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Income Tax Appellate Tribunal, ‘D ‘ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against the order dated 26/09/2018 passed by CIT(A)-9, Mumbai for the quantum of assessment passed u/s.143(3) for the A.Y.1998-99.
2. In the grounds of appeal, assessee has challenged surplus arising on transfer of 10,00,000 shares of DSP Merrill Lynch Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
Securities Ltd. (DSPMLSL) amounting to Rs.13,20,49,925/- as the business receipt arising from transfer of shares held as stock-in-trade and consequently denied the benefit of exemption u/s.54EA of the Act.
3. The facts in brief are that during the year under consideration, i.e., the previous year relevant to assessment year 1998-99, Late Shri Mathradas Kothari, had transferred 5,00,000 equity shares of DSP Merrill Lynch Securities Ltd. (DSPML Sec) (formerly DSP Securities Ltd. from its incorporation on 12/03/1996 upto 21/11/1996) to Merrill Lynch Holdings Ltd., Mauritius (MLHM). The said shares were acquired by him on 15/03/1996. Since gains arising on transfer of the said shares gave rise to long term capital gains, the assessee made investments in 54EA Bonds and claimed exemption in respect of such investment under section 54EA of the Income-tax Act (the Act) in his computation of income for AY 1998-99.
The AO noted that assessee had received total consideration of US$ 37,65,000 equivalent Rs.14,20,49,925/- as; (i) A non- refundable advance of US$ 12,50,000 received on 21/11/1996 which was to be adjusted against sale consideration, & (ii) Upon exercise of the option under clause 4 of the Subscription Agreement, the balance sale consideration of US$ 25,15,000 was Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) received on 10/02/1998. The AO had framed following issues arising in the course of assessment proceedings:- (i) Whether the shares were transferred on the date on which Myrill Lynch (buyer) exercised the option, ie 10/02/1998 which would be relevant to present AY 1998-99 or, on the date on which the Agreement for Subscription was signed on 21/11/1996 relevant to AY 1997-98; and (ii) Whether the shares which were transferred, were the trading assets or capital assets of the assessee. The AO held that the impugned shares were not purchased with an object to earn dividend on them, but they were purchased with an object of selling them subsequently at a profit and in fact, they were sold with a purpose to earn profits and accordingly, the transaction of purchase and sale of shares was an adventure in the nature of trade and the profit arising on the said transaction was revenue receipt to be taxed as a trading receipt. He further held that since the transfer had taken place on 26/11/1996, being the date on which the Agreement for Subscription was signed, therefore, the profit of Rs. 13,20,49,925/ was added on a protective basis during the year vide Assessment Order dated 28/03/2001 for AY 1998-99, and it was also held that the amount is to be added o substantive basis in the immediately preceding year i.e. AY 1997-98. The Order u/s 143(3) r.w.s. 147 for AY 1997-98 was passed on 27/03/2002 Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
making addition of said amount of Rs. 13,20,49,925/- on a substantive basis.
5. The assessee had filed first appeal against both the assessment orders for A.Y.1997-98 and 1998-99. However, the appeal for A.Y.1997-98 was dismissed by the ld. CIT (A) confirming the transfer took place in the said year and also the said income was rightly treated as „trading receipt‟. The ITAT in the appeal for A.Y.1997-98 vide order dated 09/04/2003 held that gains would be taxable only in A.Y.1998-99 and not in A.Y.1997-98 and the appeal filed by the Revenue against the said order of ITAT for A.Y.1997-98 has also been dismissed by the Hon‟ble High Court vide order dated 08/07/2008. As regard the appeal for A.Y.1998-99, one of the other issues involved was whether the assessee would be entitled to exemption u/s.54EA of the Act. The claim of the assessee was that the said gains should be assessed as capital gains and, therefore, he is entitled to exemption under section 54EA of the Act. However, the ld. AO has assessed it as business income and the ld. CIT (A) has upheld assessment of the said gains as business income and has thereby denied the assessee's claim for exemption under the said section. ITAT vide its order dated 08/09/2006 for AY 1998-99 has held; "For the assessment year under appeal, there is no finding by the ld. CIT(A) on the merits and he has deleted the addition on the ground that the substantive addition made in the AY 1997- Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
98 has been confirmed. In our view, this issue requires reconsideration by the ld. CIT (A) for the present assessment year on merits. We, therefore, restore this issue which is the subject matter of the departmental appeal as also the assessee's appeal, to the learned CIT(A) with the direction that the issue may be reconsidered in its entirety after allowing opportunity to both the sides and also after considering the factual position as brought out in the Tribunal's order for the AY 1997-98 referred to above. The ld. CIT(A) should decide the issue afresh after considering the factual position and any material which is placed before him by both the parties and he should not merely follow the order of the ld. CIT(A) for AY 1997- 98. " Accordingly, the ITAT inter alia had directed the CIT (A) to decide the issue relating to assessment of the gains under which head of income after: a) considering the factual position as brought out in the ITAT's order for AY 1997-98; and b) not merely follow the order of the CIT(A) for AY 1997-98.
