Charity By Corporates: Lawful & Tax-Neutral?

A corporate entity can donate its assets to a charitable trust registered under section 12A/12AA of the Income-tax Act, 1961 (“IT Act”)Can Corporates Donate Assets to Charitable Trusts Without Tax Implications? provided the donation conforms with applicable corporate laws, internal governance norms, and tax implications

Corporate philanthropy is no longer just about writing cheques, it’s about making real impact, often through the donation of valuable assets like shares, securities, or other financial instruments. In such a scenario, one compelling legal question which stands out is whether a corporate entity can donate its assets to a charitable trust registered under section 12A/12AA of the Income-tax Act, 1961 (“IT Act”)?

The answer, backed by statutory interpretation, legal principles, and judicial precedent, is an unequivocal yes, provided the donation conforms with applicable corporate laws, internal governance norms, and tax implications, each of which has been adumbrated hereunder:

Corporate Donations: Legal Feasibility and Framework

The Companies Act, 2013 (“CA 2013”) does not bar a company from donating assets. Section 181 of the CA 2013 expressly permits companies to contribute to bonafide charitable and other funds, subject to board approval. Where such donations exceed 5% of the company’s average net profits over the preceding three financial years, shareholder approval becomes mandatory.

Crucially, these donations must fall within the scope of the company’s objects clause, as prescribed under its Memorandum of Association. Donations made outside the scope of corporate objects may be challenged as ultra vires. Therefore, companies intending to engage in philanthropy through asset donations must ensure enabling provisions exist within their founding charter.

In addition, such donations must not violate any fiduciary obligations, especially where the company holds assets in trust for others or is subject to regulatory restrictions. They must also be made without contravening any contractual limitations such as shareholder agreements, loan covenants, or investor rights agreements that might otherwise restrict alienation of assets.

Donation vs. Gift: A Legal Nuance

It is important to understand that while “donation” and “gift” are often colloquially interchangeable, “donation” and “gift” are not the same in legal parlance.

Neither the CA 2013 nor the IT Act specifically defines the term “donation.” However, guidance can be found in legal dictionaries and judicial commentary.

Webster’s Dictionary defines donation as a voluntary transfer, especially to a public cause.

Corpus Juris Secundum states it is a transfer of ownership without consideration, typically made out of liberality.

Such definitions align with the common understanding that donation implies voluntary, non-reciprocal, and unconditional divestment of ownership, setting it apart from contractual or commercial transactions.

On the other hand, under Indian law, particularly the Transfer of Property Act, 1882, “gift” involves transfer of property voluntarily and without consideration but must be accepted by the donee during the lifetime of the donor and while the donor is still capable of giving.

By contrast, judicial decisions have clarified that donation is broader in scope. In P.V.G. Raju v. Commissioner of Expenditure-Tax¹, the Andhra Pradesh High Court, later affirmed by the Supreme Court, distinguished donations as acts made for public or charitable purposes, which need not necessarily satisfy the technical requirements of “gift.” The Court also emphasized that donations may carry an element of consideration when linked to ideological or charitable objectives yet still qualify as donations.

This nuance becomes particularly relevant in corporate settings, where donations are often part of long-term stakeholder engagement or CSR strategies, but lack commercial quid pro quo. Hence, corporate donations, even in the form of high-value assets, are not “gifts” in the strict personal sense, but are strategic charitable transfers.

Taxation of Corporate Donations: Capital Gains or Not?

A dominant concern is whether a donation by a company of assets, like, immovable property, shares, securities, or bonds to a charitable trust would amount to “transfer” under section 2(47) and thereby attract capital gains tax under section 45 of the IT Act?

Capital gains are chargeable to tax under section 45 of the IT Act on transfer of a capital asset. “Transfer” is defined under section 2(47) of the IT Act to include sale, exchange, relinquishment, extinguishment of rights, or any transaction that enables enjoyment of a capital asset.

Section 47 enumerates specific transactions that are not regarded as “transfer” for the purpose of computing capital gains under section 45 of the IT Act. Earlier, section 47(iii) exempted transfers made without consideration or gifts, by any person (including companies) from the levy of capital gains tax.

Following the amendment of section 47(iii) effective from April 1, 2025, the tax exemption for transfer by way of gift or irrevocable trust now applies only to individuals and HUFs, not companies. At first glance, this may appear to bring corporate donations into the taxable net.

However, judicial doctrine offers important relief. In CIT v. B.C. Srinivasa Setty², the Supreme Court famously ruled that no capital gains tax can be imposed where the computation mechanism under section 48 of the IT Act fails, i.e., where there is no consideration against which capital gain can be calculated.

This view is consistent with the doctrine of real income, laid down in Shoorji Vallabhdas & Co³. and Balbir Singh Maini⁴, which confines the imposition of tax to actual, accrued, or received income. Where company makes donation without receiving any form of consideration, monetary or otherwise, it does not “earn” any income and hence no tax arises.

The combined application of B.C. Srinivasa Setty principle and the doctrine of real income fortifies the argument that corporate donation, even if it involves extinguishment of rights in a capital asset, does not amount to a taxable event under section 45 of the IT Act.

In nutshell, in case of donation, absence of full value of consideration renders the computation under section 48 of the IT Act inapplicable. This logical break has been acknowledged as computational failure by the Courts where it has been held that the charging provision and computation mechanism must both apply for valid tax levy.

Furthermore, donations do not involve trade or exchange, nor is there any enrichment of the donor; rather, it is an act of divestment undertaken in good faith and often in alignment with the company’s ESG (environmental, social, governance) goals.

Compliance Strategy: Best Practices for Corporates

For companies intending to donate assets to charitable trusts, certain compliance safeguards are recommended:

1. Obtain requisite approvals in line with the provisions of the CA 2013.

2. Amend the Memorandum of Association, if necessary, to enable charitable donations.

3. Maintain clear records of the transfer documentation along with well-articulated philanthropic objective to establish the bona fide nature of the donation.

4. Ensure that the charitable trust is registered under section 12A/12AA of the IT Act and eligible to receive donations under Indian tax law.

Conclusion

In conclusion, company can lawfully donate assets to charitable trusts registered under section 12A/12AA of the IT Act. Notwithstanding the amendment to section 47(iii) of the IT Act, in case of donation, in the absence of the consideration, the mechanism for computing capital gains fails and consequently, such transfers do not attract capital gains tax.

When carried out transparently and in line with corporate and tax laws, corporate philanthropy is not only permissible but encouraged. As India moves toward global ESG standards, the legal system reflects a progressive stance affirming that corporate altruism, when genuine and transparent, is both responsible business practice and legally sound act of public benefit.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.