Sunday, May 6, 2012

Transfer Meaning for capital Gain calculation Income Tax Act


on Sunday, May 6, 2012

Transfer of Capital assets for calculation of Capital Gain.

Transfer includes: 

i) Sale, exchange or relinquishment of a capital asset 

A sale takes place when tide in the property is transferred for a price. The sale need not be voluntary. An involuntary sale of a property of a debtor by a court at the instance of a decree holder is also transfer of a capital asset. 

An exchange of capital asset takes place when the title in one property is passed in consideration of the title in another property. 

Relinquishment of a capital asset arises when the owner surrenders his rights in property in favour of another person. For example, the transfer of rights to subscribe the shares in a company under a ‘Rights Issue’ to a third person. 

ii) Extinguishment of any rights in a capital asset 

This covers every possible transaction which results in destruction, annihilation, extinction, termination, cessation or cancellation of all or any bundle of rights in a capital asset. For example, termination of a lease or of a mortgagee interest in a property. 

iii) Compulsory acquisition of a capital asset under any law 

Acquisition of immovable properties under the Land Acquisition Act, acquisition of industrial undertaking under the Industries (Development and Regulation) Act etc.., are some of the examples of compulsory acquisition of a capital asset.

iv) Conversion of a capital asset into stock-in-trade 

Normally, there can be no transfer if the ownership in an asset remains with the same person. However, the Income tax Act provides an exception for the purpose of capital gains. When a person converts any capital asset owned by him into stock-in- trade of a business carried on by him, it is regarded as a transfer. For example, where an investor in shares starts a business of dealing in shares and treats his existing investments as the stock- in-trade of the new business, such conversion arises and is regarded as a transfer. The Fair Market Value of the asset on the date of such conversion shall be the Full Value of Consideration for the transfer.

v) Part performance of a contract of sale 

Normally transfer of an immovable property worth Rs. 100/- or more is not complete without execution and registration of a conveyance deed. However, section 53A of the Transfer of Property Act envisages situations where under a contract for transfer of an immovable property, the purchaser has paid the price and has taken possession of the property, but the conveyance is either not executed or if executed is not registered. In such cases the transferer is debarred from agitating his title to the property against the purchaser. 

The act of giving possession of an immovable property in part performance of a contract is treated as ‘transfer’ for the purposes of capital gains. This extended meaning of transfer applies also to cases where possession is already with the purchaser and he is allowed to retain it in part performance of the contract. 

vi) Transfer of rights in immovable properties through the medium of co-operative societies, companies etc. 

Usually flats in multi-storeyed building and other dwelling units in group housing schemes are registered in the name of a co-operative society formed by the individual allottees. 

Sometimes companies are floated for this purpose and allottees take shares in such companies. In such cases transfer of right to use and enjoy the flat is effected by changing the membership of co-operative society or by transferring the shares in the company. Possession and enjoyment of immovable property is also made by what is commonly known as ‘Power of Attorney’ transfers. 

All these transactions are regarded as transfer. 

vii) Transfer by a person to a firm or other Association of Persons [AOP] or Body of Individuals [BOI] 

Normally, firm/AOP/BOI is not considered a distinct legal entity from its partners or members and so transfer of a capital asset from the partners to the firm/AOP/BOI is not considered 

‘Transfer’. However, under the Capital Gains, it is specifically provided that if any capital asset is transferred by a partner to a firm/AOP/BOI by way of capital contribution or otherwise, the same would be construed as transfer. 

viii) Distribution of capital assets on Dissolution 

Normally, distribution of capital assets on dissolution of a firm/AOP/BOI is also not considered as transfer for the same reasons as mentioned in (vii) above. However, under the capital gains, this is considered as transfer by the firm /AOP/BOl and therefore gives rise to capital gains for the firm/AOP/BOI. 

ix) Distribution of money or other assets by the Company on liquidation

If a shareholder receives any money or other assets from a Company in liquidation, the shareholder is liable to pay capital gains as the same would have been received in lieu of the shares held by him in the company. However, if the assets of a company are distributed to the shareholders on its liquidation such distribution shall not be regarded as transfer by the company. 

x) The maturity or redemption of a zero coupon bond 

Here, a zero coupon bond means a bond issued by any infrastructure capital company or infrastructure firm or public sector company on or after 1st June, 2005 in respect of which no payment or benefit is received or receivable before maturity or redemption and which has been specifically notified by the Central Govt. 


Transactions not regarded as Transfer 

The following, though may fall under the above definition of transfer are to be treated as not transfer for the purpose of computing Capital Gains: 

i) distribution of capital assets on the total or partial partition of a Hindu Undivided Family; 

ii) transfer of a capital asset under a gift or will or an irrevocable trust except transfer under a gift or an irrevocable trust, of shares, debentures or warrants allotted by a company to its employees under ‘Employees’ Stock Option Plan or Scheme; 