The ld. CIT (A) in his impugned order has held the said income to be assessable under the head business income and hence, denied his claim of exemption under section 54EA of the Act. Therefore, the issue which arises for consideration in the present appeals is, whether the gain arising on transfer of shares Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) of DSPML Sec should be assessed to tax under the head capital gains or as business income and, consequently, whether the assessee would be entitled to exemption in respect of the same under section 54EA of the Act. The ld. CIT (A) in his order has noted that antecedents as to how the assessee acquired the shares of DSPML in the following manner:- “The said company in name of DSP Securities Ltd. was incorporated on 12.03.1996 with the primary object of pursuing the equity broking business. The Kothari Shareholders (Including the appellant) had subscribed to total 50,00,000 shares of Rs. 10 each in the Share Capital of the Company in March, 1996.
Before the said subscription, in February 1996, an application was made to the PIPB by the appellant's son, containing a proposal whereby the appellant would promote a new company namely DSP Securities Ltd. with initial paid up capital of Rs. 5 Crores divided into 50,00,000 equity shares of Rs. 10 each which would be subscribed by the Kothari family members. Thereafter, DSP Securities Ltd, would Issue 5,00,000 equity shares of Rs. 10 each to Merrill Lynch (ML) & also 5,00,000 equity shares of Rs. 10 each to DSP Merrill Lynch Ltd. (DSPML) at a price of US$ 3.63 per share, Merrill Lynch would also have the option to increase its holding in DSP Securities Lid up to 40% by purchasing the shares from Kothari shareholders within the period of 12-24 months from the date of initial issue of shares by DSP Securities Ltd. at such price as may be mutually agreed upon, which, in any event, shall not be less than US$ 3.63 per share. Merrill Lynch would also make an interest free advance payment to Kothari Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) shareholders of US$ 25,00,000 towards the option to purchase the equity shares from them to increase its holding up to 40%. If the option to purchase the shares is not exercised, the said Interest free advance would be forfeited.
In pursuance of above agreement, the ML & DSPML were allotted 5,00,000 shares each by the Company. Further, they acquired 15,00,000 & 5,00,000 shares respectively from Kothari shareholders in exercise of the option given as per sold Subscription Agreement in previous year relevant to AY 1998- 99, In the above background, I note that the sale of 10,00,000 shares on 09.02.1998 by the appellant (being a Kothari shareholder) for rupee equivalent of Rs. 14,20,49,925/- was part of the shares sold in exercise of option used by ML.
4.2. I find that the main reasons which led the AO to reach at a conclusion that the resultant gain on sale of said shares was a trading receipt, are as under: (i) Even before the shares were allotted to the assessee, the assessee had written to the FIPB about his intention to sell; (ii) Merrill Lynch (ML) vide its letter dated 09.02.1996 had written to the FIPB expressing its interest and desire for equity participation in the Company. (iii) The assessee had intention to sell off the shares right from the beginning and even before he acquired them; (iv) From the letter written to FIPB, it is clear that both ML and the assessee had entered into an oral agreement to purchase the shares; Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
(v) Even before the Company was incorporated, the assessee had entered into a deal for purchase and sale of shares; (vi) Even before the Company was incorporated and even before the shares were allotted to assessee, he had intention to trade in these shares and his intention was to sell and not invest in these shares; (vii) The assessee had approached the Registrar of the Companies for change of the name (i.e. from DSP Securities Ltd., to DSP Merrill Lynch Securities Ltd.) even before the option is exercised by the assessee; (viii) The shares were not acquired with an object to earn dividend on them
We also note that previous finding of the ld. CIT(A) which Tribunal had already decided the issue and had categorically directed not to be influenced by the earlier order, still he has mainly referred and relied upon the same. The relevant finding had been dealt by him from pages 15-21 of his appellate order. In sum and substance, the main reasoning is that the intention of the parties is squarely borne out from application to FIPB and subscription agreement. The intention of the assessee was to sell the shares. Apart from referring to the finding of the assessee, he has also emphasized on the following:- a) The name of investee company DSP Securities ltd has been changed to DSP Merrill Lynch Securities Itd' before the exercise of option thereby indicating that Merrill Lynch was going to buy the shares Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) b) The assessee's intention was also reflected in the later execution of the subscription agreement dated 21/11/1996. c) CBDT Instruction No. 1827 dated 31.08.1989, Circular No. 4 of 2007 dated 15.06.2007, the judgement of the Hon'ble Apex Court in Rajputana Agencies Ltd. 421TR743 and the Madras High Court in Matheson Bosanquet and Co. P. Ltd. 52 ITR 380 for explaining the effect of intention of parties to transfer the property and not hold the same.
