Transfer of Capital Asset as a Result of Business Restructuring
Introduction
Transfers of capital assets under schemes like amalgamation, demerger, or business reorganisation are not considered “transfer” under Section 47 of the Income-tax Act, 1961, if specific conditions are met.
Key Transactions Exempt from Capital Gains
- Amalgamation
- Meaning of Amalgamation [Section 2(1B)]:
Amalgamation means the merger of one or more companies into another company, or the merger of two or more companies to form a new one, subject to:
- All properties and liabilities of the amalgamating company become those of the amalgamated company.
- At least 75% in value of shareholders of the amalgamating company become shareholders of the amalgamated company.
- The merger is not due to asset acquisition or distribution post-winding-up.
- Amalgamation with an Indian Company
- Transfer of Capital Assets [Section 47(vi)/(viaa)]
Transfer of capital assets by the amalgamating company to an Indian amalgamated company is not treated as transfer, including in the case of banking company mergers.
- Transfer of Shares by Shareholders [Section 47(vii)]
Transfer of shares by shareholders of the amalgamating company is exempt if:
- Consideration is in the form of shares in the Indian amalgamated company; and
- The amalgamated company is an Indian company.
- Amalgamation of Foreign Companies
- Transfer of Shares of Indian Company [Section 47(via)]
Transfer of shares in an Indian company by a foreign amalgamating company to another foreign company is not regarded as transfer if:
- The transfer occurs under a foreign amalgamation scheme,
- At least 25% of shareholders of the transferor remain shareholders in the transferee, and
- Capital gains are not taxable in the transferor’s country.
- Transfer of Shares of Foreign Company [Section 47(viab)]
Transfer of shares of a foreign company deriving value from an Indian company is not treated as transfer if:
- It occurs under an amalgamation between two foreign companies,
- At least 25% of shareholders of the transferor remain in the transferee, and
- Capital gains are not taxable in the transferor’s country.
- Demerger
- Definition: As per Section 2(19AA), a Demergerrefers to the transfer of an undertaking to a resulting company.
- Deemed Demergers:
- Splitting-up or reconstruction of any authority or a body.
- Splitting-up or reconstruction of a public sector company.
- Splitting-up or reconstruction of a company.
- Exempt Transfers:
- Capital assets transferred by a demerged company to an Indian resulting company (Section 47(vib)).
- Shares exchanged by shareholders of a demerged company for shares in the resulting company (Section 47(vid)).
- Transfers in the demerger of foreign companies, subject to conditions like shareholder continuity and tax exemptions (Sections 47(vic), 47(vicc)).
- Business Reorganization of Co-operative Banks
- Exempt Transfers:
- Capital assets transferred by a predecessor co-operative bank to a successor or converted banking company (Section 47(vica)).
- Shares transferred by shareholders in a co-operative bank for shares in a successor or converted banking company (Section 47(vicb)).
Conditions and Additional Provisions
- Conditions for Exemption:
- All properties and liabilities of the transferor must be transferred.
- Shareholders must receive shares in the transferee company.
- Shareholding or voting power continuity is required in many cases (e.g., 75% for foreign demergers).
- Other Provisions:
- Cost of Acquisition:The cost for the transferee is deemed to be the cost incurred by the transferor, including improvements.
- Holding Period:The transferee’s holding period includes the transferor’s holding period.