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Tax Exemption on Transfer of Assets between Holding and Subsidiary Company


tax-exemption-on-transfer-of-assets-between-holding-and-subsidiary-company

Under the existing provisions of section 47 of the Income-tax Act, 1961 (“Act”), any transfer of a capital asset from a holding company to its wholly-owned subsidiary company or vice-versa is exempt from the charge of capital gains tax, subject to certain conditions. The exemption is, however, withdrawn under section 47A of the Act, if such capital asset is converted by the transferee company into, or is treated by it as stock-in-trade of its business; or the parent company or its nominee or the holding company ceases to hold the whole of the share capital of the subsidiary company, before expiry of a period of 8 years from the date of transfer.

    Introduction


    Section 2(47) of the Act defines the term ‘transfer’ of a ‘capital asset’ for the purpose of computation of capital gains under the Act.


    Clause (47) of section 2 defines the term ‘transfer’ in an inclusive manner. The term “transfer”, in relation to a capital asset, includes-


    (i) the sale, exchange or relinquishment of the asset; or


    (ii) the extinguishment of any rights therein; or


    (iii) the compulsory acquisition thereof under any law; or


    (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or


    (iva) the maturity or redemption of a zero coupon bond; or


    (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or


    (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.


    However, section 47 of the Act specifies certain transactions which are although transfers in ordinary meaning but are not regarded as transfer for the purpose of computation of capital gains. Clause (iv) and Clause (v) of Section 47 specifies that any transfer of capital asset between a holding company and its 100% Subsidiary Indian company and vice-versa will not be regarded as transfer and consequently no income from such transfer is chargeable to capital gain tax.


    Transfer of capital asset by a holding company to its 100% subsidiary company


    Section 47(iv) provides that any transfer of a capital asset by a company to its subsidiary company shall not be regarded as transfer if—


    (a) the parent company or its nominees hold the whole of the share capital of the subsidiary company, and


    (b)  the subsidiary company is an Indian company;


    However, the capital asset must be transferred as a capital asset by the holding company to its wholly owned subsidiary. The capital asset shall not be transferred as stock-in-trade after the 29th day of February, 1988. 


    Transfer of capital asset by a subsidiary company to its 100% holding company


    Section 47(v) provides that any transfer of a capital asset by a subsidiary company to the holding company shall not be regarded as transfer, if—


    (a) the whole of the share capital of the subsidiary company is held by the holding company, and


    (b) the holding company is an Indian company :


    However, the capital asset must be transferred as a capital asset by the subsidiary company to its 100% holding company. The capital asset shall not be transferred as stock-in-trade after the 29th day of February, 1988.


    The proviso to section 47(iv)/(v) provides to bring to tax under the head “capital gains” any transfer of a capital asset by a holding company to its wholly-owned subsidiary company or vice-versa, in cases where the capital asset is taken over as stock-in-trade at the time of transfer.


    Nature of Capital Gains exempt under section 47(iv)/(v)


    Any nature of capital gains - long term capital or short term capital gain is exempt under section 47(iv/(v).


    Conditions for exemption under section 47(iv) and 47(v)


    The exemption under section 47(iv) and 47(v) is subject to certain conditions which are enumerated in section 47A.


    Section 47A provides for two conditions which must be satisfied for a period of 8 years from the date of transfer of capital assets by a holding company to its wholly owned subsidiary and vice-versa under section 47(iv) and section 47(v)-


    Condition 1: The transferee company must hold the capital asset as a capital asset for a period of 8 years from the date of transfer of the capital asset. This does not mean that the subsidiary cannot transfer the capital asset within the lock-in period. This aspect is discussed later. The transferee company is only prohibited from converting the capital asset into stock-in-trade of its business or treat the same as stock-in-trade in its books. The consequences of converting or treating the capital asset so received from the transferor company into stock-in-trade is discussed separately under section 47A.


    Condition 2: The parent company or its nominees shall not cease to hold the whole of the share capital of the subsidiary company for a period of 8 years from the date of transfer of the capital asset. The consequences of diluting the shareholding of the subsidiary company is discussed separately under section 47A.


    Both the conditions must be satisfied for a period of 8 years from the date of transfer of the capital asset between the holding and wholly owned subsidiary company and vice versa.


    Withdrawal of exemption under section 47A


    If both the conditions or any one of the condition is violated by the transferee company in any year within the period of 8 years from the date of transfer then the amount of profits or gains arising from the transfer of such capital asset not charged to capital gains under section 45 by virtue of the provisions contained in clause section 47(iv) or section 47(v) of shall be deemed to be income chargeable under the head "Capital gains" of the previous year in which such transfer took place.