Thus, he concluded that shares held by the assessee are rightly treated in the nature of stock-in-trade and in such a case, the deduction u/s.54EA is not allowed. Accordingly, he has confirmed the direction given by the ld. AO by treating the said gain as „business income‟ and confirmed the disallowance of claim made u/s.54EA of Rs. 13,20,49,925/-. 9. Before us ld. Counsel submitted that certain important facts are relevant for the issue involved in the appeal which can be gauged from the following sequence of additions:- Sr. Date Events No. 1 09/02/1996 HK filed an application with the Foreign Investment Promotion Board (FIPB) for seeking permission for ML to invest in equity Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
capital of DSPML Sec. The application stated that ML had indicated its interest in participating in DSPML Sec by obtaining stake of 9% by subscribing to 5,00,000 equity shares of Rs. 10 each at a price of USD 3.63 per equity share, That ML "may" increase its holding in the said company at a later date which may take its holding upto 40% for which HK and his family members would give an option to ML to purchase the shares within a period of 12 to 24 months from the date of initial issue of shares by DSPML Sec, at such price as may be mutually agreed upon which shall not be less than USD 3.63 per share. For this purpose, ML would also make an interest free advance payment to HK and his family members of USD 25 lakh towards the option to purchase the equity shares from them. If the option to purchase the shares is not exercised, the interest free advance would be forfeited. It was also clarified that ML's interest in such participation was subject to the satisfactory negotiation and documentation of the acquisition and the receipt of all requisite Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) consents and approvals 2 09/02/1996 ML confirmed their interest in pursuing the acquisition of equity shares in DSPML Sec to FIPB subject to (i)obtaining all requisite consents and approvals, (ii)satisfactory negotiation and (iii) documentation of the transaction 3. 12/03/1996 DSPML Sec was incorporated as a Company and the Kothari Group of shareholders, including the Appellant subscribed for 50,00,000 equity shares in the said Company, of which the Appellant subscribed for 10,00,000 shares. 4. 22/07/1996 FIPB granted its approval to ML for subscribing to 9% (later amended to 8.33%) of the paid up capital of DSPML Sec. The approval was subject to DSPML Sec obtaining the necessary approvals under SEBI regulations. The said approval letter mandated that only those provisions of the agreement which are covered by the approval letter or which are not in variance with the provisions of the said letter shall be binding on the Government of India or the Reserve Bank of India.
Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
23/07/1996 HK and DSPML Sec filed separate applications with FIPB for rectification of its approval dated 22.07.1996, pointing out that FIPB has failed to consider the application for approval to ML increasing its shareholding by acquiring shares from Kothari Shareholders as well as receipt of the non-refundable advance 6. 31/07/1996 FIPB rectified its approval and noted that ML proposed to increase its equity stake in the said company to 40% in the period of 12-24 months. They clarified that such acquisition of shares will be governed by RBI/ SEBI guidelines. In respect of the approval sought for receipt of the interest free advance of USD 25,00,000, it directed DSPML Sec to approach the Ministry of Finance, Department of Economic Affairs 7. 01/08/1996 DSPML Sec made an application to FIPB seeking approval for receipt of USD 25,00,000 from ML by the Kothari shareholders (US $ 12,50,000 by HK and US $ 12,50,000 by the Appellant) and further pointing out that the said amount was not a loan but a non- refundable advance payment of part Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) consideration for purchase of shares under the option and was to be forfeited if the option was not exercised 8. 08/08/1996 As the earlier approval dated 31.07.1996 only noted the proposal of ML to increase its equity stake in DSPML Sec to 40% without giving approval for the same, HK filed an application with FIPB pointing out that RBI had advised that a specific approval/ no objection permitting ML to raise its holding be obtained. Approval was also sought for receipt of interest free non-refundable advance of USD 25,00,000. 9. 09/08/1996 FIPB granted its 'in principle' approval for increasing the percentage of foreign equity participation from 8.33% to 40% over a period of 12-24 months subject to the condition that acquisition of shares shall be governed by SEBI/ RBI guidelines. As regards the request for approval to receive non-refundable advance of USD 25,00,000, FIPB advised to approach RBI 10. 19/08/1996 DSPML Sec made an application to the Stock Exchange, indicating that ML and DSP Financial Consultants (DSPFC) will subscribe Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
to 5,00,000 equity shares each and they will have an option to increase their stake in company in the next two years upto 16.70% and 33.33% respectively, by purchasing the existing shares held by the Kothari family. In this regard, approval was sought from the Stock Exchange for the initial subscription as well as the option to increase the stake 11. 03/09/1996 Stock Exchange approved issue of equity shares by DSPML Sec to ML and DSPFC as well as their option to raise the equity holding 12. 11/10/1996 Application was made by DSPML Sec to RBI seeking permission under section 19(1)(a) and 19(1)(d) of FERA for issue of 5 lakh equity shares to MLHM 13. 11/10/1996 HK and the Appellant filed a separate application with the RBI pointing out that ML has been granted permission by the FIPB to increase its stake in DSPML Sec upto 40% within 12 to 24 months by purchasing the equity shares inter alia from the Kothari shareholders at a price to be mutually agreed upon ML had also agreed to make an interest free non refundable advance of USD 25,00,000. Such advance was to be forfeited if Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) the option of purchasing the shares was not exercised. Approval was sought from RBI to receive and accept the non refundable advance. 14. 01/11/1996 With reference to Foreign Collaboration Approval Letters dated 22.07.1996 as amended by 31.07.1996 and 09.08.1996 from FIPB, DSPML Sec informed the FIPB that RBI in order to grant its approval under FERA has advised to get approval from FIPB in the name of MLHM. This was required because in its application dated 09.02.1996 approval was sought for such acquisition of shares by ML directly or through a wholly owned subsidiary in Mauritius. However, the approval dated 22.07.1996 only had the name of ML as the Foreign collaborator and there was no reference to the Mauritian subsidiary of ML 15. 07/11/1996 ML confirmed before the RBI that they had agreed to make an interest free non- refundable advance of USD 25,00,000 as part consideration in respect of DSPML Sec shares to be acquired by their wholly owned subsidiary MLHM.
Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
07/11/1996 RBI gave its in principle approval under section 19(1)(d) of FERA to DSPML Sec for issue of 5 lakh equity shares to the Foreign Collaborator viz. MLHM 17. 11/11/1996 RBI noted the approval granted by FIPB for grant of option to MLHM for increasing its equity stake from 8.33% to 40% and stated that they had no objection from FERA angle to the Kothari shareholders receiving interest free non- refundable advance towards the sale consideration. MLHM was advised to make an application under section 29(1)(b) of FERA for acquiring the shares of DSPML Sec from resident shareholders 18. 11/11/1996 FIPB noted that equity in DSPML Sec shall be subscribed through MLHM a wholly owned subsidiary of ML 19. 