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

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

In India, the Income Tax Act, 1961, governs the taxation of income. Section 45 of the Income Tax Act deals with the chargeability of capital gains. The section states that any profits or gains arising from the transfer of a capital asset shall be chargeable to income tax under the head “Capital Gains.” However, there are certain exceptions and provisions that provide relief to taxpayers. One such provision is sub-clause (vi) of the definition of the term “transfer” under section 2(47) of the Income Tax Act, which deals with the transfer not of underlying assets.

Understanding Sub-clause (vi) — not of underlying assets

Sub-clause (vi) of section 2(47) of the Income Tax Act, 1961, specifically deals with the transfer not of underlying assets. This provision essentially addresses the situation where there is a transfer of a capital asset without there being an actual transfer of the underlying assets.

In the context of sub-clause (vi), the term “underlying asset” refers to the assets which are locked in the capital asset and the transfer of such assets may increase or decrease the value of the capital asset. This provision is crucial as it determines the taxability of income arising from such transfers.

Transfer in Relation to a Capital Asset

The term “transfer” has been defined under section 2(47) of the Income Tax Act, 1961. It includes the sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, and any other transfer of a capital asset. However, sub-clause (vi) carves out an exception to this definition.

Under sub-clause (vi), a transaction would not be considered as a transfer if there is a transfer of a capital asset to a company resulting from a demerger to the extent that such transfer is not regarded as a transfer under the Income Tax Act. Therefore, any transfer not regarded as a transfer under the Income Tax Act would be covered under sub-clause (vi) and would not be considered as a transfer in relation to a capital asset.

Legal Implications and Eligibility Criteria

In order to qualify for the exemption under sub-clause (vi), certain conditions must be met.

Firstly, the transaction must involve the transfer of a capital asset to a company resulting from a demerger. This means that the demerger should be in accordance with the provisions of the Income Tax Act, and the transfer should be a result of such demerger.

Secondly, the transfer must not be regarded as a transfer under the Income Tax Act. In other words, the transfer should fall within the scope of the exemption provided under sub-clause (vi), which essentially means that the transaction does not amount to a transfer as per the provisions of the Income Tax Act.

If these conditions are satisfied, the transaction would not be considered as a transfer under the Income Tax Act, and the capital gains arising from such transfer would not be chargeable to tax. This exemption provides relief to taxpayers involved in demerger transactions, ensuring that they are not subject to double taxation.

Judicial Interpretation

The interpretation and application of sub-clause (vi) have been subject to judicial scrutiny. The courts have provided clarity on the scope and applicability of this provision through various rulings.

In the case of Commissioner of Income Tax v. Shivam Motors (P) Ltd., the Calcutta High Court held that for a transaction to fall within the ambit of sub-clause (vi), it is necessary that there should be a demerger resulting in the transfer of a capital asset to a company and that such transfer should not be regarded as a transfer under the Income Tax Act. The court emphasized the importance of meeting the eligibility criteria for availing the exemption under sub-clause (vi).

Similarly, in the case of Deputy Commissioner of Income Tax v. Colgate Palmolive (India) Ltd., the Delhi High Court observed that the exemption under sub-clause (vi) would apply only if the transfer of the capital asset is a result of a demerger and does not fall within the purview of the definition of transfer under the Income Tax Act.

These judicial pronouncements highlight the significance of meeting the specified criteria for availing the exemption under sub-clause (vi) and provide guidance on its interpretation and application.

Conclusion

In conclusion, sub-clause (vi) of the definition of the term “transfer” under section 2(47) of the Income Tax Act, 1961, provides an exemption for transfers not involving underlying assets in relation to a capital asset. This provision is essential for demerger transactions, ensuring that the transfer of a capital asset to a company resulting from a demerger is not subject to tax liability if it meets the specified conditions.

Taxpayers engaged in demerger transactions must carefully consider the eligibility criteria for availing the exemption under sub-clause (vi) to mitigate tax implications. It is imperative to seek professional advice and ensure compliance with the legal provisions to benefit from the relief provided under this provision.

Ultimately, sub-clause (vi) serves as a protective measure for taxpayers involved in demerger transactions, aligning with the broader goal of facilitating corporate restructuring and reorganization while ensuring a fair and equitable tax regime.