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30 November 2012
In a recent ruling the Authority of Advance Rulings (AAR) observed that the gifting of shares between two corporations is a 'strange' transaction (Orient Green Power Pte Ltd (128 ITR 294)).
After this ruling, the Mumbai Appellate Tribunal has examined the same issue in DP World Pvt Ltd (TS-767-ITAT-2012 (Mum)). In contrast to the AAR, the tribunal observed that a company may gift shares, and although such transaction may appear strange, it cannot be treated as a non-genuine transaction.
Orient, a company incorporated in Singapore, transferred its 49.75% holding in BWFL India to its wholly owned subsidiary OGPL India, an Indian public listed company, under a memorandum of gift. After the transfer BWFL India became the wholly owned subsidiary of OGPL India.
Since the applicant failed to demonstrate that the transfer of shares was authorised by the articles of association and was effected in the mode prescribed by the articles of association, as required under Section 82 of the Companies Act 1956, the AAR refused to rule as to the genuineness and validity of the transaction. Even though the applicant had to prove that the transfer of shares was in accordance with the company's articles of association, the AAR went a step further and observed that in a corporate business, a transfer by way of oral gift appears unusual.
Although the AAR's decision is binding only on the applicant's case, the Indian judiciary appears to have differing views on the gifting of shares.
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