21/11/1996 Subscription Agreement was entered into between ML, HK, DSPFC, MLHM& DSPML Sec. Under the said agreement the Kothari shareholders gave an option to Ml, to purchase either itself or through a designated subsidiary company 15 lakh equity shares in DSPML Sec. Such option was to be exercised not earlier than the first anniversary and not Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) later than the second anniversary of the first issue of shares to the Kothari shareholders. ML paid to the Kothari shareholders, a non- refundable interest free advance payment of USD 25,00,000. Such advance payment was to be adjusted against the aggregate price payable upon the exercise of the ML option. It was also agreed that obligations of the parties under the Agreement shall be conditional upon all required approvals having been obtained for the matters contemplated by the Agreement including the approvals from FIPB, SEBI, RBI, ROC and the Bombay Stock Exchange as applicable. 20. 21/11/1996 Pursuant to the option granted to ML/ MLHM under the Subscription Agreement, the Appellant deposited 5 lakh equity shares of DSP Securities Ltd. with the Escrow Agent viz. Dina Wadia of Little & Co 21. 23/01/1998 ML sought permission from RBI under section 29(1)(b) of FERA to purchase 15 lakh equity shares of DSPML Sec. It was also stated that the consideration agreed upon between the parties was USD 3.765 per equity share. 22. 27/01/1998 HK and the Appellant informed the RBI that Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
they had agreed to sell 15 lakh equity shares of DSPML Sec to MLHM at USD 3.765 per equity share and permission was sought for the same under section 29(1)(b) of FERA 23. 29/01/1998 DSPML Sec filed an application with the Stock Exchange seeking their permission for proposed change in the shareholding pattern whereby the equity shareholding of MLHM would be increased 24. 05/02/1998 RBI granted its approval under section 29(1)(b) of FERA to MLHM to acquire 15,00,000 equity shares of DSPML Sec which was subject to certain conditions. It was stated that request for final permission for acquisition of the said shares will be considered on receipt of certain documents and acceptance of certain conditions 25. 11/02/1998 The Stock Exchange advised that its Governing Board in the meeting held on 10.02.1998 has approved the revised shareholding pattern as per the application made by DSPML Sec subject to the necessary registration by SEBI under Rule 4(c) of the SEBI (Stock Brokers and Sub- Brokers) Rules 1992 Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
16/02/1998 HK and the Appellant applied to the RBI seeking final approval for transfer of shares of DSPML Sec to MLHM pursuant to the exercise of the option. 27. 23/02/1998 RBI gave its final approval for transfer of the shares in DSPML Sec to MLHM under sections 19(4), 19(1)(a) and 29(1)(b) of FERA 28. 24/02/1998 The Stock Exchange informed DSPML Sec about the approval granted by SEBI on 19.02.1998 in respect of the change in shareholding pattern in terms of Rule 4(c) of the SEBI (Stock Brokers and Sub-Brokers) Rules 1992 29. 24/02/1998 Pursuant to the above, 5 lakh equity shares of DSPML Sec were transferred by the Appellant to MLHM at a consideration of USD 3.765 per share. 30. 31/03/1998 In the Balance Sheet, the Appellant had shown various investments in shares and bonds as investments. Similarly, the shares of DSPML Sec were also reflected in the Balance Sheets for the year ending 31.03.1996 and 31.03.1997 as investments. 31. 31/10/1998 The Appellant filed his return of income for AY 1998-99 declaring a total income of Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
Rs.26,96,420 which included long term capital gain on the sale of shares of DSPML Sec in respect of which he claimed exemption under section 54EA of the Act. 32. 28/03/2001 The AO completed the assessment for assessment year 1998-99 under section 143(3) and assessed the Appellant on a total income of Rs. 13,54,13,330. Whilst completing the assessment he denied the claim for exemption under section 54EA of the Act as, according to him, the gains arising on transfer of shares of DSPML Sec were to be assessed as a business profit. However, as he was of the view that the gains were taxable for AY 1997-98. Hence, he made the addition of Rs. 13,20,49,925 as business income on a protective basis. 33. 15/02/2002 The AO completed the assessment for AY 1997-98 and assessed the gain arising on transfer of the shares of DSPML Sec as business profit. This assessment was on a substantive basis 34. 03/07/2002 The CIT(A) passed two separate orders disposing of the appeals for assessment years 1997-98 and 1998-99. In so far as the appeal Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) for assessment year 1997-98 was concerned, he held that the gains were taxable as business profit in that assessment year. Consequent thereto, while disposing of the appeal for assessment year 1998-99 he deleted the addition that was made on a protective basis 35. 19/08/2002 The Appellant preferred appeals to the ITAT for assessment year 1997-98being and for assessment year 1998-99 being ITA No. 4587/Bom/2002 36. 05/09/2002 The AO preferred an Appeal to the ITAT for AY 1998-99 challenging the deletion of protective assessment by the CIT(A) being Appeal No. ITA 4903/Bom/2002. 37. 09/04/2002 The ITAT disposed of the Appellant's appeal being ITA No.4586/Bom/2002 for AY 1997- 98 wherein, it held that the transfer of the shares took place in the previous year relevant to AY 1998-99. For this purpose, the ITAT inter alia relied upon the following contingencies in the exercise of the option:-
(i) At the time of entering into of the subscription agreement on 21.11.1996, Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) neither the sale consideration was known nor was the identity of the seller decided.
