Section 2(47)

Section 2(47) — the law in short

What the courts have decided on section 2(47), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Jindal Equipment Leasing Consultancy Services Ltd v CIT Supreme CourtCuts both ways
  My client held shares of the amalgamating company as stock-in-trade and received shares of the amalgamated company under the court-sanctioned scheme. Is there business income at that point, or only when those shares are sold?
  It depends. Section 28 does not require a sale, an exchange or a transfer - business profit can be realised in kind - so the substitution of shares on an amalgamation can be charged as business income where shares held as stock-in-trade are replaced by shares that are freely realisable and capable of definite valuation. It is not automatic: the Court laid down a fact-sensitive test of commercial realisability, put the burden of establishing it on the Revenue, and held that the charge is attracted only on allotment of the new shares and not on the appointed date or the date the scheme is sanctioned. The Delhi High Court's judgment was affirmed and the matter remitted to the Tribunal to decide, on the facts, whether the shares were stock-in-trade at all and whether what was received was freely realisable.
• PCIT v Jupiter Capital P Ltd Supreme CourtHelps taxpayer
  The company reduced its capital and my shareholding fell. I got a small payout and a large loss. Is that a transfer at all?
  Yes. A reduction of share capital extinguishes part of the shareholder's rights in the shares, and that is a transfer within s.2(47) even though the face value per share is unchanged and the shareholder still holds shares. The resulting long-term capital loss of Rs 164.48 crores was allowed and the Revenue's petition was dismissed.
• CIT v Mansukh Dyeing and Printing Mills Supreme CourtHelps departmentSuperseded by amendment
  The firm revalued its land and credited the surplus to the partners' capital accounts. Is that taxable?
  Under the old s.45(4), yes. The Supreme Court held that crediting a revaluation surplus to partners' capital accounts on a reconstitution is in effect a distribution of the assets to the partners and a transfer chargeable to capital gains, because the enhanced balances were immediately available for withdrawal — and two partners did withdraw.
• Seshasayee Steels P Ltd v ACIT Supreme CourtHelps department
  I signed a development agreement and a power of attorney years ago and let the builder start construction. The Department says my capital gain arose only later, when the settlement money came in. Which year is right?
  The later year. The Supreme Court dismissed the assessee's appeal and held the transfer took place in assessment year 2004-05. Permission to a builder to enter and construct is a licence, not possession under section 53A of the Transfer of Property Act, so section 2(47)(v) was not attracted on the 1998 agreement to sell. Nor was section 2(47)(vi), because on that date the owner's rights were intact both in ownership and in possession. What effected the transfer was the memorandum of compromise of July 2003, under which the whole consideration was received and the owner's rights were extinguished on encashment of the last cheque.
• CIT v Balbir Singh Maini Supreme CourtHelps taxpayer
  Our JDA was never registered and the project collapsed. Am I still taxed on capital gains?
  No. After the 2001 amendment to the Transfer of Property Act, a s.53A contract has no effect in law unless registered, so an unregistered JDA is not a transfer under s.2(47)(v); s.2(47)(vi) was not attracted either because the owners kept ownership. Independently, with the permissions never obtained, no enforceable right to receive income accrued and the gain was hypothetical.
• Sanjeev Lal v CIT Supreme CourtHelps taxpayer
  A court order delayed my sale deed. Does my s.54 exemption run from the agreement to sell?
  Yes. Executing the agreement to sell itself extinguished rights in the property and created rights in the vendee, which answers the definition of transfer in s.2(47), so that date governs. Section 54 relief could not be denied where a court restraint the assessee could not violate delayed the registered deed, and the new house had been bought within a year of the agreement.
• Suraj Lamp & Industries (P) Ltd v State of Haryana Supreme CourtCuts both waysValidity unconfirmed
  I bought a property on an agreement to sell plus a general power of attorney and a will, with possession and full payment. Do I own it?
  No. A three-judge bench of the Supreme Court held that a sale agreement, a general power of attorney and a will - singly or together - convey no title and create no interest in immovable property. Immovable property can be transferred only by a registered deed of conveyance. A power of attorney creates an agency, not a transfer, and even an irrevocable one does not pass title; a will operates only on death and is revocable until then. The purchaser is left with the agreement, which can support specific performance and the limited protection of section 53A of the Transfer of Property Act.
