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

In the realm of income tax law in India, various provisions and sub-clauses govern the taxation of capital assets and their transfer. One such important and often contentious provision is sub-clause (vi) under the definition of “transfer” in relation to a capital asset. This sub-clause deals with the exclusion of certain transactions from the purview of “transfer” and has significant implications for taxpayers and tax authorities alike. In this article, we will delve into the nuances of sub-clause (vi) and its implications under Indian income tax law.

Understanding Sub-clause (vi) of Section 2(47) of the Income Tax Act, 1961

The concept of “transfer” forms the bedrock of the taxation of capital gains under the Income Tax Act, 1961. Section 2(47) of the Act defines the term “transfer” in an inclusive manner, encompassing a wide array of transactions. However, sub-clause (vi) carves out specific transactions that do not fall within the ambit of “transfer” for the purpose of computing capital gains.

Sub-clause (vi) states that the transfer of a capital asset shall not include the transfer of a capital asset under a gift. This means that any transfer of a capital asset by way of a gift would not attract capital gains tax under the provisions of the Income Tax Act. It is important to note that the exclusion is limited to transfers by way of gift and does not extend to other modes of transfer such as sale, exchange, or relinquishments.

Not of Underlying Assets

The phrase “not of underlying assets” in sub-clause (vi) assumes significance in the context of the transfer of an asset. It is essential to understand that the term “capital asset” has been defined under section 2(14) of the Income Tax Act, 1961, and includes a wide range of properties such as land, building, securities, and more. When a capital asset is transferred, the consideration for such transfer usually includes the value of the underlying assets.

However, sub-clause (vi) explicitly carves out an exception for transfers by way of gift, where the underlying assets are not taken into consideration for the purposes of computing capital gains tax. This effectively means that if a capital asset is transferred by way of gift, the value of the underlying assets does not play a role in determining the tax liability of the transferor.

Impact on Taxation of Gifts under Income Tax Law

The exclusion of gifts from the purview of “transfer” under sub-clause (vi) has significant implications for the taxation of gifts under the Income Tax Act. While the general principle is that gifts are not taxable in the hands of the recipient, the Act contains specific provisions governing the taxation of gifts in certain circumstances.

Under section 56(2)(x) of the Income Tax Act, any sum of money or any property that is received without consideration or for inadequate consideration (exceeding specified limits) is chargeable to income tax in the hands of the recipient under the head “Income from Other Sources”. However, sub-clause (vi) carves out an exception for gifts by excluding them from the definition of “transfer”. This means that gifts, as covered under sub-clause (vi), would not attract capital gains tax or taxation under section 56(2)(x).

Judicial Interpretation of Sub-clause (vi) in Indian Courts

The interpretation of sub-clause (vi) has been the subject of several judicial pronouncements in India. The courts have been called upon to determine the scope and application of this provision in various factual scenarios, leading to the evolution of legal principles in this regard.

In the case of Commissioner of Income Tax vs Smt. Shubha S. Katti, the Karnataka High Court was confronted with the question of whether the transfer of shares under a gift could be brought within the ambit of “transfer” for the purpose of capital gains tax. The court, in its ruling, observed that sub-clause (vi) specifically excludes the transfer of a capital asset under a gift and held that such transfers do not attract capital gains tax.

Similarly, in the case of CIT vs Ashok M. Shah, the Bombay High Court dealt with the issue of whether the transfer of shares by way of gift could be subjected to capital gains tax. The court, while interpreting sub-clause (vi), reiterated that the transfer of a capital asset under a gift does not fall within the purview of “transfer” for the purpose of computing capital gains tax.

These judicial pronouncements underscore the significance of sub-clause (vi) and provide valuable insights into its interpretation and application in the context of gifts and capital gains tax.

Compliance and Reporting Requirements

While sub-clause (vi) provides relief to taxpayers by excluding gifts from the definition of “transfer” for the purpose of capital gains tax, it is essential for taxpayers to ensure compliance with the reporting requirements under the Income Tax Act. Although gifts covered under sub-clause (vi) may not attract capital gains tax, there are specific reporting obligations that must be fulfilled to avoid any inadvertent non-compliance.

Section 56(2)(x) of the Income Tax Act mandates that any sum of money or the value of property received without consideration or for inadequate consideration is chargeable to income tax in the hands of the recipient. Therefore, even though such gifts may not attract capital gains tax for the donor, the recipient may be required to disclose the receipt of the gift and comply with the reporting requirements under the Act.

Furthermore, the provisions relating to gifts under the Act also prescribe certain thresholds and limits beyond which gifts may be taxed in the hands of the recipient. Taxpayers should be cognizant of these thresholds and ensure proper disclosure and compliance to avoid any potential tax implications.

Conclusion

Sub-clause (vi) of section 2(47) of the Income Tax Act, 1961, plays a pivotal role in delineating the scope of “transfer” in the context of capital assets. By excluding gifts from the purview of “transfer”, this provision provides relief to taxpayers by ensuring that transfers of capital assets by way of gift do not attract capital gains tax.

However, it is imperative for taxpayers to navigate the legal nuances and compliance requirements to ensure adherence to the provisions of the Act. Judicial pronouncements have provided valuable insights into the interpretation and application of this provision, shedding light on its implications for taxpayers and tax authorities alike.

In conclusion, the understanding of sub-clause (vi) is crucial for taxpayers and professionals in the realm of income tax law, and compliance with its provisions is essential to avoid potential tax implications. This provision exemplifies the intricate interplay between legal principles and practical implications and underscores the importance of a nuanced understanding of income tax law in India.