2024 (8) TMI 623 - AT - Income Tax

Capital gain on sale of shares - LTCG or STCG - period of holding of shares - assessee is a NRI and a resident of USA - Assessing Officer has selectively used the Third Employment Agreement to restrict the period of holding of asset to less than 24 months -Whether the capital asset held by the assessee and subsequently transferred is any share/security of an Indian company or some other asset? HELD THAT - Since, in the facts of the present appeal the shares were never delivered in the name of the assessee, it cannot be said that the assessee had held any capital asset in the nature of share or security of an Indian company so as to get the benefit of the third proviso to section 2(42A) of the Act. In our view, the capital asset held by the assessee, which is subject to capital gain, would not fall within the exceptions provided under section 2(42A) of the Act at all. Therefore, to qualify as long term capital asset, the assessee should have held it for a period exceeding 36 months. Factually, the rights and interests acquired by the assessee under the assignment deed were held for a period less than 36 months. Therefore, the capital asset transferred by the assessee has to be treated as short term capital asset. Taxability of such asset in India - It is the case of the assessee that as per section 9(1)(i) of the Act, which is a deeming provision, income accruing or arising whether directly or indirectly through the transfer of capital asset situated in India has to be taxed in India - HELD THAT - Patently, the capital asset in the nature of rights and interests accrued to the assessee as part of employment benefit and was acquired by him through assignment deed dated 29th December, 2014. Thus, the source of assessee s rights and interests constituting a capital asset was through aforesaid agreement, executed in USA. It is further relevant to observe that the amended employment agreement dated 16.07.2014 says that any legal action or suit related in any way to the agreement shall be brought exclusively in the Federal State Court of California. Considered in the aforesaid perspective, the situs of capital asset in the nature of rights and interests acquired by the assessee, which were subsequently transferred and subjected to capital gain, was in USA and not located in India. Therefore, in terms of section 9(1)(i)(a) of the Act, the income derived from transfer of such capital asset is not taxable in India. Thus, we hold that the location of the asset transferred by the assessee, being situated outside India, the capital gain derived would not be taxable in India. Assessee had filed a return of income in India voluntarily offering to tax the capital gain derived by treating it as long term capital gain - We must observe that in the termination agreement dated 1st February, 2017, a copy of which is placed at page 293 of the paper-book, it has been clearly stipulated that the payments to be received by the assessee towards transfer of his right and interests will represent capital gain taxable under the domestic law of India and has to be offered to tax by the assessee by filing a return of income in India. The return of income filed by the assessee offering to tax the long term capital gain is strictly in compliance with the terms of termination agreement. Therefore, the assessee is entitled for relief only to the extent of claims made in the return of income. We direct the AO to accept the capital gain offered by the assessee in the return of income filed for the impugned assessment.

Issues Involved:
1. Nature of capital gain: whether long-term or short-term.
2. Taxability of the capital gain in India.
3. Allowability of deduction on account of cost of acquisition in relation to the transfer of capital assets.

Detailed Analysis:

Issue 1: Nature of Capital Gain - Long Term or Short Term
The assessee, a Non-Resident Indian (NRI) and resident of the USA, filed a return of income for the assessment year 2017-18, declaring long-term capital gain from the transfer of Compulsorily Convertible Preference Shares (CCPS) of two Indian companies, Snapdeal and Ola. The Assessing Officer (AO) treated the gain as short-term capital gain, arguing that the shares were acquired through an agreement dated 20.05.2015, and thus the holding period was less than 24 months. The assessee contended that the shares were acquired through an assignment deed dated 29.12.2014, making the holding period more than 24 months.

Upon reviewing the agreements, it was found that the Second Employment Agreement dated 17.12.2014, which was initially considered a draft, did not confer any rights or interests in the shares. Instead, the rights and interests in the shares were acquired through the assignment deed dated 29.12.2014. The Tribunal concluded that the period of holding should be reckoned from 29.12.2014, making the gain long-term.

Issue 2: Taxability of the Capital Gain in India
The Tribunal examined whether the capital gain derived from the transfer of rights and interests in the shares was taxable in India. The termination agreement dated 01.02.2017 indicated that the assessee's interests in the shares were extinguished for a cash payment. The Tribunal noted that the assessee never became the legal owner of the shares, and what was transferred were rights and interests in the shares, not the shares themselves.

The Tribunal referred to section 9(1)(i) of the Income Tax Act, which deems income from the transfer of a capital asset situated in India to be taxable in India. However, since the rights and interests were acquired through an agreement executed in the USA, the situs of the capital asset was considered to be outside India. Consequently, the capital gain was not taxable in India.

Issue 3: Allowability of Deduction on Account of Cost of Acquisition
The AO disallowed the cost of acquisition claimed by the assessee, arguing that the salary compensation received in the USA was not taxable in India, and thus there was no tax base for claiming the cost of acquisition. The Tribunal did not delve into this issue in detail, as it became academic after concluding that the capital gain was not taxable in India.

Conclusion:
The Tribunal directed the AO to accept the capital gain offered by the assessee in the return of income filed, treating it as long-term capital gain. The appeal was allowed in favor of the assessee, and the ancillary issue relating to the claim of cost of acquisition was rendered academic.

← Previous Next →