Transactions Not Regarded as Transfer under section 47 of the Income Tax Act

Key Transactions Not Regarded as Transfer

1. Partition of Hindu Undivided Family (HUF)

Distribution of capital assets on total or partial partition of an HUF is not considered a transfer.

2. Gift, Will, or Irrevocable Trust

• Transfer of a capital asset by an individual or an HUF through a gift, will, or an irrevocable trust does not attract capital gains tax.

• However, this exemption does not apply to transfers of shares, debentures, or warrants allotted under an Employee Stock Option Plan (ESOP) or similar schemes.

3. Transfers Between Holding and Subsidiary Companies

Transactions between a parent company and its wholly owned Indian subsidiary or vice versa are exempt from capital gains tax, provided:

• The entire shareholding of the subsidiary is held by the parent company.
• Both entities are Indian companies.

4. Amalgamation of Companies

• When capital assets are transferred from an amalgamating company to an amalgamated Indian company under a scheme of amalgamation, it is not regarded as a transfer.

• Similar exemptions apply to cross-border amalgamations where:

  • At least 25% of the shareholders of the amalgamating foreign company continue as shareholders of the amalgamated foreign company.

  • The transaction does not attract capital gains tax in the foreign jurisdiction.

5. Demergers and Business Reorganization

• Capital assets transferred under a scheme of demerger from a demerged company to a resulting Indian company are exempt.

• Similarly, transfers between cooperative banks and their successors under a business reorganization are exempt.

6. Conversion of Securities and Bonds

• Conversion of bonds, debentures, or preference shares into equity shares of the same company does not amount to a transfer.

• Sovereign Gold Bonds issued by the RBI are also exempt upon redemption.

7. Transfers in International Financial Services Centers (IFSC)

Transactions involving bonds, Global Depository Receipts (GDRs), derivatives, and securities carried out on a recognized stock exchange in an IFSC are exempt if the consideration is paid in foreign currency.

8. Agricultural Land Transfers

Transfers of agricultural land in India before March 1, 1970, are not regarded as a transfer.

9. Transfer to Government or Recognized Institutions

Transfers of capital assets such as artwork, manuscripts, or paintings to the Government, universities, or recognized public institutions are exempt.

10. Corporate Restructuring and Mergers

• Transfers occurring during the corporatization or demutualization of a recognized stock exchange are exempt if they meet specific conditions.

• Similarly, the conversion of a firm into a company under a succession scheme is exempt, provided:

  • All assets and liabilities of the firm become those of the company.

  • All partners of the firm become shareholders in the same proportion.

  • No additional consideration is received except for share allotment.

  • The partners maintain at least 50% of the voting rights for five years.

Conclusion

Understanding transactions not regarded as transfers under Section 47 is crucial for businesses, investors, and individuals engaged in restructuring or asset transfers. These provisions ensure that specific transactions, particularly those involving family arrangements, corporate reorganizations, and recognized institutions, are not subject to unnecessary capital gains taxation.