NRI's employment rights transfer creates short-term capital gain but not taxable in India under section 9(1)(i)

The ITAT Delhi held that an NRI assessee's capital gain from transfer of employment-related rights and interests constituted short-term capital gain, not long-term, as the asset was held for less than 36 months. The shares were never delivered in the assessee's name, so the benefit of reduced holding period for Indian company shares under section 2(42A) was unavailable. However, since the capital asset was situated in USA per the employment agreement executed there, the gain was not taxable in India under section 9(1)(i). The tribunal directed the AO to accept the capital gain as offered by the assessee in the return, consistent with the termination agreement terms.

---

---

Issues Involved:
1. Nature of capital gain: whether long-term or short-term.
2. Taxability of the capital gain in India.
3. Allowability of deduction on account of cost of acquisition in relation to the transfer of capital assets.

Detailed Analysis:

Issue 1: Nature of Capital Gain - Long Term or Short Term
The assessee, a Non-Resident Indian (NRI) and resident of the USA, filed a return of income for the assessment year 2017-18, declaring long-term capital gain from the transfer of Compulsorily Convertible Preference Shares (CCPS) of two Indian companies, Snapdeal and Ola. The Assessing Officer (AO) treated the gain as short-term capital gain, arguing that the shares were acquired through an agreement dated 20.05.2015, and thus the holding period was less than 24 months. The assessee contended that the shares were acquired through an assignment deed dated 29.12.2014, making the holding period more than 24 months.

Upon reviewing the agreements, it was found that the Second Employment Agreement dated 17.12.2014, which was initially considered a draft, did not confer any rights or interests in the shares. Instead, the rights and interests in the shares were acquired through the assignment deed dated 29.12.2014. The Tribunal concluded that the period of holding should be reckoned from 29.12.2014, making the gain long-term.

Issue 2: Taxability of the Capital Gain in India
The Tribunal examined whether the capital gain derived from the transfer of rights and interests in the shares was taxable in India. The termination agreement dated 01.02.2017 indicated that the assessee's interests in the shares were extinguished for a cash payment. The Tribunal noted that the assessee never became the legal owner of the shares, and what was transferred were rights and interests in the shares, not the shares themselves.

The Tribunal referred to section 9(1)(i) of the Income Tax Act, which deems income from the transfer of a capital asset situated in India to be taxable in India. However, since the rights and interests were acquired through an agreement executed in the USA, the situs of the capital asset was considered to be outside India. Consequently, the capital gain was not taxable in India.

Issue 3: Allowability of Deduction on Account of Cost of Acquisition
The AO disallowed the cost of acquisition claimed by the assessee, arguing that the salary compensation received in the USA was not taxable in India, and thus there was no tax base for claiming the cost of acquisition. The Tribunal did not delve into this issue in detail, as it became academic after concluding that the capital gain was not taxable in India.

Conclusion:
The Tribunal directed the AO to accept the capital gain offered by the assessee in the return of income filed, treating it as long-term capital gain. The appeal was allowed in favor of the assessee, and the ancillary issue relating to the claim of cost of acquisition was rendered academic.

---