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

Sub-clause (vi) of the Income Tax Act pertains to the definition of “transfer” in relation to a capital asset. This sub-clause is a critical component of the Income Tax Act and has far-reaching implications for taxpayers and their dealings with capital assets.

Understanding Sub-clause (vi)

Sub-clause (vi) of the Income Tax Act states that the term “transfer” includes the sale, exchange, or relinquishment of the asset or the extinguishment of any rights therein, or the compulsory acquisition thereof under any law. Further, it also includes the transfer of a capital asset by a company to a wholly-owned Indian subsidiary, the distribution of capital assets on the total or partial partition of a Hindu Undivided Family, and the transfer of a capital asset by a firm or other association of persons to a company as a result of the succession of the firm or other association of persons.

However, sub-clause (vi) also specifically excludes certain transactions from the definition of “transfer”. One such exclusion pertains to the transfer of the underlying assets, where the transfer of shares or debentures has taken place. This exclusion is of particular significance as it clarifies that the transfer of shares or debentures does not constitute a transfer of the underlying assets.

Implications of Sub-clause (vi)

The exclusion provided under sub-clause (vi) is crucial for taxpayers and has significant implications for their tax liabilities. By specifically excluding the transfer of underlying assets in relation to the transfer of shares or debentures, the provisions of the Income Tax Act ensure that the tax treatment of such transactions is in line with the intention of the legislature.

This exclusion prevents the double taxation of the same transaction, where both the transfer of shares or debentures and the transfer of the underlying assets would otherwise be subject to tax. By providing clarity on the tax treatment of such transactions, sub-clause (vi) eliminates ambiguity and ensures that taxpayers are not unduly burdened with additional tax liabilities.

Legal Precedents

The exclusion provided under sub-clause (vi) has been the subject of extensive judicial interpretation. Various courts and tribunals have examined the scope and applicability of this exclusion in the context of different factual scenarios.

One such significant ruling was delivered by the Hon’ble Supreme Court in the case of Vodafone International Holdings B.V. v. Union of India. In this case, the court considered the application of sub-clause (vi) in the context of a cross-border transaction involving the transfer of shares of a foreign company. The court held that the transfer of shares by a non-resident in a foreign company would not attract tax liability in India, as it did not constitute the transfer of underlying assets in India.

This landmark judgment reaffirmed the scope and applicability of sub-clause (vi) and provided clarity on the tax treatment of cross-border transactions involving the transfer of shares. It also underscored the importance of the exclusion provided under sub-clause (vi) in preventing the unintended double taxation of such transactions.

Compliance Requirements

As per the provisions of sub-clause (vi), taxpayers are required to comply with the exclusion of the transfer of underlying assets in relation to the transfer of shares or debentures. This entails accurately determining the tax implications of such transactions and ensuring compliance with the relevant provisions of the Income Tax Act.

Taxpayers must exercise diligence in assessing the applicability of sub-clause (vi) to their specific transactions and seek professional advice if necessary. Compliance with the exclusion provided under sub-clause (vi) is essential to avoid potential disputes with the tax authorities and ensure that the tax treatment of transactions is in accordance with the provisions of the Income Tax Act.

Conclusion

Sub-clause (vi) of the Income Tax Act plays a crucial role in defining the scope of “transfer” in relation to a capital asset. The exclusion of the transfer of underlying assets in connection with the transfer of shares or debentures is a significant provision that has implications for taxpayers and their tax liabilities.

By providing clarity and certainty on the tax treatment of such transactions, sub-clause (vi) prevents the unintended double taxation of the same transaction and ensures that taxpayers are not unduly burdened with additional tax liabilities. It is essential for taxpayers to understand and comply with the provisions of sub-clause (vi) to mitigate potential tax risks and ensure adherence to the legal requirements under the Income Tax Act.