A person would like to know if a company can make a gift deed in favour of their directors and the tax implications for it.

Response

As per your query , it is to be noted that in the case of KDA Enterprises Pvt Ltd , the Mumbai Bench of of the Income Tax Appelate Tribunal has passed a judgement that companies are competent to make and receive gifts, and natural love and affection are not a necessary requirement. Thus , yes a company make a valid gift in favour of its director. However , the company can only gift the director only if the Memorandum of Assocation and Article of Associations permits it.

With respect to the tax component , then in the same case it was held that a gift received by a company is a capital receipt and cannot be charged to tax under the Income Tax Act, 1961. Under the act , only the tax payer i.e. the company is subject to tax and not each and every receipt of the tax payer , where the other receipts are not in the nature of the income.

The income of the tax payer shall be chargeable only if it falls under any of the heads of income specified therein. A gift received is neither in the nature of salary nor in the nature of income from house property. As the gift has no relation to any capital asset, the same can also not be considered as capital gain in the hands of the taxpayer.

Reference: DCIT v KDA Enterprises Pvt Ltd
(ITA No. 2662/M/2013)

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