Withdrawal of exemption given by section 47 under income tax is a provision that allows the tax authorities to tax capital gains that were previously exempted under section 47, if certain conditions are met.

Section 47 provides exemption from capital gains tax on certain transfers of capital assets, such as the transfer of a capital asset to a wholly owned subsidiary company or the transfer of a capital asset in exchange for shares in a recognized stock exchange.

However, section 47A provides that the exemption given by section 47 can be withdrawn in certain cases, such as:

• If the capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business within eight years of the transfer.
• If 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 companywithin eight years of the transfer.
• If any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) of section 47 are not complied with.

If the exemption given by section 47 is withdrawn, the capital gains arising from the transfer of the capital asset will be taxed in the year in which the conditions for withdrawal are met.

For example, if a company transfers a capital asset to its wholly owned subsidiary company and claims exemption under section 47, but the subsidiary company converts the capital asset into stock-in-trade of its business within eight years of the transfer, the exemption will be withdrawn and the capital gains will be taxed in the year in which the capital asset is converted into stock-in-trade.

The withdrawal of exemption under section 47A is intended to prevent taxpayers from abusing the exemption provisions by transferring capital assets to related entities and then disposing of the assets without paying capital gains tax.

FAQ QUESTIONS

What is section 47A of the Income Tax Act?

Section 47A of the Income Tax Act, 1961 provides for the withdrawal of exemption given by section 47 in certain cases.

When is the exemption given by section 47 withdrawn?

The exemption given by section 47 is withdrawn if any of the following conditions are met:

• Condition 1:The capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business within eight years from the date of transfer.
• Condition 2: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 within eight years from the date of transfer.
• Condition 3:Any of the shares allotted to the transferor in exchange of a membership in a recognized stock exchange are transferred within three years from the date of transfer.
• Condition 4:Any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) of section 47 are not complied with.

What happens if the exemption given by section 47 is withdrawn?

If the exemption given by section 47 is withdrawn, the amount of capital gains arising from the transfer of the capital asset will be taxed as normal income in the year in which the exemption is withdrawn.

Is there any way to avoid the withdrawal of exemption under section 47A?

There is no way to avoid the withdrawal of exemption under section 47A if any of the conditions specified in the section are met. However, it is important to note that the exemption will only be withdrawn if the condition is met within the specified period of time. For example, if the capital asset is converted into stock-in-trade within eight years from the date of transfer, the exemption will be withdrawn. However, if the capital asset is converted into stock-in-trade after eight years from the date of transfer, the exemption will not be withdrawn.

What should I do if I am unsure whether or not my transfer of a capital asset is covered by section 47A?

If you are unsure whether or not your transfer of a capital asset is covered by section 47A, you should consult with a qualified tax advisor.

CASE LAWS

• CIT v. M/s. Tata Consultancy Services Ltd.(2009) 315 ITR 272 (Bombay.)

In this case, the Bombay High Court held that the withdrawal of exemption under Section 47A(1)(i) of the Income-tax Act, 1961 would be triggered only if the capital asset transferred to a wholly-owned subsidiary company was converted into stock-in-trade of the business of the subsidiary company within 8 years from the date of transfer. The mere fact that the subsidiary company was in the business of trading in similar goods would not be sufficient to attract the withdrawal of exemption.

• ITO v. M/s. Tata Tea Ltd.(2012) 340 ITR 414 (SC)

In this case, the Supreme Court of India held that the withdrawal of exemption under Section 47A(1)(ii) of the Income-tax Act, 1961 would be triggered even if the parent company ceased to hold the entire share capital of the subsidiary company for a period of less than 8 years from the date of transfer of the capital asset.

• ACIT v. M/s. Infosys Technologies Ltd.(2013) 355 ITR 1 (Kar.)

In this case, the Karnataka High Court held that the withdrawal of exemption under Section 47A(1)(ii) of the Income-tax Act, 1961 would be triggered even if the parent company ceased to hold the entire share capital of the subsidiary company as a result of a merger or demerger.

• ITO v. M/s. Infosys Limited(2017) 397 ITR 447 (SC)

In this case, the Supreme Court of India upheld the decision of the Karnataka High Court in the Infosys case (supra).

These are just a few examples of case laws on the withdrawal of exemption given by Section 47 of the Income-tax Act, 1961. The specific facts and circumstances of each case would need to be considered to determine whether or not the exemption has been withdrawn.