Transactions not regarded as transfer.

70(1)

The provisions of section 67 shall not apply to transfer—

• (a) of distribution of capital assets on the total or partial partition of a Hindu undivided family;
• (b) of a capital asset by an individual or a Hindu undivided family, under a will or a gift or an irrevocable trust;
• (c) of a capital asset, not being stock-in-trade, by a company to its subsidiary company, if— (i) the parent company or its nominees hold the whole of the share capital of the subsidiary company; and (ii) the subsidiary company is an Indian company;
• (d) of a capital asset, not being stock-in-trade, by a subsidiary company to the holding company, if–– (i) the whole of the share capital of the subsidiary company is held by the holding company; and (ii) the holding company is an Indian company;
• (e) 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;
• (f) by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held in the amalgamating company, if—
• (i) the transfer is made in consideration of allotment of any share or shares in the amalgamated company, except when the shareholder itself is the amalgamated company; and (ii) the amalgamated company is an Indian company;
• (g) in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if—
• (i) at least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and (ii) such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated;
• (h) in a scheme of amalgamation, of a capital asset, being a share of a foreign company, referred to in section 9(9)(a), 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, if—
• (i) at least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and (ii) such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated; (i) of a capital asset by a banking company to a banking institution under a scheme of amalgamation sanctioned and brought into force by the Central Government under section 45(7) of the Banking Regulation Act, 1949;
• (j) in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company;
• (k) of shares by the resulting company or issue of shares by such 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;
• (l) in a demerger (where the provisions of sections 230 to 232 of the Companies Act, 2013 do not apply), of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if— (i) the shareholders holding not less than 75% 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;
• (m) in a demerger (where the provisions of sections 230 to 232 of the Companies Act, 2013 do not apply), of a capital asset, being a share of a foreign company, referred to in section 9(9)(a), 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, if—
• (i) the shareholders, holding not less than 75% 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;
• (n) in a business reorganisation, of a capital asset by the predecessor co-operative bank to the successor co-operative bank or to the converted banking company;
• (o) by a shareholder, in a business reorganisation, of capital asset being share or shares held in the predecessor co-operative bank, if the transfer is made in consideration of the allotment to the shareholder of share or shares in the successor co-operative bank or the converted banking company;
• (p) of a capital asset, being bonds or Global Depository Receipts as referred to in section 209(1), made outside India by a non-resident to another non-resident;
• (q) made outside India, of a capital asset, being rupee denominated bond of an Indian company issued outside India, by a non-resident to another non-resident;
• (r) of a capital asset made by a non-resident on a recognised stock exchange located in any International Financial Services Centre, where the consideration for such transaction is paid or payable in foreign currency, and such capital asset is— (i) bond or Global Depository Receipt referred to in section 209(1); or (ii) rupee denominated bond of an Indian company; or (iii) derivative; or (iv) such other securities as notified by the Central Government;
• (s) of a capital asset, being a Government security carrying a periodic payment of interest, made outside India through an intermediary dealing in settlement of securities, by a non-resident to another non-resident;
• (t) in a relocation, of a capital asset by the original fund to the resulting fund;
• (u) by a shareholder or unit holder or interest holder, in a relocation, of a capital asset being share or unit or interest held in the original fund in consideration for the share or unit or interest in the resultant fund;
• (v) of a capital asset by India Infrastructure Finance Company Limited to an institution established for financing the infrastructure and development, set up under an Act of Parliament and notified by the Central Government for the purposes of this clause;
• (w) of a capital asset, under a plan approved by the Central Government, by a public sector company, to–– (i) another public sector company notified by the Central Government for the purposes of this clause; or (ii) the Central Government; or (iii) a State Government;
• (x) of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an individual;
• (y) of a capital asset, being conversion of gold into Electronic Gold Receipt issued by a Vault Manager, or conversion of Electronic Gold Receipt into gold;
• (z) 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;
• (za) by way of conversion of bonds referred to in section 209(1) (Table: Sl. No. 1) into shares or debentures of any company;
• (zb) by way of conversion of preference shares of a company into equity shares of that company;
• (zc) of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to— (i) the Government; or (ii) a University; or (iii) the National Museum, National Art Gallery or National Archives; or (iv) such other public museum or institution as notified by the Central Government to be of national importance or of renown throughout any State;
• (zd) of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, if–– (i) all the assets and liabilities of the firm 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 in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession; (iii) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and (iv) the aggregate of the shareholding of the partners in the company is at least 50% of the total voting power and such shareholding remains the same for five years from the date of succession;
• (ze) of a capital asset or intangible asset by a private company or unlisted public company (herein referred to as the company) to a limited liability partnership or transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership under the provisions of section 56 or 57 of the Limited Liability Partnership Act, 2008, if–– (i) all the assets and liabilities of the company, immediately before the conversion, become the assets and liabilities of the limited liability partnership; (ii) all the shareholders of the company, immediately before the conversion, become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion; (iii) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, other than by way of share in profit and capital contribution in the limited liability partnership; (iv) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than 50% at any time during five years from the date of conversion; (v) the total sales, turnover or gross receipts in the business of the company in any of the three tax years preceding the tax year in which the conversion takes place does not exceed sixty lakh rupees; (vi) the total value of the assets, as appearing in the books of account of the company in any of the three tax years preceding the tax year in which the conversion takes place does not exceed five crore rupees; and (vii) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for three years from the date of conversion;
• (zf) of a capital asset or intangible asset (by way of sale or otherwise) by a sole proprietorship concern to a company in case of succession of the sole proprietorship concern by the company in the business carried on by it, if–– (i) all the assets and liabilities related to the business of the sole proprietary concern, immediately before the succession, become the assets and liabilities of the company; (ii) the shareholding of the sole proprietor in the company is not less than 50% of the total voting power in the company and this shareholding continues to remain the same for five years from the date of the succession; and (iii) the sole proprietor does not receive any consideration or benefit, directly or indirectly, except through allotment of shares in the company;
• (zg) in a scheme for lending of any securities under an agreement or arrangement, entered into by the assessee with the borrower of such securities and which is subject to the guidelines issued by the Securities and Exchange Board of India or the Reserve Bank of India;
• (zh) of a capital asset in a transaction of reverse mortgage under a scheme notified by the Central Government;
• (zi) of a capital asset, being share or shares of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor;
• (zj) of a capital asset, being a unit or units, held by a unit holder in the consolidating scheme of a mutual fund, in consideration of the allotment to the unit holder of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund subject to the condition that the consolidation is of two or more schemes–– (i) of an equity-oriented fund; or (ii) of a fund other than equity-oriented fund;
• (zk) of a capital asset, being a unit or units, held by a unit holder in the consolidating plan of a mutual fund scheme, in consideration of the allotment to the unit holder of a capital asset, being a unit or units, in the consolidated plan of that scheme of the mutual fund;
• (zl) of a capital asset, being an interest in a joint venture, by a public sector company, in exchange for shares of a company incorporated outside India by the government of a foreign State, as per the laws of that foreign State.

