TaxTMI 
TaxTMI 
2023 (10) TMI 1182
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....urities Ltd. (DSPML Sec) (formerly DSP Securities Ltd. from its incorporation on 12/03/1996 upto 21/11/1996) to Merrill Lynch Holdings Ltd., Mauritius (MLHM). The said shares were acquired by him on 15/03/1996. Since gains arising on transfer of the said shares gave rise to long term capital gains, the assessee made investments in 54EA Bonds and claimed exemption in respect of such investment under section 54EA of the Income-tax Act (the Act) in his computation of income for AY 1998-99. 4. The AO noted that assessee had received total consideration of US$ 37,65,000 equivalent Rs. 14,20,49,925/- as; (i) A non- refundable advance of US$ 12,50,000 received on 21/11/1996 which was to be adjusted against sale consideration, & (ii) Upon exercise of the option under clause 4 of the Subscription Agreement, the balance sale consideration of US$ 25,15,000 was received on 10/02/1998. The AO had framed following issues arising in the course of assessment proceedings:- (i) Whether the shares were transferred on the date on which Myrill Lynch (buyer) exercised the option, ie 10/02/1998 which would be relevant to present AY 1998-99 or, on the date on which the Agreement for Subscription was si....
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....nding by the ld. CIT(A) on the merits and he has deleted the addition on the ground that the substantive addition made in the AY 1997- 98 has been confirmed. In our view, this issue requires reconsideration by the ld. CIT (A) for the present assessment year on merits. We, therefore, restore this issue which is the subject matter of the departmental appeal as also the assessee's appeal, to the learned CIT(A) with the direction that the issue may be reconsidered in its entirety after allowing opportunity to both the sides and also after considering the factual position as brought out in the Tribunal's order for the AY 1997-98 referred to above. The ld. CIT(A) should decide the issue afresh after considering the factual position and any material which is placed before him by both the parties and he should not merely follow the order of the ld. CIT(A) for AY 1997- 98. " Accordingly, the ITAT inter alia had directed the CIT (A) to decide the issue relating to assessment of the gains under which head of income after: a) considering the factual position as brought out in the ITAT's order for AY 1997-98; and b) not merely follow the order of the CIT(A) for AY 1997-98. 6.....
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....in exercise of the option given as per sold Subscription Agreement in previous year relevant to AY 1998-99, In the above background, I note that the sale of 10,00,000 shares on 09.02.1998 by the appellant (being a Kothari shareholder) for rupee equivalent of Rs. 14,20,49,925/- was part of the shares sold in exercise of option used by ML. 4.2. I find that the main reasons which led the AO to reach at a conclusion that the resultant gain on sale of said shares was a trading receipt, are as under: (i) Even before the shares were allotted to the assessee, the assessee had written to the FIPB about his intention to sell; (ii) Merrill Lynch (ML) vide its letter dated 09.02.1996 had written to the FIPB expressing its interest and desire for equity participation in the Company. (iii) The assessee had intention to sell off the shares right from the beginning and even before he acquired them; (iv) From the letter written to FIPB, it is clear that both ML and the assessee had entered into an oral agreement to purchase the shares; (v) Even before the Company was incorporated, the assessee had entered into a deal for purchase and sale of shares; (vi) Even before the Company was ....
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....) for seeking permission for ML to invest in equity capital of DSPML Sec. The application stated that ML had indicated its interest in participating in DSPML Sec by obtaining stake of 9% by subscribing to 5,00,000 equity shares of Rs. 10 each at a price of USD 3.63 per equity share, That ML "may" increase its holding in the said company at a later date which may take its holding upto 40% for which HK and his family members would give an option to ML to purchase the shares within a period of 12 to 24 months from the date of initial issue of shares by DSPML Sec, at such price as may be mutually agreed upon which shall not be less than USD 3.63 per share. For this purpose, ML would also make an interest free advance payment to HK and his family members of USD 25 lakh towards the option to purchase the equity shares from them. If the option to purchase the shares is not exercised, the interest free advance would be forfeited. It was also clarified that ML's interest in such participation was subject to the satisfactory negotiation and documentation of the acquisition and the receipt of all requisite consents and approvals 2 09/02/1996 ML confirmed their interest in pursuing the ....
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....e obtained. Approval was also sought for receipt of interest free non-refundable advance of USD 25,00,000. 9. 09/08/1996 FIPB granted its 'in principle' approval for increasing the percentage of foreign equity participation from 8.33% to 40% over a period of 12-24 months subject to the condition that acquisition of shares shall be governed by SEBI/ RBI guidelines. As regards the request for approval to receive non-refundable advance of USD 25,00,000, FIPB advised to approach RBI 10. 19/08/1996 DSPML Sec made an application to the Stock Exchange, indicating that ML and DSP Financial Consultants (DSPFC) will subscribe to 5,00,000 equity shares each and they will have an option to increase their stake in company in the next two years upto 16.70% and 33.33% respectively, by purchasing the existing shares held by the Kothari family. In this regard, approval was sought from the Stock Exchange for the initial subscription as well as the option to increase the stake 11. 03/09/1996 Stock Exchange approved issue of equity shares by DSPML Sec to ML and DSPFC as well as their option to raise the equity holding 12. 11/10/1996 Application was made by DSPML Sec to RBI se....
