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

Under the Income Tax Act in India, the provisions relating to the transfer of a capital asset are crucial for determining the tax implications for such transfers. Sub-clause (vi) under section 2(47) of the Income Tax Act, 1961, deals with the definition of the term “transfer” in relation to a capital asset. It specifically excludes certain transactions from the definition of transfer, thereby impacting the tax treatment of such transactions. One such exclusion pertains to the transfer of a capital asset under certain circumstances where the consideration is not solely in cash but also includes non-monetary assets. This article aims to delve into the details of sub-clause (vi) and its implications under Indian income tax laws.

Understanding Sub-clause (vi)

Sub-clause (vi) under section 2(47) of the Income Tax Act, 1961, states that a transfer includes the sale, exchange, relinquishment, or extinguishment of any right in a capital asset. However, it also clarifies that the transfer also includes the extinguishment of any right therein, but that does not include the transfer of such capital asset to any person as a result of the compulsory acquisition under any law or the transfer of a capital asset by a company to its subsidiary company or the consolidation of the holding of a company in one or more of its subsidiary companies.

Furthermore, sub-clause (vi) goes on to exclude the transfer of a capital asset under a transaction where the consideration for the transfer is not solely in cash but also includes other non-monetary assets. It specifies that such transactions shall be deemed to be transfers for the purposes of capital gains tax.

Implications of Sub-clause (vi)

The inclusion of non-monetary assets as part of the consideration for the transfer of a capital asset has significant implications for the computation of capital gains tax. In such cases, the fair market value of the non-monetary assets included in the consideration is considered for the purpose of computing the capital gains. This provision ensures that any transaction involving the transfer of a capital asset where the consideration includes non-monetary assets does not escape the purview of capital gains tax.

The rationale behind this provision is to prevent tax avoidance and ensure that the transfer of capital assets in exchange for non-monetary consideration is subject to tax in a manner consistent with transactions involving purely monetary consideration.

Case Law and Judicial Interpretation

The application and interpretation of sub-clause (vi) have been the subject of numerous judicial decisions. In the case of CIT vs. B.C. Srinivasa Setty (1981), the Supreme Court held that the expression “property” is of the widest amplitude and includes any right in rem. This decision reiterated the expansive scope of the term “property” under the Income Tax Act, thereby impacting the applicability of sub-clause (vi) to a wide range of transactions involving the transfer of capital assets.

Additionally, the case of Vania Silk Mills Pvt. Ltd. vs. CIT (2003) emphasized the importance of ascertaining the fair market value of the non-monetary consideration included in a transfer of a capital asset. The court held that the fair market value of non-monetary consideration such as goods and services must be determined in accordance with established valuation principles to ensure the accurate computation of capital gains tax.

Practical Examples

To better understand the application of sub-clause (vi), consider a scenario where an individual transfers a piece of land to another party in exchange for a combination of cash and jewelry. In such a case, the fair market value of the jewelry would be taken into account for the purpose of computing the capital gains arising from the transfer. The valuation of the jewelry would be crucial in determining the tax liability arising from the transfer, highlighting the practical significance of sub-clause (vi) in real-world transactions.

Similarly, if a company transfers its shares to another company in exchange for shares and land, the fair market value of the land and the shares received as consideration would be considered for the computation of capital gains tax. This application of the provision ensures that transactions involving the exchange of non-monetary assets are subject to taxation in a manner consistent with transactions involving cash consideration.

Conclusion

In conclusion, sub-clause (vi) under section 2(47) of the Income Tax Act, 1961, plays a crucial role in determining the tax implications of transactions involving the transfer of capital assets where the consideration includes non-monetary assets. The provision ensures that such transactions are not exempt from capital gains tax and are subject to taxation based on the fair market value of the non-monetary consideration. The judicial interpretation and practical examples further underscore the significance of sub-clause (vi) in shaping the tax treatment of diverse transactions involving capital assets.

It is essential for taxpayers and legal practitioners to have a comprehensive understanding of sub-clause (vi) and its implications to ensure compliance with income tax laws and accurate computation of capital gains tax in transactions involving the transfer of capital assets with non-monetary consideration. As the landscape of business and commercial transactions evolves, the application of sub-clause (vi) continues to be of paramount importance in navigating the complexities of capital gains taxation in India.