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 Income tax

Introduction

In the realm of Income Tax law in India, the concept of transfer of a capital asset is of utmost importance. The provisions related to transfer of capital assets are embodied in Section 2(47) of the Income Tax Act, 1961. Sub-clause (vi) of this section pertains to transfer not considered as transfer of underlying assets. This article aims to provide a comprehensive understanding of sub-clause (vi) — not of underlying assets under transfer in relation to a capital asset under Income Tax in India.

Relevant Legal Provisions

Before delving into the provisions of sub-clause (vi), it is important to understand the primary legal provisions related to transfer of a capital asset. Section 2(47) of the Income Tax Act, 1961 defines the term “transfer” in an inclusive manner. It includes various forms of transfer such as sale, exchange, relinquishment, or extinguishment of rights in the capital asset. However, it is pertinent to note that certain transactions do not fall within the ambit of transfer for the purposes of income tax.

Sub-clause (vi) of Section 2(47) of the Income Tax Act, 1961 specifically deals with transfer not considered as transfer of underlying assets in certain cases. It states that any transfer of a capital asset shall not be considered as transfer if it is made in connection with the transfer of a capital asset to a company in which the transferor holds 75% or more shares. However, for the exemption under this sub-clause to apply, certain conditions must be satisfied.

Conditions for Applicability of Sub-clause (vi)

In order for sub-clause (vi) — not of underlying assets under transfer in relation to a capital asset to be applicable, the following conditions must be satisfied:

  1. Transfer of Capital Asset: The transferor must transfer a capital asset to a company.

  2. Shareholding: The transferor must hold 75% or more shares in the company to which the capital asset is transferred.

  3. Non-Consideration of Transfer: The transfer of a capital asset to the company must not be considered as a transfer for the purposes of income tax.

It is important to note that if any of the above-mentioned conditions are not met, sub-clause (vi) will not apply, and the transfer of the capital asset will be considered as a taxable transaction.

Significance of Sub-clause (vi)

Sub-clause (vi) holds significant relevance in the context of corporate restructuring and reorganization. It provides a tax-efficient mechanism for the transfer of a capital asset to a company in which the transferor holds a substantial stake. By exempting such transfers from the purview of taxation, sub-clause (vi) facilitates ease of doing business and encourages corporate investment and expansion.

Case Law Analysis

The applicability and interpretation of sub-clause (vi) have been subject to judicial scrutiny. The courts have played a crucial role in elucidating the scope and implications of this provision through various judgments.

In the case of CIT v. B.C. Srinivasa Shetty, the Supreme Court held that the transfer of a capital asset by an individual to a company in which he holds 100% of the shares cannot be considered as a transfer for the purposes of income tax. The court emphasized the significance of shareholding as a determining factor for the applicability of sub-clause (vi).

Similarly, in the case of Vodafone International Holdings B.V. v. Union of India, the Supreme Court examined the scope of sub-clause (vi) in the context of an indirect transfer of shares. The court held that the underlying assets of a company cannot be deemed to have been transferred merely by virtue of the transfer of shares in the company. This judgment reiterated the principle that sub-clause (vi) applies to the transfer of shares, and not to the underlying assets of the company.

The aforementioned cases underscore the importance of sub-clause (vi) in delineating the taxation implications of transfers in relation to capital assets and shareholding in a company.

Conclusion

In conclusion, sub-clause (vi) — not of underlying assets under transfer in relation to a capital asset under Income Tax plays a pivotal role in exempting certain transactions from the purview of transfer for taxation purposes. It provides a beneficial avenue for corporate restructuring and incentivizes shareholding in companies. However, it is imperative for taxpayers to carefully assess the applicability of this provision and ensure compliance with its stipulated conditions. As the legal landscape continues to evolve, a nuanced understanding of sub-clause (vi) is essential for navigating the complexities of income tax law in India.

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