Corporate restructuring, especially through mergers & amalgamations, has become routine in India’s business landscape. But ask any promoter, CFO, or startup founder who has been through the process — the tax impact often becomes the most stressful part of the transaction. One mistake in reporting can trigger unnecessary capital gains tax, long assessments, or even litigation.
Section 47(vii) exists to avoid exactly this situation. It ensures that when shareholders exchange shares during a genuine amalgamation, the transaction does not get taxed like a regular sale. In other words, the law recognises that an amalgamation is a restructuring activity — not a profit-booking event — and therefore treats the transfer as “not regarded as transfer” for capital gains purposes.
This is not a loophole. It is a deliberate policy decision that supports seamless restructuring, protects shareholders, & promotes business continuity.
What Section 47(vii) Really Says
Section 47(vii) deals with transactions where a shareholder of an amalgamating company swaps their old shares for new shares of the amalgamated company. Under normal circumstances, exchanging one capital asset for another triggers capital gains.
But under Section 47(vii):
- The transaction is not treated as a transfer under Section 45.
- Since it is not a transfer, no capital gains tax applies.
- The cost of acquisition of the new shares shall be deemed to be the cost of acquisition of the old shares.
- Holding period for capital gains is also protected, since the law allows the previous holding period to continue.
This treatment ensures shareholders aren’t penalised just because their company went through a merger.
Why This Exemption Exists
In a genuine amalgamation, shareholders do not receive cash or realise any income. Their economic interest merely shifts from one legal entity to another. Taxing this would be unfair & discourage corporate consolidation.
Section 47(vii) prevents:
✔ Artificial capital gains during restructuring
✔ Tax obstacles in business revival"
✔ Unnecessary friction in mergers & acquisitions
✔ Confusion about future cost & holding period
By treating certain transactions as “not regarded as transfer,” the law supports India’s objective of creating stronger, more competitive companies.
Also Read: Exempt Transfer of Assets and Shares on Conversion of a Company into an LLP
Conditions to Claim Exemption Under Section 47(vii)
To ensure only genuine amalgamations receive tax relief, the law lays out a few conditions:
- Shareholder must receive shares only
The shareholder of the amalgamating company must receive shares of the amalgamated company."
If he receives anything else (cash, assets, or benefits), the exemption may not apply.
- The amalgamated company must be an Indian company
This is a mandatory requirement. If the merged entity is not an Indian company, the exemption under Section 47(vii) cannot be claimed.
- Transfer must occur under a valid scheme of amalgamation
The merger must satisfy the legal test of amalgamation under the Income Tax Act & the Companies Act.
- Cost of acquisition continuity
The cost of old shares becomes the cost of acquisition of the new shares.
This prevents double taxation & ensures consistency when calculating short-term or long-term capital gains (STCG/LTCG) in future.
How Capital Gains Are Calculated After Amalgamation
Because the transfer is not regarded as a transfer, no capital gains arise at the time of amalgamation.
However, when the shareholder sells the new shares later:
- The cost of acquisition remains the cost of old shares.
- The holding period includes the holding period of the old shares.
- The sale proceeds from the new shares become taxable at that time depending on STCG/LTCG rules.
This ensures that tax is deferred until an actual, real monetisation occurs.
Example to Make It Crystal Clear
Imagine Rohan owns shares worth ₹10 lakh in Company A.
Company A merges with Company B, & Rohan receives shares of Company B in exchange.
Under Section 47(vii):
- This swap is not treated as a transfer.
- No capital gains need to be paid.
- Rohan’s cost of acquisition for the new shares remains ₹10 lakh.
- His holding period continues from the date he bought shares of Company A.
If he later sells Company B’s shares, capital gains will apply normally — but only then.
ITAT View — Consistent Interpretation of Section 47(xiii) & 47(vii)
Courts & tribunals consistently uphold that genuine restructuring should not create immediate capital gains liability. Similar to Section 47(xiii), where certain partnerships-to-company conversions are exempt, Section 47(vii) ensures shareholder-level exemption in amalgamations.
The underlying principle is identical:
Tax should not obstruct legitimate business reorganisations.
Practical Tips for Shareholders Undergoing Amalgamation
✔ Keep share allotment documents securely
They prove the swap & valuation.
✔ Track your holding period accurately
It matters when you eventually sell the new shares."
Also Read: Why Selling SGBs Doesn’t Trigger Capital Gains Tax
✔ Maintain original purchase proofs
Since cost of acquisition carries forward.
✔ Avoid accepting cash or benefits during swap
It may break Section 47(vii) conditions.
✔ Consult a CA before filing ITR
Amalgamation reporting often needs Schedule CG disclosures.
Why Section 47(vii) Matters Today
With India witnessing rapid consolidation in fintech, manufacturing, NBFCs, logistics, and startups, mergers are increasing every year. Section 47(vii) ensures that shareholders are not burdened with capital gains tax merely because companies reorganise for efficiency, fundraising, debt restructuring, or expansion.
The section offers:
- Tax neutrality"
- Ease of business restructuring
- Certainty for investors
- Protection of shareholder value
Conclusion
Section 47(vii) is one of the most important provisions when dealing with mergers & amalgamations. By stating that certain transactions are “not regarded as transfer,” it exempts eligible shareholders from immediate capital gains tax & ensures the cost of acquisition and holding period remain intact. For investors, founders, and companies undergoing restructuring, understanding this section helps avoid tax disputes & ensures compliance with ease.
Need expert help to structure an amalgamation, compute capital gains, or file your ITR correctly? Talk to a qualified CA at CallMyCA.com — accurate tax advice is just one click away.
