Capital Gains of companies under Assessment of Companies :

Special Provisions:

(1) Where the assets of a company are distributed to its shareholders in species on its liquidation such a distribution is not deemed to be a transfer made by company for purposes of capital gains tax. In the absence of this specific provision, the company would be deemed to have made capital gain on the assets transferred and would consequently be liable to tax in respect of such distribution [Section 46(1)].

Where a shareholder receives any money or assets from a company on its liquidation, he is chargeable to tax under the head ‘capital gains‘ in respect of the money or the market value of the assets on the date of distribution, reduced by the amount of notional dividends, if any, assessed under section 2(22)(c) and the sum so arrived at shall be the full value of consideration for computation of capital gains under section 48 [Section 46(2)].

(2) Section 47 provides that the following transfers of capital assets will not be considered for the purposes of levying tax on capital gains under section 45:

(i) By a holding company to its Indian subsidiary company provided the latter holds all the share capital of the former.

(ii) By a subsidiary company to its Indian holding company provided the latter holds all the share capital of the former.

(iii) In a scheme of amalgamation, by the amalgamating company to its amalgamated Indian company.

(iv) In a scheme of amalgamation, by the amalgamating foreign company to the amalgamated foreign company subject to prescribed conditions.

(v) In a demerger, by the demerged company to the resulting company, if the resulting company is an Indian company.

(vi) Any transfer in a demerger of shares held in an Indian company by the demerged foriegn company to the resulting foreign company subject to prescribed conditions.

(vii) Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is in consideration of the demerger.

•  Exceptions: However, the proviso to clause (v) of section 47 provides to the effect that the exemptions at (i) and (ii) above will not apply to the transfer

of capital asset made after 29.2.1988 as stock in trade. This seeks to plug the loophole which facilitated the transferee holding/subsidiary companies to circumvent the operation of section 47A by resorting to the device of converting capital asset as stock in trade at the time of transfer itself. Now, the proviso secures that any profits derived by a holding company in a transfer of a capital asset after 29th February, 1988 to its wholly owned subsidiary company or vice versa will be subject to tax under the head ‘capital gains‘ in case where the capital asset is taken over as stock-in-trade by the transferee company at the time of transfer itself.

Inter-corporate transfer of capital assets [Section 47A]: Section 47A provides for the withdrawal of the exemption in respect of capital gains in certain cases covered by (i) and (ii) above. Under the provisions of Section 47(iv) the transfer of a capital asset by a company to its wholly owned subsidiary company is exempt from capital gains tax levy. Similarly section 47(v) exempts transfer from subsidiary company to holding company. The only condition for such an exemption is that the transferee company must be an Indian company.

Section 47A provides that where the “transfer” of a capital asset between a parent company and its hundred per cent subsidiary company has been exempted from any charge to capital gains tax by virtue of provisions of clause (iv) or (v) of section 47 such exemption will be revoked in either of the two under noted cases by an order of rectification under section 155(7A) of the Income-tax Act, 1961.

(i) Within a period of eight years from the date of the transfer the capital asset in question is converted by the transferee company into or as, stock -in-trade of its business; or

(ii) within a period of eight years from the date of the transfer 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.

Section 43C: Section 43C(1) provides that where an asset [other than an asset referred to in section 45(2)] which has become the property of an amalgamated company under a scheme of amalgamation, is sold as stock-in-trade, then, in computing the profits and gains received from such transfer, the cost of acquisition of the asset to the amalgamating company shall be the cost of acquisition of the asset to the amalgamating company, as increased by the cost of any improvement made thereto and the expenditure incurred wholly and exclusively in connection with such transfer by the amalgamating company. This provision is intended to curb the device earlier adopted by the tax payers, under which the stock -in-trade taken over by an amalgamated company was revalued at the time of amalgamation.

Note – Section 45(2) provides that profits and gains arising from conversion of capital asset into stock-in-trade would be taxable in the year in which the stock-in-trade is sold and the fair market value on the date of conversion shall be deemed to be the full value of consideration received or accruing as a result of the transfer of the capital asset.

Capital gains arising on the conversion of a partnership firm into a company or succession of a sole proprietary concern by a company are exempt subject to certain conditions specified. For a detailed discussion, students may refer to the chapter dealing with capital gains.