2023 (10) TMI 1182 - AT - Income Tax

ITAT allows section 54EA exemption on unlisted share transfer, rules capital gains treatment over business income

The ITAT Mumbai held that transfer of unlisted shares of DSPML should be taxed under capital gains rather than business income. The tribunal applied CBDT ... Exemption u/s. 54EA - surplus arising on transfer of 10,00,000 shares as the business receipt arising from transfer of shares held as stock-in-trade - whether the gain arising on transfer of shares of DSPML Sec should be assessed to tax under the head capital gains or as business income and, consequently, whether the assessee would be entitled to exemption in respect of the same u/s 54EA? - HELD THAT:- Equity shares of DSPML Sec is an unlisted shares and therefore, the principle laid down in the said Circular will apply to its case. The exceptions referred to paragraph of the said Circular will not apply as there is no doubt about the genuineness of the transfer, nor does the issue pertain to lifting of corporate veil. The third exception being transfer of shares along with the control and management of the underlying business is also not applicable to its case because, the AO has himself noted that Myrill Lynch had 4 members on the Board of Directors of DSPML when they held only 8.33% equity stake and there was no change in this position even after they acquired 40% stake. Even the ld. AO in the assessment report dated 01/01/2015 has accepted this position, accordingly, in view of the CBDT Circular itself, we hold that transfer of unlisted shares of DSPML is to be taxed under the head “capital gains” irrespective treating it as business income is set aside and the transfer of shares is treated as capital gains. Once, the gains arising of transfer of shares of DSPML is capital gains, then, the assessee is entitled for exemption u/s. 54EA - claim of deduction / exemption u/s. 54EA is allowed. Issues Involved:1. Whether the shares were transferred on the date of option exercise (10/02/1998) or on the date of Subscription Agreement (21/11/1996).2. Whether the shares were trading assets or capital assets.3. Whether the gains from the transfer of shares should be assessed as business income or capital gains.4. Whether the assessee is entitled to exemption under section 54EA of the Income-tax Act.Summary:Issue 1: Date of Transfer of SharesThe AO contended that the shares were transferred on 21/11/1996, the date of the Subscription Agreement, relevant to AY 1997-98. The ITAT, however, ruled that the transfer occurred on 10/02/1998, the date when Merrill Lynch exercised the option, making it relevant to AY 1998-99. This was upheld by the Hon'ble High Court.Issue 2: Nature of Shares (Trading or Capital Assets)The AO and CIT(A) concluded that the shares were trading assets, purchased with the intent to sell for profit, thus treating the gains as business income. However, the ITAT directed reconsideration of this issue, emphasizing the need to assess the factual position and not merely follow the previous CIT(A) order.Issue 3: Assessment of Gains (Business Income or Capital Gains)The CIT(A) upheld the assessment of gains as business income, denying the exemption under section 54EA. The ITAT, however, noted that the shares were shown as investments in the balance sheets for previous years and were part of a strategic investment in a joint venture. The ITAT emphasized that the intention at the time of acquisition was crucial, and various approvals required for the option indicated the shares were capital assets.Issue 4: Entitlement to Exemption under Section 54EAThe ITAT relied on the CBDT Circular dated 02/05/2016, which clarifies that income from the transfer of unlisted shares should be considered under the head 'capital gains' irrespective of the holding period. The exceptions in the circular did not apply to the case, as there was no doubt about the genuineness of the transfer, nor was it related to lifting the corporate veil or transferring control and management. Consequently, the ITAT concluded that the gains should be treated as capital gains, entitling the assessee to the exemption under section 54EA.Conclusion:The ITAT ruled that the gains from the transfer of shares should be assessed as capital gains, not business income, and the assessee is entitled to exemption under section 54EA of the Act. The appeal of the assessee was allowed.