    Please note that the income will be charged to capital gains in the year in which transfer of capital asset was made by the transferor company and not in the previous year in which conditions are violated. Hence, this provision has retrospective effect.


    In order to avail and continue the exemption, both the conditions of section 47A must be adhered to for a lock-in period of 8 years without any fail, else the income on transfer of capital assets which was not taxed in the hands of the transferor company, will be charged to tax under the head capital gains with retrospective effect in the hands of the transferor company.


    Under clause (iv) of section 47 of the Act, capital gain arising from the transfer of a capital asset by a company to its wholly-owned subsidiary company is exempt from tax.


    Similarly, under clause (v) of section 47, capital gain arising from the transfer of a capital asset by a subsidiary company to the holding company is also exempt from tax. Exemption under this provision is allowed only if the transferee company is an Indian company.


    Section 47A provides that if at  any time before the expiry of 8 years from the date of transfer of a capital asset referred to in clause (iv) or clause (v) of section 47, such capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business ; or the parent company or its nominee, or as the case may be, the holding company ceases to hold the whole of the share capital of the subsidiary company before the expiry of the period of 8 years aforesaid, the amount of capital gain exempted from tax by virtue of the provisions contained in section 47 of the Act shall be deemed to be the income of the transferor company chargeable under the head “Capital gains” of the year in which the transfer took place.


    Once the question of computing the capital gain comes into picture, the question of determining the cost of acquisition and the period of holding arises.


    Transfer of capital asset within lock-in period of 8 years and Section 47A is not violated


    Cost of Acquisition


    It should be noted that there is no restriction on the transferee company regarding the transfer of the capital asset as a capital asset. The transferee company can transfer the capital asset within the lock-in period period of 8 years. If this happens then there will be no consequence to the income, which was not charged to tax by virtue of section 47(iv) or section 47(v), and the same will remain exempt from tax in the hands of the transferor company.


    The rationale is that there will be no loss to the revenue by allowing the exemption to the transferor company if a capital asset is transferred as a capital asset by the transferee company.


    Cost of acquisition for the transferee company - Conditions of section 47A are complied with


    Under section 49, the cost of acquisition of capital asset which becomes the property of the assessee under a gift or will, or by succession, inheritance or devolution, under any transfer referred to in clause (iv) or clause (v) of section 47., is deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred by the previous owner or the assessee, as the case may be.


    However, it is possible that the previous owner of the capital asset may have acquired the asset under a gift or will or by any other mode of acquisition referred to in section 49.


    The Explanation to section 49 clarifies that the expression "previous owner of the property" in relation to a capital asset owned by an assessee means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in section 49.


    The cost of acquisition of the capital asset so transferred by the transferee company shall be determined as per the provisions of section 49(1)(iii)(e) of the Act in the hands of the transferee company.


    Section 49(1)(iii)(e) provides that where the capital asset became the property of the assessee under any such transfer covered by section 47(iv) or section 47(v), the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.


    Incidence of Capital Gains tax


    In this case, the income from the capital gains shall arise in the hands of the transferee company in the year in which the capital asset is actually transferred by the transferee company.


    In computing the capital gains in the hands of the transferee company, the cost of acquisition of the capital asset shall be the actual cost of the asset to the transferor company.


    The exemption earlier provided to the transferor company under section 47(iv)/(v) will not be withdrawn because there is no violation of section 47A.


    Example 1: H Ltd. (‘transferor company’) transferred a capital asset being land to its wholly owned Indian subsidiary S Ltd. (‘transferee company’)  for Rs. 1,50,000 against the book value of Rs. 1,00,000 in FY 2018-19. Assuming the asset is a short term capital asset (acquired in FY 2017-18), the capital gains of Rs. 50,000 arising from such transfer to 100% Subsidiary company will be exempt in the hands of H Ltd. by virtue of section 47(iv).


    Computation of Capital Gains in FY 2018-19 in the hands of H Ltd.

    Full Value of consideration

    Rs. 1,50,000

    Less: Cost of acquisition

    Rs. 1,00,000

    Short Term Capital Gains

    [Exempt from tax u/s 47(iv)]

    Rs. 50,000


    After three years in FY 2021-22, S Ltd. sells the land to another person for Rs. 3,15,000.


    In this case the capital gain shall be taxable in the hands of S Ltd. and is computed as given below-


    Computation of Capital Gains in FY 2021-22 in the hands of S Ltd.

