Section 47(iv) r.w. 47a in case of capital reduction

Hello Mr. Ankit,

Please find the relevant provisions & explanation for your doubt

Dividend

As per section 2(22)(d) of Income Tax Act, 1961, any distribution by a company to its shareholders on the reduction of capital is treated as dividend to the extent the company possess accumulated profits (whether capitalilsed or not) and hence the subsidiary company is liable to pay dividend tax u/s115O & in the hands of recipient shareholders, it is not chargeable to tax

Capital Gains

As per section 2(47) of Income Tax Act, 1961, the word transfer includes relinquishment of the asset or the extinguishment of any rights thereon & the words "relinquishment" & "extinguishment" not defined under the Act.

In the case of Kartikeya V. Sarabhai vs. CIT (1997), Supreme Court held that the reduction in the face value of shares amounted to ‘extinguishment’ within the meaning of Section 2(47) and hence the amount received on such reduction was taxable as capital gain.

Section 47(iv)

As per section 47(iv) of Income Tax Act, 1961, any transfer of a capital asset by a company to its subsidiary company would not be treated as transfer, if -

• The parent company or its nominees hold the whole of the share capital of the subsidiary company, and
• Subsidiary company is an Indian company

Hence, there is no question of any benefit since there is reduction of capital by a 100% subsidiary co. and not by holding co.

This is covered within section 47(v) of Income Tax Act, 1961 which deals with transfer of Capital Asset by a 100% Subsidiary to it's Holding Company and so it would not be treated as transfer. Hence there is no question of capital gain

Dear Kundipsingh,

Please Note that Capital Asset (CA) is Shares Held by holding Co. of Subsidiary Co. and shown as investment in its books of account and when these shares are transfer Capital Gain arises, In case of Capital Reduction Holding Co. will transfer CA i.e. Shares of Sub. Co. to Sub Co.

So, tansfer would be of CA from Holding Co. to Sub. Co. so, S.47(iv) is definiatly applicable.

Now the doubt is, Whether S.47A Conditions Quoted by you are met and exemption from capital gains in the hands of Holding Co. For transfer of shares are exempt from perview of Capital Gains as those transaction are not regarded as transfer.

Waiting For Valuable reply Friend

Thanks

Section 47A Withdrawal of exemption in certain cases

(1) Where at any time before the expiry of a period of eight years from the date of the transfer of a capital asset referred to in clause (iv) or, as the case may be, clause (v) of section 47 -

• such capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business; or
• the parent company or its nominees or, as the case may be, the holding company ceases or cease to hold the whole of the share capital of the subsidiary company,
  the amount of profits or gains arising from the transfer of such capital asset not charged under section 45 by virtue of the provisions contained in clause (iv) or, as the case may be, clause (v) of section 47 shall, notwithstanding anything contained in the said clauses, be deemed to be income chargeable under the head “Capital gains” of the previous year in which such transfer took place.

As per above provisions of section 47A(1), since after capital reduction by holding company assuming it would still hold the whole of share capital of it and hence provision of section 47A are complied with & accordingly it would not amount to transfer.

However, if after capital reduction the relationship of 100% subsidiary & holding company does not exist, than it would amount to transfer as per section 47A(1)