iii) transfer of a capital asset by a company to its subsidiary company, if: 
  • the parent company or its nominees hold the whole of the share capital of the subsidiary company, 
  • the subsidiary company is an Indian Company 
  • the capital asset is not transferred as stock-in-trade, and such an exemption exists if: 
    • the subsidiary company does not convert such capital asset into stock-in-trade for a period of  8 years from the date of transfer and 
    • the parent company or its nominees continue to hold the whole of the share capital of the subsidiary company for 8 years from the date of transfer. 
iv) transfer of a capital asset by a subsidiary company to the holding company, if: 
  • the whole of the share capital of the subsidiary company is held by the holding company, 
  • the holding company is an Indian Company, 
  • the capital asset is not transferred as stock-in-trade, and such an exemption exists if:  
    • the holding company does not convert such capital asset into stock-in-trade for a period of 8 years from the date of transfer and 
    • the holding company or its nominees continue or hold the whole of the share capital of the subsidiary company for 8 years from the date of transfer. 
v) in a scheme of amalgamation, transfer of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company; 

vi) transfer of shares of an Amalgamating Company, if: 
  • the transfer is made in consideration of the allotment of share or shares in the Amalgamated Company, and 
  • the Amalgamated Company is an Indian Company. vii) transfer of shares of an Indian Company, by an  amalgamating foreign company to the amalgamated foreign company, if: 
    • at least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company and 
    • such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated. 

viii) in a demerger: 
  • transfer of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian Company; 
  • transfer of share or shares held in an Indian Company by the demerged foreign company to the resulting foreign company, if:
    • the share holders holding not less than three fourths in value of the shares of the demerged foreign company continue to remain share holders of the resulting foreign company; and 
    • such transfer does not attract tax on Capital Gains in the country, in which the demerged foreign company is incorporated. 
    • transfer or issue of shares, in consideration of demerger of the undertaking, by the resulting company to the share holders of the demerged company. 
ix) transfer of bonds or Global Depository Receipts, purchased in foreign currency by a non-resident to another non-resident outside India. 

x) transfer of agricultural land in India effected before first of March, 1970 

xi) transfer of any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any such other public museum or institution notified by the Central Government in the Official Gazette to be of national importance or to be of renown throughout any State or States. 

xii) transfer by way of conversion of bonds or debentures, debenture stock or deposit certificate in any form, of a company into shares or debentures of that company. 

xiii) transfer of membership of a recognised stock exchange made by a person (other than a company) on or before 31.12.1998, to a company in exchange of shares allotted by that company. However, if the shares of the company are transferred within 3 years of their acquisition, the gains not charged to tax by treating their acquisition as not transfer would be taxed as capital gains in the year of transfer of the shares.

xiv) transfer of land of a sick industrial company, made under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) where such sick industrial company is being managed by its workers’ co-operative and such transfer is made’ during the period commencing from the previous year in which the said company has become a sick industrial company under section 17(1) of that Act and ending with the previous year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. 

xv) Transfer of a capital asset to a company in the cours of demutualisation or corporatisation of a recognised stock exchange in India as a result of which an Association of Persons (AOP) or Body of Individuals (BOI) is succeeded by such company, if: 
  • a. all the liabilities of the AOP or BOI relating to the business immediately before the succession become the assets and liabilities of the company. 
  • b. demutualisation or corporatisation is carried out in accordance with a scheme which is approved by Securities and Exchanges Board of India(SEBI). 
xvi) transfer of a membership right held by a member of a recognized stock exchange in India for acquiring shares and trading or clearing rights in that stock exchange in accordance with a scheme for demutualisation or corporatisation approved by SEBI. 


xvii) Where a firm is succeeded by a company in the business carried on by it as a result of which the firm sells or otherwise transfers any capital asset or intangible asset to the company, if
  • a) all the assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company, 
  • b) 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 succession, 
  • c) 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 
  • d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty percent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession. 
If the conditions laid down above are not complied with, then the amount of profits or gains arising from the above transfer would be deemed to be the profits and gains of the successor company for the previous year during which the above conditions are not complied with. 

xviii Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company, if: 
  • a) all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company, 
  • b) the shareholding of the sole proprietor in the company is not less than fifty percent of the total voting power in the company and his shareholding continues to so remain as such for a period of five years from the date of the succession and 
  • c) the sole proprietor does 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 

If the conditions laid down above are not complied with, then the amount of profits or gains arising from the above transfer would be deemed to be the profits and gains of the successor company for the previous year during which the above conditions are not complied with. 

xix) transfer in a scheme of lending of any securities under an arrangement subject to the guidelines of Securities and Exchange Board of India (SEBI) or Reserve Bank of India (RBI). 

xx) Any transfer, in the scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the Central Govt. under the Banking Regulation Act, 1949, of a capital asset by the Banking Company to the Banking Institution. 

xxi) Any transfer in a business reorganization, of a capital asset by the predecessor, cooperative bank to the successor cooperative bank. 

xxii) Any transfer by a share holder in a business reorganization, of a capital asset being a share or share(s) held by him in the predecessor cooperative bank if the transfer is made in consideration of the allotment to him of any share or share(s) in the successor cooperative bank. 

xxiii) Any transfer by way of conversion of bonds or Global Depository Receipts purchased in foreign currency into shares or debentures of any company. xxiv) Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made & notified by the Central Government. 

xxiv) Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made & notified by the Central Government.

xxv) Any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter in this clause referred to as the company) to a limited liability partnership or any 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 in accordance with the provisions of Section 56 or Section of the Limited Liability Partnership Act, 2008 (6 of 2009).

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