    Full Value of consideration

    Rs. 3,15,000

    Less: Indexed Cost of acquisition

    (1,00,000 x 350/272)

    Rs. 1,28,676

    Long term capital gains

    Rs. 1,86,324


    Notes:

    1. As per section 49(1)(iii)(e), the cost of acquisition for S Ltd. shall be the cost to the previous owner. In this case, the cost of H Ltd. shall be the cost of acquisition for S Ltd.


    2. As per section 2(42A), the period of holding for S Ltd. shall include the period of holding of the previous owner H Ltd.in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in section 49(1). Section 49(1)(iii)(e) covers a transaction of transfer under section 47(iv)/(v).


    3. Since the holding period of the land exceeds 24 months from the date of acquisition which is FY 2017-18, the capital gains is Long term capital gains.


    4. Cost Inflation Index (CII) for FY 2021-22 is not notified yet. Hence, it is assumed at 350.


    5. In case the period of holding of previous owner is taken into consideration the indexation shall also be computed from the period in which the asset was first held by the previous owner and not from the period in which the capital asset is owned by the current transferor. In case an asset is acquired in the modes specified in section 49(1) then the indexed cost of acquisition is to be computed with reference to the year in which the previous owners first held the assets and not the year in which the assessee became the owner of the asset. [Arun Shungloo Trust vs. CIT (ITA No. 116/2011) (Delhi High Court) : CIT vs. Manjula J. Shah (Income Tax Appeal No. 3378 of 2010) (Bombay High Court) : CIT vs. Gautam Manubhai Amin (Tax Appeal No. 699 of 2013) (Gujarat High Court) : ITO vs. Nita Narendra Mulani (ITA No.243/Mum/2016) (ITAT Mumbai) : ITO vs. Sudip Roy (ITA No. 2864/Kol/2013)(ITAT-Kol.) : ITO vs. Pritendra C. Jhaveri (ITA No. 354/Mum/2016)  (ITAT Mumbai)]


    6. The exemption from capital gains tax allowed to H Ltd. in FY 2018-19 will not be withdrawn since there is no violation of section 47A. It is taken that the twin conditions of section 47A are adhered to in FY 2021-22.


    Period of Holding


    Where a holding company transfers any capital asset to its 100% wholly owned Indian subsidiary company or vice versa and the transfer is exempt from capital gains tax under section 47(iv)/(v), in such a case the period of holding of the capital asset shall be reckoned from the date when the previous owner of the asset acquired the asset.


    Explanation 1(i)(b) to section 2(42A) states that in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in section 49(1), there shall be included the period for which the asset was held by the previous owner.


    Section 49(1)(iii)(e) covers the transfer of any capital asset by a holding company to its 100% wholly owned Indian subsidiary company or vice versa under section 47(iv)/(v).


    Hence, in the example given above, when S Ltd. sells the capital asset in FY 2021-22, the period of holding of its holding company, H Ltd., is also included in computing the period of holding and determining the nature of capital gain.


    Cost of Acquisition- After completion of 8 years


    If the conditions specified in 47A is complied with for 8 years then after the expiry of 8 years from the date of transfer of the capital asset for determining the cost of acquisition and period of holding shall be determined in the above stated manner. In other words, the cost of acquisition of the asset shall the cost to the previous owner as per section 49(1)(iii)(e) and the period of holding shall also include the period for which the asset was held by the previous owner as per section 2(47) read with section 49(1)(iii)(e).


    It is pertinent to note that even after the period of 8 years the conditions stipulated in section 47A is violated, it would not affect the above treatment for determining the cost of acquisition and period of holding. This is because section 47A has a life of 8 years only. After the period of 8 years if the holding company dilutes its stake in the subsidiary company or the transferee company converts or treats the capital asset into stock-in-trade then also the above-mentioned rules will follow for determining the cost of acquisition and period of holding.


    Prior to 1985, there was no concept of any lock-in period. Section 47A was Inserted by the Taxation Laws (Amendment) Act, 1984, w.e.f. 1-4-1985. Prior to this amendment, there were no provisions in the law to withdraw the exemption granted u/s 47(iv)/(v). The only condition for availing the exemption was that there must be 100% holding-subsidiary company relationship and the holding or subsidiary company must be an Indian company as contained in section 47(iv)/(v). Section 47A has a life of 8 years only. Hence, after the expiry of 8 years, section 47A will completely go out of the picture but such transfer will continue to remain covered under section 47(iv)/(v), provided the conditions of section 47A remain complied for 8 years. If there is any violation of section 47A within the period of 8 years, then the exemption granted u./s 47(iv)/(v) will be withdrawn and the transaction will be out of section 47(iv)/(v) and will become independent transfer transactions. Consequential amendments were also made in the Income Tax Act, 1961 by amending/inserting section 49(3) and section 155(7B).


