Section 70 Transactions not regarded as transfer.

Income-tax Act, 2025

At a Glance

Clause 70 of the Income Tax Bill, 2025 - (Old Version) lists transactions that shall not be regarded as "transfer" for the purposes of capital gains taxation u/s 67. It matters because it delineates tax-neutral corporate reorganisations, cross-border transfers between non-residents, fund relocations into IFSCs and other specified conversions. Primary stakeholders: taxpayers (individuals, HUFs, companies, financial institutions, funds), tax authorities and the securities/regulatory sector. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hook: Clause 70 (Bill) operates to exclude certain transfers from the operation of section 67 (capital gains). The clause covers a broad range of situations including partition of HUFs, transfers under will/gift/irrevocable trust, intra-group transfers between parent and subsidiary (where shareholding conditions are met), amalgamation and demerger scenarios (including certain cross-border restructurings), bank amalgamations under the Banking Regulation Act, demergers and business reorganisations, specific non-resident to non-resident transfers (bonds, GDRs, rupee-denominated bonds, derivatives), IFSC-located transactions, relocations of foreign funds into IFSC-located resultant funds, conversions (e.g., bonds to shares, preference to equity), conversions between gold and Electronic Gold Receipts, transfers to public institutions for works of art, and succession transfers (firm to company, company to LLP, proprietorship to company) subject to multiple conditions. Definitions and cross-references are provided in a Table attached to the clause; these import meanings from other statutes and specified Schedules where relevant.

Statutory Provision Mode

Text & Scope

The provision explicitly lists categories of transfers that will not be treated as "transfer" - thereby exempting them from capital gains computation u/s 67. The clause is structured as a non-exhaustive catalogue of tax-neutral transfers, each with conditions. Coverage includes:

• Family settlements: partition distributions within HUFs (clause (a)).
• Transfers on death/gift/irrevocable trust by individuals/HUFs (clause (b)).
• Group transfers between Indian parent and subsidiary and vice versa where whole share capital is held (clauses (c) & (d)).
• Amalgamation and demerger neutral transfers, including specific cross-border conditions and exceptions tied to domestic company status or continuation of shareholders (clauses (e)-(m)).
• Banking amalgamations sanctioned under the Banking Regulation Act (clause (i)).
• Non-resident to non-resident transfers outside India in specified securities and bonds (clauses (p)-(s)).
• Relocation of funds into IFSC-located resultant funds and corresponding shareholder/unit-holder exchanges (clauses (t) & (u)), with detailed definitions in the Table.
• Conversions and redemptions - sovereign gold bonds redemption, conversion of gold to Electronic Gold Receipt, bonds/debentures to shares, preference shares to equity (clauses (x), (y), (z), (za), (zb)).
• Transfers for public institutions and art acquisitions to government/universities/museums (clause (zc)).
• Succession transfers from firms/sole proprietorships to companies, and conversion of companies to LLPs subject to conditions (clauses (zd), (ze), (zf)).
• Other specified transactions - securities lending schemes, reverse mortgage schemes, transfers of SPV shares to business trusts, mutual fund consolidations, joint venture interest exchanges by public sector companies (clauses (zg)-(zl)).

Interpretation

The legislative intent evident from the Bill's text is to carve out tax neutrality for commercial and structural reorganisations, cross-border non-resident transactions executed in specified marketplaces, and to encourage certain policy objectives (e.g., IFSC fund relocations, conversions to LLP, public sector restructurings) by removing capital gains consequences subject to specified conditions. The clause relies heavily on specific qualifying tests (shareholding continuity, registration/certificates, resident status of companies/funds, adherence to SEBI/IFSCA regulations) which indicate a purposive, conditional exemption rather than blanket immunity.

Exceptions/Provisos

Carve-outs and conditions are integral: most exemptions require either continuity of ownership (e.g., 25% or 75% shareholder continuation thresholds for cross-border amalgamation/demerger), the amalgamated/resulting company being an Indian company, regulatory sanctioning (Banking Regulation Act amalgamations), registration/certification of IFSC resultant funds, and caps/limits for company-to-LLP conversions (turnover, asset values, restrictions on distribution of accumulated profits). Several clauses explicitly require that the transfer "does not attract tax on capital gains in the country in which the [foreign] company is incorporated."

Illustrations

• Example 1: An Indian parent transfers a non-stock-in-trade capital asset to a wholly owned Indian subsidiary. If the parent (or nominees) hold the whole share capital and the subsidiary is Indian, the transfer is not a "transfer" under clause 70(c).

• Example 2: A foreign fund (original fund) relocates assets to a resultant fund in an IFSC on or before 31 March 2025 (as per Bill). If consideration is issued in units/shares to original fund holders in the same proportion, the relocation is not a "transfer" under clause 70(t)/(u), subject to the registration/certificate requirements for the resultant fund.

• Example 3: A private company converts into an LLP where shareholders become partners and aggregate profit share remains >=50% for five years, and asset/turnover limits are satisfied - such transfer is not a "transfer" under clause 70(ze).

