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Most of the things that we gift to our loved ones don't have growth potential. But how about gifting an asset that has the potential to grow and which can be encashed any time? This could be achieved by gifting shares of the high growth potential companies.
In general terms 'transfer of property means an act by which a person conveys the property to one or more persons, or himself and one or more other persons.
There are various modes of transferring ownership of property: permanently by 1) relinquishment 2) sale 3) gift; and temporarily by way of 4) mortgage 5) lease and 6) leave and license agreement.
One of the most common methods to transfer shares is through gift. In this article we will run you through the process of transferring the shares through gifts in the private companies.
First, let us first understand the legal definition of Gift as per the Transfer of Property Act,1882.
Gift:
The section 122 states that, ‘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.
Shares are movable property:
- As per Section 2 (36) of the General Clause Act, 1897 “movable property” shall mean property of every description, except immovable property.
- Further, as per the provision of Section 2(7) of the Sales of Goods Act, 1930 “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;
- In light of the above-stated provisions, we can conclude as the shares or share capital of the Company are movable property.
Transfer of shares (movable property) under TOPA,1882:
- Section 123 states that “For the purpose of making a gift of movable property, the transfer may be effected either by a registered instrument signed as aforesaid or by delivery.”
- So, execution of gift deeds is not mandatory for transferring the shares. It can be transferred merely by delivery.
Transfer of shares under companies Act, 2013:
- The shares are considered to be a movable property under the TOPA,1882 and are freely transferable under the Companies Act,2013 subject to the conditions laid down in the Articles of Association of the companies.
- The private companies may limit/restrict the transferability of the shares through the AOA with a precondition that if any shareholder of a private company wishes to transfer some shares, the existing shareholders shall have a preemptive right to be offered these shares first and on their refusal or failure to act within the given time, the shares can be transferred to a third party.
Section 56 of the companies Act,2013 governs the transfer of shares which states that-
A company shall not register a transfer of securities of the company, other than the transfer between persons both of whose names are entered as holders of a beneficial interest in the records of a depository, unless -
The transferor/transferee submits the Transfer form SH-4 duly stamped, dated and executed by or on behalf of the transferor and the transferee.
The form SH-4 shall specify the name, address and occupation, if any, of the transferee.
SH-4 shall be delivered to the company within a period of sixty days from the date of execution.
The form shall be accompanied with the share certificate or if no such certificate is in existence, along with the letter of allotment of securities
Provided that where the instrument of transfer has been lost or the instrument of transfer has not been delivered within the prescribed period, the company may register the transfer on such terms as to indemnity as the Board may think fit.
Every company shall deliver the certificates of all securities transferred — within a period of one month from the date of receipt by the company of the instrument of transfer.
Procedure for transfer of shares by way of Gift:
1. Preparation of Gift Deed for transfer of Equity share or Preference Shares; (optional)
2. Delivery of Gift Deed along with share certificate by Donor in favour of Donee; (If any gift deed executed)
3. Gift Deed along with share certificate should be accepted by or on behalf of Donee; (If any gift deed executed, otherwise there should be acceptance of share certificate only.)
4. Execution of SH-4 and payment of an adequate amount of stamp duty;
5. Delivery of duly Stamped, dated and executed transfer documents by gift, by Donor or Donee to the Company within 60 days from the date of its execution;
6. Company shall convene the Board meeting, within a period of 1 month from the receipt of transfer documents by way of Gift;
7. Pass the Board Resolution for transfer of shares by way of Gift;
8. The company shall deliver the certificate of share transfer within one month from the receipt by the Company of the transfer documents by gift.
Documents to be prepared
- 7 days Board’s Meeting notice or a shorter notice;
- Board Resolution.
- Gift deed (optional)
- Execution of Form-SH-4
- Share certificate.
Other provisions relating to the transfer of shares by gift:
Companies Act, 2013 requires that the share transfer form should be duly stamped, with adequate value, and dated and cancelled as per section12 of the Indian Stamp Act.
Generally, the transferee is responsible for the payment of the stamp duty. Being the transfer of Shares are subject to the central Stamp duty, accordingly, as per the provision of Article 62 (a), Schedule I of Indian Stamp Act, 1899, the transferee is required to pay stamp duty at the rate of Rs 0.25 for every Rs 100 of the value of the share. Special adhesive stamps bearing the word “share transfer” shall be used for stamping for share transfers.
Taxability of gifts under Income Tax Act, 1961:
If the total consideration of the Gift in case of transfer of shares is above 50,000/- then in such a case it shall be disclosed in the income tax return of the Company and is taxable as Income from Other Sources (IFOS) at slab rates.
Exemption from taxability of the gifts in the following situations:
- Individual receiving gift from a relative (including siblings, spouse and lineal ascendants or descendants)
- Individual receiving gift on the occasion of marriage
- Gift received by way of inheritance.
- In contemplation of death of the payer.
Reporting of gift under Income Tax Act,1961:
The receiver of the gift should report the gift under Schedule Exempt Income if the income is exempt or Schedule OS (IFOS) if the income is taxable. If the gift is taxable, calculate tax liability at slab rates.
On the sale of such shares & securities, report income as capital gains under Schedule CG. The taxpayer should file ITR-2 on the income tax website and pay tax at applicable rates.
Conclusion: It is very important to maintain proper documentation for gift transactions. It is advisable for the sender and receiver to maintain a registered gift deed as proof of the gift transaction. In cases of scrutiny, this document can be used to justify the genuineness of the gift transaction and avoid charges for tax evasion.
Article By: Ms Shivangi Dhanuka, Legal Associate at Bhavya Sharma and Associates located in Delhi. In case you need any assistance for corporate law compliances or advisory related services, contact us at legal@bhavyasharmaandassociates.com or for more details you can visit: www.bhavyasharmaandassociates.com
Disclaimer: Although due care and diligence have been taken in the preparation and uploading of this Article, Bhavya Sharma & Associate shall not be responsible for any loss or damage, resulting from any action taken on the basis of the contents of this Article. Anyone wishing to act on the basis of the material contained herein should do so after cross-checking with the circulars, notifications, applicable acts, press releases issued by the concerned department or seek appropriate counsel for their situation.
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