 2013?

Answer: With application of Literal Rule of Interpretation to the Rule 11 of the Companies (Share Capital and Debentures) Rules 2014 which employs words “instrument of transfer” which asks to execute the same in Form SH-4 (and off course excludes any other form) and hence there is no need to execute any other instrument to effect the transfer whether the same is for consideration or otherwise i.e. Gift. This means Form SH -4 is itself an instrument of transfer, there is no need of execution of separate instrument like Gift Deed

Q.2 In addition to the Form SH-4 the Gift Deed executed, do Gift Deed attract stamp duty? And under State Stamp act or Union Stamp act or both?

Answer: In case the Gift Deed is executed, we need to determine whether stamp duty is to be paid and under which law.

Since Article 246 of the Indian Constitution provides exclusive powers to the Union to levy stamp duty on the “Transfer of Shares”. This means State Government is not entitled to levy tax on the transaction of “Transfer of Shares”

Section 9B of the Indian Stamp Act employs words “sale or transfer or reissue of securities for consideration” and “consideration”, each and every word in this phrase has significance and with the application of cardinal rule of literal interpretation, we can-not add words (like “for other than consideration” “as a gift” etc.) or remove words from the statute while interpreting the law. Since there is no apparent ambiguity, absurdity or uncertainty there is no scope for application of any other rule of interpretation.

Since Section 9B is the charging Section which does not deal with transfer for no consideration i.e. gift of shares which involves zero consideration, the Act indirectly exempts the Transfer of Shares for no consideration i.e. gift of Shares; hence no Stamp Duty is required to be paid on the transaction even when the Gift Deed is executed.

The Latin maxim “Ignorantia Juris non excusat” means “Ignorance of the law is not excused”. If a person takes part in a contract without knowing any specific provisions of Indian Law (which is essential for that contract), then Contract is not voidable because everyone is supposed to know the law of his country.

For example: According to the provisions of Indian law, we have to recover the amount of loan within 3 months from the due date, after that time-barred debt is imposed. Now if we do not show any interest in the recovery of loan amount during these 3 months because of not knowing the law (mistake of law), then we can-not take it up as an excuse or defence.

A robs Bank, A cannot apply for the defence of mistake of law that he was not aware of law related to the robbery.

General intension of executing Gift Deed (for transfer of shares) is to record matters which could not be recorded or dealt in Form SH-4. Taking into consideration above legal maxim, in my opinion, “instrument of transfer” executed in other form (being gift deed or any other form), shall be in violation of Rule 11 of the Companies (Share Capital and Debentures) Rules 2014 and consequently to be treated void. Wherever Gift Deed is executed in addition to the instrument of transfer in Form SH-4, the Gift Deed shall be treated as Supplemental Deed to the Form SH-4 and not independent deed for the purpose of gift of shares, otherwise it should be treated as void as it infringes Rule 11 of the Companies (Share Capital and Debentures) Rules 2014. Does supplemental deed attract stamp duty?

Further, some professionals are of the opinion that Shares are goods by virtue of sale of Goods Act and hence being Movable Property, attract Stamp Duty under Article 34, and 25 of the Maharashtra Stamp Act 1958. If this is so, it poses one more question that if the Gift Deed attracts stamp duty due the reason shares being movable property then in case of sale of shares for consideration, why Form SH-4 being itself an “Instrument of Transfer” does not attract stamp duty under State Act also?

As per applicability of literal rule of Interpretation to the Article 246 of the Indian Constitution, Article 91 of the Union List and Article 63 of the Sate list in Schedule VII to the Constitution of India, State Government has no power to provide stamp duty on the transaction of “Transfer of Shares”. This is express exclusion by the Constitution of India.

Further the words “movable property” used in the Article 34 of the Maharashtra Stamp Act and shares being goods and consequently movable property, application of literal rule of interpretation to the Article 34 will defeat the provisions of Article 246 of the Indian Constitution, Article 91 of the Union List and Article 63 of the Sate list in Schedule VII to the Constitution of India and hence it creates conflict between the statutes and in such state of ambiguity and uncertainty, application of literal rule of interpretation can lead to absurd results like double payment of stamp duty, double execution and attestation of instruments etc. and hence Rule of Harmonious Construction comes into play.

According to which we need to take into consideration all provisions of the applicable statutes like Article 246 of the Indian Constitution, Article 91 of the Union List and Article 63 of the Sate list in VII Schedule to the Constitution of India, definitions of goods, shares and movable property. And with the application of the said rule of interpretation, I am of the opinion that the words “movable property” employed in Article 34 of the Schedule to the Maharashtra Stamp Act is a General Word (Generic) which does not override Special Word (Specific) “Shares” used in the Article 91 of the Union List in Schedule VII to the Constitution of India. In order to reach harmony in these conflicting provisions, here for the purpose of the “movable property” with reference to the Maharashtra Stamp Act 1958 shall be interpreted as movable property include every kind of movable property but exclude “Shares”.

Some professionals also think that though Article 34 of the Schedule to the Maharashtra Stamp Act 1958 attempts to override Article 91 of the Union List, the same can be held valid by application of Doctrine of Pith and Substance where “incidental encroachment” is allowed. In my opinion, since any article of the Schedule to the Maharashtra Stamp Act 1958 does not expressly provide for transfer of “shares”, in such case, the Doctrine of Pith and Substance also does not come into picture due to absence of express “incidental encroachment”.

Hence in conclusion, I am of the opinion that for the purpose of gift; Instrument of Transfer in Form SH-4 or Gift Deed or any other form for Transfer of Shares do not attract Stamp Duty under Indian Stamp Act 1899, Article 34 of the Schedule to the Maharashtra Stamp Act 1958 or any other state act, notwithstanding the form of instrument.

*****

DISCLAIMER: It is to be noted that the views expressed and conclusions reached in the Article are based on relevant provisions, rules of interpretation, information available and my personal opinion which is based on my understanding of the law and its interpretation perceived by me in the light of the provisions of the statute and rules made thereunder. However, authorities or regulators or courts /tribunal/ may take a different or contrary view to the conclusions reached in this article. In no event, Author shall be liable for any direct or indirect results derived based on this article.

The author CS Mahendra Samdole can be reached through Email: Mahendra.samdole@gmail.com or Mobile No. 9096626070.