TaxTMI 
TaxTMI 
2023 (10) TMI 1182
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....5,00,000 equity shares of DSP Merrill Lynch Securities 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....
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....9 has held; "For the assessment year under appeal, there is no finding 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 ....
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.... each by the Company. Further, they acquired 15,00,000 & 5,00,000 shares respectively from Kothari shareholders 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;....
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.... the issue involved in the appeal which can be gauged from the following sequence of additions:- Sr. No. Date Events 1 09/02/1996 HK filed an application with the Foreign Investment Promotion Board (FIPB) 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 interes....
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....96 only noted the proposal of ML to increase its equity stake in DSPML Sec to 40% without giving approval for the same, HK filed an application with FIPB pointing out that RBI had advised that a specific approval/ no objection permitting ML to raise its holding be 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 t....
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.... shares of DSPML Sec from resident shareholders 18. 11/11/1996 FIPB noted that equity in DSPML Sec shall be subscribed through MLHM a wholly owned subsidiary of ML 19. 21/11/1996 Subscription Agreement was entered into between ML, HK, DSPFC, MLHM& DSPML Sec. Under the said agreement the Kothari shareholders gave 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 S....
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.... the Balance Sheets for the year ending 31.03.1996 and 31.03.1997 as investments. 31. 31/10/1998 The Appellant filed his return of income for AY 1998-99 declaring a total income of Rs. 26,96,420 which included long term capital gain on the sale of shares of DSPML Sec in respect of which he claimed exemption under section 54EA of the Act. 32. 28/03/2001. The AO completed the assessment for 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 assessm....
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....0 26/09/2018 The CIT(A) passed the impugned appellate order giving effect to the ITAT's order assessment of gains arising on transfer of shares of DSPML Sec has been upheld as business income. Hence the present appeal 9. Thus, it has been submitted that the holding of shares by the assessee in DSPML should be recorded as "capital asset" and not as "stock-in-trade" for the following reasons:- a) CBDT by its Circular being F. No. 225/12/2016/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 except....
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....neutral. In the present case, sale of shares of DSPML Sec by the Appellant to MLHM was with a view to increasing association by way of equity stake of ML/MLHM in the said company in the hope that the equity broking business of the said company would improve ML Group had contacts with various Foreign Institutional Investors. Their increasing the equity stake in DSPML Sec from 8.33% to 40% would, it was felt, reflect a larger commitment to the investee company resulting in manifold 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 ....
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.... i. satisfactory negotiation as the price for transfer of the shares was to be determined at the time of exercise of such option. ii. obtaining all requisite consents and approval - which were to be obtained from FIPB, RBI, SEBI and the Stock Exchange, and iii. documentation of the transaction. According to the AO/CIT (A), the Appellant's intention was clear on 09.02.1996 which was even before the acquisition of shares i.e., he intended to transfer the shares. 13. However, seeking 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 ....
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....nce payment towards sale consideration in November, 1996 is irrelevant. ii. Even in November, 1996 when the assessee received 50% of the total advance payment of USD 25 lakh i.e., USD 12,50,000 it was not known which shareholder in the Kothari group would be honouring the exercise of option by ML and what would be the quantum of shares that would be transferred by that shareholder. iii. Even the Tribunal and the Hon'ble High Court in their orders for AY 1997-98 have held that receipt of this advance payment is an irrelevant factor while 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 th....