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

In India, the Income Tax Act, 1961, contains provisions related to the taxation of capital gains. One such provision deals with sub-clause (vi) of Section 47, which pertains to transactions that do not constitute transfer in relation to a capital asset. This article aims to provide an overview of sub-clause (vi) and its implications under the Income Tax Act.

Understanding Sub-clause (vi)

Sub-clause (vi) of Section 47 of the Income Tax Act, 1961, states that any transfer of a capital asset by a company to its subsidiary company, or vice versa, shall not be considered a transfer for the purposes of capital gains tax. It is important to note that this provision applies specifically to companies and their subsidiary companies.

The term “transfer” in relation to a capital asset has a broad scope under the Income Tax Act, and it includes the sale, exchange, relinquishment, or extinguishment of rights in a capital asset. However, sub-clause (vi) carves out an exception for transfers between a company and its subsidiary company. This exception is aimed at facilitating the ease of doing business within a corporate group structure.

Conditions for Applicability

For the provisions of sub-clause (vi) to apply, certain conditions must be met:

1. The transfer must be between a company and its subsidiary company.
2. Both the transferor and the transferee companies must be Indian companies.
3. The specified conditions under the Companies Act, 2013, for a company to qualify as a subsidiary company must be satisfied.

It is crucial for taxpayers to ensure that all the conditions specified under sub-clause (vi) are met in order to avail the benefit of non-taxability of the transfer.

Not of Underlying Assets

One of the key aspects of sub-clause (vi) is the concept of “not of underlying assets.” This refers to the transfer of shares of a company, which represents the ownership interest in the company, and not the underlying assets of the company. In the context of sub-clause (vi), the transfer of shares between a company and its subsidiary company is considered distinct from the transfer of the underlying assets owned by the company.

It is essential to differentiate between the transfer of shares and the transfer of underlying assets, as the tax implications vary for each type of transfer. Sub-clause (vi) provides clarity on the treatment of transfers of shares between a company and its subsidiary company, thereby preventing any ambiguity in the tax treatment of such transactions.

Implications for Capital Gains Tax

The exclusion of transfers between a company and its subsidiary company from the purview of capital gains tax has significant implications for taxpayers. As a result of sub-clause (vi), such transfers are not subject to tax on capital gains, thereby providing a tax-efficient mechanism for intra-group restructuring or realignment of shareholding within a corporate group structure.

This provision is particularly beneficial for companies engaging in restructuring exercises, mergers, demergers, or acquisitions involving their subsidiary companies. By exempting such transfers from the scope of capital gains tax, sub-clause (vi) facilitates corporate reorganizations and simplifies the tax implications associated with such transactions.

Judicial Interpretation

The applicability and interpretation of sub-clause (vi) have been subject to judicial scrutiny. Courts have provided guidance on the scope and implications of this provision in various cases. The judicial interpretation of sub-clause (vi) plays a crucial role in shaping the understanding of its applicability and in resolving disputes related to its interpretation.

In several cases, the courts have emphasized the importance of adhering to the prescribed conditions under sub-clause (vi) to avail the benefit of non-taxability of transfers. Additionally, the courts have clarified the distinction between the transfer of shares and the transfer of underlying assets, reaffirming the intent of sub-clause (vi in providing tax relief for certain transactions.

Compliance Considerations

While sub-clause (vi) provides a valuable benefit in terms of tax efficiency for specific transactions, it is essential for taxpayers to ensure strict compliance with the prescribed conditions and requirements. Any failure to meet the conditions specified under sub-clause (vi) can lead to the re-characterization of the transaction and the imposition of tax on capital gains.

Taxpayers must undertake thorough due diligence and seek professional advice to ensure that the transfer of shares between a company and its subsidiary company complies with the provisions of sub-clause (vi). Compliance considerations form a critical aspect of leveraging the benefits of this provision and avoiding potential tax implications.

Conclusion

Sub-clause (vi) of Section 47 of the Income Tax Act, 1961, exempts the transfer of a capital asset between a company and its subsidiary company from the scope of capital gains tax. This provision facilitates intra-group restructuring and realignment of shareholding within corporate groups, providing a tax-efficient mechanism for such transactions.

Understanding the conditions and implications of sub-clause (vi) is essential for taxpayers seeking to leverage its benefits while ensuring compliance with the prescribed requirements. Judicial interpretation has further clarified the scope of this provision, emphasizing the importance of adherence to the specified conditions for availing the tax relief provided.

It is imperative for taxpayers to seek professional guidance and undertake comprehensive due diligence to ensure compliance with the provisions of sub-clause (vi) and to optimize the tax efficiency of transactions involving the transfer of shares between a company and its subsidiary company.