• CIT v Ghanshyam (HUF) Supreme CourtHelps department
  The court enhanced my acquisition compensation with interest. Which year is it taxed, and is the interest capital?
  Enhanced compensation is charged as capital gains under s.45(5)(b) in the year of receipt. Interest awarded by the court under s.28 of the Land Acquisition Act is an accretion to the value of the land and takes the character of compensation; interest under s.34, being purely for delay in paying what was already awarded, does not.
• CIT v D.P. Sandu Bros. Chembur (P) Ltd Supreme CourtHelps taxpayerSuperseded by amendment
  The landlord paid my company to give up its tenancy. Is that taxable, and if it cannot be computed as a capital gain can the officer tax it as a casual receipt instead?
  No — he cannot move it to another head. A tenancy right is a capital asset and its surrender is a transfer, so s.45 is the only head that can reach the consideration. For assessment year 1987-88 the Court held the receipt escaped tax altogether because the cost of acquiring the tenancy could not be ascertained and s.48 therefore could not be worked, and it refused to let the department bring the same receipt back under s.10(3) read with s.56. Section 55(2) was amended with effect from 1 April 1995 to supply a cost of acquisition for a tenancy right, so the computation gap this case turned on is closed for later years — the head-of-income holding is what survives.
• CIT v Grace Collis Supreme CourtHelps department
  My shares in the amalgamating company simply ceased to exist on the merger. Is that a transfer at all?
  Yes. The words 'extinguishment of any rights therein' in s.2(47) are not confined to an extinguishment brought about by a transfer; they cover extinguishment of rights in a capital asset independently of and otherwise than on account of a transfer. On amalgamation the shareholder's rights in his shares in the amalgamating company stand extinguished, and that is a transfer.
• CIT v G. Narasimhan Supreme CourtCuts both ways
  My company reduced its share capital and paid me cash and property for the reduction. Is that dividend, capital gains, or both?
  Both, in that order. The Supreme Court held that what a company distributes on a reduction of capital splits into two components. So much as can be correlated with its accumulated profits, capitalised or not, is deemed dividend under section 2(22)(d) and is taxed as income. Only the excess over accumulated profits is a capital receipt, from which the cost of acquiring the extinguished portion of the shareholding is deducted to find any capital gain. The Court also held that a loan already taxed as deemed dividend under section 2(22)(e) reduces the company's accumulated profits.
• Kartikeya V. Sarabhai v CIT Supreme CourtHelps department
  The company reduced the face value of my preference shares and paid me the difference in cash. I still hold the shares, so is there any transfer to tax?
  Yes. The Supreme Court held that reducing the face value of a share and paying the holder off extinguishes part of his rights as a shareholder, and extinguishment of any rights in a capital asset is a transfer under section 2(47). It does not matter that he continues to hold the shares, and it does not matter that there was no sale: sale is only one of the modes of transfer the definition covers. His right to dividend, his right to share in the net assets on liquidation, and the weight of his vote on a poll all fell proportionately. The capital gain was chargeable under section 45.
• Anarkali Sarabhai v CIT Supreme CourtHelps department
  The company redeemed my preference shares and paid me the face value. Is that a transfer, or just a repayment?
  It is a transfer. When a company redeems its preference shares the shareholder has to give up, abandon or surrender the shares in order to get the money, which is a relinquishment; and in substance the shareholder sells the shares to the company. The gain is chargeable under s.45.
• Vania Silk Mills (P) Ltd v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  My machinery was destroyed in a fire and I received an insurance settlement larger than what the machinery cost me. Is the excess taxable as capital gains?
  No, on the law as it then stood. The Supreme Court held that money received under an insurance claim for the destruction of a capital asset is not received on a transfer, so section 45 was not attracted. A transfer, in any of the modes then listed in section 2(47), presupposes that the asset exists; unless the asset exists in fact there can be no transfer of it. Destruction ends the owner's rights, but by the disappearance of the asset, not by transfer. An extinguishment of rights not brought about by a transfer falls outside section 45. The appeal was allowed.
• Sunil Siddharthbhai v CIT Supreme CourtCuts both waysSuperseded by amendment
  I brought my shares into a partnership firm as my capital contribution and the firm credited my account at market value. Am I taxable on capital gains on the appreciation?
