Section 71 — Withdrawal of Exemption | ITA 2025

Section 71 — - WITHDRAWAL OF EXEMPTION IN CERTAIN CASES

Section 71 is the substantive equivalent of 1961 s. 47A -- the WITHDRAWAL-OF-EXEMPTION provision that operates as the CLAW-BACK SISTER of s. 70 (Transactions not regarded as transfer). Where a tax-neutral transfer under s. 70 fails to maintain the prescribed conditions within the cure-period, s. 71 reverses the s. 70 benefit by deeming the previously-exempt CG as chargeable in the year of breach. Three specific cure-mechanisms covered: (1) Holding-subsidiary [s. 70(1)(c)/(d)] 8-year cure for stock-conversion or whole-share-capital cessation; (2) Firm/Proprietorship-to-Company [s. 70(1)(zd)/(zf)] cure-condition breach -> charge to successor; (3) Pvt-co-to-LLP [s. 70(1)(ze)] cure-condition breach -> charge to LLP or shareholders. Practitioner-grade rule: every s. 70 tax-neutral transaction MUST be paired with cure-period compliance calendar -- s. 71 cascade can be devastating retroactively.

Statutory text — Income-tax Act, 2025

Marginal note -- Withdrawal of exemption in certain cases

(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 any- thing 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.

(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.

(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.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 -- s. 71	INCOME-TAX ACT, 1961 -- s. 47A
s. 71(1) -- 8-year cure for s. 70(1)(c)/(d) holding-subsidiary; stock-conversion or share-capital cessation triggers	1961 s. 47A(1)
s. 71(2) -- s. 70(zd)/(zf) firm/proprietorship-to-company conditions breach	1961 s. 47A(3)
s. 71(3) -- s. 70(ze) Pvt-co-to-LLP conditions breach	1961 s. 47A(4)

STATUTORY ARCHITECTURE

TRIGGER: a transaction that was tax-neutral under s. 70 (Transactions not regarded as transfer) becomes subsequently disqualified when conditions are breached. MECHANICAL EFFECT: the previously-exempt CG is DEEMED to arise as chargeable income in the year of breach -- NOT in the year of original transfer. This 'cure-clawback' approach prevents retroactive cascading and keeps the charge in a current year. (I) HOLDING-SUBSIDIARY 8-YEAR CURE [s. 70(1)(c)/(d)]: Sub-s. (1) covers two trigger events within 8 YEARS of the s. 70 tax-neutral transfer: (a) The TRANSFEREE COMPANY converts the capital asset INTO STOCK-IN-TRADE OR TREATS IT AS such; OR (b) The PARENT COMPANY (or its nominees) / HOLDING COMPANY ceases to hold the WHOLE share capital of the subsidiary. On either trigger, the originally-exempt CG becomes chargeable in the year of trigger AT THE ORIGINAL TRANSFEROR's hands (or its successor entity). (II) FIRM-TO-COMPANY / PROPRIETORSHIP-TO-COMPANY [s. 70(1)(zd)/(zf)]: Sub-s. (2): if the conditions under s. 70(1)(zd) (firm-to-company) or s. 70(1)(zf) (proprietorship-to-company) are NOT COMPLIED WITH, the previously-exempt CG is chargeable in the SUCCESSOR COMPANY's hands. Note: charge in successor (not original transferor). Failure includes: (i) <50% shareholding-by-erstwhile-partners/proprietor; (ii) further consideration paid otherwise than allotment of shares; (iii) shareholding falling below 50% within 5 years. (III) PRIVATE-CO-TO-LLP [s. 70(1)(ze)]: Sub-s. (3): if the seven cumulative conditions under s. 70(1)(ze) are not maintained, the CG is chargeable in either the SUCCESSOR LLP's hands OR the SHAREHOLDER OF PREDECESSOR COMPANY's hands. Conditions monitored: (i) all assets/liabilities continuity; (ii) all shareholders become partners with proportional PSR; (iii) no other consideration; (iv) 50%+ PSR for 5 years; (v) turnover in any 3 preceding years <= INR 60L; (vi) book value of assets in any 3 preceding years <= INR 5 cr; (vii) no accumulated-profits payout for 3 years.

CASE LAW

(i) DCIT v. Aravali Polymers LLP (ITAT Kol, 2014) -- LLP-conversion 50%-PSR breach within 5 years triggered s. 71 reversal. Foundational case. (ii) CIT v. Texspin Engineering & Manufacturing Works (Bom HC, 2003, 263 ITR 345) -- proprietorship-to-company cure-conditions; 50%-shareholding-continuance test. (iii) Gujarat Reclaim & Rubber Products v. ACIT (ITAT Mumbai) -- firm-to-company succession cure-conditions. (iv) ITAT decisions on minority introduction within 8 years of s. 70(1)(c) holding-subsidiary transfer triggering s. 71 cascade.

PLANNING NOTES

(i) CURE-PERIOD COMPLIANCE CALENDAR -- year-1 to year-8 for s. 70(1)(c)/(d); year-1 to year-5 for s. 70(1)(zd)/(zf)/(ze). Annual board-resolution affirming compliance. (ii) HOLDING-SUBSIDIARY MINORITY ALLOTMENTS -- ESOP / strategic round / employee-trust may break 100% holding; document; restructure to maintain. (iii) STOCK-CONVERSION RISK -- transferee company converting fixed-asset into stock-in-trade triggers; particularly real-estate companies receiving land that later gets re-classified. (iv) LLP CONVERSION ANNUAL REVIEW -- PSR / turnover / asset / accumulated-profits compliance; INR 60L turnover and INR 5 cr asset thresholds particularly tight. (v) FIRM-TO-COMPANY POST-SUCCESSION SHARE TRANSFERS -- partners / former-partners selling shares within 5 years can collapse 50%-shareholding; document. (vi) DOCUMENTATION RETENTION -- 8 / 5 year cure-period evidence (board minutes / share-register / financial statements) must be retained for full cure period.

CROSS-REFERENCES

Section 70 -- Transactions not regarded as transfer (sister provision).
Section 67 -- CG charge.
Section 72 -- Mode of computation (revival valuation).
Section 89 -- DVO reference for FMV at trigger date.
Section 70(1)(c)/(d) -- Holding-subsidiary tax neutrality (8-year cure).
Section 70(1)(zd) -- Firm-to-company succession (5-year cure).
Section 70(1)(ze) -- Pvt-co-to-LLP (5-year cure).
Section 70(1)(zf) -- Proprietorship-to-company (5-year cure).

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