S. 45

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.

ESOP transfer (prior to exercise) chargeable to tax as capital gains – Bangalore ITAT

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 ...

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 ...

Armstrong World Industries Mauritius Multiconsult Ltd., In re  A.A.R. NO. 1044 OF 2011 (dtd 22.08.2012) Background: Armstrong World Industries Mauritius Multiconsult Ltd (Armstrong Mauritius) is a wholly owned subsidiary of Armstrong World Industries Limited United Kingdom (Armstrong UK). Armstrong UK in turn is a fully owned subsidiary of Armstrong USA. The Armstrong Mauritius was incorporated in Mauritius in the year 1999. It is a tax resident of Mauritius. Armstrong World Industries India (Pvt.) Limited (Armstrong India) was incorporated in India in the year 1999 as a wholly owned subsidiary of Inarco Ltd., an Indian company. Inarco Limited was engaged in the business of production of textile machine parts and floorings. Armstrong UK, through the applicant, was holding 50% of the share capital in Inarco Limited. Pursuant to a scheme of amalgamation, approved by the High Court of Bombay, the flooring business of Inarco Limited was transferred to Armstrong-India. In consideration of that transfer of business, Inarco Limited was allotted 3,60,000 shares of the value of Rs. 10/- each in Armstrong India. Subsequently, Inarco Limited transferred to Armstrong Mauritius 36,00,000 shares of Rs. 10 each of Armstrong India. This resulted in Armstrong Mauritius holding 99.97% of the share capital of Armstrong India. The other 0.03% of the shares therein are held by Armstrong UK.

AAR disregards Revenue’s arguments for treating Mauritian company as conduit company

Smt Girija Reddy v ITO [IT Appeal No. 297 (Hyd.) of 2012] (Hyderabad ITAT) Background: During the year under consideration, the assessee, a partner in the firm M/s. Montage Manufacturers, retired and her account had been credited by the firm with Rs. 7,95,88,639 being her share of goodwill. The Assessing Officer held that the crediting of the amount of Rs. 7,95,88,639 in lieu of the assessee’s share of goodwill on her retirement also amounting to transfer, and therefore, such receipt is liable for capital gains tax, as her right in the firm is a capital asset and extinguishment thereof amounts to transfer.

Lumpsum consideration received on retirement is chargeable to capital gains – Hyderabad ITAT