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2015 (11) TMI 69 - ITAT MUMBAI

2015 (11) TMI 69 - ITAT MUMBAI - [2015] 44 ITR (Trib) 658 (ITAT [Mum]) - Transaction of shares - Assessment of income - whether the shares held by the assessee on behalf of its settler i.e. Mahindra & Mahindra Ltd. was capital asset and whether the income arising from sale proceeds of these shares in pursuant to exercise of the options by the eligible employees was to be determined under the head capital gains or under the head income from business? - Held that:- In the case of a trader, the mot .....

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mum profits. Thus, it could be safely said that certainly assessee trust is not in the business of trading of shares. The shares held by the assessee trust cannot be categorised as "stock- in-trade" of the assessee trust.

The assessee trust is like an extended arm or special purpose vehicle of the settler company, created for the purpose of carrying out certain transactions on behalf of the settler company, as discussed in detail in the above paras, and therefore, under these facts & .....

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e hands of assessee trust. - Decided in favour of assessee

Income of the assessee trust - whether chargeable to tax at maximum margin rate? - Held that:- The long term capital gain on shares is chargeable to tax at maximum marginal rate which cannot exceed the rate provide u/s 112 of the Act. Therefore, we hold that the action of AO in not providing the benefit of section 112 to the assessee with regard to the income assessable under the head income from capital gains is contrary to l .....

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stock exchange and assessee was eligible for the benefit of second proviso of section 112, as per facts. The AO shall give full opportunity to the assessee and shall confine his examination limited to this factual requirement only - Decided in favour of assessee for statistical purposes. - ITA No.2389/Mum/2015 - Dated:- 21-10-2015 - SHRI JOGINDER SINGH, JM & SHRI R.C.SHARMA, AM For The Assessee : Shri H.P.Mahajani For The Revenue : Shri N.P.Singh ORDER Per R.C.Sharma, AM The present appeal i .....

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peal for your sympathetic consideration, which are raised without prejudice to each other: 1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming in its entirety the order passed u/s 143(3) by the learned Assessing Officer (AO for short). The subject order is contrary to facts and the legal position and is perverse and, therefore, merits being set aside; 2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in con .....

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ion; c. The shares were being held only to promote the business interest of M & M; d. It was merely engaged in the business of administration of the Employees Stock Option Scheme; and, e. The Appellant had no independent real existence of its own. 3. Without prejudice to the above the learned CIT(A) failed to dispose of the submission of the Appellant that, even if income is assessable under the head profits and gains of business, the AO had over-assessed it by ₹ 19.64 crores. 4. The l .....

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its total income. 3. We have heard rival contentions. During the course of hearing, Shri H.P.Mahajani made submissions on behalf of assessee and Shri N.P.Singh, ld. CIT DR made submissions on behalf of Revenue. After hearing both the sides, this appeal is adjudicated as under :- 4. Grounds No 1,5 & 6 are general, therefore, do not need any specific adjudication. 5. Ground No.2 : In this ground the assessee has challenged the action of ld. CIT(A) in confirming the action of AO in assessing th .....

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, namely, Mahindra & Mahindra Ltd. and its subsidiaries, for the subscription to the equity shares of the said company. The AO further noted that the activities of the trust include investing the General Corpus in the Equity Shares of the Company (ie. Mahindra & Mahindra Ltd.), to hold the Equity Shares of the Company and to administer the plans as instructed by the Compensation Committee, for the benefit of the Eligible Employees. The Compensation Committee (constituted by the Settler C .....

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ce is the price at which the Eligible Employee is entitled to acquire the Equity Shares pursuant to the Options granted and vested in him/her under the ESOS and is decided by the trust in accordance with the recommendations of the Compensation Committee at the time of Grant of Options. Thereafter, the Eligible Employees are entitled to Exercise the options after the vesting date. Exercise of the options means the act whereby the Eligible Employee actually applies to the trust to exercise the opt .....

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ised their respective options and, in turn, have paid the corresponding Exercise Price to the trust and the trust has issued underlying shares to such Eligible Employees in view of their exercise of the options. Based on these proceeds received from the Eligible Employees, the trust has recognized the revenue and computed and shown Long Term Capital Gains in its return of income. The trust has also shown interest from deposits with banks under the head Income from Other Sources. After perusing t .....

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of section 164(1) are applicable, whether the assessee trust is covered by the exception given under proviso (iv) of section 164{1}? 5.3. Thus, the relevant question for adjudication of this ground, as was raised by the AO was - whether the shares held by the assessee on behalf of its settler i.e. Mahindra & Mahindra Ltd. was capital asset and whether the income arising from sale proceeds of these shares in pursuant to exercise of the options by the eligible employees was to be determined un .....

