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 Act

Under the Income Tax Act, 1961, there are specific provisions that deal with the taxation of capital gains arising from the transfer of capital assets. One of the key provisions is Sub-clause (vi) under Section 45 of the Income Tax Act, which pertains to the computation of capital gains in cases where the transfer of a capital asset is undertaken not by the transfer of the underlying assets.

Understanding Sub-clause (vi) of Section 45

Sub-clause (vi) of Section 45 of the Income Tax Act, 1961, provides for the taxation of capital gains arising from the transfer of a capital asset where such transfer is not of the underlying assets but is in relation to such capital asset. This provision is particularly important in cases where the transfer of a capital asset takes place through modes such as surrender, relinquishment, extinguishment, or transfer of rights in the capital asset, but not necessarily the transfer of the underlying assets themselves.

Scope of Sub-clause (vi)

Sub-clause (vi) of Section 45 applies to a wide range of transactions and arrangements where the transferor gives up his rights or interest in a capital asset without actually transferring the ownership of the underlying assets. This can include cases where a person surrenders his rights in a capital asset to another person, or relinquishes his claim to a capital asset in favor of someone else, or simply extinguishes his ownership rights in a capital asset, without any transfer of the underlying assets.

Computation of Capital Gains under Sub-clause (vi)

In cases falling under Sub-clause (vi) of Section 45, the determination of capital gains is undertaken based on the fair market value of the capital asset on the date of transfer. This fair market value is then considered as the full value of the consideration received or accruing as a result of the transfer for the purposes of computing capital gains under the Income Tax Act.

It is important to note that the provisions of Sub-clause (vi) also deem certain transactions as transfer for the purpose of making a capital gain taxable. This means that even if the transferor has not actually transferred the underlying assets, the transaction is treated as a transfer for the purposes of taxation, and the capital gains arising from such transaction are liable to be taxed accordingly.

Case Law and Judicial Interpretation

The interpretation and application of Sub-clause (vi) of Section 45 have been the subject of judicial scrutiny, leading to several important pronouncements by the Indian courts. In the case of Commissioner of Income-Tax v. G. K. Ghaisas (HUF), the Bombay High Court held that where a person relinquishes his rights in a property in favor of the co-owner by registered instrument, it amounted to a transfer within the meaning of Section 2(47) of the Income Tax Act.

Similarly, in the case of Doshi Accounting Services (P.) Ltd. v. Commissioner of Income Tax, the Supreme Court held that the surrender or relinquishment of tenancy rights by a tenant for consideration would amount to a transfer under the Income Tax Act.

These cases demonstrate the broad interpretation given to the concept of transfer under Sub-clause (vi) of Section 45, and underline the importance of understanding the scope and implications of this provision in the context of various real-life transactions and arrangements.

Exclusions and Exceptions

While Sub-clause (vi) of Section 45 applies to a wide range of transactions, it is important to note that there are certain exclusions and exceptions provided under the Income Tax Act. For example, the transfer of a capital asset in a scheme of amalgamation, demerger, or transfer of a capital asset by a shareholder in a scheme of amalgamation or demerger, is specifically excluded from the purview of Sub-clause (vi).

Similarly, the transfer of a capital asset by a partner to a partnership firm in certain cases and the transfer of a capital asset by a shareholder to a company in certain cases are also exempted from the applicability of Sub-clause (vi). These exclusions and exceptions are important to consider while analyzing the tax implications of specific transactions falling within the ambit of Sub-clause (vi) of Section 45.

Conclusion

In conclusion, Sub-clause (vi) of Section 45 under the Income Tax Act, 1961, plays a crucial role in the taxation of capital gains arising from the transfer of capital assets not involving the transfer of underlying assets. The scope of this provision is broad, encompassing various modes of transfer such as surrender, relinquishment, and extinguishment of rights in capital assets. While this provision has been the subject of judicial interpretation, it is essential for taxpayers and professionals to have a clear understanding of its implications in order to ensure compliance with the legal requirements and optimize tax planning strategies.