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TMI Blog2024 (8) TMI 623X X X X Extracts X X X X X X X X Extracts X X X X ..... y, 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offer their comments. While the assessee has completely denied the allegations made in the complaint, the Assessing Officer has furnished a report through letter dated 22.05.2023 addressed to learned CIT(DR). The report furnished by the Assessing Officer is in two parts. The first part contains the details of assessment proceedings, whereas, in the second part, the Assessing Officer has offered para-wise comments on the complaint, which read as under: Bogus refund claim of Rs. 102 crores and misrepresentation of facts by Nikesh Arora:- In this para the applicant stated the brief history of Sh. Nikesh Arora, his employer and transactions related to shares of M/s Jasper Infotech Pvt. Ltd. (SNAPDEAL) and ANI Technologies Pvt. Ltd. (Ola). Therefore, no comments are required. 1. Transaction in the shares of ANI through SIMI PACIFIC:- The main contention of the applicant in this para is that the transactions related to acquiring shares of ANI Technologies are covered u/s 2(42A) of the Income Tax Act, 1961 and gain accrued is short term capital gain. In this regard, it is to state that while passing the assessment order, the AO disallowed the claim of the assessee and held gain on transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come on 31.07.2017 declaring total income of Rs. 431,21,34,020/- and claiming refund of Rs. 102,14,67,220/-. Assessee s case was selected for scrutiny. In course of assessment proceedings, the Assessing Officer made a reference to FT TR Division seeking further information. After receiving such information as well as other details called from the assessee, the Assessing Officer proceeded with the assessment proceedings. While verifying the return of income filed and other details furnished by the assessee, he noticed that the assessee has offered long term capital gain from transfer of Compulsorily Convertible Preference Shares (CCPS) of two Indian companies, viz., Jasper Infotech Pvt. Ltd. (in short Snapdeal ) valued at USD 25,005,379 and ANI Technologies Pvt. Ltd. (in short Ola ) at USD 15,005,296. He further noticed that these shares were received by the assessee through a share transfer agreement executed on 17th December, 2014. He observed that the assessee has treated the capital gain as long term by considering the period of holding exceeding 24 months from December, 2014 to 1st February, 2017. Accordingly, he has computed the capital gain and resultant tax liability in acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares were transferred to him in December, 2014. In this context, he observed that in response to the notices issued under section 133(6) of the Act, the Indian companies have confirmed that the assessee was not a registered shareholder during the period December, 2014 to May, 2015. He observed, no document evidencing transfer of shares w.e.f. 29.12.2014 has been produced by the assessee. Thus, ultimately the Assessing Officer concluded that the gain derived from sale of shares has to be treated as short term capital gain. 9. Having held so, he proceeded further to hold that no cost of acquisition can be allowed while computing capital gain in view of the provisions contained under section 49(2AA) read with section 17(2)(vi) of the Act. According to the Assessing Officer, the salary compensation received by the assessee amounting to USD 40,009,677 from SIMI US was offered to tax in the tax return in US, whereas, no tax has been offered in India. Thus, he held that there is no tax base in India for claiming cost of acquisition. He observed, as per section 49(2AA) of the Act, for claiming cost of acquisition of shares, the value should be fair market value, which has been taken int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... says that the assessee has relinquished his rights being interest, which has been defined as right to acquire the legal title of shares. He submitted, the right to acquire the legal title over shares was acquired by the assessee vide assignment deed dated 29.12.2014, which is specifically mentioned in the Termination Agreement dated 01.02.2017. Thus, he submitted, once it is accepted that the capital gain has arisen on account of transfer of rights in respect of shares, the date of acquisition has to be 29.12.2014, as there is no other date, event or document correlating the acquisition. 13. Learned counsel submitted, as per section 2(42A) of the Act, a short term capital asset is an asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. However, he submitted, as per the third proviso to section 2(42A) of the Act, in respect of unlisted security, asset will qualify as short term capital asset if it is held for less than 24 months. He submitted, the expression held used in section 2(42A) of the Act does not refer to legal ownership of the capital asset. He submitted, as per the meaning of the expression held , the date on which the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et situated in India is deemed to accrue and arise in India. He submitted, all the Employment Agreements pursuant to which assessee s right to acquire or right to obtain shares arose were entered outside India and were subject to the US jurisdiction. Therefore, situs of assessee s interest or rights to acquire shares, which is a capital asset, is outside India. He submitted, since, the assessee has transferred his interest/rights over the shares, which is situated outside India, capital gain is not taxable in India. In support of such contention, he relied upon the following decisions: (1) Vodafone International Holding B.V. Vs. Union of India [2012] 17 taxmann.com 202 (SC) (2) A F Harvey Ltd. Vs. CWT (107 ITR 326) (3) CWT Vs. O.M.M. Kinnison [1986] 161 ITR 824 (SC) 16. However, he submitted, if the asset is held as shares, as the Assessing Officer has held, the assessee does not have any objection to suffer tax liability of long term capital gain arising out of sale of shares. 17. As regards the issue of denial of cost of acquisition, learned counsel submitted, the purpose of section 49(2AA) read with section 17(2)(vi) is to restrict the quantum of deduction to the amount taxed un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by the assessee for a period less than 36 months. Therefore, the asset has to be treated as short term capital asset. 