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....ve an option to Ml, to purchase either itself or through a designated subsidiary company 15 lakh equity shares in DSPML Sec. Such option was to be exercised not earlier than the first anniversary and not later than the second anniversary of the first issue of shares to the Kothari shareholders. ML paid to the Kothari shareholders, a non- refundable interest free advance payment of USD 25,00,000. Such advance payment was to be adjusted against the aggregate price payable upon the exercise of the ML option. It was also agreed that obligations of the parties under the Agreement shall be conditional upon all required approvals having been obtained for the matters contemplated by the Agreement including the approvals from FIPB, SEBI, RBI, ROC and the Bombay Stock Exchange as applicable. 20. 21/11/1996 Pursuant to the option granted to ML/ MLHM under the Subscription Agreement, the Appellant deposited 5 lakh equity shares of DSP Securities Ltd. with the Escrow Agent viz. Dina Wadia of Little & Co 21. 23/01/1998 ML sought permission from RBI under section 29(1)(b) of FERA to purchase 15 lakh equity shares of DSPML Sec. It was also stated that the consideration agreed upon between th....
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....or assessment year 1998-99 under section 143(3) and assessed the Appellant on a total income of Rs. 13,54,13,330. Whilst completing the assessment he denied the claim for exemption under section 54EA of the Act as, according to him, the gains arising on transfer of shares of DSPML Sec were to be assessed as a business profit. However, as he was of the view that the gains were taxable for AY 1997-98. Hence, he made the addition of Rs. 13,20,49,925 as business income on a protective basis 33. 15/02/2002 The AO completed the assessment for AY 1997-98 and assessed the gain arising on transfer of the shares of DSPML Sec as business profit. This assessment was on a substantive basis 34. 03/07/2002 The CIT(A) passed two separate orders disposing of the appeals for assessment years 1997-98 and 1998-99. In so far as the appeal for assessment year 1997-98 was concerned, he held that the gains were taxable as business profit in that assessment year. Consequent thereto, while disposing of the appeal for assessment year 1998-99 he deleted the addition that was made on a protective basis 35. 19/08/2002 The Appellant preferred appeals to the ITAT for assessment year 1997-98being ITA No. ....
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....016/ITA.II dated 02.05.2016 has in respect of tax treatment of income arising from transfer of unlisted shares has expressed the need to have a consistent view in assessments pertaining to such income. It is clarified therein that such income would be considered under the head capital gain irrespective of the period of holding. It is an admitted position that the equity shares of DSPML Sec is unlisted shares and, hence, the principle as laid down in the said circular should apply to its case. The exceptions as referred to in paragraph 3 of the said circular should not apply to its case as there is neither a 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 as, the AO in the assessment order (running page 59 of the appeal memo) has observed that Merrill 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. This position also stands confirmed in the remand report dated January....
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....ld increase in its broking business. From the point of view of ML/MLHM, they wanted an option to increase their stake at a later point of time, and not immediately, because they wanted to experience and see the manner in which the economic, legal and other reforms were taking shape in the process of opening up of the Indian economy. This option period would also enable them to gain relevant experience about the joint venture partner. Therefore, there was a possibility of them, not exercising their option of increasing the equity stake if the performance on any of these fronts was not up to their satisfaction. Hence, increasing of equity stake by grant of said option was a strategic decision and not a trading venture. 10. The ld. CIT DR referred to the various observations made by the ld. AO as well as ld. CIT(A) as elaborated from para 4.4 to 4.6 of the ld. CIT(A) order and also relied upon relevant portion of the said order. 11. We have heard the rival submissions and perused the relevant finding given in the impugned order as well as material referred to before us. As discussed above, the investment made by the assessee in equity shares of DSPML Sec was a strategic investment t....
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....g approval for granting and option to ML for purchase of shares of DSPML Sec did not fulfill the test of intention to be looked at, at the time of acquisition of shares because:- (i) In February 1996 such option was proposed to be granted by Kothari shareholders. At that point of time it was not known whether the assessee would be a shareholder of DSPML Sec or would grant any such option to ML; ii. Further, even after the allotment of shares by DSPML Sec to the assessee on 12/03/1996 it was not known which member of the Kothari shareholders would transfer the shares and quantum thereof. The assessee submitted that, it became clear that he would be transferring 5 lakh equity shares only when the option was exercised by ML/MLHM. Such action cannot have retrospective effect on the expression of intention at the time of acquisition of shares. iii. The grant of option and its exercise by ML/MLHM was, as explained hereafter, subject to various approvals to be obtained before granting the option and also before exercise of the same. 14. With respect to grant of option to ML / MLHM for purchasing the shares of DSPML from the Kothari Shareholders, various approvals were required to b....
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....ile deciding the issue relating to the year in which the gains arising on transfer of shares of DSPML Sec needs to be assessed. 16. Thus, it will not be held that simply because of aforesaid facts, the intention of the assessee was to treat the shares as "stock-in-trade" and not as "capital asset. 17. One very important contention which has been raised by the ld. Counsel before us by relying heavily upon the CBDT Circular in F.No.225/12/2016 dated 02/05/2016 in respect of tax treatment of income arising from transfer of unlisted shares wherein the CBDT has clarified in case of unlisted shares. Income should be considered under the head "capital gains" irrespective of period of holding. The relevant Circular reads as under:- "Regarding characterisation of Income from transactions in listed shares and securities, Central Board of Direct Taxes ('CBDT) had issued a clarificatory Circular no 6/2016 dated 29 February, 2016, wherein with a view to reduce litigation and maintain consistency in approach in assessments, it was instructed that income arising from transfer of listed shares and securities, which are held for more than twelve months would be taxed under the head Capital ....