Transactions not regarded as 'transfer' for capital gains

Introduction

The Income-tax Act has specifically excluded certain types of transfer from the scope and meaning of the word 'transfer' in relation to a capital asset. Consequently, no capital gain may arise from such a transfer. These transactions are listed in Section 70.

1. About

The term 'transfer' has been defined under Section 2(109) of the Income-tax Act. The definition has been explained in an inclusive manner. The term 'transfer' is deemed to include all transactions prescribed below besides what is otherwise understood as transfer in common parlance:

(a) By way of sale;

(b) By way of exchange;

(c) By way of relinquishment;

(d) By way of extinguishment of rights;

(e) Compulsory acquisition;

(f) Conversion into stock in trade;

(g) Maturity or redemption of zero-coupon bond;

(h) Allowing possession of immovable property; and

(i) Indirect transfer as referred to in Section 9(10).

2. Scope of provision

The transactions listed below are not regarded as transfer for the purpose of computing the capital gains tax. Therefore, any profit or gain arising from these transactions are not chargeable to tax under the head Capital Gains.

2.1. Distribution on Partition of HUF [Section 70(1)(a)]

Any distribution of capital assets on total or partial partition of a HUF is not treated as transfer. Partition is only a mode to determine the individual share of each member of the HUF in the properties which were hitherto held by them jointly before such partition. After partition a member just holds his share in the partitioned property separately and exclusively. Therefore, such a transaction is not regarded as a transfer.

However, if assets are sold by the HUF and the sale price is distributed among members, instead of assets in specie, any capital gain arising on such sale is liable to be taxed in the hands of HUF.

2.2. Transfer by way of Gift, Will or Irrevocable Trust [Section 70(1)(b)]

Any transfer of a capital asset by an individual or a HUF under gift or Will or an irrevocable trust is excluded from the ambit of transfer. The distribution of capital assets must be in specie. If an administrator under a Will sells the capital assets and distributes the sale proceeds amongst the legatees, any capital gain arising on such sale is taxable in the hands of the administrator

2.3. Transfer between holding and subsidiary co. [Section 70(1)(c)/(d)]

Main article: Transfer of capital asset between holding and subsidiary cos.

Any transfer of a capital asset by a holding company to its Indian subsidiary company is not regarded as transfer provided the specified conditions in respect of such transaction are satisfied. Similarly, any transfer of a capital asset by a subsidiary company to its Indian holding company is not regarded as transfer provided the specified conditions in respect of such transaction are satisfied.

The exemption from the capital gain tax in respect of transfer of a capital asset by a holding co. to its subsidiary co. or vice-versa shall be withdrawn if before expiry of 8 years from the date of transfer, the capital asset is converted by the transferee co. into as stock-in-trade or the holding co. ceases to hold the whole of the share capital of the subsidiary co. When exemption is withdrawn, the amount of capital gain exempted earlier is deemed to be the income of the transferor company chargeable under the head 'capital gain' in the tax year in which such transfer took place. In this case, the Assessing Officer shall rectify the assessment within 4 years from the end of the tax year in which the relevant asset was converted into stock-in-trade, or the holding co. ceased to hold the entire share capital of the subsidiary co.

2.4. Transfer in business restructuring [Section 70(1)(e) to 70(1)(o)]

Main article: Transfer of capital asset as a result of business restructuring

2.4-1. In case of amalgamation

Transfer of the following capital assets in a scheme of amalgamation is not considered as transfer if the specified conditions are satisfied:

(a) Transfer of capital assets from amalgamating co. to Indian amalgamated co. [Section 70(1)(e)/(i)];

(b) Transfer of shares by shareholders in the amalgamating co. in lieu of shares of Indian amalgamated co. [Section 70(1)(f)];

(c) Transfer of shares of Indian Co. under a scheme of amalgamation of two foreign companies [Section 70(1)(g)];

(d) Transfer of shares of foreign co. under a scheme of amalgamation of two foreign companies [Section 70(1)(h)].

2.4-2. In case of demerger

Transfer of the following capital assets in a scheme of demerger is not considered as transfer if the specified conditions are satisfied:

(a) Transfer of capital assets from demerged co. to Indian resulting co. [Section 70(1)(j)];

(b) Allotment of shares in resulting co. [Section 70(1)(k)];

(c) Transfer of shares of Indian Co. under a scheme of demerger of two foreign companies [Section 70(1)(l)];

(d) Transfer of shares of foreign co. under a scheme of demerger of two foreign companies [Section 70(1)(m)].

2.4-3. In case of business reorganisation [Section 70(1)(n)/(o)]

Any transfer of a capital asset in a scheme of business reorganisation of co-operative banks is not treated as transfer. Similarly, any transfer of shares by the shareholders in a scheme of business reorganisation of co-operative banks is not treated as transfer.