70(2)

In sub-section (1), the definitions of the expressions mentioned in column C of the Table below shall apply to the corresponding clauses of the said sub-section mentioned in column B of the said Table. ----table----

Explanation

Section Summary:

Section 70(1) of the Income Tax Act outlines specific transactions that are not considered as transfers for the purpose of capital gains tax. This means that these transactions are exempt from being taxed under the capital gains provisions. The section applies to various scenarios, including family partitions, gifts, corporate reorganizations, and certain international transactions. The purpose is to provide clarity and exemptions for transactions that do not result in a change of beneficial ownership or are part of legitimate business reorganizations.

Key Changes:

This section consolidates and updates the list of transactions that are exempt from being treated as transfers under the capital gains tax provisions. It includes new provisions for modern financial instruments, international transactions, and corporate restructuring mechanisms like amalgamation, demerger, and conversion of entities. The section also introduces exemptions for transactions involving Sovereign Gold Bonds, Electronic Gold Receipts, and securities lending.

Practical Implications:

1. Taxpayers: Individuals and Hindu Undivided Families (HUFs) can transfer capital assets through gifts, wills, or partitions without triggering capital gains tax.
2. Businesses: Companies involved in amalgamations, demergers, or conversions can reorganize their structures without incurring capital gains tax liabilities, provided the conditions are met.
3. Non-Residents: Non-residents can transfer certain capital assets (e.g., bonds, shares) outside India without attracting capital gains tax in India.
4. Investors: Transactions involving Sovereign Gold Bonds, Electronic Gold Receipts, and mutual fund consolidations are exempt from capital gains tax, making these instruments more attractive.

Critical Concepts:

1. Capital Asset: Any property held by a taxpayer, whether movable or immovable, tangible or intangible, except for certain excluded items like personal effects.
2. Amalgamation: The merger of two or more companies into one, where the amalgamating company transfers its assets and liabilities to the amalgamated company.
3. Demerger: The splitting of a company into two or more entities, where the demerged company transfers its assets and liabilities to the resulting company.
4. Non-Resident: A person who is not a resident of India for tax purposes.
5. Sovereign Gold Bonds: Government-issued bonds denominated in grams of gold, which can be redeemed in cash or physical gold.

Compliance Steps:

1. Documentation: Ensure proper documentation for transactions like gifts, wills, or corporate reorganizations to prove compliance with the conditions specified in the section.
2. Reporting: Report exempt transactions in tax returns, even though they are not taxable, to maintain transparency.
3. Conditions: Verify that all conditions for exemptions (e.g., shareholding continuity in amalgamations or demergers) are met to avoid unintended tax liabilities.

Examples:

1. Gift of Property: An individual gifts a residential property to their child. Since this is a transfer under a gift, it is not considered a transfer for capital gains tax purposes.
2. Amalgamation of Companies: Company A merges with Company B, and Company A transfers its assets to Company B. If Company B is an Indian company and all conditions are met, this transfer is not taxable.
3. Sovereign Gold Bond Redemption: An individual redeems Sovereign Gold Bonds issued by the RBI. The redemption is not treated as a transfer, and no capital gains tax applies.
4. Demerger: Company X splits into Company Y and Company Z. The transfer of assets from Company X to Company Y is not considered a transfer for capital gains tax purposes if all conditions are satisfied.

This section simplifies tax compliance for taxpayers and businesses by clearly defining which transactions are exempt from capital gains tax, reducing ambiguity and potential disputes.