Assessee, an employee of Infosys BPO Ltd, was granted ESOP options, of which 6000 options vide Option Transfer Agreement dated 07.02.2007 were transferred to/bought back by Infosys Technologies Ltd., with Infosys BPO Ltd., as a confirming party.
6000 options comprised of 1250 options granted on 28.02.2003; 2500 options granted on 02.02.2004 and 2250 options granted on 01.06.2005.
The options granted on 28.02.2003 and 02.02.2004 were held for a period of more than 3 years before their transfer on 07.03.2007.
For the AY 2007-08, the assessee filed his return of income declaring Long Term Capital Gains ('LTCG') arising on transfer of above 3750 ESOP options amounting to Rs. 20,41,672.
Assessee's case was selected for scrutiny and the Assessing Officer ('AO') treated the said capital gains as Short Term Capital Gains ('STCG') instead of LTCG. The AO held that the options have no value without their exercise and the gains derived by the assessee by transfer thereof, essentially represents the exercise by the assessee of the rights that the options had rendered to him.
Capital Gains
CIT v KAPUR INVESTMENTS (P) LTD [ITA NO.158/2014 & ITA NO.159/2014 dated 20.04.2015] KARNATAKA HIGH COURT Background: Assessee Company is engaged in the business of finance and films. The assessee had invested money in shares through the Portfolio Management Scheme of M/s.Kotak Securities Limited. Since there were regular transactions of sale and purchase of shares, the Assessing Officer, for the relevant assessment years, held the same to be ‘business income’. Commissioner of Income-tax (Appeals) granted relief to the assessee and held the profit to be taxed as capital gains. Against the orders of theCIT(A), the tax authorities filed appeals before the ITAT. In the first round, the Tribunal remanded the matter to the CIT(A), which again held in favour of the assessee. Thereafter, the Tribunal dismissed the appeals of the Tax Authorities.
Profit on sale of shares through PMS to be taxed as capital gains & not ...
Kancast Pvt. Ltd v ITO (ITA No.1265/PN/2011 dated 19.01.2015) – Pune ITAT Background: The assessee transferred factory land, building and shed for a consideration of Rs.3,12,04,000/- for land and building and Rs.47,96,000/- for other fixed assets. Out of the consideration of Rs 3,12,04,000 for land and building, amount of Rs 77,00,000 pertained to leasehold rights in land. The Assessing Officer noted that the value of land and building adopted by the registering authority for the purposes of stamp duty valuation under section 50C for the purpose of computing capital gains based on the Ready Reckoner rates of the State Government was Rs.5,75,93,000/-. The assessee contended that section 50C of the Act was not applicable as the assessee was only holding leasehold rights in the land and was not owner of the land. However, the Assessing Officer considered the stamp duty value of the consideration for land under section 50C at Rs.4,98,93,000/- (Rs.5,75,93,000/- minus Rs.77,00,000/-). In the first level appellate proceedings, the assessee reiterated that it did not transfer any land because it was not owning the land and therefore transfer of leasehold rights in land did not invite the provisions of section 50C of the Act. Reliance was placed on the ruling of Mumbai ITAT in the case of Atul G. Puranik vs. ITO vide ITA No.3051/Mum/2011 dated 13.05.2011. The CIT(A) dismissed the submission of the assessee and held that the Explanation below section 269UA(d)(i) of the Act makes it clear that the land, building, etc. included in the phrase ‘immovable property’ also includes any rights therein. Therefore, he upheld that the order of Assessing Officer was justified in applying the provisions of section 50C.
Provisions of section 50C not applicable on leasehold rights in land – Pune ITAT
CIT v Kuldeep Singh (ITA No: 117/2014 dated 12th August, 2014) (Delhi High Court) Background: The assessee in his return had declared a taxable income of Rs.47,88,579/- after claiming benefit of Section 54 of the Act of Rs.37,86,273 on sale consideration of Rs.2 crores declared as income from capital gains on the sale of house property. The Assessing Officer referred to the copy of the flat buyers agreement dated 9th February, 2006 between the assessee and the builder and observed that the ownership in the new property would be conferred on the date of issuance of occupation certificate. Further, the expected date of completion was 36 months from the date of the agreement dated 9th February, 2006 i.e. 8th February, 2009. He held that the assessee was not entitled to benefit of Section 54 as he had not purchased the new property within a period of one year before the sale of first property on 3rd June, 2005 or within two years from the date on which the transfer took place. The assessee had not constructed residential house within three years from 3rd June, 2005.
