2019 (1) TMI 1362 - HC - Income Tax

Assessment of trust - Benefit of section 112 read with section 164 - proceeds received from the employees - income assessable under the head capital gain - whether the share held by the assessee trust and transferred to the employee were in the nature of capital asset and not stock in trade? - Held that - The assessee trust is like a Special Purpose Vehicle (SPV) of the settler company, which has been formed for the special purpose of holding the shares of the settler company and issuing the same to the eligible employees, interalia, for the benefit of settler and its employees. It is acting as an extended arm of the settler company. It is not holding the shares in its own absolute rights, as has been contended by the Revenue also. Under these circumstances, it will be very difficult to categorise these shares as business assets, meant for trading 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 assessee 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 circumstances, the assessee trust is not in a position to earn maximum 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. - No question of law.

Summary

Issues:
1. Benefit of section 112 read with section 164 of the Income Tax Act, 1961 not provided to the assessee.
2. Taxation of the share held by the assessee trust and transferred to the employee under the head income from capital gain or business income.

Issue 1:
The primary issue in this case revolves around the interpretation of the Income Tax Act, specifically regarding the benefit of section 112 read with section 164 not being provided to the assessee. The Tribunal held that the Assessing Officer erred in not granting this benefit to the assessee in relation to the income assessable under the head capital gain. The Tribunal found that the Trust, acting in a fiduciary capacity, was akin to a Special Purpose Vehicle (SPV) formed for holding shares of the settler company and issuing them to eligible employees. The Tribunal concluded that the proceeds from such transactions should not be taxed as business income but rather as capital gain. The Tribunal's decision was based on a thorough analysis of the nature of the Trust's activities and the context in which the shares were held and transferred.

Issue 2:
The second issue pertains to the taxation treatment of the shares held by the assessee trust and transferred to employees. The Assessing Officer initially classified the proceeds from these transactions as business income, contrary to the Tribunal's finding that they should be considered as capital gain. The Tribunal emphasized that the Trust was not engaged in trading activities but rather acted as a custodian of shares for the benefit of employees, following the recommendations of the Compensation Committee. The Tribunal highlighted the differences between trading motives and investment activities, concluding that the Trust's actions aligned more with an investor's approach rather than a trader's. The Tribunal's detailed analysis led to the determination that the shares held by the Trust could not be categorized as stock-in-trade, thereby supporting the treatment of the resultant gain as income from capital gain.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing that the Trust's role as a fiduciary entity and the nature of its activities justified the taxation of the proceeds as capital gain rather than business income. The judgment provides a comprehensive analysis of the legal and factual aspects involved, ensuring a fair and reasoned interpretation of the Income Tax Act in the context of the Trust's operations and transactions.