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

Under the Indian Income Tax Act, 1961, the transfer of a capital asset gives rise to a capital gain, which is taxable under the head “Capital Gains.” Section 45 of the Income Tax Act, 1961, provides for the charging of tax on any profits or gains arising from the transfer of a capital asset. Sub-section (1) of section 45 states that any profits or gains arising from the transfer of a capital asset shall be chargeable to income tax under the head “Capital Gains” in the year in which the transfer took place.

Definition of Transfer

The term “transfer” is defined under section 2(47) of the Income Tax Act, 1961. According to the said definition, the term “transfer” includes the sale, exchange, relinquishment, or extinguishment of rights in a capital asset or the compulsory acquisition thereof under any law. However, the definition of “transfer” also specifically excludes certain transactions from its scope.

Exclusions under Sub-clause (vi)

Sub-clause (vi) of section 2(47) of the Income Tax Act, 1961, carves out an exclusion from the definition of “transfer.” This provision states that the transfer of a capital asset shall not include the transfer of a capital asset under a transaction of reverse mortgage made under a scheme as notified by the Central Government, subject to certain conditions.

One of the conditions specified under sub-clause (vi) is that the consideration received on the transfer of the capital asset is to be utilized for the purchase of an annuity plan.

Not of Underlying Assets

In the context of sub-clause (vi), it is important to understand the meaning of the expression “not of underlying assets.” This term is significant in the application of the exclusion provided under sub-clause (vi) of section 2(47) of the Income Tax Act, 1961.

The expression “not of underlying assets” refers to the transfer of a capital asset without the underlying assets being affected or transferred along with it. Consequently, if there is a transfer of a capital asset and the underlying assets are not transferred with it, such transfer will fall within the scope of sub-clause (vi) and will be excluded from the definition of “transfer.”

Under Transfer in Relation to a Capital Asset

The phrase “under transfer in relation to a capital asset” is also crucial in the interpretation of sub-clause (vi). This phrase deals with the transfer of a capital asset and its relationship with the exclusion provided under sub-clause (vi) of section 2(47) of the Income Tax Act, 1961.

The use of the term “in relation to” signifies the connection between the transfer and the capital asset. It indicates that the exclusion under sub-clause (vi) applies specifically to the transfer of a capital asset and not to any other form of transfer.

Significance under Income Tax Laws

The exclusion provided under sub-clause (vi) of section 2(47) of the Income Tax Act, 1961, has significant implications for the taxation of capital gains. By excluding certain transactions from the definition of “transfer,” this provision ensures that specific types of transfers are not subjected to tax under the head “Capital Gains.”

The exclusion is particularly relevant in the context of reverse mortgage transactions, where the transferor receives consideration in the form of periodic payments or a lump sum amount from the transferee. Under such transactions, if the conditions specified under sub-clause (vi) are satisfied, the transfer will not be treated as a transfer for the purposes of taxation under the head “Capital Gains.”

Judicial Interpretation

The interpretation and application of sub-clause (vi) of section 2(47) have been the subject of judicial scrutiny. Courts have emphasized the need to strictly construe the scope of the exclusion provided under this provision and to ensure that the conditions specified therein are met for the exclusion to apply.

In the case of CIT vs. Jyotsna Bhatia [2006] 281 ITR 150 (Del.), the Delhi High Court held that the exclusion under sub-clause (vi) would apply only if the transfer of the capital asset is in accordance with a scheme notified by the Central Government and if the consideration received is used for the purchase of an annuity plan, as specified under the relevant provisions.

The court further observed that the conditions prescribed under sub-clause (vi) must be strictly complied with, and any deviation from the requirements would render the exclusion inapplicable. Therefore, it is imperative for taxpayers to ensure strict adherence to the conditions specified under sub-clause (vi) to avail of the exclusion from the definition of “transfer” under the Income Tax Act, 1961.

Conclusion

In conclusion, sub-clause (vi) of section 2(47) of the Income Tax Act, 1961, plays a pivotal role in determining the taxability of capital gains arising from the transfer of a capital asset. The exclusion provided under this provision applies to specific transactions, such as reverse mortgage transactions, subject to the fulfillment of certain conditions.

Understanding the significance and implications of sub-clause (vi) is essential for taxpayers and practitioners involved in transactions relating to the transfer of capital assets. Strict compliance with the conditions prescribed under this provision is necessary to avail of the exclusion from the definition of “transfer” and to ensure the correct application of tax laws regarding capital gains. Moreover, judicial pronouncements underscore the need for adherence to the prescribed conditions, emphasizing the importance of a meticulous approach in claiming the benefit of the exclusion under sub-clause (vi) of the Income Tax Act, 1961.