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SECTION 47: TRANSCTION NOT CONSIDERED AS TRANSFER

SECTION 47: TRANSCTION NOT CONSIDERED AS TRANSFER

 

SECTION 47: CETRAIN TRANSFER NOT REGARDED AS TRANSFER (EXEMPT TRANSFER)

 

  1. Introduction to Section 47.

Section 47 of the Income Tax Act is a necessary provision that exempts certain transactions from being classified as transfers. This is important as under the Act, any profit or gains arising from transferring a capital asset shall be chargeable to capital gain tax. Section 47 helps avoid capital gain tax in many instances by excluding certain transactions from this definition, mitigating the burden of tax for certain transactions.

 

 

  1. Provisions to Section 47.

Following Transactions are not regarded as transfers. Therefore, no Capital Gain will arise.

 

  1. Partition of HUF (47(i))

Distribution of Capital Asset on the partial or total partition of HUF.

 

  1. Transfer under gift, will, irrevocable trust (47(ii))

Transfer of Capital asset by Individual or HUF under gift, will, irrevocable trust will not be considered as transfer.

 

NOTES:

This clause shall not apply to gift, or an irrevocable trust of share, debenture or warrants allotted by company to employees under ESOPS.

 

As per sixth proviso to Section 48 – Fair Market Value (FMV) on date of transfer (date of gift or irrevocable trust) shall be treated as Full Value of Consideration (FVOC) of such shares, debentures, or warrants.

 

  1. Transfer by Holding Company to its Subsidiary Company or Vice Versa (47(iv)/ 47(v))

Transfer of a Capital Asset by holding company to its subsidiary company or subsidiary company to its holding company provided the following conditions are satisfied:

 

S.NO

CONDITION
  1.  

Holding company holds 100% shareholding of subsidiary company.
  1.  

Transferee company should be Indian Company.

NOTE: This exemption is not allowed if capital asset is transferred as stock in trade.

 

Section 47A: Withdrawal of Exemption

In case of clause (iv) & (v) of Section 47 (Holding company to Subsidiary company) and (Subsidiary company to Holding company), if within 8 years from the date of transfer;

 

            Such asset is converted in stock in trade by transferee company or

            Holding company cease to hold 100% share capital of subsidiary company.

Then, exemption claimed earlier shall be withdrawn & tax shall be charged to Transferor company in the Previous year in which transfer took place.

 

 

In above cases:

 

S.NO

EXPLANATION
  1.  

Cost of Acquisition will be cost to previous owner (Section 49(1)).
  1.  

Cost of Improvement done by previous owner & present owner shall be considered.
  1.  

Period of Holding of previous owner shall also be considered
  1.  

Indexed cost of Acquisition as per Manjula J. Shah (Bombay H.C.) will be:

 

(A*B)/C, where A, B & C means;

A

Cost of Acquisition of previous owner

B

Cost inflation index of the year of transfer

C

Cost inflation index in which asset is first held by Previous owner.

 
  1.  

Benefit of Fair Market Value (FMV) as on 01/04/2001 is also available to present owner.

 

 

  1. Transfer under Amalgamation

 

Transfer of any capital asset by Amalgamating company to Amalgamated company

If amalgamating company is an Indian Company (Section 47(vi)).

Transfer of shares in Indian company or shares of foreign company which derives its value from shares of Indian company by Amalgamating foreign company to Amalgamated foreign company
  1. If atleast 25% of shareholding of Amalgamating foreign company continue in Amalgamated foreign company.
  2. Such transfer does not attract tax in the country in which amalgamating company is incorporated (Section 47(via) & 47(viab).

Transfer under scheme of amalgamation of Banking company with Banking institution

As per section 45(7) of Banking Regulation, 1949 (Section 47(viaa))

Surrender of shares in Amalgamating company by shareholders of Amalgamating company to Amalgamated company
  1. Consideration will be only allotment of share in Amalgamated company except when amalgamated company is itself the shareholder.
  2. Amalgamated company is an Indian company.

 

 

  1. Transfer under Demerger

 

Transfer of any capital asset by Demerged company to resulting company

If resulting company is an Indian company (Section 47(vib)).

Transfer of shares in Indian company or share of a foreign company which derives its value from share of Indian company by demerged foreign company to resulting foreign company

a) If shareholders holding atleast 75% of value of shares in demerged company continue in resulting company

b) such transfer does not attract tax in the country in which demerged company is incorporated (Section 47(vic) & 47(vid)).

Issue of shares by resulting company to shareholder of demerged company

Here shareholder received shares of resulting company is not treated as transfer of shares in demerged company (Section 47(vid)).

 

  1. Transfer in case of Non-Resident

Bond/ GDR referred u/s 115AC outside India

By one non-resident to another non-resident, outside India (Section 47(viia)).

Rupee denominated bond of an Indian company

By one non-resident to another non-resident, outside India (Section 47(viiaa)).

Govt. securities carrying periodic payment of interest

By one non-resident to another non-resident outside India through an intermediary dealing in settlement of securities (Section 47(viib).

Bonds or GDR referred u/s 115AC or derivates or rupee denominated bond of Indian company or other notified securities

By non-resident on a Recognized Stock Exchange located in any IFSC & where the consideration is paid or payable in foreign currency (Section 47(viiab)).

