Transactions not regarded as transfer [Section 47] :

Section 47 specifies certain transactions which will not be regarded as transfer for the purpose of capital gains tax:

(1) Any distribution of capital assets on the total or partial partition of a HUF [Section 47(i)];

(2) Any transfer of a capital asset under a gift or will or an irrevocable trust [Section 47(iii)];

However, this clause shall not include transfer under a gift or an irrevocable trust of a capital asset being shares, debentures or warrants allotted by a company directly or indirectly to its employees under the Employees’ Stock Option Plan or Scheme offered to its employees in accordance with the guidelines issued in this behalf by the Central Government.

(3) Any transfer of a capital asset by a company to its subsidiary company [Section 47(iv)].

Conditions -(i) The parent company must hold the whole of the shares of the subsidiary company; (ii) The subsidiary company must be an Indian company.

(4) Any transfer of capital asset by a subsidiary company to a holding company [Section 47(v)];

Conditions – (i) The whole of shares of the subsidiary company must be held by the holding company; (ii) The holding company must be an Indian company.

Exception – The exemption mentioned in 3 or 4 above will not apply if a capital asset is transferred as stock-in-trade.

(5) Any transfer in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company [Section 47(vi)].

(6) Any transfer in a scheme of amalgamation of shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company [Section 47(via)].

Conditions – (i) At least 25 percent of the shareholders of the amalgamating foreign company must continue to remain shareholders of the amalgamated foreign company; (ii) Such transfer should not attract capital gains in the country in which the amalgamating company is incorporated.

(7) Any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the Central Government under section 45(7) of the Banking Regulation Act, 1949, of a capital asset by such banking company to such banking institution [Section 47(viaa)].

(8) any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company referred to in Explanation 5 to section 9(1)(i), which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company shall be exempt, if the following conditions are satisfied:

(a) at least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and

(b) such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated [Section 47(viab)]

(9) Any transfer in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company [Section 47(vib)].

(10) Any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerger foreign company to the resulting foreign company [Section 47(vic)].

Conditions – (i) The shareholders holding at least three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and
(ii) Such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated.

However, the provisions of sections 391 to 394 of the Companies Act, 1956, shall not apply in case of demergers referred to in this clause.

(11) any transfer in a business reorganisation, of a capital asset by the predecessor cooperative bank to the successor co-operative bank [Section 47(vica)].

(12) any transfer by a shareholder, in a business reorganisation, of a capital asset being a share or shares held by him in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any share or shares in the successor co-operative bank [Section 47(vicb)].

Note – Refer to section 44DDB for the meanings of “business reorganisation”, “predecessor co-operative bank” and “successor co-operative bank”.

(13) any transfer in case of a demerger of a capital asset, being a share of a foreign company, referred to in Explanation 5 to section 9(1)(i), which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company shall be exempt, if the following conditions are satisfied:

(a) the shareholders, holding not less than three-fourths in value of the shares of the demerged foreign company, continue to remain shareholders of the resulting foreign company; and

(b) such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated [Section 47(vicc)]

However, the provisions of sections 391 to 394 of the Companies Act, 1956 shall not apply in case of such demergers.

(14) 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 made in consideration of demerger of the undertaking [Section 47(vid)].

(15) Any transfer by a shareholder in a scheme of amalgamation of shares held by him in the amalgamating company [Section 47(vii)].

Conditions – (i) The transfer is made in consideration of the allotment to him of any share in the amalgamated company, except where the shareholder itself is the amalgamated company; (ii) The amalgamated company is an Indian company.

For example, let us take a case where A Ltd., an Indian company, holds 60% of shares in B Ltd. B Ltd. amalgamates with A Ltd. Since A Ltd. itself is the shareholder of B Ltd., A Ltd., being the amalgamated company, cannot issue shares to itself. However, A Ltd. has to issue shares to the other shareholders of B Ltd.

