Withdrawal of exemption in certain cases
[Section-71 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 71(1) of Income Tax Act 2025
71(1) The profits or gains arising from the transfer of capital asset not charged under section 67 by virtue of section 70(1)(c) and (d) 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, if at any time before the expiry of eight years from the date of such transfer,—
- (a) the transferee company converts the capital asset into, or treats it as, stock-in-trade of its business; or
- (b) the parent company or its nominees or the holding company, ceases or cease to hold the whole of the share capital of the subsidiary company.
Section 71(2) of Income Tax Act 2025
71(2) If any of the conditions laid down in section 70(zd) or (zf) are not complied with, the profits or gains arising from the transfer of such capital asset or intangible asset not charged under section 67 by virtue of such conditions shall be deemed to be the profits and gains chargeable to tax under the head “Capital gains” of the successor company for the tax year in which such conditions are not complied with.
Section 71(3) of Income Tax Act 2025
71(3) If any of the conditions laid down in section 70(ze) are not complied with, the profits or gains arising from the transfer of such capital asset or intangible assets or share or shares not charged under section 67 by virtue of such conditions shall be deemed to be the profits and gains chargeable to tax under the head “Capital gains”of the successor limited liability partnership or the shareholder of the predecessor company, for the tax year in which such conditions are not complied with.
FAQs on Section 71 of Income Tax Act 2025
1. What is the meaning of “Withdrawal of exemption in certain cases” under the Income Tax Act, 2025?
It refers to situations where exemptions initially granted under Section 67 are withdrawn if specific conditions are violated, making the profits or gains taxable under “Capital gains”.
2. From when is the provision for withdrawal of exemption effective?
The provision is effective from 1st April, 2026, as per the Income Tax Act, 2025.
3. Under which section is the withdrawal of exemption governed?
It is governed by Section 71 of the Income Tax Act, 2025.
4. What does Section 71(1) of the Income Tax Act, 2025 state?
Section 71(1) states that profits or gains from transfer of a capital asset, which were not charged under Section 67 due to Section 70(1)(c) and (d), shall become taxable under “Capital gains” if specific conditions are violated within eight years of the transfer.
5. In what cases will exemption under Section 70(1)(c) and (d) be withdrawn according to Section 71(1)?
The exemption will be withdrawn if either the transferee company treats the capital asset as stock-in-trade, or if the parent/holding company ceases to hold the entire share capital of the subsidiary company.
6. What is the time limit for monitoring the conditions under Section 71(1)?
The conditions must be maintained for eight years from the date of transfer.
7. What happens if the transferee company treats the capital asset as stock-in-trade?
The profits or gains from such transfer will be deemed taxable under “Capital gains” in the year of conversion.
8. What happens if the parent company ceases to hold the whole of the share capital of the subsidiary?
The profits or gains from the transfer will become taxable under “Capital gains” in the tax year when the shareholding requirement is not met.
9. What does Section 71(2) of the Income Tax Act, 2025 provide?
Section 71(2) provides that if conditions under Section 70(zd) or 70(zf) are not complied with, the profits or gains from the transfer will be taxable as “Capital gains” in the hands of the successor company in the year of non-compliance.
10. Which conditions’ non-compliance triggers taxation under Section 71(2)?
Non-compliance with the conditions specified under Section 70(zd) or Section 70(zf).
11. In whose hands will the gains be taxable under Section 71(2)?
The gains will be taxable in the hands of the successor company.
12. In which year will the profits be taxable under Section 71(2)?
The profits will be taxable in the tax year in which the conditions were not complied with.
13. What does Section 71(3) of the Income Tax Act, 2025 provide?
Section 71(3) provides that if the conditions under Section 70(ze) are not complied with, the profits or gains will be taxable as “Capital gains” in the hands of the successor LLP or the shareholder of the predecessor company.
14. Which conditions’ non-compliance triggers taxation under Section 71(3)?
Non-compliance with the conditions specified under Section 70(ze).
15. In whose hands will the gains be taxable under Section 71(3)?
The gains will be taxable either in the hands of the successor limited liability partnership or the shareholder of the predecessor company.
16. In which year will the profits be taxable under Section 71(3)?
The profits will be taxable in the tax year in which the conditions were not complied with.
17. What is the head of income under which such profits or gains will be taxed upon withdrawal of exemption?
They will be taxed under the head “Capital gains”.
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