Section 219 — Conversion of an Indian branch of foreign company into subsidiary Indian company. Successor to s.115JG of the 1961 Act.
Section 219 is in Chapter XIII — Determination of Tax in Special Cases, which runs from section 190 to section 235.
Sub-section (1) applies where a foreign company carrying on banking in India through an Indian branch converts that branch into a subsidiary Indian company under a scheme framed by the Reserve Bank of India. Overriding the rest of the Act and subject to conditions notified by the Central Government, it exempts the capital gains arising on the conversion in the year of conversion, and applies the Act's provisions on unabsorbed depreciation, set off and carry forward of losses, tax credit for tax paid on deemed income of certain companies, and computation of the income of both companies, with the exceptions, modifications and adaptations specified in the notification. Sub-section (2) withdraws all of that if any condition in the scheme or the notification is not complied with, applying the Act to both companies without any benefit, exemption or relief. Sub-section (3) deals with a later failure after relief has been granted: the relief is deemed to have been wrongly allowed, the Assessing Officer may recompute total income and amend, and section 287 applies with the four-year period in section 287(8) counted from the end of the tax year in which the failure occurs. Sub-section (4) requires every notification to be laid before each House of Parliament.
Conversion of a bank branch into a subsidiary at the Reserve Bank's instance is a regulatory restructuring rather than a commercial disposal, so the section removes the tax cost of doing it. The conditions, the withdrawal machinery and the restarted limitation period ensure the relief is contingent on the restructuring holding good.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Period for rectification under section 287 following a failure of conditions | 4 years | The section 287(8) period, reckoned from the end of the tax year in which the failure to comply with the condition takes place, not from the year of the original order | Sub-section (3)(c) |
The exemption is not self-executing on any RBI-approved conversion: it depends on the scheme framed by the Reserve Bank of India and on conditions notified by the Central Government, and the treatment of losses, unabsorbed depreciation and tax credits comes with whatever exceptions and modifications that notification specifies — so the notification, not the section, is where the working rules are. If a condition fails later, the exposure is not time-barred by reference to the conversion year: sub-section (3)(c) restarts the four-year rectification clock from the end of the tax year of the failure, which can be many years after the conversion.
A foreign company carrying on banking in India converts its Indian branch into a wholly owned Indian subsidiary under a scheme framed by the Reserve Bank of India, and the capital gains of Rs. 200 crore arising on the conversion are not charged in that year under sub-section (1)(a). Three years later a condition in the Central Government's notification is broken. Sub-section (3) then deems the relief to have been wrongly allowed, lets the Assessing Officer recompute the total income of the conversion year and amend accordingly, and — this is the sting — runs the four-year period in section 287(8) from the end of the tax year in which the failure occurred, not from the year of conversion, so a year long since closed is opened up.
In the Central Government notification setting the conditions for the conversion, which sub-section (4) requires to be laid before each House of Parliament, and later in the Assessing Officer's recomputation and amendment order made under section 287 if a condition of the scheme or the notification fails.
the capital gains arising from such conversion shall not be chargeable to tax in the tax year in which such conversion takes place
See the full 1961 to 2025 concordance.