Withdrawal of Exemption in Certain Cases: Clause 71 of the Income Tax Bill, 2025 vs. Section 47A of the Income-tax Act, 1961

Clause 71 Withdrawal of exemption in certain cases.

Income Tax Bill, 2025

Introduction

Clause 71 of the Income Tax Bill, 2025, and Section 47A of the Income-tax Act, 1961, both address the withdrawal of exemptions in specific cases where capital gains are involved. These provisions are crucial in defining the tax implications when certain conditions are not met after a transfer of capital assets. This article provides a detailed analysis of Clause 71, compares it with Section 47A, and discusses the potential implications for stakeholders.

Objective and Purpose

Clause 71 and Section 47A aim to prevent tax avoidance through the misuse of capital asset transfers. The legislative intent behind these provisions is to ensure that capital gains are taxed appropriately when the conditions for exemption are violated. These measures are part of a broader effort to maintain the integrity of the tax system and ensure equitable tax treatment.

Detailed Analysis

Clause 71 of the Income Tax Bill, 2025

1. Subsection (1):

This provision applies when a transferee company converts a capital asset into stock-in-trade or when the parent or holding company ceases to hold the entire share capital of a subsidiary within eight years of the transfer. In such cases, the capital gains, initially exempt, become chargeable to tax in the year of transfer.

2. Subsection (2):

This addresses situations where conditions in Section (Clause) 70(zd) or (zf) are not met. The capital gains not charged u/s (clause)  67 become taxable for the successor company in the year of non-compliance.

3. Subsection (3): Similar to Subsection (2), this applies to conditions in Section (Clause) 70(ze). If unmet, the capital gains become taxable for the successor LLP or the shareholder of the predecessor company.

Section 47A of the Income-tax Act, 1961

1. Subsection (1):

Mirrors Clause 71(1) by taxing capital gains if the capital asset is converted into stock-in-trade or if the parent or holding company ceases to hold the entire share capital within eight years.

2. Subsection (2):

Applies to shares allotted in exchange for stock exchange membership. If transferred within three years, the gains become taxable.

3. Subsection (3):

Similar to Clause 71(2), it taxes gains if conditions in the proviso to Section 47(xiii) or (xiv) are not met.

4. Subsection (4):

Comparable to Clause 71(3), it taxes gains if conditions in the proviso to Section 47(xiiib) are not met.

Practical Implications

For businesses, these provisions necessitate careful compliance with the conditions of asset transfers to avoid unexpected tax liabilities. Companies must monitor their corporate structures and asset treatment to ensure ongoing eligibility for exemptions. Non-compliance could lead to significant tax liabilities, affecting financial planning and reporting.

Comparative Analysis

Both Clause 71 and Section 47A serve similar purposes but differ in specific references to sections and conditions. Clause 71 is structured to align with the new Income Tax Bill, 2025, reflecting changes in section numbering and potentially updated conditions. The fundamental principle of taxing gains upon non-compliance remains consistent across both provisions.

Conclusion

Clause 71 of the Income Tax Bill, 2025, and Section 47A of the Income-tax Act, 1961, are pivotal in ensuring that capital gains exemptions are not misused. Their alignment underscores the importance of compliance in corporate and financial structuring. Future reforms may further refine these provisions to address emerging tax avoidance strategies and enhance clarity for taxpayers.

Full Text:

Clause 71 Withdrawal of exemption in certain cases.

Dated: 12-3-2025