2008 (3) TMI 407 - AT - Income Tax

Summary

Issues Involved:
1. Beneficial Ownership vs. Legal Ownership for Capital Asset
2. Period of Ownership for Capital Gains Calculation
3. Application of ESOP Scheme and Public Issue Process
4. Treatment of Dividends and Bonus Shares
5. Determination of Short-term vs. Long-term Capital Gains

Summary:

Issue 1: Beneficial Ownership vs. Legal Ownership for Capital Asset
The CIT(A) failed to appreciate that only the 'beneficial ownership' is considered for reckoning the period of ownership in case of a capital asset. The assessee argued that he became the beneficial owner of the shares from 29th March, 1998, and thus, the capital gain should be treated as long-term. However, the AO and CIT(A) determined that the assessee acquired full legal ownership only on 1st Jan., 2003, making the gain short-term.

Issue 2: Period of Ownership for Capital Gains Calculation
The AO argued that the assessee exercised the ESOP option in the financial year 2003-04, thus becoming the complete owner of the shares during that year. Consequently, the shares were held for less than 12 months, resulting in short-term capital gain. The assessee contended that the shares were held since 1998, but the AO and CIT(A) concluded that full legal ownership was only achieved in 2003.

Issue 3: Application of ESOP Scheme and Public Issue Process
The CIT(A) grossly failed in appreciating the process of public issue of shares and the consequent application in the assessee's case. The AO noted that the ESOP-1998 Scheme involved a phased conversion of beneficiary ownership to full legal ownership, contingent on continued employment and payment of the strike price. The assessee's argument that legal ownership was established upon share allotment was not accepted.

Issue 4: Treatment of Dividends and Bonus Shares
The CIT(A) failed to appreciate that dividends and bonuses are received only by registered owners of shares. The AO and CIT(A) held that receiving dividends as a beneficiary owner does not equate to full legal ownership, which is necessary for determining the period of holding for capital gains.

Issue 5: Determination of Short-term vs. Long-term Capital Gains
The AO and CIT(A) determined that the gain arising from the sale of shares was short-term because the assessee acquired full legal ownership only in 2003. The assessee's argument that the holding period should be considered from the date of beneficiary ownership was rejected. The Tribunal concluded that the assessee held full legal ownership in a phased manner, and thus, the profit arising from 30% of shares held for less than 12 months was short-term, while the profit from other shares was long-term.

Conclusion:
The appeal was partly allowed, recognizing that the assessee held full legal ownership of shares in a phased manner, impacting the classification of capital gains as short-term or long-term.