Capital Gain - Transactions which are not considered as transfer

Section 46: Distribution of assets on liquidation of Company

Where the assets of a company are distributed to its shareholders on liquidation of a company, such distribution shall not be regarded as transfer in the hands of the company.

Section 47: Transactions which are not considered as Transfer

The following transactions are exempt from chargeability to Capital gains, subject to the satisfaction of conditions stipulated:

1- Distribution of a capital asset on total or partial partition of a HUF.

2- Transfer of a capital asset by way of gift or under a will or an irrevocable trust.

(This clause hall not apply to transfer under a gift / irrevocable trust of a capital asset being share, debentures or warrant allotted by a company to its employee under ESOP of the company as per guidelines of CG. i.e.ESOP are not covered over here.)

3- Transfer of a capital asset by holding company to its subsidiary company or vice versa is exempt if the following two conditions are fulfilled:

a- The holding company or its nominee should hold the whole of the share capital of the subsidiary company;

b- The transferee company should be an Indian Company.

Amendment u/s 47: Where a holding company transfers a capital asset to its subsidiary company as a SIT or vice versa, then exemption u/s 47 shall not be available. 

Withdrawal of exemption: According to Sec. 47A, if any of the following events occur within a period of 8 years from the date of transfer of capital assets, the capital gains so exempted earlier shall be chargeable to tax in hands of the transferor company in the year of transfer of such capital asset:

a- The holding company does not continue to hold the whole of the share capital of the subsidiary company; or

b- The transferee company converts into or treats the capital asset as stock-in-trade.

Note: In the case of a transaction between holding company and subsidiary company, the following additional points need to be borne in mind:

a- If the provisions of Sec. 47A are applicable to a transfer, than the assessment shall be reopened in respect of the assessment year relevant to the previous year in which original transfer took place, to amend the order so as to charge the capital gains to tax.

b- If the transferee company subsequently sells the asset subject to satisfaction of conditions prescribed in Sec. 47A, then for computation of Capital gains, the cost to the transferor company shall be adopted as cost to the transferee company – Sec. 49(1).

c- If the asset is sold after attracting the provisions of Sec. 47A, then cost to the transferee company shall be the actual cost incurred by that company to acquire the asset from the transferor company – Sec. 49(3).

4- Amalgamation of companies: Transfer of a capital asset in a scheme of amalgamation, is exempt if the amalgamated company is an Indian company.

5- Transfer of a capital asset being shares held in an India company, in a scheme of amalgamation by the amalgamating foreign company to the amalgamated foreign company is exempt, if the following two conditions are fulfilled:

a- At least 25% of the shareholders of the amalgamating foreign company continue to be shareholders of the amalgamated foreign company; and \

b- Such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.

6- Asset Transferred is SHARE of A FOREIGN COMPANY (Amalgamation) referred to in Expl. 5 to Sec 9(1), which drives directly or indirectly, its value substantially from the shares of an Indian Company. Provided: a- At least 25% of the shareholders of amalgamating foreign company remains shareholders of the amalgamated foreign company.

b- Such transfer does not attract Capital Gain Tax in country in which the amalgamating company is incorporated.

7- Transfer of capital asset being shares held by a shareholder in the amalgamating company is exempt, if the following two conditions are fulfilled:

a- The transfer is made in consideration of allotment to him of any shares in the amalgamated company except where the amalgamated company itself is the shareholder; and

b- The amalgamated company is an India company.

8- Demerger of companies: Transfer of a capital asset in a demerger by the demerged company to the resulting company is exempt. If the resulting company is an Indian company.

9- Transfer of a capital asset, being share or shares held in an India company by the demerged foreign company to the resulting foreign company, is exempt if

a- The shareholders holding not less than 75% in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and

b- Such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated.

10- Asset Transferred is SHARE of A FOREIGN COMPANY (Demerger) referred to in Expl. 5 to Sec 9(1), which drives directly or indirectly, its value substantially from the shares of an Indian Company. Provided:

a- At least 75% of the shareholders of demerged foreign company remains shareholders of the resulting foreign company.

b- Such transfer does not attract Capital Gain Tax in country in which the amalgamating company is incorporated.

11- Transfer / issue of shares by the resulting company in a scheme of demerger to the shareholders of the demerged company in consideration of demerger is exempt.

12-Transfer of capital asset by a banking company to a banking institution in a scheme of amalgamation is exempt.

13-Transfer of capital asset by a predecessor co-operative bank to a successor co-operative bank in a scheme of business reorganization is exempt.

14-Transfer of shares held by the shareholder in predecessor co-operative bank in lieu of the shares issued by the successor co-operative bank in a scheme of business reorganization is exempt.

15-Amendment as per Finance Act, 2021:

Tax neutral conversion of urban Co-operative Bank into Banking Company: Transfer of a Capital Asset by the primary co-operative bank to the banking company as a result of conversion shall not be treated as transfer u/s 47.

Consequently, the allotment of shares of the converted banking company to the shareholders of the predecessor primary co-operative bank shall not be treated as transfer.

16-Any transfer of a capital asset being a membership right held by a member of a recognised stock exchange in India as approved by SEBI.

17-Conversion of Preference share of a company into equity shares of that company.

18-Conversion of bonds, debentures, debenture stock or deposit certificates of a company into shares or debentures of that company is exempt.

19-Any transfer by way of conversion of bonds u/s 115AC into share or debentures of a company.

19- Transfer of Capital Assets referred u/s 115AC (GDR / FCCB) by a NR to other NR.