Illustration M held 2000 shares in a company ABC Ltd. This company amalgamated with another company during the previous year ending 31-3-2016. Under the scheme of amalgamation, M was allotted 1000 shares in the new company. The market value of shares allotted is higher by Rs50,000 than the value of holding in ABC Ltd. The Assessing Officer proposes to treat the transaction as an exchange and to tax Rs 50,000 as capital gain. Is he justified? Solution In the above example, assuming that the amalgamated company is an Indian company, the transaction is squarely covered by the exemption explained above and the proposal of the Assessing Officer to treat the transaction as an exchange is not justified.

(16) Any transfer of bonds of an Indian company or Global Depository Receipts purchased in foreign currency [referred to in section 115AC(1)] [Section 47(viia)].

Conditions – (i) The transfer must be made outside India; (ii) The transfer must be made by the non-resident to another non-resident.

(17) any transfer of a capital asset, –

(i) being a Government Security carrying a periodic payment of interest,

(ii) made outside India through an intermediary dealing in settlement of securities,

(iii) by a non-resident to another non-resident [Section 47(viib)]

This is for the purpose of facilitating listing and trading of Government securities outside India

(18) Any transfer of agricultural lands effected before 1-3-1970 [Section 47(viii)]

(19) Any transfer of any of the following capital asset to the Government or to the University or the National Museum, National Art Gallery, National Archives or any other public museum or institution notified by the Central Government to be of (national importance or to be of) renown throughout any State [Section 47(ix)] :

(i) work of art

(ii) archaeological, scientific or art collection

(iii) book

(iv) manuscript

(v) drawing

(vi) painting

(vii) photograph or

(viii) print.

(20) Any transfer by way of conversion of bonds or debentures, debenture stock or deposit certificates in any form, of a company into shares or debentures of that company [Section
47(x)].

(21) Any transfer by way of conversion of Foreign Currency Exchangeable Bonds into shares or debentures of a company [Section 47(xa)].

(22) Transfer by way of exchange of a capital asset being membership of a recognised stock exchange for shares of a company to which such membership is transferred [Section 47(xi)].

Conditions – (i) Such exchange is effected on or before 31st December, 1998 and (ii) such shares are retained by the transferor for a period of not less than three years from the date of transfer.

(23) Capital gains arising from the transfer of land under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985, by a sick
industrial company which is managed by its workers’ co-operative [Section 47(xii)].

Conditions – Such transfer is made in the period commencing from the previous year in which the said company has become a sick industrial company and ending with the previous year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

(24) Where a firm is succeeded by a company or where an AOP or BOI is succeeded by a company consequent to demutualisation or corporatisation of a recognised stock exchange in India in the course of which there is any transfer of a capital asset or intangible asset (in the case of a firm) to the company [Section 47(xiii)].

Conditions – (i) All assets and liabilities of the firm or AOP or BOI relating to the business immediately before the succession become the assets and liabilities of the company;

(ii) All the partners of the firm immediately before the succession become the shareholders of the company and the proportion in which their capital accounts stood in the books of the firm on the date of succession remains the same;

(iii) The partners of the firm do not receive any consideration or benefit in any form, directly or indirectly, other than by way of allotment of shares in the company.

(iv) The partners of the firm together hold not less than 50% of the total voting power in the company, and their shareholding continues in such manner for a period of 5 years from the date of succession.

(v) The corporatisation of a recognised stock exchange in India is carried out in accordance with a scheme for demutualisation or corporatisation approved by SEBI.

(25) any transfer of a membership right by a member of recognised stock exchange in India for acquisition of shares and trading or clearing rights in accordance with a scheme for demutualization or corporatisation approved by SEBI [Section 47(xiiia)].

