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2015 (11) TMI 69 - AT - Income TaxTransaction of shares - Assessment of income - whether the shares held by the assessee on behalf of its settler i.e. Mahindra & Mahindra Ltd. was capital asset and whether the income arising from sale proceeds of these shares in pursuant to exercise of the options by the eligible employees was to be determined under the head capital gains or under the head income from business? - Held that - 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 assesee 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. The assessee trust is like an extended arm or special purpose vehicle of the settler company, created for the purpose of carrying out certain transactions on behalf of the settler company, as discussed in detail in the above paras, and therefore, under these facts & circumstances, the nature and character of shares held by the assessee trust, on behalf of the assessee trust, and resultant gain or loss arising from the transfer of these shares, should also be same, as it would have been in the hands of settler company. Thus, viewed from this angle also the shares held by the assessee trust are capital assets in its hands and gain arising on the transfer of these shares by the assessee trust, shall be taxable under the head income from the capital gains in the hands of assessee trust. - Decided in favour of assessee Income of the assessee trust - whether chargeable to tax at maximum margin rate? - Held that - The long term capital gain on shares is chargeable to tax at maximum marginal rate which cannot exceed the rate provide u/s 112 of the Act. Therefore, we hold that the action of AO in not providing the benefit of section 112 to the assessee with regard to the income assessable under the head income from capital gains is contrary to law and facts and the same is reversed. The AO is directed to charge tax on capital gains as per section 112 of the Act. With regard to other issue raised by the assessee i.e. availability of benefit of second proviso to section 112, it is seen by us that same has not been examined properly on facts. For this limited purpose, we send this issue back to the file of the AO. The assessee shall place requisite details and evidences before the AO to establish that the impugned shares were listed with stock exchange and assessee was eligible for the benefit of second proviso of section 112, as per facts. The AO shall give full opportunity to the assessee and shall confine his examination limited to this factual requirement only - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Confirmation of the order passed under section 143(3) by the Assessing Officer (AO). 2. Assessment of income under the head "Profits and gains of business" instead of "Capital gains." 3. Over-assessment of income by Rs. 19.64 crores. 4. Chargeability of income at the maximum marginal rate. 5. Acceptance of the computation of total income as done by the appellant in the return. 6. Consequential relief in the amount of tax and interest charged. Detailed Analysis: Issue 1: Confirmation of the Order Passed Under Section 143(3) by the AO - The appellant challenged the confirmation of the order passed by the AO under section 143(3). However, this ground was considered general and did not require specific adjudication. Issue 2: Assessment of Income Under the Head "Profits and Gains of Business" Instead of "Capital Gains" - Facts of the Case: The appellant, a trust established by Mahindra & Mahindra Ltd. for the welfare of its employees, was involved in administering the Employees Stock Option Scheme (ESOS). The trust held shares of Mahindra & Mahindra Ltd. and issued these shares to eligible employees upon exercise of stock options. - AO's Position: The AO assessed the income from the sale of these shares under the head "Profits and gains of business" instead of "Capital gains," arguing that the trust's activities were systematic and organized, characteristics of business activity. - Appellant's Argument: The appellant contended that the shares were held as capital assets and not for trading purposes. The trust's activities were solely to administer the ESOS and not to earn profits. - Tribunal's Findings: The tribunal analyzed the trust deed, ESOS, and the nature of transactions. It concluded that the trust held the shares in a fiduciary capacity, akin to a Special Purpose Vehicle (SPV) for the settler company. The shares were not held for trading but for the benefit of the employees. The tribunal held that the shares were capital assets, and the income from their sale should be assessed under the head "Capital gains." - Conclusion: The tribunal allowed this ground, holding that the shares were capital assets, and the income from their sale was to be taxed under the head "Capital gains." Issue 3: Over-Assessment of Income by Rs. 19.64 Crores - Since the tribunal allowed the appellant's claim that the income should be assessed under the head "Capital gains," this ground became infructuous and was dismissed. Issue 4: Chargeability of Income at the Maximum Marginal Rate - AO's Position: The AO held that the income of the trust was chargeable to tax at the maximum marginal rate under section 164(1) of the Income Tax Act, as the trust was a discretionary trust with indeterminate beneficiaries. - Appellant's Argument: The appellant argued that the trust's income should not be taxed at the maximum marginal rate and relied on the judgment of the Bombay ITAT in the case of Jamsetji Tata Trust. - Tribunal's Findings: The tribunal referred to the judgment in the case of Jamsetji Tata Trust, which held that the rate of tax on long-term capital gains should not exceed the rate provided under section 112. The tribunal directed the AO to apply the concessional rate of tax as per section 112 for long-term capital gains. - Conclusion: The tribunal allowed this ground for statistical purposes, directing the AO to re-examine the factual aspects and apply the appropriate rate of tax as per section 112. Issue 5: Acceptance of the Computation of Total Income as Done by the Appellant in the Return - This ground was considered general and did not require specific adjudication. Issue 6: Consequential Relief in the Amount of Tax and Interest Charged - The tribunal's decision on the main issues would result in consequential relief in the amount of tax and interest charged. Final Judgment: - The appeal of the assessee was partly allowed. The tribunal directed the AO to assess the income from the sale of shares under the head "Capital gains" and apply the appropriate rate of tax as per section 112. The AO was also directed to re-examine the factual aspects regarding the applicability of the second proviso to section 112.
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