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

Sub-clause (vi) — Not of Underlying Assets Under Transfer in Relation to a Capital Asset

Under the Income Tax Act, 1961, sub-clause (vi) of section 47 provides for exemptions related to transfers in relation to a capital asset. This sub-clause specifies the conditions under which certain transfers are not considered as transfers for the purpose of capital gains tax. In this article, we will delve into the details of sub-clause (vi) and understand its implications in the context of the Indian tax law.

Understanding sub-clause (vi) of section 47

Sub-clause (vi) of section 47 deals with the concept of transfers not considered as transfers for the purpose of capital gains tax. Specifically, this sub-clause pertains to transfers of capital assets by a company to its subsidiary company, where the subsidiary company is an Indian company. In such cases, if the following conditions are met, the transfer shall not be considered as a transfer for the purpose of computing capital gains:

  1. The transfer is in consideration of the issue of shares by the subsidiary company to the shareholders of the holding company.
  2. The holding company holds the shares of the subsidiary company as a result of the transfer.
  3. The holding of such shares is in the same proportion as the shareholder’s holding in the holding company.

Key provisions of sub-clause (vi)

It is important to understand the key provisions of sub-clause (vi) in order to gain clarity on the exemptions it provides. Let us discuss the key provisions in detail:

  1. Transfer of capital assets by a company to its subsidiary company: The sub-clause is specific in its applicability and applies to transfers of capital assets by a company to its subsidiary company. The relationship between the transferor (holding company) and the transferee (subsidiary company) is crucial in determining the eligibility for the exemption under this provision.

  2. Consideration in the form of shares: The transfer must be in consideration of the issue of shares by the subsidiary company to the shareholders of the holding company. This means that the consideration for the transfer of the capital asset should be in the form of shares of the subsidiary company, which are issued to the shareholders of the holding company.

  3. Maintenance of proportionate shareholding: The holding company should hold the shares of the subsidiary company as a result of the transfer, and the holding of such shares should be in the same proportion as the shareholder’s holding in the holding company. This provision ensures that the shareholders of the holding company continue to maintain their proportionate shareholding in the subsidiary company after the transfer.

Implications of sub-clause (vi) in Indian tax law

The exemption provided under sub-clause (vi) of section 47 has significant implications in the context of Indian tax law. By exempting certain transfers of capital assets from the purview of capital gains tax, this provision aims to promote corporate restructuring and realignment of business interests within a group of companies without triggering tax liabilities.

The provision facilitates the transfer of capital assets between a holding company and its subsidiary company, where the consideration for the transfer is in the form of shares issued by the subsidiary company. This allows for the reorganization of shareholding patterns within the group, while ensuring that the transfer does not attract capital gains tax.

From a legal standpoint, the provisions of sub-clause (vi) of section 47 have been interpreted and analyzed by the judiciary in various cases. The courts have provided clarity on the scope and applicability of this provision, and have delved into specific aspects such as the nature of consideration, maintenance of proportionate shareholding, and the qualifying criteria for the exemption.

It is important for taxpayers to understand the nuances of this provision and ensure compliance with the conditions specified under sub-clause (vi) in order to avail the benefit of the exemption. Legal advisors and tax professionals play a crucial role in providing guidance on the interpretation and application of this provision in the context of specific transactions.

Conclusion

In conclusion, sub-clause (vi) of section 47 of the Income Tax Act, 1961 provides for exemptions related to transfers in relation to a capital asset. The provision exempts certain transfers of capital assets by a holding company to its subsidiary company from the purview of capital gains tax, subject to compliance with specified conditions. This exemption has significant implications in the context of corporate restructuring and realignment of business interests within a group of companies.

It is essential for taxpayers and businesses to comprehend the legal nuances of this provision and ensure adherence to the qualifying criteria in order to avail the benefit of the exemption. Additionally, seeking professional guidance from legal and tax experts can aid in navigating the complexities of sub-clause (vi) and its implications in the realm of Indian tax law.

Disclaimer:
The Bar Council of India does not permit the solicitation of work and advertising by legal practitioners and advocates. By accessing The Law Codes website, the user acknowledges that:The user wishes to gain more information about us for his or her information and use.He/She also acknowledges that there has been no attempt by us to advertise or solicit work. Any information obtained or downloaded by the user from our website does not lead to the creation of the client-attorney relationship between our office and the user. None of the information contained on our website amounts to any form of legal opinion or legal advice. All information contained on our website is the intellectual property of the office.