Chapter IV - Computation of Total Income

Section 71

Section 71: withdrawal of exemption in certain cases

Section 71 is the enforcement mechanism behind several of the exclusions in Section 70 - it claws back the capital gains exemption if the conditions attached to a subsidiary/holding-company transfer, a firm-to-company conversion, or a company-to-LLP conversion are later broken.

Official text

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Need advice on Section 71?

This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.

Statutory text

Bare law

(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.

(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.

Introduction

Some Section 70 transfers remain tax-neutral only while later conditions continue. Section 71 brings the earlier gain into charge when the company or successor breaches the specified requirement.

Key takeaways

Relief can reverse

An otherwise non-taxable transfer between qualifying related companies can become taxable as capital gains if, within eight years, the asset becomes stock-in-trade or the required shareholding relationship ends.

Reorganisation conditions

Specified firm-to-company and company-to-LLP reliefs can also be withdrawn when their Section 70 conditions later cease to be met.

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.

Monitor after the original transfer

For parent/subsidiary transfers, track the asset's treatment and the parent's complete shareholding through the eight-year window.

For firm, proprietary or company-to-LLP conversions, track the particular Section 70 continuity conditions and the tax year in which any failure occurs.

Step-by-step flow for applying Section 71

1
Was an earlier transfer kept out of Section 67 by Section 70(1)(c), (d), (zd), (ze) or (zf)?
- No: Section 71 does not apply.
- Clause (c) or (d): Go to the next step (eight-year test).
- Clause (zd), (ze) or (zf): Skip to the last step (conditions test).
2
Within eight years of the transfer, did the transferee company convert the asset into, or treat it as, stock-in-trade, or did the parent or holding company stop holding the whole share capital of the subsidiary?
- No: The exemption stands.
- Yes: The gain is deemed income under 'Capital gains' of the tax year in which the original transfer took place, not the year of the later event (Section 71(1)).
3
Were the conditions in Section 70(zd), (ze) or (zf) not complied with?
Under Section 71(2), for (zd) or (zf), the gain is chargeable as capital gains of the successor company. Under Section 71(3), for (ze), it is chargeable as capital gains of the successor LLP or the shareholder of the predecessor company. In both cases the charge falls in the tax year in which the conditions are not complied with.

Practical checklist

Do

Maintain a transfer-date schedule with the relevant Section 70 clause and every continuing condition.
Document stock-in-trade conversion, ownership changes and successor compliance each year.

Avoid

Do not regard the original non-transfer classification as permanently unconditional.

Illustrative example

Worked example: land transferred to a wholly owned subsidiary and later used as stock-in-trade

Hypothetical facts (illustration only, not a real taxpayer): In Year 1, H Ltd transfers land (not stock-in-trade) to its wholly owned Indian subsidiary S Ltd. Ignoring Section 70(1)(c), the gain computed on that transfer would have been ₹40,00,000 (assumed figure). In Year 5, S Ltd starts treating the land as stock-in-trade of its real-estate business.

Original exemption
In Year 1 the transfer was not charged under Section 67 because of Section 70(1)(c): H Ltd held the whole share capital of S Ltd, an Indian company.
Trigger within eight years
Treating the land as stock-in-trade in Year 5 falls within eight years of the transfer, so Section 71(1)(a) is triggered.
Year of charge
The ₹40,00,000 is deemed income under 'Capital gains' of Year 1, the tax year in which the transfer took place, not Year 5.

Outcome

Year 1's capital-gains position has to be revisited to bring in the ₹40,00,000.
The same result would follow if, within eight years, H Ltd or its nominees ceased to hold the whole share capital of S Ltd (Section 71(1)(b)).

Glossary

Withdrawal of exemption: A later statutory charge after a condition supporting an earlier tax-neutral transfer fails.
Stock-in-trade conversion: Treating an asset as business trading inventory, one trigger for subsection (1).

Frequently asked questions

What triggers withdrawal of the subsidiary-holding company transfer exemption?

If, within eight years of the original transfer, the transferee converts the asset into stock-in-trade, or the parent/holding company stops holding the subsidiary's entire share capital, per Section 71(1).

What happens if the conditions for a firm-to-company conversion under Section 70(zd) are later broken?

The gain that was originally exempt becomes taxable as capital gains of the successor company, in the tax year the conditions are not complied with, per Section 71(2).

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Last updated 9 October 2026

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