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 Transfer in Relation to a Capital Asset

Introduction

In the realm of income tax law in India, the provisions relating to the transfer of capital assets and the tax implications thereof are of paramount importance. One such provision is contained in sub-clause (vi) of Section 47 of the Income Tax Act, 1961. This provision deals with transactions which do not constitute a transfer for the purposes of capital gains tax. Specifically, sub-clause (vi) carves out an exemption for transfers not involving the underlying assets in certain cases. In this article, we will delve into the nuances of sub-clause (vi) — not of underlying assets under transfer in relation to a capital asset, and explore its implications under Indian income tax law.

Understanding Sub-clause (vi) of Section 47

Sub-clause (vi) of Section 47 of the Income Tax Act, 1961 provides that any transfer of a capital asset, being a share or shares held in an Indian company, by a demerged foreign company, in a scheme of amalgamation, would not be regarded as a transfer for the purposes of capital gains tax. This exemption is subject to certain conditions, including the issuance of shares by the amalgamated Indian company to the shareholders of the demerged foreign company, and the non-availability of the underlying Indian assets to the demerged foreign company.

Key Elements of Sub-clause (vi)

In order to fully comprehend the scope and applicability of sub-clause (vi), it is essential to dissect its key elements:

  1. Transfer of Capital Asset: The provision applies to the transfer of shares held in an Indian company by a demerged foreign company. It is important to note that only such transfers as part of a scheme of amalgamation are covered under this provision.

  2. Scheme of Amalgamation: The transfer of shares must occur in the context of a scheme of amalgamation, which involves the restructuring of companies. The scheme of amalgamation typically entails the transfer of various assets and liabilities from one company to another.

  3. Non-availability of Underlying Assets: One of the crucial conditions for the applicability of sub-clause (vi) is that the underlying Indian assets must not be available to the demerged foreign company. This condition serves as a safeguard against potential abuse of the provision.

The interpretation and application of sub-clause (vi) of Section 47 have significant legal implications, both for taxpayers and tax authorities. The provision serves as a statutory exception to the general rule that transfers of capital assets are subject to capital gains tax. By extending the exemption to certain transfers involving demerged foreign companies, the provision aims to facilitate the ease of doing business and corporate restructurings.

However, the application of sub-clause (vi) is contingent upon strict compliance with the prescribed conditions. Failure to satisfy these conditions may lead to the transfer being treated as a taxable event, thereby exposing the parties involved to potential tax liabilities. As such, it is imperative for taxpayers to carefully scrutinize the requirements of the provision and ensure that the transaction falls within its ambit.

From a legal standpoint, the language employed in sub-clause (vi) and the corresponding judicial interpretations play a pivotal role in delineating its scope. Courts have time and again elucidated the legislative intent behind the provision and have sought to harmonize its interpretation with the broader objectives of the Income Tax Act. Such judicial pronouncements serve as binding precedents and guide the application of the provision in concrete cases.

Compliance and Due Diligence

Given the intricate nature of sub-clause (vi) and its implications for taxation, compliance and due diligence assume paramount significance. Taxpayers contemplating transactions falling within the purview of the provision must exercise caution and prudence in order to ensure compliance with the prescribed conditions. This necessitates a meticulous examination of the provisions of the Income Tax Act, relevant judicial precedents, and expert professional advice.

Furthermore, due diligence assumes added significance in the context of cross-border transactions involving demerged foreign companies. The complexity of such transactions, coupled with the nuances of international taxation, underscores the need for thorough due diligence to mitigate the risk of adverse tax implications.

Conclusion

Sub-clause (vi) of Section 47 of the Income Tax Act, 1961, constitutes a vital provision with far-reaching implications for the taxation of capital asset transfers. Its exemption for certain transfers by demerged foreign companies in the context of a scheme of amalgamation serves to balance the exigencies of taxation with the imperatives of corporate restructuring and business facilitation. Nonetheless, the complexity and conditions governing the applicability of the provision underscore the need for meticulous compliance and due diligence by taxpayers. In conclusion, a comprehensive understanding of sub-clause (vi) is imperative for navigating the intricacies of capital gains tax in the Indian legal landscape.

Disclaimer:
The Bar Council of India does not permit the solicitation of work and advertising by legal practitioners and advocates. By accessing The Law Codes website, the user acknowledges that:The user wishes to gain more information about us for his or her information and use.He/She also acknowledges that there has been no attempt by us to advertise or solicit work. Any information obtained or downloaded by the user from our website does not lead to the creation of the client-attorney relationship between our office and the user. None of the information contained on our website amounts to any form of legal opinion or legal advice. All information contained on our website is the intellectual property of the office.