Interplay

The clause imports meanings from the Banking Regulation Act, SEBI Acts and Regulations, IFSCA regulations, the Limited Liability Partnership Act and references Schedules and other sections (e.g., section 65, section 209(1), Schedule VI, Schedule VII). The Bill conditions many exemptions on compliance with those sectoral/regulatory frameworks, indicating coordinated regulatory-tax treatment. Specific cross-references to domestic company status and foreign tax consequences in the transferor's jurisdiction create inter-legislative and international tax interplay.

Differences between Section 70 of the Income-tax Act, 2025 and Clause 70 of the Income Tax Bill, 2025 - (Old Version)

Summary of material differences and practical impact derived from comparing Document 1 (Section 70 as enacted) and Document 2 (Clause 70 - Old Version of the Bill):

• References to section numbers for foreign shares: Document 2 uses "section 9(9)(a)" in clauses (h), (m) and elsewhere; Document 1 (enacted Section 70) uses "section 9(10)(a)".
  • Practical impact: The enacted provision updates the cross-reference to a different subsection of section 9. This can change the scope of foreign shares covered (depending on the content of section 9(9)(a) v. 9(10)(a)); practitioners must check which specific category of foreign share is intended under the final section 9 reference. Exact impact depends on section 9's text (Not stated in the document).
• Formatting and wording differences in certain clauses: Some clauses in Document 2 include parenthetical clarifications such as "(where the provisions of sections 230 to 232 of the Companies Act, 2013 do not apply)" in clauses (l) and (m). Document 1 relocates that qualification out of the clause and instead states in those clauses that the provisions of sections 230-232 shall not apply (explicitly appended at the end of clauses (l) and (m)).
  • Practical impact: The enacted text more clearly and directly excludes application of Companies Act sections 230 to 232 in the specified foreign demerger situations, potentially reducing ambiguity about the precondition for tax neutrality.
• "Relocation" timeline and resultant fund registration wording: In the Bill (Document 2), the definition of "relocation" in the Table item 5(b) states the transfer must occur "on or before the 31st March, 2025." In the enacted text (Document 1) the deadline is extended to "on or before the 31st March, 2030."
  • Practical impact: The enacted provision provides a materially longer window (five additional years) for qualifying relocations of funds into an IFSC-located resultant fund, affecting fund managers, sponsors and foreign funds looking to migrate; increases practical opportunity to restructure without capital gains consequences.
• Resultant fund registration wording and condition structure: Document 2 sets out the resultant fund as a fund located in an IFSC which "has been granted - (i) a certificate of registration as a Category I or Category II or Category III Alternative Investment Fund, and is regulated under the SEBI (AIF) Regulations, 2012 or regulated under the IFSCA (Fund Management) Regulations, 2022; or (ii) a certificate as a retail scheme or an Exchange Traded Fund..." Document 1 uses similar language but structures the Table 5(c) slightly differently and includes explicit reference to Schedule VI (Note 1) and to conditions in Schedule VI (Table: Sl. No. 1).
  • Practical impact: Enacted wording appears more granularly linked to Schedule VI conditions (administrative detail), which may affect eligibility assessments; practitioners must consult Schedule VI for operational criteria (Not stated in the document).
• Other drafting refinements and additions: Document 1 includes newly numbered subclauses and adds or clarifies certain definitions (for example, the Table entry 5(a)(B) referring to Abu Dhabi Investment Authority appears more explicitly framed in Document 1).
  • Practical impact: These drafting refinements may tighten eligibility and compliance requirements in conversion and relocation scenarios; the substantive change depends on the interplay with other statutory text (Not stated in the document).

Practical Implications

• Compliance and risk areas: Tax neutrality is conditional; failure to meet continuity, registration, or certification requirements (e.g., for IFSC resultant funds or for LLP conversion asset/turnover caps) will attract capital gains. For cross-border amalgamations/demergers, practitioners must evidence the shareholder continuity thresholds and demonstrate absence of taxability in the foreign jurisdiction where required.
• Record-keeping/evidence: Maintain contemporaneous records proving shareholding continuity (25%/75%/50% thresholds), statutory sanction/registration certificates (IFSCA/SEBI/AIF registration, Banking Regulation Act sanction), documentation showing nature of consideration (shares/units), valuations, and foreign tax treatment certificates where clause conditions require the transfer not to attract tax in the foreign jurisdiction. Preserve corporate filings, agreements of succession/conversion and board/shareholder resolutions relied upon.

Key Takeaways

• Clause 70 (Bill) enumerates specified transfers that are not "transfer" - insulating many reorganisations and prescribed cross-border and financial-market transactions from capital gains tax, subject to conditions.
• Most exemptions require objective conditions: shareholding continuity, registration/certification, adherence to regulatory guidelines, or thresholds for asset/turnover/receipt.
• Relocation relief (original fund -> resultant fund in IFSC) is time-bound under the Bill (deadline in the Bill: 31 March 2025) and requires resultant fund registration; the enacted text extends the deadline to 31 March 2030 (Not stated in the document regarding enacted change).
• Cross-border amalgamations/demergers invoke a non-taxability condition in the foreign jurisdiction for certain transfers; proof of foreign tax treatment will be relevant.
• Conversions (company->LLP; firm->company; proprietor->company) are exempt only if detailed continuity and non-distribution conditions are satisfied - careful compliance and record-keeping are essential.

Full Text:

Section 70 Transactions not regarded as transfer.