20- Transfer of Capital Assets being Government security (carrying periodic payment of interest) through an intermediary dealing in settlement of securities.

21- Sovereign Gold Deposit Bond: Any redemption of Sovereign Gold Bond under the scheme (by Individual) shall not be treated as transfer.

Notes:

1- SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors pay issue price in cash & bonds will be redeemed in cash on maturity. RBI issues SGB on behalf of government.

2- It is important to note that exemption is available on redemption only. It means if these SGBs are transferred then Sec 47 shall not be applicable i.e. charged to Capital Gain tax.

3- If any individual purchased these bonds from market then also he shall be eligible to get exemption at the time of maturity.

22- Any transfer made outside India of a capital asset being rupee denominated bond of an Indian company issued outside India, by a non-resident to another non-resident shall not be regarded as transfer.

Note:

A rupee denominated bond is a bond issued by an Indian entity in foreign markets and the interest payments and principal reimbursements are denominated (expressed) in rupees.

The peculiarity of rupee denominated bond is that buying of bonds, interest payments and repayment all are expressed in rupees. All payments are converted into corresponding dollar values at the time of payment. The term ‘masala bond’ is also used to describe rupee denominated ever since the first issuer of rupee-denominated bonds used the name masala bonds in its first issue. RBI in its August 2016 regulations also used this name.

23- Any transfer of a capital asset, being—

a- bond or Global Depository Receipt referred to in sub-section (1) of section 115AC; or

b- rupee denominated bond of an Indian company; or

c- derivative,

d- such other securities as may be notified by the Central Government in this behalf,

made by a non-resident on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency. 

24- Transfer of capital asset being any work of art, archaeological, scientific or art collection, book, manuscript, painting, drawing, photograph or print, to the Government or a University or the National Museum, National Archives, National Art Gallery or any such other public museum or institution notified by the Central Government to be national importance.

25- Transfer of land of a sick industrial company under a scheme sanctioned under Sec. 18 of the Sick Industrial Companies (Special Provisions) Act, 1985, where such sick industrial company is being managed by its workers’ co-operative. Such transfer is eligible for exemption only if the transfer is made during the period commencing from the previous year in which the company has become sick and ending with the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

26- Transfer in a scheme for lending of any securities under an agreement or arrangement, which the assessee has entered into with the borrower of such securities and which is subject to the guidelines issued by SEBI or RBI is exempt.

27- UNITS IN CONSOLIDATING SCHEME OF MUTUAL FUND:

- Transaction: Transfer by a Unit Holder, made in consideration of the allotment to him of a Capital Asset, being units in the consolidated scheme of a mutual fund.

- Capital Assets: Units held by him in the consolidating scheme of a mutual fund.

- Condition: Consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund.

28- UNITS IN CONSOLIDATING PLANS OF MUTUAL FUND: Any transfer by a unit holder of a capital asset being a unit or units held by him in consolidating plan of a mutual fund scheme, made in consideration of the allotment of him a capital asset, being a unit or units, in the consolidated plan of that scheme of the mutual fund shall not be considered as transfer.

29- Transfer of capital asset in a transaction of reverse mortgage.

30- Transfer of share of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor.

Note: Special Purpose Vehicle is explained u/s 10(23FC).

31- Any transfer of a capital asset or intangible asset by a firm/BOI/AOP to a company as a result of succession or any transfer of a capital asset to a company in the course of demutualisation or corporatization of a recognised stock exchange in India as a result of which an AOP or BOI is succeeded by such company is not regarded as transfer subject to the following conditions:

a) All the assets and liabilities of the firm or AOP or BOI relating to the business immediately before the succession shall become the assets and liabilities of the company;

b) All the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession;

c) The partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of share in the company;

d) The partners of the shareholding in the company of the partners of the firm is not less than 50% of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession; and

e) The demutualisation or corporatization of a recognised stock exchange in India is carried out in accordance with a scheme approved by SEBI in this regard.

32- Any transfer of a capital asset or intangible asset to a company where a proprietary concern is succeeded by such company in the business carried on by it, is not regarded as transfer subject to the following conditions:

a) All the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession shall become the assets and liabilities of the company;

b) The shareholding of the sole proprietor in the company is not less than 50% of the total voting power in the company and his shareholding shall continue to remain as such for a period of five years from the date of succession; and

c) The sole proprietor does not receive any consideration or benefit, directly, in any form or manner, other than by way of allotment of share in the company.

33- In a case where a private company or an unlisted public company is converted into LLP, any transfer of capital asset or intangible asset to LLP shall not be regarded as transfer. In addition, transfer of shares held by the shareholder also not to be considered as transfer. These exemptions are available subject to fulfilment of following conditions:

a) All the assets and liabilities of the company relating to the business immediately before the conversion shall become the assets and liabilities of the LLP;

b) All the shareholders of the company immediately before the conversion become the partners of the LLP and their contribution as well as profit sharing ratio in the LLP should be in the same proportion in which they held shares in the company on the date of conversion;

c) The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share of profit and capital contribution in the LLP;

d) The aggregate of profit sharing ratio of the shareholders of the company to the extent of not less than 50% in LLP should be continued for a period of five years from the date of the conversion;

e) The total sales, turnover or gross receipts in business of the company in any of the three preceding previous years should not exceed Rs. 60 lakhs; and

f) The partners of LLP should not withdraw the accumulated profits as on the date of conversion, including reserves, of the company for a period of 3 years from the date of conversion.

g) The total value of the assets as appearing in the books of company in any of the 3 preceding years in which conversion took place should not exceed Rs 5 crores.