  No, on the law as it then stood, though for a reason narrower than the taxpayer wanted. The Supreme Court held there was a transfer: the definition in section 2(47) is inclusive, and a partner who brings a personal asset into the firm reduces his exclusive interest to a shared interest, which is a transfer of interest even though it is not a sale. But no capital gain arose. The consideration is only the right to a share of profits and, on dissolution or retirement, to the value of a share in the net assets; the credit in the capital account is a notional figure, not the true consideration. As it cannot be valued under section 48, the case falls outside section 45 altogether.
• Malabar Fisheries Co v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  Our firm dissolved and the assets went to the partners. Has the firm transferred those assets, so that allowances it claimed on them can be withdrawn?
  No, on the law as it then stood. The Supreme Court held that a partnership firm under the Indian Partnership Act 1932 is not a distinct legal entity apart from its partners, and the firm as such has no separate rights of its own in the partnership assets. What follows dissolution - the distribution, division or allotment of assets after liabilities are discharged - is nothing but a mutual adjustment of rights between the partners, so there is no extinguishment of any right of the firm and no transfer within section 2(47). The Court added a second reason: dissolution precedes distribution, so the distribution is not made by the firm at all.
• Kale v Deputy Director of Consolidation Supreme CourtHelps taxpayer
  Our family settled a property dispute orally and only filed a memorandum with the authorities. Someone now says the settlement is void because it was never registered. Is it?
  No. The Supreme Court upheld an oral family arrangement of 1956 that had been acted on for seven years. Because the settlement itself was oral and the petition later filed before the Assistant Commissioner was only a memorandum for the information of the court, it created no rights in immovable property and did not require registration under section 17(1)(b) of the Registration Act. A party who took benefit under the arrangement cannot afterwards resile from it. The Court also held that a party with no subsisting legal title can still be a party, because antecedent title is assumed where the others relinquish in his favour.
• CIT v Dewas Cine Corporation Supreme CourtHelps taxpayer
  Our firm dissolved and each partner took back the building he had brought in. The officer says the firm sold it to him and wants to tax the depreciation back. Is that a sale?
  No. The Supreme Court held that the return of the two cinema theatres to the partners who had brought them in was not a sale, so the balancing charge under the second proviso to section 10(2)(vii) of the 1922 Act did not apply. Property brought into a firm becomes the firm's property, and on dissolution a partner is entitled to have it applied in paying the firm's debts and to share in the surplus. The distribution of that surplus adjusts the rights of the partners; it is not a transfer. Sale in its ordinary sense is a transfer of property for a price, and this was neither.
• Alapati Venkataramiah v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  I handed over possession of my factory and the buyer credited me with the price, but the sale deed came much later. In which year did I make the capital gain?
  In the year the conveyance was executed and registered, not the year possession changed hands. The Supreme Court held that title to the machinery, electrical fittings, buildings and site could not pass to the company until a conveyance was executed and registered, and none was before 1 April 1948. Transfer in the capital gains provision means an effective conveyance of the asset; delivery of possession of immovable property is not by itself equivalent to a conveyance. Entries in the books of the assessee and the company were irrelevant to fixing the date. Only the furniture, title to which passes by delivery, was transferred in time.
• Tamal Kundu v Additional/Joint/Deputy/Assistant Commissioner of Income Tax High CourtHelps taxpayer
  I paid the whole price and took possession of a factory under an agreement for sale in December 2016, but the sale deed was only registered in March 2018. Can the department tax the stamp-value difference under section 56(2)(x) in the later year?
  No. The Calcutta High Court held that where the entire consideration is paid on the date of the agreement for sale, possession of the property is handed over, and the buyer starts running the business on it, the transfer takes place then and not on the later registration of the sale deed. Section 2(47)(ii) covers extinguishment of the vendor's rights, and section 2(47)(vi) covers any transaction that has the effect of enabling the enjoyment of immovable property. So the purchase of the rice mill fell in the previous year relevant to assessment year 2017-18, and the section 56(2)(x) addition made in assessment year 2018-19 could not stand. The Tribunal's order was set aside.
• PCIT v Redington (India) Ltd High CourtHelps department
  Our company transferred shares to a group entity without consideration. Is that a gift outside capital gains under s.47(iii)?
