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Section 47: Certain transactions not regarded as transfer for capital gains

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Under the Income Tax Act provisions, capital gains arise when there is a “transfer” of a capital asset effected during the previous year. If there is no transfer of a capital asset, no income is chargeable to tax under the head capital gains.

Section 47 of the Income Tax Act covers certain transactions that are not regarded as “transfer” and, accordingly, gains arising from such transactions are not liable to capital gain tax. The rational for such an exemption is that these transactions do not result in any taxable income in the hands of the transferor.

Meaning of transfer
“Transfer”, in relation to a capital asset, involves:

  1. The sale, interchange or relinquishment of the asset; or
  2. The eradication of any rights therein; or
  3. The mandatory acquisition thereof under any law; or
  4. In a case where the asset is transformed by the owner thereof into, or is treated by him as, the stock-in-trade of a business carried on by him, such conversion or treatment; or
  5. Any transaction requiring the authorization of the possession of any secured property to be taken or reserved in part performance of a contract of the nature mentioned in section 53A of the Transfer of Property Act, 1882; or
  6. any deal (whether by way of becoming a member of, or obtaining shares in, a co-operative society, firm or other association of individuals or by way of any consent or any arrangement or in any different manner whatsoever) which has the effect of transferring, or qualifying the enjoyment of any secured property.
  7. The maturity or absolution of a zero-coupon bond.

Certain transactions not regarded as transfer
These specified transactions will not be regarded as transfers for section 45, and therefore, no capital gains will arise:

  1. Any dispensation of capital assets in kind by a Hindu undivided family to its members at the time of total or partial partition.
  2. Any transfer of a capital asset under a gift, will, or irrevocable trust.
  3. Transfer of shares in amalgamating firm/ demerged company instead of allotment of shares in the amalgamated company
  4. Dispensation of assets in kind by a company to its shareholders on its liquidation.
  5. Transfer of capital asset between holding firm and its 100% subsidiary company if the transferee company is Indian.
  6. Transfer of capital asset in a plan of amalgamation of a banking firm with a banking organization.
  7. Transfer of shares in an Indian firm held by a foreign firm to another foreign firm in a plan of amalgamation/demerger of the two foreign firms if a few conditions are met.
  8. Transfer of a capital asset by a non-resident of foreign money convertible bonds or global depository receipts to other non-resident if the transfer is made exterior to India and if some conditions are met.
  9. Transfer by an individual of sovereign gold bond (provided by RBI under the Sovereign Gold Bond Scheme, 2015) by way of redemption.
  10. Transfer of any work of art, archaeological, technological or art accumulation, book, text, drawing, painting, snapshot or print, to the government or a college or the national museum, national art gallery, national archives or further any notified public museum or institute.
  11. Any transfer by way of turning of bonds or debentures, debenture-stock or deposit certificate in any form, of a firm into shares or debentures of that firm.
  12. Transfer by way of turning of preference shares of a firm into equity shares of that company.
  13. A sick industrial company transfers land if a few conditions are met.
  14. Transfer of a capital asset by a private firm/unlisted public company to a limited liability partnership in the case of transformation of firm into LLP, if a few conditions are met.
  15. Transfer of capital assets at the time of transformation of a company/ sole proprietary concern in a firm if a few conditions are satisfied.
  16. Any transfer involved in a scheme for lending any securities if a few conditions are satisfied.
  17. Any transfer of a capital asset in a reverse mortgage.
  18. Transfer of a capital asset (being government security carrying periodic remittance of interest) made outside India throughout an intermediary dealing in settlement of securities by a non-resident to another non-resident.
  19. Transfer of a capital asset (being share of a particular purpose vehicle) to a business trust in exchange for units assigned by that confidence to the transferor.
  20. Any transfer by a unitholder of units held by him in the consolidating scheme of a mutual fund, made in consideration of the assignment to him of units in the consolidated scheme of the mutual fund, if the consolidation is of two or more schemes of equity oriented fund or two or more schemes of a fund other than equity oriented fund.
  21. Transfer by a unitholder of units grasped by him in the consolidating plan of a mutual fund scheme, made in consideration of the assigning to him of units, in the consolidated plan of that scheme of the mutual fund.
  22. Transfer of capital asset [being bonds/GDR mentioned in section 115AC(1) or rupee-denominated bond of an Indian firm or derivative] made by a non-resident on a certified stock exchange situated in any international financial services centre and where the consideration is paid/payable in overseas currency.

If the conditions above are satisfied, the transaction is not treated as a “transfer.”

Withdrawal of exemption in certain cases- section 47A
The central government has introduced section 47A in 1995; which withdraws exemption granted in some instances.

Section 47A provides that:

  1. Whereat any time prior to the termination of a span of eight years from the date of transfer of a capital asset mentioned in clause (iv) or (v) of section 47:
  • Such capital asset is transformed by the transferee company into or is treated by it as the stock-in-trade of its business, or
  • The parent firm or its nominees or, as the case may be, the holding firm winds up or cease to hold the whole of the share capital of the subsidiary company, the sum of profits or gains arising from the transfer of such capital asset not charged under section 45 under the provisions included in clause (iv) or, as the case may be, clause (v) of section 47 shall, notwithstanding anything included in the said clauses, be considered to be earnings chargeable under the head “capital gains” of the prior year in which such transfer took place.
  1. At which any time, prior to the expiry of a span of three years from the date of the transfer of a capital asset, mentioned in clause (xi) of section 47, any of the shares assigned to the transferor in exchange for membership in recognized stock exchange are transferred, the sum of profits and gains not charged under section 45 under the provisions included in clause (xi) of section 47 shall, notwithstanding anything included in the said clause, be deemed to be the earnings chargeable under the head “capital gains” of the prior year in which such shares are transferred.
  2. Where any of the conditions laid down in the provision to clause (xiii) or the provision to clause (xiv) of section 47 are not followed, the sum of profits or gains emerging from the transfer of such capital asset or impalpable asset not charged under section 45 by virtue of conditions laid down in the provision to clause (xiii) or the provision to clause (xiv) of section 47 shall be considered to be the profits and gains chargeable to a tax of the successor company for the prior year in which the requisites of the provision to clause (xiii) or the provision to clause (xiv), as the case may be, are not complied with.
  3. Where any of the conditions laid down in the provision to clause (xiiib) of section 47 are not followed, the amount of profits or gains arising from the transfer of such capital asset or intangible assets or shares not charged under section 45 by conditions laid down in the said provision shall be considered to be the profits and gains chargeable to a tax of the inheritor limited liability partnership or the shareholder of the forerunner firm, as the case may be, for the prior year in which the requirements of the said provision are not complied with.

At AJSH, we assist our clients with various income tax compliances, including income tax assessments, ITR filings, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about Section 47, kindly contact us.

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