    Cost of Acquisition- Conditions of section 47A violated within 8 years


    Where the transferor company fails to comply with the conditions specified in section 47A with in the period of 8 years and the exemption granted to the income arising from the transfer of the capital asset under section 47(iv)/(v) shall be withdrawn and the income so made exempt shall be deemed to the income of the previous year in which the transfer took place.


    Section 49(3) provides that where the capital gain arising from the transfer of a capital asset referred to in section 47(iv) or section 47(v) is deemed to be income chargeable under the head "Capital gains" by virtue of the provisions contained in section 47A, the cost of acquisition of such asset to the transferee-company shall be the cost for which such asset was acquired by it.


    Period of holding


    Once the transfer is charged to capital gains income by virtue of applicability of section 47A, the transfer is not regarded as transfer within the meaning of section 47(iv)/(v) of the Act and it goes out of the purview of such provisions.


    The transfer shall be treated as normal transfer and all the provisions of the ACt shall apply as if it was a transfer of assets between two independent companies.


    In this case, the period of holding shall not include the period of holding of the transferor company rather it should be counted from the date when the asset was acquired by the transferee company. Explanation 1(i)(b) to section 2(42A) read with section 49(1)(iii)(e) will not apply in this case.


    Example 2: H Ltd. (‘transferor company’) transferred a capital asset being land to its wholly owned Indian subsidiary S Ltd. (‘transferee company’)  for Rs. 1,50,000 against the book value of Rs. 1,00,000 in FY 2018-19. Assuming the asset is a short term capital asset (acquired in FY 2017-18), the capital gains of Rs. 50,000 arising from such transfer to 100% Subsidiary company will be exempt in the hands of H Ltd. by virtue of section 47(iv).


    Computation of Capital Gains in FY 2018-19 in the hands of H Ltd.

    Full Value of consideration

    Rs. 1,50,000

    Less: Cost of acquisition

    Rs. 1,00,000

    Short Term Capital Gains

    [Exempt from tax u/s 47(iv)]

    Rs. 50,000


    In the FY 2020-21, H Ltd. diluted its stake in S Ltd. and sold 25% of its stake in S Ltd. to another person.


    Hence, the conditions of section 47A is violated in FY 2020-21, hence, the exemption given to H Ltd. in FY 2018-19 will be withdrawn. The Short Term Capital Gains of Rs. 50,000 which was not charged to taxed in that year, will be deemed to be the income of FY 2018-19.


    In FY 2021-22, S Ltd. sells the land to another person for Rs. 3,15,000.


    In this case the capital gain shall be taxable in the hands of S Ltd. and is computed as given below-


    Computation of Capital Gains in FY 2021-22 in the hands of S Ltd.

    Full Value of consideration

    Rs. 3,15,000

    Less: Indexed Cost of acquisition

    (1,50,000 x 350/280)

    Rs. 1,87,500

    Long term capital gains

    Rs. 1,27,500


    Notes:

    1. As per section 49(3), the cost of acquisition for S Ltd. shall be the cost of acquisition shall be the cost at which the asset was acquired by S Ltd. which is Rs. 1,50,000.


    2. The period of holding for S Ltd. shall be counted from the date when the asset was acquired by S Ltd. It will not include the period of holding of the previous owner H Ltd. in this case, since there is a violation of section 47A.


    3. Since the holding period of the land exceeds 24 months from the date of acquisition which is FY 2018-19, the capital gains is Long term capital gains. Further, indexation shall begin from FY 2018-19 itself.


    4. Cost Inflation Index (CII) for FY 2021-22 is not notified yet. Hence, it is assumed at 350.


    6. The exemption from capital gains tax allowed to H Ltd. in FY 2018-19 will be withdrawn since there is a violation of section 47A and will be deemed to be income of that year in the hands of H Ltd..


    Cost of Acquisition - Transfer of asset after lock-in period of 8 years


    Where the transferee company has followed the conditions of section 47A for a period of 8 years from the date of the transfer and thereafter transfers the capital asset, the cost of acquisition of the capital asset so transferred by the transferee company shall be determined as per the provisions of section 49(1)(iii)(e) of the Act in the hands of the transferee company.