Exemption u/s 54 cannot be denied merely because payment is made but possession is not ...
Zaheer Mauritius v DDIT (Intl Taxation) (W.P.(C) NO. 1648 OF 2013 dated 30.07.2014) – Delhi High Court Background: The petitioner is a company incorporated in Mauritius and is engaged in the business of investment into Indian companies engaged in construction and development business in India. The petitioner entered into a Securities Subscription Agreement (‘SSA’) and a Shareholder’s Agreement (‘SHA’) with Vatika and its JV Company. As per the SSA, the petitioner agreed to acquire 35% ownership interest in the JV Company by making a total investment of Rs. 100 crores in five tranches. The petitioner agreed to subscribe to 46,307 equity shares having a par value of Rs. 10/- each and 88,25,85,590 zero percent CCDs having a par value of Rs. 1/- each in a planned and phased manner. The SHA provided for a call option given to Vatika by the petitioner to acquire all the aforementioned securities during the call period and likewise, a put option given by Vatika to the petitioner to sell to Vatika all the aforementioned securities during the determined period. On 08.04.2010, Vatika partly exercised the call option and purchased 22,924 equity shares and 43,69,24,490 CCDs from the petitioner for a total consideration of Rs. 80 crores. The Petitioner filed an application before the AAR for advance ruling on the taxability of the consideration received with respect to CCDs. AAR held that gains received/receivable by the petitioner resulting from transfer of the investments held by the petitioner in the JV company, was interest under Section 2(28A) of the Act.
Profit on sale of Compulsorily Convertible Debentures should be treated as Capital Gains and not ...
Redington (India) Limited v JCIT (ITA No.513/Mds/2014 dated 07.07.2014) – Chennai ITAT Background: The assessee, M/s. Redington (India) Limited provides end-to-end supply chain solutions for all categories of Information Technology(IT) products. The assessee has a wholly owned subsidiary company M/s. Redington Gulf FZE(‘RGF Gulf’) in Dubai. In 2008, a Private Equity Fund(PE fund)- IVC evinced interest to invest in the overseas operations of the assessee group. The assessee company set up another wholly owned subsidiary company in Mauritius in July, 2008 (‘RIML Mauritius’). The assessee made an initial investment of US$ 25000 equivalent of ` 10.78 lakhs. The said newly set up subsidiary M/s. RIML Mauritius, in turn, set up its own wholly owned subsidiary in Cayman Islands (‘RIHL Cayman’). IVC has infused a sum of US$ 65 millions into M/s. RIHL Cayman for fresh allotment of shares. After the above incorporation exercises, the assessee company transferred its entire shareholding in M/s. RGF Gulf to M/s. RIHL Cayman on 13th November, 2008. The transfer was made without any consideration. Once this transfer of shareholding was made, RGF Gulf became a step down subsidiary of RIML Mauritius and the assessee company. As the shares were transferred without consideration, the assessee company took the stand that it is a gift within the meaning of section 47(iii) and therefore, not chargeable to tax as capital gains. Further, it is also not an international transaction. It stated that in order to come under the purview of an international transaction, the transaction must generate income. The TPO held that the transfer of shares made by the assessee is an international transaction. In computing the value of shares transferred by the assessee, the TPO has adopted the price paid by IVC, the PE fund on allotment of shares in RIHL Cayman, as the comparable. The fresh infusion of funds by M/s. IVC and allotment of shares in M/s. RIHL Cayman, resulted in M/s. IVC, holding a stake of 27.17%. The TPO extrapolated the said shareholding and determined an amount of US$ 174.23 millions, as representing 100% of the value of M/s. RIHL Cayman and on that basis determined the ALP of RGF Gulf shares transferred by the assessee. Accordingly, the TPO determined the ALP of M/s. RGF Gulf shares at Rs 865,40,04,100. The Assessing Officer modified the above gross amount by setting off the indexed cost of acquisition and determined the long term capital gains adjustment at Rs 610,15,75,820. The DRP stated that a gift as generally understood is made out of love and affection by natural persons; that corporate entities cannot make gifts, as the term “gift” in sec.47(iii) is used in conjunction with the word “will”. It directed to give a marginal relief in the capital gains addition proposed against the transfer of shares. They accepted the argument that in view of the buy-back agreement between the Venture capital fund (PE fund) and the assessee, the PE investment was relatively risk-free. Consequently, the DRP agreed that to the extent of the risk premium, the […]
Company gifting shares to a foreign company is exempt u/s 47(iii) and also not an ...