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ii. Till the time the employee exercises the option, the shares remain in the name of the trust and it is the absolute owner of the shares though of course with attendant obligations envisaged in the Trust deed and ESOS. iii. The resultant capital gains are taxable only because such transfers are without payment of STI. iv. Referring to provisions of sections 115WB,115WC, 17(2),49(2AA) and 2(42A), the assessee has shown the incidence of tax at different stages from issue of shares by the Company .....

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between such cost and the price at which shares are transferred to the employees (indirect transfer) pursuant to exercise of Option represents sale consideration to the trust and purchase consideration to the employee exercising the Option; iv. Purchase consideration paid by the employee minus fair market value computed under Rule 3(8) represents taxable value of perquisite in his hands. v. The essence of business is not only that it should be an activity carried on a regular basis and in a syst .....

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g in them or for holding them as stock in trade. The purpose was only to make available more shares for administering the ESOP Scheme of the employer 5.4. However, the AO was not satisfied and it was held by the AO that the impugned shares constituted business assets in the hands of the assessee and consequently income arising there-from was to be assessed under the head income from business. This conclusion was drawn by the AO on the basis of following observations:- i. The name and style of th .....

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nsation Committee are in respect of grant of options to the eligible employees. Hence, it is not correct contention that the trust has nothing to do with the options. ii. The facts of the case indicate that the Compensation Committee only recommends the grant of options to the eligible employees to the assessee trust. Thereafter the assessee trust decides the exercise price and grants options to the eligible employees. ii. The Exercise Price is the price at which the Eligible Employee is entitle .....

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te. vi. Exercise of the options means the act whereby the eligible employee actually applies to the trust to exercise the options granted to him/her. vii. On exercise of the options by the eligible employees, the trust scrutinizes the details and after realizing the exercise price paid by the eligible employees recognizes revenue and issues/distributes the underlying equity shares of the Company to the eligible employees. viii. The assessee trust's submissions in respect of fringe benefit an .....

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were not listed securities. According to the AO, these options would not fall within the ambit of capital asset as per provisions of Income Tax Act, and resultantly income arising there-from would not be covered under the head capital gains. It was further held by the AO that the activities carried out by the assessee trust were conducted on regular basis and in systematic and organized manner showing income/profits since last several years and these were characteristics of business activity, an .....

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e trust and resultant gain was to be assessed as capital gain. The CIT(A) rejected all the contentions of the assessee and upheld the action of the AO in assessing the amount of gain as profits or business arising on transfer of shares and confirmed the action of the AO in assessing the same as business income. 5.6. Before us, both the parties have made detailed submissions. 5.7. Ld. CIT DR reiterated observations made by the AO, and supported contentions AO in treating the impugned amount as bu .....

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settler company. It was submitted that essence of business activity would not be judged only from the fact it is an activity carried on a regular basis and in a systematic and organized manner, but the other important factor is that such activity should be carried out with a view to earn income. The main object for carrying out the activity should be earning of profits. It is also inherent in the definition of the word business as per Section 2(13) of the Act and in the words trade , commerce o .....

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igible employees exercising the options and how much is predetermined by the difference having the cost and exercise price and these are not attributes of business. 5.9. According to the ld. counsel in the present case, the only object for carrying out the activity by the assessee trust is to administer ESOP scheme of the employer and to transfer shares to the employees at the point of time they decide to exercise the option. There was neither a commercial motive, nor a profit motive, as is norm .....

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the assessee trust was established on 1-3-2001 and in the last 10 years only five transactions of purchase from secondary market were made which constituted hardly 4.09% of holding at the end of the year under appeal. According to ld. Counsel by any stretch of imagination, it cannot be said that these five instances were purchased from the secondary market over a period of 10 years, and thus could not have the attributes of a trader buying stock in trade for the purpose of reselling them. Accord .....

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s of various evidences enclosed in the paper book that the period of holding of these shares was quite long and few instances were referred to showing period of holding being five years to eight years. Our attention was drawn by the him upon the Circular of the CBDT in support of the claim of the assessee that in the given facts and circumstances, the shares held by the assessee trust would constitute a capital asset. 5.10. In nutshell, ld. counsel for the assessee submitted that the shares were .....

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these shares, in the hands of the trust, was merely circumscribed by the ESOP scheme. But in view of the decision of the Hon‟ble Supreme Court in the case of Podar Cement (supra), such contractual restriction do not change the character nor defeat ownership in the asset held by the trust. Thus, the shares held by the trust, clearly classified as investment, and had been shown in the audited accounts of the trust as such, and accordingly return of income was rightly filed by the assessee by .....

