Introduction
The act of company gifting an immovable property is frequently interpreted as a gesture of goodwill or appreciation towards an individual or another entity. However, before engaging in such a transaction, it is critical to understand the legalities and implications.
It is a general rule that every contract or transaction is made for some consideration and an agreement without consideration is of no value and is void in the eyes of law. This rule is backed by the provisions of the Indian Contract Act, of 1872 (“ICA, 1872”). As per the section 25 of the ICA1872, a contract without consideration is void unless it is in writing, and voluntary. However, section 25 also contains a proviso in the form of explanation 1 which states that nothing in section 25 shall affect the validity, as between the donor and donee, of any gift actually made.
Gift: Meaning and essential elements
To understand the application of explanation 1 it is important to understand the expression “gift”. The term gift is not defined under the companies act, the sales of goods act, or the ICA1872. However, a reference to the term has been made under the Transfer of Property Act, of 1882 (“TPA, 1882”).
The expression “gift” is defined u/s 122 of TPA, 1882, which reads as follows:
“Gift” is the transfer of certain existing moveable or immovable 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.
From the above it is evident that the definition under the TPA, 1882 highlights certain prerequisites of gift, namely, transfer of property, voluntary transfer, and acceptance by the done.
The Hon’ble Supreme Court in the case of Asokan v. Lakshmikutty (2007) 13 SCC 210, observed that the definition of gift contained in TPA, 1882 provides for certain essential elements such as absence of consideration, the donor, the donee, the subject matter, the transfer, and acceptance.
Section 122 of TPA, 1882 and gifts by companies
Since section 25 of the ICA1872 makes all agreements without consideration void, a question arises as to whether a company is competent to make gifts and whether such gifts made by company will be valid.
Generally, a gift is something given out of love and affection, but the company is an artificial judicial person, so there cannot be any natural love & affection by a company or between the companies. Hence, an impression is formed 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.
However, in the case of Vodafone Essar Ltd. and Ors. vs. Vodafone Essar Infrastructure Ltd. (MANU/DE/0992/2011) the Hon’ble Delhi High Court had held that there is no legal impediment to a company transferring property to another company, by gift. Furthermore, Hon’ble Income Tax Appellate Tribunal (“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.
This contentious also came before 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.
The aforesaid position has also been relied, and affirmed in Redington (India) Ltd., Vs. JCIT ([2014]) 49 taxmnn.com 146), Dev Kumar Roy vs. The Income Tax-Officer (MANU/IL/0055/2019) and in various other judicial/ quasi-judicial forums.
Moreover, in the case of CIT v. Groz- Beckert Saboo Ltd. [116 ITR 125], a company received the capital asset as a gift from one of its collaborators and the Hon’ble Supreme Court did not question the validity of the giving or receiving of gifts by the corporate body.
Conclusion
To summarise the above, it can be said that the natural love and affection for a gift transaction appears not to be applicable in case of a company since it is an artificial judicial person. Furthermore, there is no such requirement for a gift to be out of natural love and affection under TPA, 1882. Therefore, a property can be gifted by a corporate person under the veil of explanation 1 of section 25 of the ICA1872 read with the provisions of TPA, 1882.
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Disclaimer: The views expressed in this document are based on our understanding of the legal position prevailing as on the date of issue of this article. The contents of this document are solely for information. While every care has been taken in the preparation of this article to ensure its accuracy at the time of publication, Aekom Legal assumes no responsibility for any errors which despite all precautions, may be found therein or any liability for any loss or damage of any kind arising out of any information in this article nor for any actions taken consequent to placing reliance thereon. The material contained in this document does not constitute/substitute professional advice that may be required before acting on any matter.
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| Lokesh Dhyani
Company Secretary | Advocate Partner at Aekom Legal Email: lokesh@aekomlegal.com |
Sonam Malik
Company Secretary | Advocate Associate at Aekom Legal Email: advsonamalik@gmail.com |
if a company gifts to director immovable property what will be the consequences of taxaation for assesee and individual who will sell the property.