Aravali Polymers LLP v JCIT (I.T.A. No. 718/Kol. / 2014 dated 27.06.2014) (Kol ITAT) Background: A Private Limited Company namely Aravali Polymers Pvt. Ltd. was converted into a Limited Liability Partnership under section 56 of the ertwhile Companies Act and the assessee Aravali Polymers LLP came into existence. After the conversion of the Private Limited Company into the Assessee LLP, 31,84,807 equity shares of the East India Hotels Ltd. was sold by the appellant for an amount of Rs.53,56,69,888/- and the same was offered for taxation as long-term capital gains. After paying the capital gains tax, the assessee had approximately Rs. 49 crores profit. The assessee had also received Reserves and Surplus amounting to Rs.3,06,31,969/- of the Private Limited Company. The assessee had given an amount of Rs.50 crores as interest-free loans to the partners of the LLP. When the assessee filed its return, the assessee had offered the capital gains on the sale of the equity shares of East India Hotels Ltd. and had also claimed exemption under section 47(xiiib). The AO observed that the assessee had provided interest-free loan to the partners of the assessee-firm out of the Reserve and Surplus received by the assessee firm on the conversion. The AO held that there was violation of the provisions of section 47(xiiib) and consequently held that in view of the provisions of section 47A(4), the amount of profit and gains arising from the transfer of the capital assets or shares is to be profit and gains chargeable to tax on the assessee. The AO adopted the value of the shares in East India Hotels Ltd. held by the Pvt. Limited Company and transferred to the assessee-firm as liable to be valued at market price as on the date of the transfer.
On violation of S. 47(xiiib) (for LLP), capital gains to be computed considering value at ...
RADIALS INTERNATIONAL v ACIT ITA No.485/2012 dated 25.04.2014 (Delhi HC) Background: Assessee is a partnership firm, engaged in the business of providing technical, marketing and maintenance services. Assessee offered the profit on sale of shares lying in PMS as capital gains. The AO held that since the motive of the transactions was the earning of profit and not a dividend, where the holding period was ranging from a few days to a few months, it was concluded that the income was business income earned by way of adventure in the nature of trade. Commissioner of Income Tax (Appeals) held that the intention at the time of purchase and sale, the magnitude and frequency of transactions has to be seen to test whether the sum of gain made “was a mere enhancement of value by realizing a security” or a “gain made in operation of business in carrying out a scheme for profit-making”. It was concluded that the shares were not in the nature of property which yielded any income or personal enjoyment to the owner, by virtue solely of its ownership. Thus, the intention was concluded to be profit-making, and the gains were found to be business income.
Delhi HC lays down important principles in treatment of profit on sale of shares lying ...
Shyamlal Tandon v ITO [IT APPEAL NO.1774 (HYD.) OF 2012 dated 21.0.10214] – Hyderabad ITAT Background: The assessee, an individual, did not file his return of income for the AY 2003-04. From the information received from DDIT(Inv), it came to light that the assessee has earned capital gains, which were not disclosed, and consequently, within the meaning of S.147 of the Act, the AO, held the view that there was escapement of income chargeable to tax. Accordingly a notice under section 148 of the Act was issued. In response thereto, assessee filed return declaring ‘nil’ income. Assessment Proceedings During the course of assessment proceedings, it was submitted that the assessee, alongwith his father purchased a piece of land on 17.3.1978 for Rs.34,320. The assessee and his son had demolished the house standing on the above plot and gave the property for development. As per clause (4) of the development agreement, both the father and son were entitled to share the built up area on 50:50 basis in exchange of transfer of the land. However, neither the father nor the son have has declared any long term capital gains on transfer of the land in exchange for 50% of the built up area either in the year in which the development agreement was entered into, relevant to assessment year 2001-02 or in the relevant assessment year in which transfer of 50% of the land and building took place. According to the AO, the long term capital gain worked out to Rs.55,75,661 of which the assessee’s share came to Rs.27,87,831, which was assessable to tax in the assessment year 2001-02.