  No, not on these facts. A transfer without a price is not automatically a gift. The Court applied s.122 of the Transfer of Property Act and found neither of the two essentials - the transfer was not voluntary, and it was made for consideration in the shape of the private equity investment the restructuring was built around. The transfer therefore attracted s.45 and was chargeable as capital gains.
• CIT v Dynamic Enterprises (Karnataka Full Bench) High CourtHelps taxpayerSuperseded by amendment
  Three partners retired and took cash for their share. The firm carried on. Is the firm liable to capital gains under s.45(4)?
  On the pre-2021 provision, no. A Full Bench of the Karnataka High Court held that s.45(4) needs an actual distribution of a capital asset by the firm to a partner, so that the firm's interest in that asset is extinguished and the partner acquires it. Where the retiring partners took only money representing the value of their share and the property stayed with the firm, nothing was distributed and nothing was transferred. The Court held that the earlier Division Bench decision in CIT v. Gurunath Talkies did not lay down the correct law. This is authority for assessment years up to 2020-21 only: the Finance Act 2021 rewrote s.45(4) so that money received by a partner on reconstitution is itself the charging event on the firm.
• Chalasani Venkateswara Rao v ITO High CourtHelps taxpayerValidity unconfirmed
  A partner took money in full settlement of his share when the firm was dissolved. Is he personally liable to capital gains?
  No. The Andhra Pradesh High Court held that a partner who receives the money value of his share on dissolution is not making a transfer; he is having his account made up. The Court also held that when Parliament inserted s.45(4) with effect from 1 April 1988 it deliberately placed the charge on the firm and not on the partner. On that second point the position is unchanged after the Finance Act 2021: both s.9B and the substituted s.45(4) charge the specified entity, not the partner.
• CIT v Kay Arr Enterprises High CourtHelps taxpayer
  Our family rearranged shareholdings among ourselves to head off a dispute. Is that a transfer attracting capital gains tax?
  No. The Madras High Court dismissed the Revenue's appeals and held that a realignment of interest by way of a family arrangement is not a transfer, so no capital gains tax arises. The Tribunal had found the rearrangement of shareholdings was a prudent arrangement to avoid possible litigation among family members and to let the major shareholders control the company effectively, and that it was voluntary and not induced by fraud or coercion. The Court held such an arrangement, made to compromise doubtful or disputed rights or to preserve family property, peace and honour, cannot be treated like a dealing between strangers. No substantial question of law arose.
• CIT v A.N. Naik Associates High CourtHelps departmentValidity unconfirmed
  Our family split the firms by a settlement and gave assets to the partners who retired. There was no dissolution, so section 45(4) cannot apply, can it?
  It can. The Bombay High Court held that otherwise in section 45(4) is not to be read ejusdem generis with dissolution. It goes with the words transfer of capital assets by way of distribution of capital assets, so where a subsisting firm hands assets to a retiring partner the firm's right in the property is extinguished and there is a transfer chargeable under section 45(4), with the fair market value on the date of transfer deemed to be the full value of consideration. The Court accepted that there was no dissolution and that the family settlement was genuine and not a device, but allowed the Revenue's appeals and restored the assessments.
• CIT v Texspin Engg & Mfg Works High CourtHelps taxpayer
  My partnership firm became a limited company under Part IX of the Companies Act. The Assessing Officer wants capital gains tax on the market value of the assets. Is that right?
  No, on the law as it stood for assessment year 1996-97. The Bombay High Court held that section 45(4) needs a transfer by way of distribution of capital assets, and statutory vesting on a Part IX conversion is not distribution: vesting takes the properties across as they stand, while distribution presupposes division, realisation and appropriation. Section 45(1) also failed, both because a firm treated as a company is a case of transmission with no counterparty and no incoming consideration, and because even if there were a transfer, full value of consideration in section 48 means what the transferor gets, not the market value of what he parts with.
• CIT v Texspin Engineering & Manufacturing Works High CourtHelps taxpayerValidity unconfirmed
  Our partnership firm became a limited company under Part IX of the Companies Act. The Assessing Officer wants capital gains on the market value of the assets. Is that right?