(26) any transfer of a capital asset or intangible asset by a private company or unlisted public company to a LLP or any transfer of a share or shares held in a company by a shareholder on conversion of a company into a LLP in accordance with section 56 and section 57 of the Limited Liability Partnership Act, 2008, shall not be regarded as a transfer for the purposes of levy of capital gains tax under section 45, subject to fulfillment of certain conditions, namely:

(i) the total sales, turnover or gross receipts in business of the company should not exceed Rs 60 lakh in any of the three preceding previous years;

(ii) the shareholders of the company become partners of the LLP in the same proportion as their shareholding in the company;

(iii) no consideration other than share in profit and capital contribution in the LLP arises to the shareholders;

(iv) the erstwhile shareholders of the company continue to be entitled to receive at least 50% of the profits of the LLP for a period of 5 years from the date of conversion;

(v) all assets and liabilities of the company become the assets and liabilities of the LLP; and

(vi) no amount is paid, either directly or indirectly, to any partner out of the accumulated profit of the company for a period of 3 years from the date of conversion [Section 47(xiiib)].

(27) Where a sole proprietary concern is succeeded by a company in the business carried out by it, as a result of which the sole proprietary concern transfers or sells any capital asset or intangible asset to such company [Section 47(xiv)].

Conditions – (i) All assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;

(ii) The sole proprietor holds not less than 50% of the total voting power in the company, and his shareholding continues in such manner for a period of 5 years from the date of succession;

(iii) The sole proprietor does not receive any consideration or benefit in any form, directly or indirectly, other than by way of allotment of shares in the company.

(28) Any transfer in a scheme for lending of any securities under an agreement or arrangement which the assessee has entered into with the borrower of such securities and which is subject to the guidelines issued by SEBI or the RBI, for example, the Securities Lending and Borrowing (SLB) Scheme for all market participants in the Indian securities market under the overall framework of Securities Lending Scheme, 1997 of SEBI [Section 47(xv)].

(29) Any transfer of a capital asset in a scheme of reverse mortgage under a scheme made and notified by the Central Government [Section 47(xvi)].

(30) Any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund [Section 47(xviii)].

However, this exemption would be available only if, the consolidation takes place of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund.

Meaning of the following terms:

Term	Meaning
Consolidating scheme	The scheme of a mutual fund which merges under the process of consolidation of the schemes of mutual fund in accordance with the SEBI (Mutual Funds) Regulations, 1996 made under SEBI Act, 1992.
Consolidated scheme	The scheme with which the consolidating scheme merges or which is formed as a result of such merger
Equity Oriented Fund	Meaning as assigned under section 10(38), i.e., A fund— (i) where the investible funds are invested by way of equity shares in domestic companies to the extent of more than 65% of the total proceeds of such fund; and (ii) which has been set up under a scheme of a Mutual Fund specified under section 10(23D). The percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;
Mutual Fund	A mutual fund specified under section 10(23D), i.e., (i) a Mutual Fund registered under the SEBI Act, 1992 or regulations made thereunder; (ii) such other Mutual Fund set up by a public sector bank or a public financial institution or authorised by the Reserve Bank of India and subject to conditions notified by the Central Government.

 

Illustration In which of the following situations capital gains tax liability does not arise? (i) Mr. A purchased gold in 1970 for Rs 25,000. In the P.Y. 2015-16, he gifted it to his son at the time of marriage. Fair market value (FMV) of the gold on the day the gift was made was Rs 1,00,000. (ii) A house property is purchased by a Hindu undivided family in 1945 for Rs 20,000. It is given to one of the family members in the P.Y. 2015-16 at the time of partition of the family. FMV on the day of partition was Rs 12,00,000. (iii) Mr. B purchased 50 convertible debentures for Rs 40,000 in 1995 which are converted in to 500 shares worth Rs 85,000 in November 2015 by the company. Solution We know that capital gains arise only when we transfer a capital asset. The liability of capital gains tax in the situations given above is discussed as follows: (i) As per the provisions of section 47(iii), transfer of a capital asset under a gift is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the given situation. (ii) As per the provisions of section 47(i), transfer of a capital asset (being in kind) on the total or partial partition of Hindu undivided family is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the given situation. (iii) As per the provisions of section 47(x), transfer by way of conversion of bonds or debentures, debenture stock or deposit certificates in any form of a company into shares or debentures of that company is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the given situation.

 

Kindly also read Withdawl of Exepmtion of Capital Gain