 

  1. Conversion of Entities:

 

Conversion of Sole Proprietor into company (Section 47(xiv))
  1. All assets & liabilities transfer to company.
  2. Sole proprietor becomes shareholder.
  3. Consideration to sole proprietor shall only be allotment of shares in the company.
  4. His shareholding in company should be atleast 50% during 5 years from the date of conversion.

Conversion of Firm into company or conversion of Stock exchange as AOP/ BOI into recognized stock exchange as company (Section 47(xiii))
  1. All assets & liabilities transfer to company.
  2. All Partners/ members becomes shareholder in proportion of their capital standing as on last date of succession.
  3. Consideration to partners/ members shall only be allotment of shares in the company.
  4. Total voting power of partners/ members in the company should be atleast 50% during 5 years from the date of succession.
  5. The corporatization of Recognized Stock Exchange (RSE) in India is carried out as per Corporatization scheme approved by SEBI.

 

Transfer of membership rights for acquisition of shares & trading right in that RSE

Cost of Acquisition of equity shares allotted will be cost to acquire membership.

Cost of Acquisition of trading rights will be Nil.

Period of holding shall be reckoned from date of his membership in RSE.

Conversion of Unlisted Public Company/ Private Company into LLP (Section 47(xiiib))
  1. All assets & liabilities transfer to LLP.
  2. All shareholders become Partners and their capital contribution & PSR are in proportion of their shareholding.
  3. Consideration to shareholder will only be share in profit & capital.
  4. Total PSR in LLP of shareholders should be atleast 50% during 5 years from the date of conversion.
  5. No amount is paid directly/ indirectly to any partner from accumulated profit balance standing on conversion date for 3 years from date of conversion.
  6. Total T.O/ G.R. of company should be upto Rs. 60 lakhs in last 3 Financial years preceding the year of conversion.
  7. Total assets of the company should be upto Rs. 5 crores in last 3 Financial years preceding the year of conversion.  

 

Section 47A(3)(4): Violation of above conditions:

If any condition of Section 47(xiii)/ 47(xiv)/ 47(xiiib) is violated, the exemption claimed by the proprietor/ firm/ company will be taxable in the hands of successor company/ LLP in the year of violation.

 

  1. Conversion of securities:

 

Conversion of Bond, debenture, debenture stock, deposit certificates of a company into shares or debentures of same company (Section 47(x))

Cost of Acquisition of shares/ debentures received on conversion will be cost of that part of bond, debenture, deposit certificate which is so converted.

Period of Holding of share/ debenture shall also include the period for which bond, debenture, deposit certificates held by the assessee.

Conversion of Preference share of a company into Equity share of same company (Section 47(xb))

Cost of Acquisition of equity share received on conversion will be cost of that part of preference share which is so converted.

Period of Holding of equity share shall also include the period for which preference shares held by the assessee.

Conversion of Gold into Electronic Gold Receipt (EGR) issued by a vault manager, or conversion of Electronic Gold Receipt into Gold (Section 47(viid)

Cost of Acquisition of current asset received on conversion will be cost of earlier asset which is so converted.

Period of Holding of earliest asset shall also include the period for which current asset held by the assessee.

 

  1. Transfer of Sovereign Gold Bond issued by RBI under Sovereign Gold Bond Scheme 2015, by way of redemption by the assessee being an Individual (Section 47(xviic)).

 

  1. Stock lending scheme: any transfer in a scheme for lending any securities under an agreement between the assessee and borrower of such securities as per SEBI or RBI guidelines (Section 47(xv)).

 

  1. Transfer of work of art, scientific, archaeological, manuscript, books, photographs or print to government, University, National Museum or art gallery or archives, any public notified museum (Section 47(ix)).

 

 

  1. Transfer of capital asset under reversed mortgage under a scheme made and notified by Central Government (Section 47(xvi)).

 

 

  1. Transfer of share of SPV to a Business trust in exchange of units of the trust (Section 47(xvii)).

 

 

  1. Transfer of capital asset in a business reorganization, by the predecessor co-operative bank to successor or to the converted banking company (Section 47(vica)).

 

 

 

  1. Transfer of capital asset by India Infrastructure Finance Company Limited to an institution established for financing the infrastructure and development, set up under an Act of parliament and notified by the Central Government (Section 47(viiae).

 

 

  1. Transfer of shares by a shareholder, in a business reorganization, if the transfer is made in consideration of the allotment to him of any share or shares in the successor co-operative bank or to the converted banking company (Section 47(vicb).

 

 

  1. Transfer of capital asset, under a plan approved by the central government, by a public sector company (PSC) to another PSC notified by Central Government or to the Central Government or to a State Government.

 

 

  1. Any transfer, by a Mutual Fund unit holder of units, held by him in the consolidating scheme of MF, made in consideration of the allotment to him of units in consolidating scheme of the MF. Provided the consolidation should be of two or more schemes of equity-oriented fund or of two or more schemes of a fund other than equity-oriented scheme (Section 47(xviii)).

 

 

  1. Any transfer of interest in a joint venture, held by a public sector company, in exchange of shares of a company incorporated outside India by the government of a foreign state, in accordance with the laws of that foreign state (JV means business entity as may be notified by the CG).

 

 

 

 

 

 

 

 

 

 

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