Transfer of Capital Asset Between Holding and Subsidiary Companies
Introduction
Transfers of capital assets between a holding company and its subsidiary (or vice-versa) are not regarded as “transfer” under Section 47 of the Income-tax Act, subject to specified conditions. Such transactions are exempt from capital gains tax unless certain conditions are breached.
Conditions for Exemption
- Transfer by Holding Company to Subsidiary Company:
- The holding company or its nominees must hold 100% of the subsidiary’s share capital.
- The subsidiary must be an Indian company.
- The capital asset must not be transferred as stock-in-trade.
- Transfer by Subsidiary Company to Holding Company:
- The holding company must hold 100% of the subsidiary’s share capital.
- The holding company must be an Indian company.
- The capital asset must not be transferred as stock-in-trade.
Cost of Acquisition and Holding Period
- The cost of acquisition in the hands of the transferee is deemed to be the cost incurred by the transferor, including any improvements.
- The holding period of the transferred asset is calculated from the date of acquisition by the transferor.
Withdrawal of Exemption
- The exemption is revoked if:
- The transferee company treats the asset as stock-in-trade within 8 years from the date of transfer of the capital asset, or
- The holding company ceases to hold 100% of the subsidiary’s share capital within 8 years.
When exemption is withdrawn, the amount of capital gain exempted earlier is deemed to be the income of the transferor company chargeable under the head ‘capital gain’ in the year in which such transfer took place.