    Section 49(1)(iii)(e) provides that where the capital asset became the property of the assessee under any such transfer covered by section 47(iv) or section 47(v), the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.


    Transfer of capital assets - At which value: Book Value or any other value


    In case of 100% holding-subsidiary related companies, the transferor company is at liberty to transfer the capital asset to the transferee company at any value at which the transferor desires. It is not restricted to transfer the capital asset at book value only. The capital asset may be transferred at the market value of the asset which may be higher or lower than book value. At whatever value the capital asset is transferred, the gain or income therefrom will be exempt in the hands of the transferor company if the conditions specified in section 47(iv)/(v) are satisfied. The exemption will continue for 8 years if the conditions specified in section 47A are complied with for 8 years from the date of transfer.


    In case the capital asset is transferred at book value then in case section 47A applies there will be no income in the hands of the transferor company since the cost and the consideration will remain the same. However, this will not hold good for transfer of land and/or building or unlisted shares since provisions of section 50C or section 50CA shall apply in case section 47A applies.


    In certain cases it may result in loss due to indexation of cost of acquisition or improvement if the asset transferred is a long term capital asset.


    Applicability of Section 56(2)(x) - Transfers covered by section 47(iv)/(v)


    The holding company may transfer the capital asset to its 100% wholly owned subsidiary company or vice versa and which is covered by section 47(iv) or section 47(v) for a consideration or for inadequate consideration. In such a case, the provisions of section 56(2)(x) shall not apply to the transfer so covered u/s 47(iv)/(v).


    Since section 56(2) specifically exempts the transaction between a Holding Company and its wholly owned subsidiary company and vice-versa, relating to transfer of a capital asset, no taxability arises in the hands of the transferee company under section 56.


    Further in case of applicability of section 47A(1), there are no corresponding provisions in section 56(2)(x) to tax the income in the hands of the transferee company which was excluded by virtue of applicability of section 47(iv)/(v). Hence, even if the exemption u/s 47(iv)/(v) is withdrawn by section 47A(1), the income will be taxed in the hands of the transferor but not in the hands of the transferee.


    Applicability of section 50C/50CA - Transfers covered by section 47(iv)/(v)


    Section 50C provides for a special provision for determining the full value of consideration in cases of transfer of immovable property being land and/or building.


    Section 50C provides that where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by the stamp valuation authority for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.


    In order to invoke section 50C, there must be transfer. In case the holding company transfers any land and/or building to its wholly-owned Indian subsidiary or vice-versa and since the transfer is covered by section 47(iv)/(v), there is no transfer and hence provisions of section 50C shall not apply.


    However, where the exemption from transfer u/s 47(iv)/(v) is withdrawn by section 47A and the total income of the transferor company is recomputed under section 155(7B) to include the capital gains income, then the normal provisions of computing the capital gains shall apply. Therefore, in case of exempt transfer of capital assets being land/building, provisions of section 50C shall invariably apply in the course recomputation of total income.


    Similar is the case for transfer of capital assets being unquoted shares. In this case provisions of section 50CA shall apply to the exempt transfers u/s 47(iv)/(v) subsequently withdrawn by section 47A.


    Re-computation of total income of the transferor company after the exemption u/s 47(iv)/(v) is withdrawn by section 47A- Section 155(7B)


    This is in consequence of insertion of a new section 47A. Section 155(7B) provides that where profits or gains arising from the transfer of a capital asset are not charged to tax under section 45 of the Act by virtue of clause (iv)  or clause (v) of section 47 of the Act, but such profits and gains are deemed under section 47A to be income chargeable under the head “Capital gains”, the Assessing Officer may make an order of amendment at any time before the expiry of four years from the end of the previous year in which the relevant capital asset was converted into, or treated as, stock-in-trade or, as the case may be, the parent company or its nominees or, as the case may be, the holding company ceased to hold the entire share capital of the subsidiary company.


    Thus, the Assessing Officer have the power to re-compute the income of the transferor company only in the following two cases-


    (i)  such capital asset being converted by the transferee company into, or being treated by it, as stock-in-trade of its business ; or


    (ii)  the parent company or its nominees or, as the case may be, the holding company ceasing to hold the whole of the share capital of the subsidiary company.


    The above two conditions are similar to the conditions specified in section 47A(1).


    Hence, if the capital asset is transferred as a capital asset by the transferee company there is no violation of section of section 47A and hence there will be no re-computation of total income of the transferor company.


