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Shares- latest circulars intended to reduce litigation - some suggestions to really reduce litigation on share transactions and other tax litigation in tax matters

Income Tax - Direct Tax Code - DTC - By: - CA DEV KUMAR KOTHARI - Dated:- 23-7-2016 - Relevant references and links: Circular - Income Tax - LETTER F.NO.225/12/2016/ITA.II DATED 2-5-2016 Circular no. 6/2016 dated 29th February, 2016, Provisions of section 2 of Income-tax Act, 1961 containing various meanings and explanations about capital asset, stock-in-trade, long-term and short-term capital assets , long-term and short-term capital gains etc. General discussion: Disputes about treatment of ga .....

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rculars and instructions issued by CBDT have not been able to reduce litigation, rather more litigation have been created due to riders, exceptions, and discretions provided to tax authorities. It is advisable to provide a minimum period of holding for treatment of any asset as capital asset and treatment as short-term capital asset . If holding period is less than such period, then the asset must not be regarded a capital asset and income or loss should be assessed under head business or other .....

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ters and their associates. Majority of unlisted companies are private limited companies. Earlier, under the companies Act, limit on number of shareholders was 50 + any employee or ex-employee shareholder, who continues to be shareholder. Under the Companies act 2013 this limit has been raised to 200 + any employee or ex-employee shareholder who continues to be shareholder. In case of private limited companies, there are restrictions on transfer of shares and invitation of public for subscription .....

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Purpose Vehicle ( SPV) through whom business is carried by promoters in corporate style. Some SPV s are initially formed for limited purpose and once that purpose is achieved, either company is wound up or it changes objects for furtherance of other business by the same set of promoters or by new promoters. In some cases a section of shareholders transfer shares to other section of shareholders and company continue. Shares in such companies are acquired with a long-term perspective and not for s .....

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s is limited. Marketability of share of unlisted public companies are also restricted because generally people in control have understanding about transfer of shares and shares can be transferred within group of approved people including nominees. Therefore, shares of such companies (private or public) being held with a long-term perspective and as instrumentality for controlling companies are generally capital asset . Exceptions: The exceptions can be in respect of shares held by some persons w .....

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lders. Listed shares held by people in control of companies: Even in case of listed shares held by promoters and directors who control such companies are acquired and held with a long-term perspective and are used as instrumental for control of such companies. Therefore, even listed shares held by people in control of company or acquired with a view to acquire significant holding are for long-term perspective and are therefore investments and capital assets and not stock-in-trade. Shares held ab .....

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t-term perspective and objective or even with a view to trade and gain. Minimum holding period for short-term asset should be provided: In case of freely marketable assets, particularly listed shares, it is desirable that a minimum holding period (say one month) be provide for treatment of listed shares and three months for any other asset as a capital asset . In fact different minimum period of holding for treatment as short-term capital asset can be provided, for example: Listed shares - one m .....

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circular about shares: Recently two circulars have been issued by CBDT about treatment of income as business income or capital gains. The circulars have been issued for simplicity and avoid litigations. However, instructions are with many riders. This provide scope of more discretion to the Assessing Officer and are therefore, likely to create more litigation. Some conditions stipulated are like that an option once exercised by assessee shall prevail in future also is totally unjustified and rob .....

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ued a clarificatory Circular no. 6/2016 dated 29th 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 Gain' unless the taxpayer itself treats these as its stock- in-trade and transfer thereof as its business income. It was further stated that in other situations, th .....

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riod of holding, with a view to avoid disputes/litigation and to maintain uniform approach. 3. It is, however, clarified that the above would not be necessarily applied in the situations where: i. the genuineness of transactions in unlisted shares itself is questionable; or ii. the transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or iii. the transfer of unlisted shares is made along with the control and management of underlying business and the Assessin .....

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2 of the Income-tax Act, 1961 ('Act') defines the term capital asset to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-in-trade/ trading assets or both. Determination of the character of a particular investment in shares or other securities, whe .....

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said principles for guidance of the field formations . 3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. Whether the same is in the nature of capital gain or busi .....

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espective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. .....

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the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain / Short Term Capital Loss or any other sham transactions. 5. It is reiterated that the above principles have been formulated with the sale objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relev .....

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by the assessee. In fact , in disputed cases what has happened in past are illustrated below: a. Where assessee claimed business income or loss, AO treated it as capital gains. b. Where assessee claimed capital gains AO treated it as business income. c. In scrutiny cases, generally intentions of the AO has always been to try denial of a claims made by the assessee, just to deny benefits available under law to assessee. For example, if an assessee has claimed profit on transfer ofshares as busin .....

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noticed that generally the Government of India (GOI) has adopted policy to make amendments in tax laws just to deny benefits allowed under law, if such benefit involved litigation and courts held in favour of tax payers. The amendments are introduced with a view to express legislative intention. This really is a loose expression used to make amendment. When a provision has remained in statutory books for years and have been interpreted then how suddenly GOI wakeup, and express legislative intent .....

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a tax benefit by assessee should not be viewed suspiciously and as tax avoidance. d. The provisions intended for benefit of taxpayers must be interpreted liberally. e. Accountability of tax authorities to consider law, facts and explanation of taxpayer reasonably and honestly and not just to deny benefit to tax payers. The present attitude of tax authorities is find ways and means to disallow benefit, wherever there is some scope to deny the benefit, even though unreasonably. f. There should be .....

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