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Section 7 of The Industrial Reconstruction Bank (Transfer of Undertakings and Repeal) Act, 1997

(1)Notwithstanding anything contained in the Income-tax Act, 1961 (43 of 1961) or any other enactment for the time being in force relating to tax or income, profits or gains, the Company shall not be liable to pay income-tax or any other tax for a period of five years computed from the appointed day in respect of any income, profits or gains derived, or any amount received by the Company.
(2)The transfer and vesting of the undertakings or any part thereof in terms of section 3 shall not be construed as a transfer within the meaning of the Income-tax At, 1961 (43 of 1961) for the purposes of capital gains.

Summary

The new Company does not have to pay income tax or any other tax on its income, profits, gains, or any money received for a period of five years.
This five-year tax-free period starts counting from the appointed day, which is the official date the transfer happens.
This tax holiday applies regardless of what is written in the Income-tax Act, 1961, or any other active tax laws.
The transfer of undertakings, which means the business assets and liabilities, from the Reconstruction Bank to the Company under section 3 will not be treated as a transfer under the Income-tax Act, 1961, for capital gains tax purposes.

Practical examples

1Suppose the appointed day is set as March 27, 1997. If the newly formed Industrial Investment Bank of India Limited earns a profit of 10,000,000 rupees in 1999 from its lending business, it will pay zero income tax on that amount because it falls within the five-year tax exemption window running from 1997 to 2002.

2In April 1997, during the transfer of undertakings under section 3, land worth 5,000,000 rupees owned by the old Reconstruction Bank is legally moved to the new Company. Under normal rules, this might trigger a capital gains tax, which is a tax on the increased value of assets, but because of this provision, the government does not treat this asset movement as a taxable transfer, so no capital gains tax is charged.

FAQ

1. How long does the Company get to enjoy this tax-free status?

The Company is exempt from paying income tax or other taxes for five years starting from the appointed day.

2. Does this exemption apply to all types of earnings?

Yes, it applies to any income, profits, gains, or any other amounts received by the Company.

3. Will the transfer of assets from the old Reconstruction Bank to the new Company trigger capital gains tax?

No, the transfer of undertakings under section 3 is not considered a transfer for capital gains purposes under the Income-tax Act, 1961.

Test yourself

Q1.Under Section 7, how many years from the appointed day is the Company exempt from paying income tax?

Q2.Which specific act is mentioned in Section 7 regarding tax on income, profits, or gains?

Q3.Under Section 7(2), the transfer under which section shall not be construed as a transfer for capital gains purposes?

Q4.What type of tax is specifically mentioned as not being triggered by the transfer of undertakings under Section 7(2)?

Q5.When does the five-year tax exemption period begin?

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