Monday, November 27, 2023

Can Companies Give Away Everything as Gift or Otherwise donation ?

Introduction: Delving into Corporate Generosity

In the business world, companies are like big family ventures owned by their shareholders. But can these owners decide to generously give away the whole business and assets of the company? This article dives into the legal side of such corporate benevolence.

1. Shareholders and Their Giving Spirit

Shareholders, the owners of a company's shares, can indeed donate their shares. We've seen big shots like Mark Zuckerberg sharing their wealth for a good cause. However, when it comes to giving away the entire business or assets of a company, things get a bit tricky.

2. Unwrapping Corporate Gift Rules

In the legal world, giving without getting something in return can be a bit complicated. But there are exceptions, like gifts made out of love, compensations for past services, or dealing with old debts. Understanding these exceptions helps us figure out if companies can be generous too.

3. Companies Can Gift? What the ITAT Says

The ITAT Mumbai bench has said that companies can indeed give and receive gifts. They pointed out that companies can meet the essential requirements for a valid gift – transfer, voluntary intent, and acceptance.

4. Giving Away Assets: What Shareholders Need

Even though companies can give, shareholders can't just empty out the whole company without limits. The rules laid out in the Memorandum of Association (MoA) and the need for shareholder approval are crucial. These rules protect the company's interests.

5. Considerations for Giving Away Everything

If a company wants to donate all its assets, here are some important things to think about:

  • Getting Approval: Shareholders need to agree, especially for significant donations under Section 181 of the Companies Act.
  • Big Disposal Rules: Disposing of substantial parts of the company needs special approval under Section 180(1)(a).
  • Clearing Debts: Donating assets without settling debts could lead to legal trouble under the IBC and the Companies Act.

6. Taxes and Giving: What Companies Should Know

When it comes to taxes on corporate generosity:

  • No Capital Gains: Giving assets as a gift usually doesn’t attract capital gains tax. But pretending to gift while restructuring might raise eyebrows.
  • Other Sources Income: If gifts go beyond limits, Section 56 of the IT Act may tax them as 'income from other sources.' Companies need to follow the rules.

Conclusion: Finding the Right Balance

While it's okay for companies to be generous, they need to follow the rules. Giving away everything is legally okay, but companies must be careful not to look like they're avoiding taxes. Philanthropy is good, but it has to go hand in hand with the law