Withdrawal of exemption in certain cases :
Section 47A provides for withdrawal of the benefit of exemption given by section 47 in certain cases.
As noted above, capital gains arising from the transfer of a capital asset by a company to its wholly owned subsidiary company is exempt from tax. Similarly, capital gains arising from the transfer of a capital asset by the subsidiary company to the holding company is also exempt from tax, provided under both circumstances the transferee is an Indian company.
Section 47A provides that the above exemption will be withdrawn in the following cases:
(1) Where at any time before the expiry of eight years from the date of transfer of a capital asset referred to above, such capital asset is converted by the transferee company or is treated by it as stock-in-trade of its business;
(2) Where before eight years as noted above, the parent company or its nominee ceases to hold the whole of the share capital of the subsidiary company.
In the above two cases, the amount of capital gains exempt from tax by virtue of the provisions contained in section 47 will be deemed to be the income of the transferor company chargeable under the head ‘capital gains’ of the year in which such transfer took place.
(3) Capital gains not charged to tax under clause (xi) of section 47 shall be deemed to be the income chargeable under the head “capital gains” of the previous year in which such transfer took place if the shares of the company received in exchange for transfer of membership in a recognised stock exchange are transferred at any time before the expiry of three years of such transfer.
(4) Where any of the conditions laid down in section 47 for succession of a firm or sole proprietary concern by a company are not complied with, the amount of profits or gains arising from the transfer of such capital asset or intangible asset shall be deemed to be the profits and gains chargeable to tax of the successor company for the previous year in which the conditions are not complied with.
(5) If subsequent to the conversion of a company into an LLP, any of the conditions laid down in section 47(xiiib) are not complied with, the capital gains not charged under section 45 would be deemed to be chargeable to tax in the previous year in which the conditions are not complied with, in the hands of the LLP or the shareholder of the predecessor company, as the case may be.
Kindly also read : Transactions not regarded as transfer for Capital Gain [Section 47]