The proposed amendment to Section 47 of the Income-tax Act aims to refine the exclusion criteria for capital asset transfers not subject to capital gains tax. Currently, Clause (iii) of Section 47 exempts transfers under gifts, wills, or irrevocable trusts from capital gains tax, with exceptions for specified Employees’ Stock Option Plans (ESOPs). Recent judicial arguments have exploited this exemption, particularly concerning the gift of shares by companies, leading to tax avoidance and erosion of the tax base. To address these issues, the amendment proposes to substitute Clause (iii) to apply the exemption specifically to transfers by individuals or Hindu Undivided Families (HUFs), excluding corporate entities. This change seeks to reinforce anti-avoidance measures and clarify the tax treatment of such transactions. The amendment will be effective from April 1, 2025, applying to the assessment year 2025-26 and subsequent years.
Budget 2024: Amendment of section 47
Section 47 of the Act provides exclusion to certain transactions not regarded as transfer for the purposes of chargeability under ‘Capital Gains’ under section 45.
2. Clause (iii) of section 47 provides that nothing contained in section 45 shall apply to any transfer of a capital asset under a gift or will or an irrevocable trust. The first proviso to the said clause makes an exception to the clause in respect of specified ESOPs.
3. With the insertion of section 50D in the Act in the Finance Act, 2012, providing for taking fair market value as full value of consideration in cases where the consideration received or accruing as a result of the transfer of a capital asset is not ascertainable or cannot be determined, and section 50CA vide Finance Act, 2017, providing for taking fair market value as full value of consideration in case of unquoted shares where the consideration received or accruing is less than the fair market value of such share, the Revenue has aimed at bolstering the anti-avoidance machinery provisions of the Act to eliminate avoidance of Capital Gains tax. However, in multiple cases, taxpayers have argued before judicial fora that transaction of gift of shares by company is still not liable to capital gains tax, in view of the provisions of section 47(iii) of the Act. The matter thus remains a litigated issue leading to:
a) tax avoidance and
b) erosion of Indian tax base.
4. Further, a gift is given out of natural love and affection and accordingly it is proposed to substitute clause (iii) of section 47 and its proviso, to provide that nothing contained in section 45 shall apply to transfer of a capital asset, under a gift or will or an irrevocable trust, by an individual or a Hindu undivided family.
5. This amendment is proposed to be made effective from the 1st day of April, 2025 and will accordingly apply to assessment year 2025-26 and subsequent assessment years.
Clause 19 of the Bill seeks to amend section 47 of the Income-tax Act relating to transactions not regarded as transfer.
The provisions of clause (iii) of the said section provide that any transfer of a capital asset, under a gift or will or an irrevocable trust shall not be regarded as a transfer. The proviso to the said clause makes an exception to the clause in respect of specified Employees’ Stock Option Plan or Scheme of a company.
It is proposed to substitute the said clause so as to provide that nothing contained in section 45 shall apply to any transfer of a capital asset by an individual or a Hindu undivided family under a gift or will or an irrevocable trust.
This amendment will take effect from 1st April, 2025 and will, accordingly, apply to assessment year 2025-2026 and subsequent years.
Proposed Amendment to section 47 of Income Tax Act, 1961 vide Finance Bill, 2024
In section 47 of the Income-tax Act, for clause (iii), the following clause shall be substituted with effect from the 1st day of April, 2025, namely:––
“(iii) any transfer of a capital asset by an individual or a Hindu undivided family, under a gift or will or an irrevocable trust;”.