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d here first is to determine the nature of shares held by the assessee trust and the resultant profit/gain/loss derived from transfer of these shares. Before we discuss about the nature of the shares held and transferred by the assessee trust during the year, we find it necessary to briefly understand and appreciate the nature and constitution of the assessee trust. The assessee trust namely Mahindra & Mahindra Employees‟ Stock Option Trust, was established on 1st March, 2001 for the w .....

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ompensation committee for the benefit of the eligible employees. The brief procedure of option exercise that transfer to the employees‟ Dmat‟ account, as followed by the assessee trust, was that the compensation committee would grant shares to the employees based on criteria like length of services, grade, performance etc., to be vested as per the scheme. Thereafter, the HR Department of the said settler company would send grant letter to each such employee, and after the vesting dat .....

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ing the receipt of amount for exercise and perquisite tax, the assessee trust would transfer shares to the employee‟s demat account. The procedure has been stated to have been carried out by the assessee trust in this manner. The issue arose, whether the exercise price received by the assessee trust would give rise to capital gain or business income in the hands of the assessee trust. For analyzing this issue, we have first, analysed, the trust deed of the assessee trust under which the as .....

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mmittee. The Compensation Committee of the trust, as per definition given in the trust deed, means, the Compensation Committee of the Directors of the settler company, as constituted by the Board of Directors. Few other terms are also worth noting in this regard e.g. the settler is entrusted with the authority to formulate and implement the plans., the exercise price as per trust deed means exercise price for equity share as decided by the trust in accordance with recommendation of the compensat .....

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he benefit of the eligible employees. As per the trust deed, the trust funds are to be applied for the purpose of the employees‟ stock option scheme and for administration of the trust. It has also been provided in the trust deed that the trust may, if required for the purposes of meeting with the expenses of the trust, borrow such amounts in the form of loans or obtain grants from the settler company. 5.12. Further, it is worth noting that the scheme formulated by the company, available a .....

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apital of the Company consists of 11,04,84,380 Equity Shares of the face value of ₹ 10 each. The Equity Shares aggregating to 55,24,219 to be issued to the Trust constitute 5% of the total issued and paid-up share capital of the Company as on March 31, 2000. The Company reserves the right to issue further Equity Shares to the Trust at its discretion, for the purposes of the ESOS or any further scheme/plan as may be determined by the Company, subject to compliance with the applicable laws. .....

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tions. Subject to the terms and conditions mentioned in the Trust Deed, the. Trust may, at the discretion of the Trustees, from time to time, purchase Equity Shares of the Company on any of the stock exchanges where the shares of the Company are listed. 5.13. Thus, perusal of all the factual material placed before us, reveals that the assessee trust has been holding the shares in the fiduciary capacity. It could also be said, in other words, that the assessee trust is like a Special Purpose Vehi .....

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ding by the assessee trust. In the case of a trader, the motive is to maximize the profits, as the main object of the proper is mechanized the profits by doing the business of trading. The attributes available in the transaction of the assesee trust are unlike that of a trader and are more like that of an investor. The assessee trust is not free or authorized to sell the shares, held by it on behalf of the settler company, to any person in the free market at fair market price. Under such circums .....

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xercise/transaction would have been done directly by the settler trust. If the settler company would have issued these shares directly in the name of the employees at a value higher than their face value, then the difference amount would have been share premium in the hands of settler company, and undisputedly, the same would be treated as capital receipt in its hands. In that case, the difference amount would certainly be not treated as profit earned from business activities of the settler comp .....

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oss arising from the transfer of these shares, should also be same, as it would have been in the hands of settler company. Thus, viewed from this angle also the shares held by the assessee trust are capital assets in its hands and gain arising on the transfer of these shares by the assessee trust, shall be taxable under the head income from the capital gains in the hands of assessee trust. 5.15. Finally, we deal with the doubts expressed by the AO and the Ld. CIT(A), that impugned shares were no .....

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2 ITR 594, Hon‟ble Bombay High Court got occasion to explain the meaning and scope of the word property‟ in context of section 2(14). It was observed by the Hon‟ble High Court that the word property , used in section 2(14), is an expression of widest amplitude as the definition clause has re-emphasised this, by user of the words ..of any kind . Thus, any right which can be called as a property , will be included in the definition of capital asset . Further in the case of Dhurja .....

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unjab & Haryana High Court in the case of Hari Brothers Pvt. Ltd. vs. ITO 52 ITR 399, wherein it was held that right to subscribe for shares of company is also a capital asset. On exercising the option, the assessee gets shares, which is only conversion of one capital asset into other capital assets. Similar view has been followed by Honb‟le Delhi Bench ITAT in the case of Abhiram Seth vs JCIT 150 TTJ 228 (Delhi) and many other cases of similar nature. We further derive support from th .....

