2015 (11) TMI 69 - AT - Income Tax

Tribunal directs assessment of share sale income under Capital Gains, re-examines tax rate applicability

The tribunal partly allowed the appeal, directing the Assessing Officer to assess the income from the sale of shares under the head 'Capital gains' and ... Capital asset - income from capital gains - income from business - fiduciary capacity / special purpose vehicle - consistency of returns and finality of position - taxability of long-term capital gains under section 112 - maximum marginal rate and interaction with specific charging provisionsCapital asset - income from capital gains - income from business - fiduciary capacity / special purpose vehicle - Characterisation of shares held by the ESOP trust and head under which gain on transfer (on exercise of options) is taxable - HELD THAT: - The Tribunal examined the trust deed, ESOS terms and factual matrix and held that the trust was established as an extended arm / special purpose vehicle of the settler company, holding shares in a fiduciary capacity for the benefit of eligible employees. The settler retained de facto control (through the Compensation Committee and other trust deed provisions), limiting the trust's freedom to deal with the shares as an absolute owner or market trader. The pattern of infrequent secondary market transactions, the purpose of holding shares to effect grants under ESOS, the long holding periods and the historical consistent classification of the shares as investments in the trust's returns collectively indicate that the shares were not stock-in-trade. Reliance was placed on authorities recognising rights to subscribe and options as property and on the wide ambit of the term 'property' under the definition of capital asset. In view of these findings, the gains arising on transfer of the impugned shares (on exercise of options) are capital in nature and taxable under the head income from capital gains. The Tribunal also noted that the Revenue had accepted the trust's consistent treatment in earlier years and that no change of facts or law justified disturbing that position. [Paras 5]Shares held by the Mahindra & Mahindra Employees' Stock Option Trust are capital assets in the hands of the trust and the resultant gain on transfer is taxable as income from capital gains.Taxability of long-term capital gains under section 112 - maximum marginal rate and interaction with specific charging provisions - Whether the trust's capital gains are to be charged at the maximum marginal rate under the provision applicable to trusts, or whether concessional rates under the specific capital gains provision apply - HELD THAT: - The Tribunal held that where income has been rightly characterised as capital gains, the specific charging and rate provisions applicable to capital gains (notably the provisions governing long-term capital gains) must be given effect. The AO's view that section 164(1) (charging tax at maximum marginal rate for certain trusts) precludes application of the concessional rates under the capital gains provision was rejected. The Tribunal followed the reasoning of the Bombay ITAT in Jamsetji Tata Trust that the maximum marginal rate cannot override a specific rate prescribed for capital gains and directed that tax on the capital gains be charged as per section 112. However, the Tribunal observed that the factual question whether the benefit of the second proviso to section 112 (relating to listed securities) applies had not been examined and remitted that limited factual issue to the AO for verification and determination; the AO is to confine enquiry to whether the impugned shares were listed and whether the trust satisfies the factual requirements for the proviso, after giving the assessee full opportunity to tender evidence. [Paras 7]Tax on the gains characterised as capital gains is to be charged under the capital gains provision (section 112) and not entirely at the maximum marginal rate; a limited factual issue as to availability of the second proviso to section 112 (listing/eligibility) is remitted to the AO for determination.Final Conclusion: The appeal is partly allowed: the Tribunal reversed the assessment treating the impugned receipts as business income and held instead that the shares were capital assets and the gains are taxable as capital gains; tax is to be computed under the capital gains provision (section 112), subject to the AO's fresh, confined factual inquiry on the applicability of the second proviso to section 112. Issues Involved:1. Confirmation of the order passed under section 143(3) by the Assessing Officer (AO).2. Assessment of income under the head 'Profits and gains of business' instead of 'Capital gains.'3. Over-assessment of income by Rs. 19.64 crores.4. Chargeability of income at the maximum marginal rate.5. Acceptance of the computation of total income as done by the appellant in the return.6. Consequential relief in the amount of tax and interest charged.Detailed Analysis:Issue 1: Confirmation of the Order Passed Under Section 143(3) by the AO- The appellant challenged the confirmation of the order passed by the AO under section 143(3). However, this ground was considered general and did not require specific adjudication.Issue 2: Assessment of Income Under the Head 'Profits and Gains of Business' Instead of 'Capital Gains'- Facts of the Case: The appellant, a trust established by Mahindra & Mahindra Ltd. for the welfare of its employees, was involved in administering the Employees Stock Option Scheme (ESOS). The trust held shares of Mahindra & Mahindra Ltd. and issued these shares to eligible employees upon exercise of stock options.- AO's Position: The AO assessed the income from the sale of these shares under the head 'Profits and gains of business' instead of 'Capital gains,' arguing that the trust's activities were systematic and organized, characteristics of business activity.- Appellant's Argument: The appellant contended that the shares were held as capital assets and not for trading purposes. The trust's activities were solely to administer the ESOS and not to earn profits.- Tribunal's Findings: The tribunal analyzed the trust deed, ESOS, and the nature of transactions. It concluded that the trust held the shares in a fiduciary capacity, akin to a Special Purpose Vehicle (SPV) for the settler company. The shares were not held for trading but for the benefit of the employees. The tribunal held that the shares were capital assets, and the income from their sale should be assessed under the head 'Capital gains.'- Conclusion: The tribunal allowed this ground, holding that the shares were capital assets, and the income from their sale was to be taxed under the head 'Capital gains.'Issue 3: Over-Assessment of Income by Rs. 19.64 Crores- Since the tribunal allowed the appellant's claim that the income should be assessed under the head 'Capital gains,' this ground became infructuous and was dismissed.Issue 4: Chargeability of Income at the Maximum Marginal Rate- AO's Position: The AO held that the income of the trust was chargeable to tax at the maximum marginal rate under section 164(1) of the Income Tax Act, as the trust was a discretionary trust with indeterminate beneficiaries.- Appellant's Argument: The appellant argued that the trust's income should not be taxed at the maximum marginal rate and relied on the judgment of the Bombay ITAT in the case of Jamsetji Tata Trust.- Tribunal's Findings: The tribunal referred to the judgment in the case of Jamsetji Tata Trust, which held that the rate of tax on long-term capital gains should not exceed the rate provided under section 112. The tribunal directed the AO to apply the concessional rate of tax as per section 112 for long-term capital gains.- Conclusion: The tribunal allowed this ground for statistical purposes, directing the AO to re-examine the factual aspects and apply the appropriate rate of tax as per section 112.Issue 5: Acceptance of the Computation of Total Income as Done by the Appellant in the Return- This ground was considered general and did not require specific adjudication.Issue 6: Consequential Relief in the Amount of Tax and Interest Charged- The tribunal's decision on the main issues would result in consequential relief in the amount of tax and interest charged.Final Judgment:- The appeal of the assessee was partly allowed. The tribunal directed the AO to assess the income from the sale of shares under the head 'Capital gains' and apply the appropriate rate of tax as per section 112. The AO was also directed to re-examine the factual aspects regarding the applicability of the second proviso to section 112.