19. As regards the contention of assessee that since what the assessee has transferred is merely interest/right in shares and not the shares itself, therefore, situs of such interest/right over the shares being situated outside India is not taxable in India, learned Departmental Representative drew our attention to Explanation-2 to section 2(47) of the Act and submitted, since the underlying assets are shares of Indian companies, the capital gain is taxable in India. So far as the issue of deduction of cost of acquisition, learned Departmental Representative relied upon the observations of the Assessing Officer and learned DRP. 20. We have considered rival submissions, both oral and in writing, in the light of decisions relied upon and perused the materials on record. Undisputedly, the assessee is a NRI and a resident of USA. On 16.07.2014, the assessee entered into an Employment Agreement with Soft Bank Corp., a Japanese Co. and was employed with one of its group entities in USA, being SIMI US, as President and Chief Executive Officer and most Senior Executive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... US for termination of his Employment. Pursuant to which, the assessee was paid USD 50.32104 million, subject to which, assessee s interest in the CCPS would stand fully extinguished. It is a fact on record that the assessee has offered the compensation received on extinguishment of his interest in the CCPS as long term capital gain in the return of income filed in India. 23. However, the dispute is with regard to the nature of such capital gain, whether short term or long term. While the assessee has claimed the gain as long term capital gain pleading that the period of holding of interest in CCPS was more than 24 months, the Assessing Officer has treated it as short term capital gain by holding that the assessee had acquired the shares or rights in the shares on or after 20.05.2015, the date on which the Third Employment Agreement was executed. While coming to such conclusion, the Assessing Officer has held that the Second Employment Agreement dated 17.12.2014, being a mere draft agreement does not vest any right in the assessee, hence, cannot be considered for the purpose of period of holding of CCPS. 24. As discussed earlier, on 16.07.2014, the assessee had entered into an Emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ict the period of holding of asset to less than 24 months. Paragraph 3 of clause (B) of part 2 of the agreement dated 20.05.2015 not only incorporates similar terms as mentioned in the Second Employment Agreement dated 17.12.2014, but also says that on or prior to December 31st, 2014 the assessee shall receive the CCPS. In fact, the preamble of the Third Employment Agreement refers to the Second Employment Agreement dated 17th December, 2014. The chain of events starting from the first Employment Agreement and ending with the Termination Agreement dated 01.02.2017 do establish that the assessee did not acquire the shares physically but acquired certain rights and interest in the shares by virtue of assignment deed dated 29.12.2014 28. That being the factual position emerging on record, it cannot be said that the shares or right and interest in the shares were acquired by the assessee on 20.05.2015 or thereafter. In our view, the Assessing Officer has misdirected himself by placing much reliance on the Third Employment Agreement dated 20.05.2015. Whereas, the said document neither confers any right or interest on the assessee qua the CCPS, nor the assessee can be said to have acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with second amended employment agreement dated 17th December, 2014, the assessee as part of its employment benefit was supposed to receive certain lump sum amount in money terms and some further amount by way of fully vested equity shares of two Indian companies. However, it is a fact that the shares of Indian companies were never transferred in the name of the assessee. By virtue of assignment agreement dated 29th December, 2014, what the assessee acquired was certain rights and interests of SIMI US in the shares of the two Indian companies. From the date of assignment deed dated 29th December, 2024 till the Termination agreement dated 1st February, 2017, under which the assessee transferred its rights and interests in the shares, the ownership of the shares never stood in the name of the assessee. Even, the assessee never appeared as a shareholder in the records of the two Indian companies. In fact, in submission dated 29.12.2023 filed before the Tribunal, the assessee has conceded to the aforesaid factual position. 32. Though, it may be a fact that both the Assessing Officer and learned DRP, despite observing that no evidence has been brought on record by the assessee to estab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under section 5(1)(xx) of the Act. After interpreting the provisions of sections 4(1) and 5(1) of the Wealth Tax Act, the Court concluded that the assessee can claim exemption in respect of shares transferred in the name of the wife. This is so because, section 4(1) provides for clubbing of wealth transferred directly or indirectly otherwise than for adequate consideration to the name of the spouse of the individual, who is assessed to wealth tax. Thus, by operation of such specific provision permitting clubbing of wealth, the Hon ble High Court allowed assessee s claim of exemption. 35. However, facts are totally different in assessee s case. Even, other decisions relied upon by the assessee including that of the Hon ble Supreme Court in case of Mysore Minerals Ltd. Vs. CIT (supra) are factually distinguishable and do not fit into the facts of the present case. 36. At this stage, we may refer to the Circular no.704, dated 28.04.1995 issued by the Central Board of Direct Taxes (CBDT) to explain the meaning of period of holding under section 2(42A) of the Act. It has been clarified by the Board that the date of broker note or date of contract of sale shall be relevant for deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od and valuation consideration, the receipt and sufficiency of which are hereby acknowledged, SBG US, Starfish I, SIMI Pacific, Mr. Arora and the Trust hereby agree as follows: 1. Cash Payments; Extinguishment of Interests. (a) Subject to the terms and conditions of this Agreement. (i) Starfish I shall make a lump sum payment to the Trust of USD 50,320,177.60 (the Starfish I Payment ), and (ii) SIMI Pacific shall make a lump sum payment to the Trust of USD 54,078,761.57 (the SIMI Pacific Payment , and together with the Starfish I Payment, the Cash Payments ), subject in each case to applicable Indian tax and withholdings as provided in Section 2(a) Starfish I and SIMI Pacific shall make the Cash Payments no later than February 9, 2017. (b) Effective on completion of the Cash Payments, all of the Trust s (and, as applicable, Mr. Arora s) Interests will be fully and completely extinguished, and Mr. Arora, on his own behalf and on behalf of the Trust, agrees not to assert to the contrary. 39. Thus, it is established on record, what the assessee transferred by virtue of the termination agreement is a capital asset in the nature of certain rights and interests and not any shares of Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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