2015 (11) TMI 1367 - AT - Income Tax

Taxability of the gain on the transfer of sweat equity shares allotted to the assessee - Revenue seeks to bring the entire gain to tax as short-term capital gain, the assessee concedes it to be income by way of capital gains, albeit long term in nature and, accordingly, exempt u/s.10(38) of the Act. The Revenue s alternate claims are of the income being assessable as speculation income u/s. 43(5) or even as income from other sources u/s. 56 - Held that - In essence and substance though the co-ordinate Bench in the assessee s own case for A.Y. 1998-999 express the same opinion, i.e., that the rights to the assessee, undoubtedly a capital asset, vests on the exercise of the option/s by the assessee, and not at any time earlier, who, at best, could be considered as having held the shares for a single day. In fact, it states this in the alternative, observing that the assessee did not become the owner of the shares at any point of time. This is also precisely what the A.O. states in the alternative (as did the assessing authority in that case). The shares were not intended to be held in-as-much as the payment of cost, a precondition for their acquisition, could not be made. The assessee s account was accordingly settled, for all intents and purposes, otherwise than through delivery, yielding speculative gain, assessable u/s. 43(5), and which could itself fall under any head of income, including capital gains . Thus we confirm the assessment of income on the sale of shares, as short-term capital gain or, in the alternative, as income from other sources, not liable for exemption u/s.10(38) or s. 54EC of the Act. We decide accordingly. - Decided against assessee.

Summary

Issues:
Taxability of gain on transfer of sweat equity shares during the relevant previous years allotted to the assessee.

Analysis:

Issue 1: Taxability of gain on transfer of sweat equity shares

The case involves two Appeals by the Revenue against the Order by the Commissioner of Income Tax (Appeals) regarding the taxability of the gain on the transfer of sweat equity shares during the assessment years 2002-03 and 2004-05. The Revenue contends that the entire gain should be taxed as short-term capital gain, while the assessee argues that it should be considered as income by way of capital gains, specifically long term and exempt under section 10(38) of the Income Tax Act, 1961. The Revenue also suggests alternate claims of the income being assessable as speculation income under section 43(5) or as income from other sources under section 56.

The basis of the assessee's case is the sweat equity offer made by the employer to the assessee in 1998, which was accepted by the assessee. The dispute revolves around the timing of the crystallization of the right in the shares and the subsequent gain on their transfer. The tribunal, in its analysis, concludes that the assessee's stand cannot be accepted. It emphasizes that the right in the shares only materializes upon exercise of the option by the assessee, complying with the terms and conditions of the offer. The tribunal highlights that the contractual relationship and the crystallization of the right occur at the point of exercising the option, not earlier.

The tribunal further supports its decision by referencing a previous case involving the assessee, where similar aspects of the transaction were discussed. It aligns with the earlier decision that the rights to the assessee, being a capital asset, vest upon the exercise of the option, not at the time of the initial offer. The tribunal also upholds the Revenue's view that the benefit arising is in the nature of income, assessable as income from other sources. It dismisses the assessee's appeal and confirms the assessment of income on the sale of shares as short-term capital gain or income from other sources, not eligible for specific exemptions under the Act.

In conclusion, the tribunal affirms the taxability of the gain on the transfer of sweat equity shares as short-term capital gain or income from other sources, based on the timing of the crystallization of the right in the shares upon the exercise of the option by the assessee.