Briefly explain transfer of a capital assets section 2(47)

Capital gains arises on transfer section 2(47) of a capital asset. If the asset transfered is not a capital asset, no capital gains will aries. Tranfer section 2(47) in relation to a capital asset, along with sale, exchange or relinquishment of the assets; or the extinguishment of any rights in an asset therein; or the compulsory acquisition thereof under any law. However, the following are treated as "transfer".

WHAT IS THE MEANING OF TRANSFER OF A CAPITAL ASSETS SECTION 2(47) | CAPITAL GAIN TRANSFER SECTION 2(47)

Transfer section 2(47) in relation to a capital asset includes:

(a) Sale, Exchange & Relinquishment of the asset;

(b) Extinguishment of any right in an asset; 

(c) Compulsory acquisition of an asset under any law section 2(47);

(d) Conversion of asset into stock-in-trade (STD) by the owner;

(e) Any transaction of immovable property under section 53A of the Transfer of Property Act, 1882;

(f) Any transaction the membership right is transferred which has the effect of transferring or qualifying or enabling the enjoyment of any immovable property. 

(g) Maturity or redemption of a zero coupon bond (ZCB). 

TAXPOINT

• Above definition is indicative and not exhaustive 

• Above definition section 2(47) is applicable only in relation to capital assets and not otherwise.

• It also includes--

✓ disposing of or parting with an asset or any interest therein, or 

✓ creating any interest in any asset in any manner whatsoever, the aforesaid disposing of assets or creating any interest in any asset may be done directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, it can be done by way of compliance (whether entered into in India or out of India) or otherwise, although such transfer or sale of rights has been characterised or distinguish as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated out of India.

Note: The Apex Court in the case of Vodafone International Holdings B.V. –vs.- UOI [2012] 204 Taxman 408 has held that the transfer of shares of the foreign holding company do not results in an extinguishment of the foreign company (FC)  control and management of the Indian company and it also does not constitute an extinguishment and transfer of an asset situated in India. Transfer of the foreign holding company’s share off-shore (located at sea), cannot result in an extinguishment of the holding company right of control and management of the Indian company nor can it be stated that the same comprise extinguishment and transfer of an asset / property control and management of property / assets situated in India. To nullify the decision of the Apex Court, Finance Act, 2012 (after the amendment) has inserted the said explanations w.r.e.f. 01-04-1962.

EXCHANGE

Exchange along with barter which means mutual transfer of ownership of one thing for the ownership of another.

Notes: In case of exchange although there is only one transaction the tax liability arises on both the parties. The sale consideration shall be taken as the fair market value (FMV) of assets or property received.

RELINQUISHMENT OF THE ASSET

Relinquish defined as ‘to withdraw from’ or ‘to discontinue / abandoned’ or ‘to give up any thing or any right’ or ‘to cease to hold’ or ‘to surrender’. Hence, relinquishment means act of surrendering. In other words, it means interest of a person in a property / assets is either given up, abandoned, or discontinue or surrendered but the property / assets in which right is relinquished continues to exist.

TAXPOINT

• Right of the taxpayer in the asset is given up or abandoned; 

• Asset / property itself continues to exist after such relinquishment and becomes the asset / property of someone else.

• There must be mutual consent of the partner. A unilateral / one sided action of writing off the claim in the books of account cannot be treated as relinquishment.

EXTINGUISHMENT OF ANY RIGHT IN AN ASSET

Extinguishment defined as ‘to put a total end to’ or ‘total destruction / waste’ or ‘blot out of existence’ or ‘annihilation’. Extinguishment does not mean extinguishment of asset / property itself but to extinguishment of holder’s right to the asset / property and such right cannot be held by someone else.

Incidences of extinguishments –

• Cancellation or abolishment of licences: concession of a project and termination of industrial licence, shall be treated as transfer. 

• Reduction / decrease of share capital: When a part of the share capital is paid to the shareholder or stake holders by a company, such reduction / decrease of share capital shall be treated as extinguishment of proportionate right in the shares and such shareholder / stake holders shall be liable to capital gain.

When there is a reduction / decrease of capital by a company and amounts are distributed to shareholder / stake holders, such amount has two components –

(a) Distribution attributable to accumulated profits i.e. chargeable as deemed dividend under section 2(22)(d); 

(b) Distribution attributable to capital i.e. subject to tax under section 45.

• Forfeiture of share: Forfeiture or surrender of shares indicates extinguishment or relinquishment of right of shareholder / stake holders in such shares, which have been forfeited by the company. As in CIT vs Vania Silk Mills Pvt. Ltd it was held that the term extinguishment along with all possible transactions which results in the waste, destruction, spoiling, termination, cessation or cancellation of any right in an asset or property whether corporeal or incorporeal. Though there is no consideration in case of share forfeiture or surrender, still such transaction shall be treated as transfer or sale and liable to capital gain.

COMPULSORY ACQUISITION OF AN ASSET UNDER ANY LAW

Normally, transfer / sale means a mutual will full agreement between two or more parties. But for the purpose of section 2(47), transfer includes compulsory acquisition of any property under any law in force.

CONVERSION OF ASSET INTO STOCK IN TRADE (STT) BY THE OWNER

Generally, a transfer / sales requires two or more parties, but in Income tax (IT) Act even one party’s involvement may constitute transfer / sale. As per section 2(47)(iv) where an asset or property is converted by the owner into or treated by him as ‘stock in trade / STT’ of the business carried on by him, such transformation or treatment shall constitute transfer.

ANY TRANSACTION OF IMMOVABLE PROPERTY UNDER SECTION 53A OF THE TRANSFER OF PROPERTY ACT

Any transaction of immovable property in which possession is allowed against part performance of the contract shall be treated as transfer [section 53A of the Transfer of Property Act, 1882].

ANY TRANSACTION WHICH HAS ENABLE THE ENJOYMENT OF ANY IMMOVABLE PROPERTY

Any agreement or transaction which has the effect of transferring or enabling the enjoyment of any immovable property or immovable asset whether by way of suitable a member of, or acquiring shares in a co-operative society, company or other association of persons (AOP) or by way of any agreement or any arrangement or in any other manner, is treated as transfer. 

Property accepted by a member of a company, co-operative society or other association of persons (AOP) to whom a property or building or a part thereof is allotted or leased under House Building Scheme of the company or association of person (AOP), is treated as  deemed owner of that property or building or a part thereof. 

Under the process of owning flats in co-operative housing societies, the legitimate ownership in the flats can be said to vest in the individual members themselves and not in the co-operative societies. Consequently for all purposes including connection and recovery of tax, etc. the individual member should be regarded as the legitimate owner. 

TAXPOINT

• Taxpayer is a member of a company, co-operative society or other association of person (AOP).

• He has been distributed or leased a building on account of such membership.