Under Section 45(1), any profit or gain arising from the transfer of a capital asset is chargeable to tax under the head Capital Gains in the year in which the transfer takes place.

BUT—certain transfers are specifically excluded from being treated as “transfer” under Section 47, hence not taxable.

Section 47(iv):
“Any transfer of a capital asset by a company to its wholly owned subsidiary company, if the subsidiary is an Indian company, shall not be regarded as a transfer.”

Therefore, no capital gain arises on such a transaction

If Section 47(iv) is not applicable, then:

Capital Gain = Full Value of Consideration – Indexed Cost of Acquisition – Expenses on Transfer

• Full Value of Consideration: Amount received or fair market value (in some cases as per Section 50C/50CA)

• Cost of Acquisition: Actual cost + indexing (if LTCG)

• Taxability: Short-term or long-term based on holding period (24 months for immovable property)

• Situation	Capital Gain Taxable?	Relevant Section
  Transfer of capital asset by holding to 100% Indian subsidiary	❌ Exempt	Section 47(iv)
  Transfer of capital asset to foreign/partial subsidiary	✅ Taxable	Section 45
  Cost in hands of subsidiary	– Uses holding company’s cost	Section 49(1)

Self-generated assets are those which:

• Are not purchased or acquired for a price

• Are created or developed over time by the assessee’s own effort or business activities

Common Examples:

• Goodwill of a business

• Brand name

• Tenancy rights

• Route permits

• Loom hours

• Right to manufacture or carry on a profession

Section 55(2)(a) says that “Cost of acquisition” of self-generated assets like goodwill, trademark, brand name, tenancy rights, etc., shall be taken as Nil if it is self-generated.

Similarly, Section 55(1)(b) provides that “The cost of improvement” shall also be Nil, if the asset is self-generated.

Capital Gain = Full Value of Consideration – (Cost of Acquisition + Cost of Improvement + Expenses on Transfer)

The taxation of right entitlements (REs) and right shares is governed by the provisions of the Income-tax Act, 1961, particularly:

• Section 2(14): Defines “capital asset” to include rights in or in relation to an Indian company.

• Section 2(47): Defines “transfer” to include the sale, exchange, relinquishment, or extinguishment of rights.

• Section 45: Deals with taxation of capital gains arising from the transfer of a capital asset.

• Section 48: Lays down the method of computation of capital gains.

• Section 55(2)(aa): Specifies the cost of acquisition in case of rights entitlements.

What are Right Entitlements (REs) and Right Shares?

• • Right Entitlement (RE): A tradable right offered to existing shareholders to subscribe to additional shares at a discounted price in a rights issue.

  • Right Share: The share actually subscribed to by the shareholder by exercising the right entitlement.

1. Transfer of Right Entitlement (RE)

As per Section 55(2)(aa)(iii) of the Income-tax Act, 1961:
“The cost of acquisition of the right to subscribe to shares shall be taken as Nil if such right is acquired by the assessee without paying any amount to acquire it.”

Nature of Gain:

• Treated as Short-Term Capital Gain (STCG) if holding period is less than 12 months.

• Otherwise, Long-Term Capital Gain (LTCG) applies.

2. Transfer of Right Shares (After Subscription)

• Cost of Acquisition: Amount actually paid to subscribe to the right shares.

• Capital Gain = Sale Price – Cost of Acquisition

• Holding Period: From the date of allotment of right shares to the date of sale.

Section 55(2)(aa)(iiia):
“The cost of acquisition of shares acquired by way of right issue shall be the amount actually paid by the assessee.”

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