2.5. Transfer among non-residents

2.5-1. Transfer of GDRs or Bonds [Section 70(1)(p)]

Any transfer of Bonds or Global Depository Receipts as referred to in Section 209 by a non-resident to another non-resident outside India is not treated as transfer.

2.5-2. Transfer of Rupee Denominated Bond [Section 70(1)(q)]

Any transfer of Rupee Denominated Bond of an Indian company by a non-resident to another non-resident outside India is not treated as transfer.

2.5-3. Transfer through Stock Exchange located in IFSC [Section 70(1)(r)]

Any transfer of the following capital assets by a non-resident on a recognised stock exchange located in any IFSC is not treated as transfer provided the consideration is paid or payable in foreign currency:

(a) Bonds or GDRs as referred to in Section 209;

(b) Rupee Denominated Bond of an Indian company;

(c) Derivative;

(d) Foreign Currency Denominated Bond;

(e) Unit of a Mutual Fund;

(f) Unit of a Business Trust;

(g) Foreign Currency Denominated equity share of a company;

(h) Unit of Alternative Investment Fund

(i) Bullion Depository Receipt with underlying bullion

(j) Unit of Investment Trust (a REIT or an InvIT);

(k) Unit of a Scheme

(l) Unit of an Exchange Traded Fund launched under International Financial Services Centres Authority (Fund Management) Regulations, 2022

Further, any income arising to specified fund from transfer of such securities on a recognised stock exchange located in IFSC, it shall be exempt from tax under Schedule VI [Table S. No. 1] subject to fulfilment of specified conditions.

Furthermore, a non-resident being an eligible foreign investor

• Name, e-mail id and contact number;

• Address in the country or specified territory of which he is a resident;

• A declaration that he is a resident of a country or specified territory outside India; and

• Tax Identification Number allotted in his home country and if such number is not available, then a unique number on the basis of which he is identified by the Government of his home country.

2.5-4. Transfer of Govt. Security [Section 70(1)(s)]

Any transfer of a capital asset, being a Government Security carrying periodic payment of interest, outside India by a non-resident to another non-resident through an intermediary dealing in settlement of securities is not treated as transfer.

2.6. Redemption of Sovereign Gold Bond [Section 70(1)(x)]

The redemption of a Sovereign Gold Bond (SGB) issued by the RBI under the Sovereign Gold Bond Scheme, 2015 or any subsequent scheme shall not be regarded as a transfer where the following conditions are satisfied:

(a) the bond was subscribed to by the individual at the time of original issue; and

(b) the bond is held continuously from the date of original issue till maturity.

Accordingly, where both conditions are fulfilled, redemption of the SGB shall not give rise to capital gains tax.

However, the following transactions shall continue to be taxable:

(a) premature redemption of SGB, even by the original subscriber;

(b) redemption by a person who acquired the SGB from the secondary market; and

(c) transfer of SGB prior to maturity.

Here, an interpretational issue may arise in the case of legal heirs inheriting SGBs from the original subscriber. Although the provision, on a literal reading, requires subscription at the time of original issue and continuous holding till maturity, it may be contended based on the doctrine of impossibility and the stepping-into-the-shoes principle recognised by the Supreme Court

2.7. Conversion of Gold into Electronic Gold Receipt or vice versa [Section 70(1)(y)]

Conversion of gold into Electronic Gold Receipt (EGR) issued by a vault manager, or conversion of EGR into Gold is not treated as transfer.

"Electronic Gold Receipt (EGR)" is an electronic receipt which is issued based on the deposit of underlying physical gold in accordance with the regulations made by the Exchange Board. EGR is covered under the definition of securities

"Vault Manager" means any person who stores and safe keeps gold deposited by the depositor, for the purpose of trading in Electronic Gold Receipt and providing services incidental thereto

2.8. Transfer of art, painting, etc., to Govt. [Section 70(1)(zc)]

Any transfer of work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print to the Government or a University or the National Museum, National Art Gallery, National Archives, other notified public museum or institution

2.9. Conversion of Securities

2.9-1. Conversion of debentures into shares [Section 70(1)(z)]

Conversion of bonds, debentures, debenture-stock or deposit certificate of a company into shares or debentures of that company is not treated as transfer.

2.9-2. Conversion of Foreign Currency Exchange Bonds [Section 70(1)(za)]

Conversion of Foreign Currency Exchange Bonds (FCEB), issued to non-residents by Indian companies, into shares of that company is not treated as transfer.

2.9-3. Conversion of preference shares into equity shares [Section 70(1)(zb)]

Conversion of preferences shares of a company into equity shares of that company is not treated as transfer.

2.10. Conversion of entities

Main article: Conversion or succession of entities not regarded as transfer

The following conversions from one form of entity to another is not regarded as transfer provided the specified conditions are satisfied:

(a) Succession of firm by company [Section 70(1)(zd)];

(b) Conversion of company into LLP [Section 70(1)(ze)]; and

(c) Succession of Proprietary Concern by Company [Section 70(1)(zf)].