    Applicability of exemption in respect of capital assets only and not for stock-in-trade


    The exemption under section 47(iv)/(v) only covers the “capital gain” income from transfer of capital assets as capital assets. If the capital asset is transferred as stock in trade, then the exemption from section 47(iv)/(v) shall not be available and the income shall be computed in the normal manner. Any transfer of a capital asset by a holding company to its wholly-owned subsidiary company or vice-versa, in cases where the capital asset is taken over as stock-in-trade at the time of transfer is subject to tax under the head “business income”. Further provisions of section 45(2) related to tax on conversion of capital assets into stock-in-trade shall also apply.


    Further if the transferor company transfers any stock-in-trade to the transferee company then it will be subject to tax under the head ‘business income’ in the normal manner. Section 47 deals with only capital assets.


    Applicability of MAT u/s 115JB - Capital gains on transfers u/s 47(iv)/(v)


    When the holding company transfers the capital asset to its wholly owned Indian subsidiary company or vice-versa at a price higher than the book value of the assets then the transferor company earn profit which is then credited to its Profit and Loss Account.


    The starting point of computing the ‘Book Profit’ under section 115JB is the Profit as per the Profit and Loss Account of a company which is subject to certain adjustments provided in section 115JB. 


    Thus, the profit on transfer of capital asset by the transferor company is included in the Book Profit which is subject to Minimum Alternative Tax or MAT.


    A question may arise whether the transferor company is liable to pay MAT u/s 115JB on the profit made on transfer of capital asset which is otherwise not chargeable to tax u/s 47(iv)/(v).


    The first and foremost decision in this context is that of the Special Bench of the ITAT Hyderabad in the case of Rain Commodities Ltd vs DCIT [(2010) 41 DTR 449]. 


    In this case, the issue before the Tribunal was whether capital gain arising from the transfer of capital assets by the holding company to its wholly owned Indian subsidiary company which is not considered as transfer u/s 47(iv) be taxed u/s 115JB or whether it has to be excluded while computing book profits?


    The Tribunal held that in the absence of any provision for exclusion of exempted capital gain in the computation of book profit under the provisions contained in Explanation to section 115JB of the Act, the assessee is not entitled to the exclusion thereof as claimed.


    While coming to the conclusion the S.B. had considered the character of exemption granted under ss. 47(iv), 47(v) and 50 and observed that these are not total exemptions but in the nature of deferment of tax. The exemption granted under s. 47(iv)/47(v), in respect of transfer from/to holding company to/from its wholly-owned subsidiary is not a complete exemption from taxation but only a deferment.


    It was further observed that whenever the legislature wanted income exempt under the normal provisions of the Act to be excluded from the computation of book profits, they have provided so. Under Expln. (ii) and Expln. (f) to section 115JB, the income and expenditure to which provisions of sections 10, 11 and 12 apply are to be excluded from the computation of book profits.


    Similarly, if any deductions permitted under the normal provisions of the Act are intended to be deducted from the book profits also the same is specifically provided. Deductions under ss. 80HHC, 80HHD, 80HHE,80HHF and deductions under ss. 80-IA, 80-IB were specifically excluded from the computation of book profits at various times. 


    It was held that the long-term capital gain is to be included in the net profit prepared under the Companies Act and the same is not deductible from the net profit for the purpose of computing book profit under s. 115JB of the Act. 


    Merely because the long-term capital gain is exempt under s. 47(iv) of the Act under the normal provision of the Act, it is not correct to say that it is also to be reduced from the net profit for the purpose of computing book profit under s. 115JB of the Act when the Explanation to s. 115JB does not provide for any deduction in terms of s. 47(iv) of the Act. No further rebates or deductions after such adjustments, notwithstanding the fact whether any income is taxable or not under the normal provisions of the IT Act. Computation of income under the normal provisions and the book profits are two parallel computations. 


    In fact only because the Government felt that companies availing of various deductions permitted under the IT Act showed a low income for the purpose of income-tax but was able to show healthy profits as per books on the basis of which dividends were distributed and to tax these type of companies that tax on book profits were introduced. By again importing deductions allowed under the normal provisions of income-tax into computation of book profits, the very purpose for which these sections were introduced will be negated.


    In this case the assessee routed the income from transfer of capital assets to its subsidiary company through the Profit & Loss account.


    In certain cases it was held that  a capital receipt which is not chargeable to tax under any provisions of the Act would not be liable for book profits tax u/s 115JB of the Act. This aspect of capital receipt was not dealt with by the special bench, instead, the bench decided the case on the basis of an income which is exempt by virtue of specific provision of section 47(iv).


