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 Circular principles, noting that exceptions for genuineness of transfer, corporate veil lifting, or transfer of control did not apply. The AO's own findings showed no change in board composition despite increased stake acquisition. Consequently, the assessee was entitled to exemption under section 54EA, and the claim for deduction was allowed. The tribunal set aside the treatment as business income and confirmed capital gains treatment.

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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 Shares
The 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 54EA
The 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.

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