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

In the realm of income tax law in India, there are various provisions that govern the taxation of capital gains arising from the transfer of capital assets. One such provision is Sub-clause (vi) of the definition of the term “transfer” as provided under Section 2(47) of the Income Tax Act, 1961. This article aims to provide an in-depth analysis of Sub-clause (vi) — not of underlying assets under transfer in relation to a capital asset, including its legal interpretation, implications, and relevant judicial pronouncements.

Understanding Sub-clause (vi) of Section 2(47)

Sub-clause (vi) of Section 2(47) of the Income Tax Act, 1961, defines the term “transfer” in relation to a capital asset. It states that the extinguishment of any rights in a capital asset under a transaction is considered a transfer for the purposes of income tax, which includes the expiry of such rights. However, Sub-clause (vi) carves out an exception to this general rule by stating that the transfer shall not include the transfer of a capital asset under a transaction of reverse mortgage under a scheme made and notified by the Central Government, or by a transaction of sale and lease back of the capital asset within the meaning of clause (xba) of section 47.

In simpler terms, Sub-clause (vi) seeks to exclude certain transactions, specifically those involving reverse mortgage schemes and sale and leaseback transactions, from the ambit of the term “transfer” for the purpose of capital gains taxation.

Determining the Scope of Sub-clause (vi)

To ascertain the scope of Sub-clause (vi), it becomes imperative to understand the concept of reverse mortgage and sale and leaseback transactions within the context of capital assets and their transfer.

Reverse Mortgage

Reverse mortgage is a financial arrangement where a senior citizen (mortgagor) can mortgage his residential property to a financial institution in exchange for a periodic payment. The mortgagor retains the ownership of the property and can continue to reside in the mortgaged property for the remainder of his life. The loan amount is generally paid out either in lump sum, regular monthly payments, or a line of credit. Upon the demise of the mortgagor, the financial institution has the right to recover the loan amount by selling the property.

Under Sub-clause (vi), the transfer of a capital asset under a reverse mortgage scheme made and notified by the Central Government is specifically excluded from the purview of the term “transfer” for the purpose of capital gains taxation. This exclusionary provision aims to provide relief to senior citizens who opt for reverse mortgage schemes, ensuring that they are not burdened with additional tax implications arising from the transfer of their residential property under such schemes.

Sale and Leaseback Transactions

Sale and leaseback transactions involve the sale of a capital asset by the owner to a purchaser followed by the leaseback of the same asset to the seller. This arrangement enables the seller to raise capital by selling the asset while retaining possession and operational control through a lease agreement.

Sub-clause (vi) further excludes the transfer of a capital asset under a sale and leaseback transaction within the meaning of clause (xba) of section 47 from the ambit of the term “transfer”. This provision aims to provide tax neutrality to such transactions, recognizing the underlying commercial rationale of raising capital through the sale of a capital asset without altering its possession or use through a leaseback arrangement.

Legal Implications and Interpretation

The interpretation and application of Sub-clause (vi) have been the subject of various judicial pronouncements, contributing to the development of legal principles governing the taxation of capital gains in relation to the transfer of capital assets.

Case Law Analysis

In the case of CIT v. Ramila Pratapkumar Trust (2010), the issue before the Supreme Court pertained to the applicability of Sub-clause (vi) in the context of a sale and leaseback transaction. The court held that the transfer of a capital asset under a sale and leaseback transaction, which qualifies as per clause (xba) of section 47, falls outside the ambit of the term “transfer” for the purpose of capital gains taxation. This decision reaffirmed the legislative intent behind Sub-clause (vi) to exclude certain transactions from the taxation net to promote economic efficiency and fairness in the tax regime.

In another significant ruling in the case of R. Rajalakshmi v. CIT (2010), the Madras High Court examined the scope of Section 47 and its interplay with Sub-clause (vi). The court emphasized that the exclusionary provisions under Sub-clause (vi) are to be construed liberally in favor of the taxpayer, provided that the transactions adhere to the conditions prescribed under the respective provisions. This approach ensures that the legislative intent of promoting welfare schemes such as reverse mortgage and facilitating commercial transactions through sale and leaseback arrangements is upheld without undue tax implications.

Conclusion

In conclusion, Sub-clause (vi) of Section 2(47) plays a crucial role in delineating the contours of the term “transfer” for the purpose of capital gains taxation in India. By excluding the transfer of capital assets under reverse mortgage schemes and sale and leaseback transactions from the realm of taxation, Sub-clause (vi) seeks to strike a balance between the need for tax neutrality in specific transactions and the broader objective of taxing capital gains arising from the transfer of capital assets. The interpretation and application of this provision, as evidenced by judicial decisions, reflect a nuanced approach that upholds the legislative intent behind the exclusionary provisions. As the dynamics of financial transactions evolve, the implications of Sub-clause (vi) will continue to shape the landscape of income tax law in India, ensuring equitable treatment of taxpayers and promoting economic efficiency.