    Interestingly, the Mumbai Tribunal in the case of Shivalik Venture Pvt. Ltd vs. DCIT (ITA No. 2008/Mum/2012 decided on 19.08.2015) distinguished the case of  Rain Commodities Ltd. (supra) on the lone ground of taxability of capital receipt in the transaction of transfer covered by section 47(iv) and directed the AO to exclude the profit from transfer of capital asset to the wholly owned subsidiary Indian company from the computation of “Book Profit” u/s 115JB.


    The Tribunal observed that the notes to accounts should be read along with the profit and loss account. Hence, the net profit shown in the profit and loss account should be adjusted with the items given in the notes to accounts. In this case, the assessee had specifically mentioned in the notes to accounts that the capital gain on the transfer of an asset to its wholly owned subsidiary are not includible in the net profit. Accordingly, it was held that such gains should be excluded from the net profit for the computation of MAT. 


    The Tribunal further held that the profit arising on transfer of capital asset to its wholly owned Indian subsidiary company is liable to be excluded from the Net profit., i.e., the Net profit disclosed in the Profit and Loss account should be reduced by the amount of profit arising on transfer of capital asset and the amount so arrived at shall be taken as “Net profit as shown in the profit and loss account” for the purpose of computation of book profit under Explanation 1 to sec. 115JB of the Act. Alternatively, since the said profit does not fall under the definition of “income” at all and since it does not enter into the computation provisions at all, there is no question of including the same in the Book Profit as per the scheme of the provisions of sec. 115JB of the Act. 


    The decision in the case of Rain Commodities (Supra) is not followed and distinguished in this case since the said decision was in relation to taxability of the capital gain in computing the book profits under section 115JB of the Income Tax Act and not taxability of the capital receipts which does not have any element income embedded in it.


    Some interesting cases on transfer of asset between 100% holding and subsidiary company


    Subsidiary includes step-down subsidiary: The provisions of section 47(iv) shall apply not only to direct or immediate wholly-owned subsidiaries but also to 100% step-down subsidiary companies of the holding company. A second step-down subsidiary company is also regarded as subsidiary of the holding company under the Companies Act, 1956 as the term ‘subsidiary company’ has not been defined under the Income Tax Act. [Emami Infrastructure Ltd. vs. ITO [2018] 91 taxmann.com 62 (Kolkata-Trib.): ITA No. : 880/Kol/2014 decided on 28.02.2018]


    This decision of ITAT Kolkata is contrary to the decision of the Hon'ble Gujarat High Court in the case of Kalindi Investments Pvt. Ltd vs. CIT [2002] 256 ITR 713 (Guj.) wherein it was held that the benefit of section 47 (iv) is not available on the transfer of shares by a holding company to subsidiary of the subsidiary company. The Tribunal has followed the decision of the Hon’ble Bombay High Court in the case of  Petrosil Oil Company Limited vs. CIT [1999] 236 ITR 220 (Bom.) in deciding the meaning of the term 'subsidiary company’.


    Nominee shareholders are included in computing wholly owned subsidiary company’s shareholding: Where the directors of the company holds 0.60% of shares of the subsidiary company as nominees of the holding company, which owns the 99.40% of the shares of the subsidiary company, in order to comply with the mandatory requirement of having minimum two shareholders in a Private Limited Company are included in determining the status of wholly-owned subsidiary company relationship. This is because the nominee shareholders are not the beneficial shareholders and the beneficial interest of those shares are held only by the holding company only. Wholly-owned does not mean 100% shares should be owned by the holding company. [ACIT vs Armcess Engineers P. Limited (ITA No. 755/Mds/2008 decided on 29.03.2012, ITAT-Chennai]


    Section 47(iv) does not require that the holding company should hold the entire share capital of the subsidiary company in its own name as it requires that shares should be held by the holding company and its nominees. Further as per Companies Act, 2013, it is legally impossible to hold the whole share capital of a subsidiary company by a single holding company.


    If two separate companies hold the shares of the subsidiary company, with the second shareholder not being the nominee of the other shareholder the conditions of Section 47(iv) are not fulfilled.


