Section 71: withdrawal of exemption in certain cases

Subsidiary-holding company transfers (Section 70(1)(c) and (d))

Section 71(1) deems the gain from a transfer that escaped tax under Section 70(1)(c)/(d) (asset transfers between a wholly-owned subsidiary and its Indian holding company) to become chargeable as capital gains of the year of the original transfer, if within eight years of that transfer either of the following happens:

• The transferee company converts the capital asset into, or treats it as, stock-in-trade of its business; or
• The parent company (or its nominees) or the holding company ceases to hold the entire share capital of the subsidiary.

Firm-to-company and company-to-LLP conversions

Section 71(2) applies where the conditions under Section 70(1)(zd) (firm succeeded by a company) or Section 70(1)(zf) (sole proprietorship succeeded by a company) are not complied with: the previously untaxed gain becomes chargeable to tax as capital gains of the successor company, in the tax year the conditions are breached.

Section 71(3) applies similarly where the conditions under Section 70(1)(ze) (private/unlisted public company converting to an LLP) are not complied with: the gain becomes chargeable as capital gains of the successor LLP or of the shareholder of the predecessor company, in the tax year of the breach.

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