Section 71 — Withdrawal of exemption in certain cases. Successor to s.47A of the 1961 Act.
Section 71 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) reverses the holding-company relief: where a transfer of a capital asset escaped charge under section 67 because of section 70(1)(c) or (d), the gain is deemed to be income under "Capital gains" of the tax year in which the transfer took place if, at any time within eight years of that transfer, the transferee company converts the asset into or treats it as stock-in-trade, or the parent or holding company ceases to hold the whole of the subsidiary's share capital. Sub-section (2) does the same for conditions in section 70(zd) or (zf): on non-compliance, the previously exempt gain on the capital asset or intangible asset becomes capital gains of the successor company for the tax year in which the condition is broken. Sub-section (3) applies the same treatment where section 70(ze) conditions fail, charging the gain to the successor limited liability partnership or to the shareholder of the predecessor company for the year of non-compliance.
The transfers exempted under section 70 are exempt because the asset is expected to stay within the group or the successor entity on the stated terms; this section withdraws the exemption when that premise fails. The three sub-sections differ deliberately on who is charged and in which year, matching the person who broke the condition.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Period within which the disqualifying event triggers withdrawal of the section 70(1)(c) or (d) exemption | 8 years | From the date of the transfer; the trigger is conversion of the asset into stock-in-trade or the holding company ceasing to hold the whole share capital of the subsidiary | Sub-section (1) |
The year of charge is not uniform, and getting it wrong misplaces the whole assessment. Under sub-section (1) the gain goes back to the tax year of the original transfer, so a breach in year seven reopens year one; under sub-sections (2) and (3) it is charged in the tax year in which the condition is not complied with. The eight-year clock in sub-section (1) runs from the date of transfer, and it is broken by the holding company ceasing to hold the whole of the share capital — any dilution at all, not a fall below a majority.
A holding company transfers a warehouse to its wholly owned subsidiary and a gain of Rs. 12 crore escapes charge under section 67 by virtue of section 70(1)(c). In the sixth year after the transfer it sells 5% of the subsidiary's shares: it no longer holds the whole of the share capital, sub-section (1)(b) bites, and the Rs. 12 crore is deemed capital gains of the tax year in which the transfer took place — the earlier year is reopened, not the year of the sale. Had the sale waited until the ninth year the eight-year window in sub-section (1) would have closed and nothing would have been charged; and had the breach instead been of a section 70(zd) condition, sub-section (2) would have charged the successor company in the tax year of non-compliance rather than reaching back.
In an assessment or reassessment order for the year of the original transfer, which is the year sub-section (1) charges, or in the successor's assessment for the year the condition failed under sub-sections (2) and (3). The section names no form and no authority — the exemption it withdraws was claimed under section 70 in an earlier return.
shall, irrespective of anything contained in the said clauses, be deemed to be income chargeable under the head "Capital gains" of the tax year in which such transfer took place
See the full 1961 to 2025 concordance.