    Section 47A shall apply only if the subsidiary company actually treats the transferred capital asset as stock-in-trade: In order to apply section 47A and to disallow the exemption of the transfer of capital assets to the holding company u/s 47(iv) the subsidiary company should have actually converted or treated the capital asset so received on the transfer as stock-in-trade. The exemption cannot be withdrawn merely on the suspicion of profit motive of the companies by the AO. The ITAT Hyderabad observed that when a holding company transfers its capital asset to its wholly-owned subsidiary company, it can be treated as a ‘transfer’ for assessing the income arising therefrom under Capital Gain only if it is proved that the same was treated as stock-in-trade” in the hands of the transferee subsidiary company. [ACIT vs. Parbati Agro Farms Pvt. Ltd. and others in ITA No. 287/Hyd/2015 ITAT-Hyderabad]


    Exemption u/s 47(iv) on buy-back of shares: Exemption under section 47(iv) is not available in case of buyback of shares that are taxable under section 46A of the Act. [Acciona Wind Energy Private Limited vs. DCIT (ITA No. 1784/BANG/2018) (ITAT-Bangalore)]


    In this case, the Tribunal observed that section 45 deals with the taxability of capital gain on transfer of a capital asset, and section 47 provides exemption to certain categories of transfers. Section 46A is applicable in case of buyback of shares does not require transfer of any capital asset as there is no mention of the term “Transfer” in section 46A. Section 45 and section 46A operate in different fields. Section 45 covers actual capital gain on transfer of a capital asset but section 46A is about Deemed Capital gains on buy back of shares. Therefore, buyback of shares taxable under section 46A is not entitled to exemption under section 47(iv).


    Similar rulings were ruled by Authority for Advance Ruling (AAR) in Re RST (A.A.R. No. 1067 of 2011) and in Armstrong World Industries Mauritius Multiconsult Ltd. (A.A.R. No. 1044 of 2011) to rule that the transaction of buyback of shares by subsidiary company is not exempt by virtue of section 47(iv).


    Exemption u/s 47(iv/(v) applies to capital assets only: Provisions of section 47(iv)/(v) applies only to capital assets alone and not to stock-in-trade. If stock-in-trade is transferred from holding to its wholly-owned subsidiary company or vice-versa, then the transfer shall be chargeable under the head ‘business income’. ‘Capital Asset’ u/s 2(14) excludes stock-in-trade. [CIT vs. Simpson General Finance Co. Ltd. (1998) 96 Taxman 172 (Mad. HC)/(1998) 146 CTR (MAD)].


    Subsidiary means wholly-owned subsidiary and not any subsidiary company: In CIT v. Sunaero Ltd. (2012) 345 ITR 163 (Del.), the Delhi High Court held that for benefit under section 47(v) of the Income-tax Act, 1961, the subsidiary must be wholly owned subsidiary. Being subsidiary is not sufficient, even if one of the share holders was not a nominee of the holding company, the benefit under section 47(v) has to be denied. The Court also held that the normal presumption in law is that the registered shareholder holds the share in his own right and in his individual personal capacity. He does not hold shares as a nominee. The onus is, therefore, on the party who claims to the contrary. 


    Summary of the Provisions


    In the nutshell, the provisions related to the tax exemption on the transfer of capital assets between holding and subsidiary company are summarized below-


    1. Exemption from tax: Any transfer of a capital asset by a holding company to its wholly-owned Indian subsidiary company and vice versa is exempt from capital gains.


    Note: Exemption is available only if the transferee company is an Indian Company and not a foreign company. The mandatory requirement is that the subsidiary company must be an Indian company and not the holding company. The holding company can be a foreign company and vice-versa.


    2. Withdrawal of exemption: Where at any time before the expiry of a period of 8 years from the date of the transfer of the capital asset –

    a) Such capital asset is converted by the transferee-company into stock in trade; or

    b) 100% relationship between holding and subsidiary company ceases to exist, 

    then such exemption will be withdrawn.


    Note: When the transferee company converts the capital asset into stock-in-trade then the provisions of section 45(2) shall apply.


    3. Consequences of withdrawal of exemption: The amount of capital gains arising from the transfer of such capital asset [which was not charged to tax by virtue of section 47(iv)/(v)] shall be deemed to be income chargeable under the head “Capital gains” of the previous year in which such transfer took place in the hands of transferor company.


    4. Cost of acquisition in hands of transferee company: In case where the exemption u/s 47(iv)/(v) has not been withdrawn, the cost of acquisition for the transferee company shall be the cost of acquisition of the transferor company. On the contrary, if exemption u/s 47(iv)/(v) has been withdrawn, the cost of acquisition of the transferee company shall be the actual cost for which the transferee company acquired such asset.


    5. Recomputation of total income: Where the exemption is withdrawn by section 47A and the assessment of the transferor company has already been completed, Assessing Officer has power to rectify the total income of the transferor company at any time before the end of 4 years from the end of previous year in which the condition is violated.



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