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well as Ld. CIT(A), in not treating the impugned shares as capital assets in the hands of assessee trust, were contrary to law and facts. 5.16. Apart from the aforesaid reasoning, last but not the least, we further find that the most important aspect is with regard to own history‟ of the assessee trust. It is noted by us that since inception, the assessee trust has been filing its return of income, wherein these shares were shown as capital assets in the balance sheet. Resultant gain has b .....

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that situation, in our considered view, the Revenue does not have unfettered powers under the law to disturb such a consistent stand, and that too without there being any change in facts or law. If this kind of approach of the department is allowed, in unregulated manner, it may lead to chaos in compliance of fiscal constitute and there will be uncertainties, all around. The finality of litigation would become extinct. Our view is supported by the judgment of Hon‟ble Supreme Court in the .....

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s issue, as has been adopted by the assessee and accepted by the department, since inception, during last many years. There was no cause or justification with the Revenue to take a contrary stand in this year. 5.18. Ld. AO has mentioned in the assessment order that the Assessee had sold some shares in the secondary market, and on the basis of this, it should be inferred that the Assessee was in the business of trading of shares. We have examined even this argument of the Ld. DR and find that the .....

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hat assessee is not free to sell shares to any person at its own will. The assessee trust is bound by the trust deed and also with the terms of the ESOS scheme, which are in turn controlled by the settler company. The assessee is not permitted to take advantage of fluctuations of stock market. There are no attributes like that of a trader. Detailed discussion has been already been made in this record in earlier paras. 5.19. Thus, keeping in view the aforesaid discussion and totality of facts and .....

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t even if income is assessable under the head profits and gains of the business, the AO has over assessed its income. 6.1. Since, we have allowed Ground No.2 of the assessee‟s appeal, holding that impugned income is to be assessed under the head capital gains, as was shown by the assessee in the Return filed by it, and therefore, Ground no.3 becomes infructuous and dismissed. 7. Ground No.4: In this ground, the assessee has challenged the action of Ld. CIT(A) in confirming the action of th .....

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e from a date much earlier than that of section 112 and it deals with special cases, whereas the provision of section 112 deal with certain other special cases. Reliance was placed by the AO on the judgments of Madras Bench of ITAT in the case of Gopal Srinivasan Trust vs Addnl. CIT 46 ITD 157. According to the AO, reading of provisions of section 164(1) along with provisions of section 160 of the Act and their specific reference to income and not total income makes it very clear that entire inc .....

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eld by him in para 1.3 of the appellate order that it was clear from the deed of the trust that individual shares are indeterminate or unknown, since individual shares of various employees have not been specified in the deed of the trust and also for the reason that trust has been found for benefit of both i.e. for present as well as future employees/director of the settler company. These future persons are not known, and hence tax is to be charged on income of the assessee at maximum marginal r .....

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n Other hand, Ld. DR has placed reliance on the orders of lower authorities. We have gone through the submissions made by both the sides as well as cases relied upon by the Ld. Counsel. The issue involved before us is that even if income is assessed as per section 164, whether the entire amount will be subjected to maximum marginal rate of tax on the entire income, or the assessee shall be given the benefit of specific concessions provided by the specific section i.e. section 112 dealing with th .....

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ded u/s 111A as 15%. However relevant income which is derived from the property held under trust wholly for charitable or religious purpose is charged to tax as per the provisions of section 164(2) which reads as under:- [(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, [or which is of the nature referred to in sub-clause (iia) of clause (24) of section 2,] [or which is of the nature referred to in sub-section (4A) of .....

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the maximum marginal rate.]] 13.6 Section 164(2) does not prescribe the rate of tax but it mandates the maximum marginal rate as prescribed under the provision of Act. Section 111A is a special provision for rate of tax chargeable on such income which reads as under:- 111A. (1) Where the total income of an assessee includes any income chargeable under the head Capital gains , arising from the transfer of a short term capital asset, being an equity share in a company or a unitof any equity orien .....

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ble on the balance amount of the total income as if such balance amount were the total income of the assessee: Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income tax, then , such income as so reduced falls short of the maximum amount which is not chargeable income tax and the tax on the balance of such short term capital gains sha .....

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gains. Explanation - for the purpose of this section, the expression equity oriented fund shall have the meaning assigned to it in the Explanation to clause (38) of Section 10. 13.7 When the short term capital gain arising from the sale of shares subjected to STT is chargeable to tax at 15% then the maximum marginal rate on such income cannot exceed the maximum rate of tax provided under the Act. Accordingly, we are of the view that the short term capital gain on sale of shares already subjecte .....

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