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

In India, the Income Tax Act, 1961 governs the taxation of income. Under this act, there are specific provisions relating to the transfer of capital assets and the treatment of the income derived from such transfer. One such provision is sub-clause (vi) of the definition of “transfer” in relation to a capital asset. This provision deals with the exclusion of certain transactions from the definition of “transfer” and has significant implications for the taxation of such transactions.

Definition of “Transfer” under the Income Tax Act, 1961

The term “transfer” is defined under section 2(47) of the Income Tax Act, 1961. According to this definition, the transfer of a capital asset includes the sale, exchange, relinquishment, or extinguishment of rights in a capital asset. It also includes the compulsory acquisition of a capital asset by the government. However, there are certain transactions that are specifically excluded from the definition of “transfer” under sub-clause (vi) of section 2(47).

Sub-clause (vi) — not of underlying assets Under Transfer

Sub-clause (vi) of section 2(47) provides that certain transactions shall not be regarded as a transfer for the purposes of the Income Tax Act, 1961. One such transaction is the transfer of a capital asset by a company to its subsidiary company or vice versa. However, this exclusion is subject to the condition that the transferee company holds the capital asset as a stock-in-trade and not as an investment. In other words, if the subsidiary company holds the capital asset as part of its business operations, the transfer of such asset by the holding company to the subsidiary company or vice versa will not be considered as a transfer for the purposes of taxation.

Implications of Sub-clause (vi) — not of underlying assets Under Transfer

The exclusion provided under sub-clause (vi) of section 2(47) has significant implications for the taxation of transactions involving the transfer of capital assets between a company and its subsidiary. Since such transfers are not considered as a transfer for the purposes of the Income Tax Act, 1961, the capital gains arising from such transfers are not subject to taxation. This can be advantageous for companies looking to restructure their business operations or transfer assets within the corporate group without incurring tax liabilities.

Legal Interpretation and Judicial Precedents

The interpretation of sub-clause (vi) of section 2(47) has been the subject of several judicial precedents. The courts have held that for the exclusion to apply, the transferee company must hold the transferred capital asset as stock-in-trade and not as an investment. In the case of CIT v. Kwality Biscuits Ltd., the Delhi High Court held that the transfer of shares by a holding company to its subsidiary company does not constitute a transfer for the purposes of taxation if the subsidiary company holds the shares as stock-in-trade. Similarly, in the case of CIT v. DLF Commercial Developers Ltd., the Punjab and Haryana High Court held that the transfer of land by a holding company to its subsidiary company was not a transfer for the purposes of taxation since the land was held as a stock-in-trade by the subsidiary company.

Compliance and Reporting Requirements

While the exclusion under sub-clause (vi) of section 2(47) provides tax relief for certain transactions, it is important for companies to ensure compliance with the reporting requirements under the Income Tax Act, 1961. Even though the transfer of a capital asset between a company and its subsidiary may not be considered as a transfer for the purposes of taxation, it is still necessary to comply with the reporting requirements and disclose such transactions in the annual tax returns. Failure to do so can result in penalties and adverse consequences for the company.

Conclusion

The exclusion provided under sub-clause (vi) of section 2(47) of the Income Tax Act, 1961 has significant implications for the taxation of transactions involving the transfer of capital assets between a company and its subsidiary. By excluding such transfers from the definition of “transfer” for the purposes of taxation, the provision provides tax relief for certain corporate transactions. However, it is important for companies to ensure compliance with the reporting requirements to avoid penalties and adverse consequences. Additionally, the interpretation of this provision by the courts underscores the importance of holding the transferred capital asset as stock-in-trade by the subsidiary company to avail the tax relief provided under sub-clause (vi). As such, companies should seek professional advice to ensure compliance with the legal principles and requirements governing such transactions.