Sub-clause (vi) — not of underlying assets Under Transfer in Relation to a Capital Asset

The Indian Income Tax Act, 1961 governs the taxation of income in India. It contains provisions related to the transfer of capital assets and the taxation of income arising from such transfers. One such provision is Sub-clause (vi) of Section 47 of the Income Tax Act, which pertains to transfers not regarded as transfers in relation to a capital asset, specifically in cases where the transfer is not of the underlying assets.

Legal Framework

Section 47 of the Income Tax Act enumerates certain transactions which shall not be regarded as transfers for the purpose of capital gains tax. Sub-clause (vi) of Section 47 is one such provision that deals with a specific type of transfer where the underlying assets are not transferred.

The provision of Section 47( vi) is as follows:

“Notwithstanding anything contained in section 45, [or section 45A or section 45C] , where a transfer of a capital asset by a company to its subsidiary company or a holding company or a wholly owned subsidiary company or a joint venture company is made and the following conditions are fulfilled, namely:—
(a) the parent company or the subsidiary company or the holding company or the joint venture company, as the case may be, continues to hold the shares in the subsidiary company or the holding company, as the case may be, for a period of at least five years from the date of such transfer; and
(b) the subsidiary company or the holding company, as the case may be, does not convert the capital asset so received by it from the parent company into stock-in-trade of the business carried on by it.”

It is important to note that Section 47( vi) provides an exception to Section 45 of the Income Tax Act which provides for the taxation of capital gains arising from the transfer of a capital asset.

Exemptions under Sub-clause (vi)

The exemption provided under Sub-clause (vi) of Section 47 is applicable in cases where a company transfers a capital asset to its subsidiary company, holding company, wholly owned subsidiary company, or joint venture company, and the following conditions are fulfilled:

The parent company or the subsidiary company or the holding company or the joint venture company continues to hold the shares in the subsidiary company or the holding company, as the case may be, for a period of at least five years from the date of such transfer.
The subsidiary company or the holding company, as the case may be, does not convert the capital asset received from the parent company into stock-in-trade of the business carried on by it.

If both these conditions are met, then the transfer of the capital asset by the parent company to its subsidiary company, holding company, wholly owned subsidiary company, or joint venture company will not be regarded as a transfer for the purposes of capital gains tax.

Analysis and Interpretation

The provision of Sub-clause (vi) of Section 47 is aimed at providing relief to companies that transfer capital assets to their subsidiary, holding, wholly owned subsidiary, or joint venture companies. It ensures that such transfers are not treated as transfers for the purpose of capital gains tax, provided that the specified conditions are met.

The first condition requires the parent company or the subsidiary company or the holding company or the joint venture company to continue to hold the shares in the subsidiary company or the holding company for a period of at least five years from the date of such transfer. This condition aims to ensure that the transfer is not merely for the purpose of evading tax and that the relationship between the transferor and the transferee company is genuine and long-term in nature.

The second condition prohibits the subsidiary company or the holding company from converting the capital asset received from the parent company into stock-in-trade of the business carried on by it. This condition prevents the misuse of the exemption provided under Sub-clause (vi) by ensuring that the transferred capital asset is not used for the purpose of trading or business activities.

Advantages and Implications

The exemption provided under Sub-clause (vi) of Section 47 has several advantages for companies involved in intra-group transfers of capital assets. By availing the exemption, the transferor company can avoid the tax implications that would arise from the transfer of a capital asset. This can result in significant cost savings for the company and can also facilitate the efficient management and utilization of its assets within the group.

Furthermore, the exemption promotes the growth and expansion of business groups by facilitating the transfer of assets within the group without the burden of capital gains tax. This can be particularly beneficial in cases where the transfer of assets is a part of strategic restructuring or realignment of business operations within the group.

However, it is important for companies to carefully consider and comply with the conditions specified under Sub-clause (vi) of Section 47 in order to avail the exemption. Non-compliance with these conditions can result in the transfer being treated as a taxable event, leading to potential disputes with the tax authorities and the imposition of tax, interest, and penalties.

Conclusion

Sub-clause (vi) of Section 47 of the Income Tax Act provides an exemption for certain transfers which are not regarded as transfers in relation to a capital asset, specifically in cases where the transfer is not of the underlying assets. This exemption is applicable to transfers of capital assets by a company to its subsidiary company, holding company, wholly owned subsidiary company, or joint venture company, subject to the fulfillment of specified conditions.

The provision of Sub-clause (vi) aims to promote genuine intra-group transfers of capital assets and provides relief to companies from the tax implications that would arise from such transfers. It is important for companies to carefully consider and comply with the conditions specified under Sub-clause (vi) in order to avail the exemption and avoid potential disputes with the tax authorities.