  No, on the law as it stood for assessment year 1996-97. The Bombay High Court held that neither section 45(4) nor section 45(1) was attracted. Section 45(4) needs a transfer by way of distribution of capital assets, and statutory vesting under Part IX is not distribution, which presupposes division, realisation and appropriation of the proceeds. Section 45(1) fails because there is no party and counterparty and no consideration coming to the firm: the same entity simply exchanges one cloak for another. And even if vesting were a transfer, section 48 allows only the consideration actually received or accrued, not market value, which is deemed only by section 45(4). Depreciation was also allowed.
• CIT v A.L. Ramanathan High CourtHelps taxpayer
  Our family settled a long-running property dispute by realigning who holds what, with cash passing between the branches. Is that a transfer that attracts capital gains?
  No. The Madras High Court held that a bona fide family arrangement, which merely realigns existing interests among members of the same family, is not a transfer and gives rise to no chargeable capital gain. The arrangement here was reached before panchayatdars to end a family dispute, and the Tribunal had found it voluntary and free of fraud or collusion. The Court applied the principle that family arrangements are governed by rules that do not apply to dealings between strangers. The question referred at the Revenue's instance was answered in favour of the assessee.
• Pramod Kumar Jain v DCIT ITATHelps taxpayerValidity unconfirmed
  The company bought back my vested options before I exercised them. Salary or capital gains?
  Capital gains, on this order, and on a fact that does real work. The shares of the Singapore parent were not listed, so the assessee could never exercise his options. Section 17(2)(vi) charges the value of a specified security allotted or transferred to the employee and values it on the date the option is exercised; with no exercise and no allotment there was no specified security and no way to value one, so the salary charge failed. The vested option was itself a capital asset - a right to subscribe to shares - and its repurchase was a relinquishment, so the consideration fell under s.45. The Tribunal said in terms that this leaves the ordinary case alone: exercise the option and the perquisite charge applies as usual.
• ITO v Ratna Aggarwal ITATHelps taxpayerValidity unconfirmed
  Property came to me under a family settlement but the instrument was a gift deed. Is that taxable under s.56(2)?
  No, on these facts, but the decision is narrower than it reads. The first appellate authority had held that the gift deed merely culminated a family settlement and so was not a transfer within s.2(47), and the Tribunal declined to disturb that. Its own route was different: it held that the exclusion for property received from a relative applies, the definition of relative for a Hindu undivided family being any member of it, and found the settlement to be between members of a family with antecedent rights in the property. That finding was admitted as settled because the Assessing Officer had never disputed it, not because the Tribunal examined it. An addition of Rs. 3,03,43,440 was deleted.
• Gokulakrishna v DCIT (ITAT Chennai) ITATHelps taxpayerValidity unconfirmed
  A new partner came into an LLP, my profit share fell and an amount was credited to my current account. Am I taxable on it?
  On this order, for a pre-2021 year, no. The Chennai Tribunal held that where an existing partner does not retire but simply sees his profit-sharing ratio reduced on the admission of a new partner, there is no transfer under s.2(47), because during the subsistence of the firm a partner has no defined share in its assets and nothing is relinquished. The Tribunal also held that the revaluation of the LLP's assets, credited to partners' accounts before the new partner came in, did not by itself give rise to capital gains. It recorded expressly that s.9B and the substituted s.45(4) are prospective and had no application to assessment year 2017-18.
• Raunaq Prakash Jain v ITO ITATHelps taxpayerValidity unconfirmed
  I sold Bitcoin in FY 2020-21, before the VDA regime — capital gains or income from other sources?
  Capital gains, for that year. For AY 2021-22 Bitcoin was a capital asset under s.2(14), so the gain fell under the capital gains head and not s.56, and a holding period of more than three years made it long-term and eligible for s.54F relief on reinvestment in property. This decides only years before the virtual digital asset regime took effect on 1 April 2022; for years inside that regime s.115BBH governs and this answer does not carry across.
• CBDT SOP on s.45(5A) joint development CBDT Circulars & InstructionsHelps departmentValidity unconfirmed
  I gave my land to a builder under a JDA. When do I have to pay tax on the capital gain?
  In the year the completion certificate is issued. For an individual or HUF transferring land or building under a specified agreement, s.45(5A) charges the gain in the previous year in which the competent authority issues the completion certificate for the whole or part of the project, with consideration taken as the stamp duty value of the landowner's share plus any money received.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.