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

Under the Income Tax Act, 1961, capital gains are taxable in India. Section 45 of the Income Tax Act, 1961, deals with the chargeability of capital gains. When a capital asset is transferred, any profit or gain arising from such transfer is considered as capital gains and is subject to taxation. However, certain exemptions and provisions under the Act provide relief from the tax liability on capital gains. Sub-clause (vi) of Section 47 is one such provision that exempts certain transactions from being considered as a transfer for the purpose of capital gains tax. This article will delve into the intricacies of Sub-clause (vi) and its implications.

Meaning of Sub-clause (vi)

Sub-clause (vi) of Section 47 of the Income Tax Act, 1961, deals with transactions which shall not be considered as a transfer in relation to a capital asset. Specifically, it provides that any transfer of a capital asset by a company to a wholly-owned Indian subsidiary company shall not be regarded as a transfer. The meaning of this provision can be dissected as follows:

Transfer of a Capital Asset: The term ‘transfer’ under the Act has a wide connotation and includes sale, exchange, relinquishment, or extinguishment of rights in a capital asset. Therefore, when a capital asset is disposed of in any manner, it amounts to a transfer.
By a Company: The transferor in this context must be a company as defined under the Companies Act, 2013.
To a Wholly-Owned Indian Subsidiary Company: The transferee, in this case, must be a wholly-owned Indian subsidiary company as defined under the Act.

Implications of Sub-clause (vi)

The implications of Sub-clause (vi) are significant for companies engaged in mergers, demergers, or restructuring exercises. When a company transfers its capital assets to its wholly-owned Indian subsidiary company, such transfer is deemed to be not a transfer for the purpose of capital gains tax. Consequently, no capital gains tax liability arises for the transferor company. This provides a tax-efficient mechanism for companies to realign their business interests and assets within the group without incurring a tax liability.

Not of Underlying Assets

The expression “not of underlying assets” has been interpreted by judicial authorities in the context of Sub-clause (vi). The underlying assets of a company refer to the assets held by a company, including tangible and intangible assets, investments, and securities. In a transfer between a company and its wholly-owned Indian subsidiary under Sub-clause (vi), it is important to ascertain that the transfer does not involve the transfer of underlying assets. The intention behind the provision is to facilitate business restructuring and expansion within the group without triggering a tax liability.

Conditions to be Satisfied

For the benefit of Sub-clause (vi) to apply, certain conditions are to be satisfied:

Transferor-Transferee Relationship: The transferor must be a company and the transferee must be its wholly-owned Indian subsidiary. The relationship between the transferor and transferee is crucial to determine the applicability of the provision.
Wholly-Owned: The transferee must be a wholly-owned Indian subsidiary company. Any dilution of shareholding or ownership can impact the eligibility for the exemption.
Non-Inclusion of Underlying Assets: The transfer should not involve the transfer of underlying assets. It is essential to carefully examine the nature of assets being transferred to ensure compliance with this condition.
Business Purpose: The transfer should be undertaken for genuine business purposes and not for the sole purpose of tax avoidance. The tax authorities may scrutinize the transaction to ascertain its commercial substance and intention.

Case Law Analysis

The interpretation and application of Sub-clause (vi) have been the subject of litigation before various High Courts and the Supreme Court of India. Judicial authorities have elucidated the scope and ambit of the provision and have clarified its applicability in specific factual scenarios.

In the case of CIT v. PVP Ventures Ltd. (2019), the Karnataka High Court held that the transfer of shares of a foreign company by an Indian company to its wholly-owned Indian subsidiary company falls within the purview of Sub-clause (vi). The court emphasized that the provision encompasses not only the transfer of physical assets but also the transfer of rights emanating from shares and securities.

Another significant decision was rendered by the Delhi High Court in the case of CIT v. Urbane Retail India Ltd. (2017), where the court observed that the exemption under Sub-clause (vi) should be construed liberally to promote corporate reorganizations and business restructuring without the burden of tax implications.

Conclusion

In conclusion, Sub-clause (vi) of Section 47 of the Income Tax Act, 1961, provides a valuable exemption from the taxation of capital gains in the context of transfers between a company and its wholly-owned Indian subsidiary company. The provision serves as a facilitative mechanism for corporate restructuring and realignment of business interests within a group. However, the applicability of the provision is contingent on the satisfaction of specific conditions. The interpretation and application of Sub-clause (vi) have been clarified through judicial pronouncements and continue to remain relevant in the landscape of Indian tax laws. It is imperative for companies to seek professional advice and conduct a comprehensive analysis of the legal and tax implications before undertaking transactions falling within the purview of Sub-clause (vi).