2.11. Lending of Securities [Section 70(1)(zg)]

Where an assessee lends securities through an approved intermediary to the borrower under an agreement which complies with the guidelines issued by the SEBI, such transaction is not to be treated as transfer.

The Securities Lending Scheme is introduced to improve liquidity in the stock market and facilitate the timely settlement by correcting the temporary imbalances in supply and demand in stock market.

The scheme permits lending of the securities by the owner to the borrower who will be entitled to deal with or dispose of the securities so borrowed. The borrower would return equivalent securities of the same type at the end of the specified period along with the corporate benefits accruing on the securities so borrowed. This could have been treated as an "exchange" under general law, giving rise to capital gain. However, this provision provides that any lending of the securities under an agreement in accordance with the guidelines issued by the SEBI will not be treated as transfer for the purposes of capital gain.

2.12. Transfer under reverse mortgage scheme [Section 70(1)(zh)]

In reverse mortgage a residential house is mortgaged by a senior citizen with a bank to secure a stream of cash flow against the mortgaged property. There is no intention to alienate the property. Therefore, it has been provided that mortgage of a property under reverse mortgage is not treated as transfer unless the mortgaged property is alienated for the recovery of loan amount.

2.13. Transfer of shares by Indian co. to business trust [Section 70(1)(zi)]

Transfer of shares of an Indian company, being Special Purpose Vehicle (SPV), to a business trust in exchange of units allotted by that trust to the transferor is not treated as transfer for the purposes of capital gains.

2.14. Consolidation of Mutual Funds [Section 70(1)(zj)/(zk)]

To promote consolidation of similar schemes of Mutual Fund, this provision provides that consolidation of units shall not be treated as transfer. Thus, any transfer of units held by unit holder in the consolidating scheme (including consolidation plan) of a mutual fund in consideration of allotment of units in the consolidated scheme of the mutual fund shall not be treated as transfer. The exemption is available provided the 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.

2.15. Transfer of interest in a joint venture by a public sector company in exchange for shares in a foreign government company [Section 70(1)(zl)]

Transfer of interest in a joint venture by a public sector company in exchange of shares of a foreign company incorporated by the Government of a foreign State, is not treated as transfer..

'Joint venture' shall mean a business entity, as may be notified by the Central Government.

2.16. Relocation of offshore fund to IFSC [Section 70(1)(t)/(u)]

2.16-1. Transfer of capital assets of fund

To promote establishment of entities in IFSC and making such relocation a tax neutral transfer, this provision extends the exemption to any transfer of a capital asset by the original fund to the resultant fund at the time of relocation of the entity to an IFSC. Thus, such a transfer shall not be subject to tax under the head capital gains.

2.16-2. Transfer of shares of the original fund

Further, any transfer by a shareholder (or unitholder or interest holder) of a capital asset being a share (or unit or interest) held by him in the original fund in consideration for the share (or unit or interest) in the resultant fund shall not be considered as a transfer.

2.16-3. Meaning of original fund

"Original Fund" is defined to mean

(a) a fund established or incorporated or registered outside India, which collects funds from its members for investing it for their benefit and fulfils the following conditions, namely:

• The fund is not a person resident in India;

• The fund is a resident of a country or a specified territory with which India has entered into DTAA or is established or incorporated or registered in a notified country or a specified territory

• The fund and its activities are subject to applicable investor protection regulations in the country or specified territory where it is established or incorporated or is a resident; and

• Where a capital asset is transferred by the original fund to a resultant fund being a Category III AIF, , the aggregate participation or investment in the original fund by persons resident in India shall not exceed 5% of the corpus of such fund at the time of such transfer;

(b) An investment vehicle, in which Abu Dhabi Investment Authority is the direct or indirect sole shareholder or unit holder or beneficiary or interest holder and such investment vehicle is wholly owned and controlled, directly or indirectly, by the Abu Dhabi Investment Authority or the Government of Abu Dhabi; or

(c) A fund notified by the Central Government subject to such condition as may be specified.

2.16-4. Meaning of resultant fund

"Resultant fund" is a fund established or incorporated in India in the form of a trust or a company or an LLP, which is located in any IFSC as referred to in Section 147 and has been granted-

(a) a certificate of registration as a Category I or Category II or Category III AIF; or

(b) a certificate as a retail scheme or an Exchange Traded Fund.

2.16-5. Meaning of relocation

"Relocation" means the transfer of assets of the original fund to a resultant fund on or before the 31-03-2030, where consideration for such transfer is discharged in the form of share or unit or interest in the resulting fund to the shareholder or unitholder or interest holder of the original fund in the same proportion in which share or unit or interest was held by such shareholder or unitholder or interest holder in such original fund.

2.17. Transfer by India Infrastructure Finance Co. Ltd. [Section 70(1)(v)]

2.18. Transfer of capital asset under a plan approved by Central government [Section 70(1)(w)]