(ii) Shares were delivered to Ms. Wadia for custody as escrow agent and the final proposed transfer was subject to several terms and conditions like exercising the option and obtaining approvals from various government/statutory authorities. 38. 08/09/2006 ITAT disposed of the Revenue's appeal being and the Appellant's appeal being ITA No. 4587/Bom/2002 for AY 1998-99. The Tribunal has restored the issue relating to the head of income under which the gains arising on transfer of shares of DSPML Sec should be assessed and consequently whether the Appellant would be entitled to exemption under section 54EA of the Act. 39. 08/07/2008 Appeal filed by the Revenue before the High Court against the Tribunal's Order for AY 1997-98 was dismissed by the High Court wherein the High Court concluded that handing over of shares to the escrow agent was subject to terms and conditions like Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) exercising of option and obtaining approval from various government and statutory authorities. Further, at the time of entering into the subscription agreement the sale consideration for transfer of shares of DSPML Sec. was not even determined. (See pages 96 to 99 of PB-II). 40 26/09/2018 The CIT(A) passed the impugned appellate order giving effect to the ITAT's order assessment of gains arising on transfer of shares of DSPML Sec has been upheld as business income. Hence the present appeal
Thus, it has been submitted that the holding of shares by the assessee in DSPML should be recorded as „capital asset‟ and not as „stock-in-trade‟ for the following reasons:- a) CBDT by its Circular being F.No. 225/12/2016/ITA.II dated 02.05.2016 has in respect of tax treatment of income arising from transfer of unlisted shares has expressed the need to have a consistent view in assessments pertaining to such income. It is clarified therein that such income would be considered under the head capital gain irrespective of the period of holding. It is an admitted position that the equity shares of DSPML Sec is unlisted shares and, hence, the principle as laid down in the said circular should apply to its Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) case. The exceptions as referred to in paragraph 3 of the said circular should not apply to its case as there is neither a doubt about the genuineness of the transfer nor does the issue pertain to lifting of corporate veil. The third exception being transfer of shares along with the control and management of the underlying business is also not applicable to its case as, the AO in the assessment order (running page 59 of the appeal memo) has observed that Merrill Lynch had 4 members on the Board of Directors of DSPML when they held only 8.33% equity stake and there was no change in this position even after they acquired 40% stake. This position also stands confirmed in the remand report dated January 1, 2015 filed by the AO (Page 158, relevant page 159 of the Paper book I) when the appeal was pending before the CIT(A). It is well settled by now that the circulars issued by the CBDT are binding on the Revenue. Based only on this, it is urged that the gain arising on sale of shares of DSPML Sec being an unlisted company ought to be treated as giving rise to capital gain and, hence, eligible for exemption under section 54EA of the Act. b) The Appellant's investment in equity shares of DSPML Sec was a strategic investment. The said company was to carry on the equity broking business and the Appellant's holding in the said company represented promoter's equity contribution D.S. Purbhoodas Group had been engaged in the equity broking business for more than 140 years at the relevant point of time.
Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
The business had been carried on by the group for several generations now. Association of ML/MLHM in the said company was as a joint venture partner. DSPML Sec was formed as a joint venture vehicle as a part of a corporate strategy to develop the equity broking business of the said company. With the opening up of the Indian economy in the year 1991 and inflow of funds of Foreign Institutional Investors in the stock market, it was felt that joint venture with ML/MLHM would improve the prospects of the equity broking business and the said company. The Appellant submits that strategic investments as a part of promoter's equity are always held as capital asset and can never be regarded as stock-in- trade. c) Though the Appellant has transferred equity shares held by him in DSPML Sec to MLHM, the shares were held as participation in a joint venture. The distinction between equity stake in a joint venture and stock-in-trade is that in the case of a joint venture the shareholder is interested in who is the purchaser of the shares whereas in the case of stock-in-trade the seller is neutral. In the present case, sale of shares of DSPML Sec by the Appellant to MLHM was with a view to increasing association by way of equity stake of ML/MLHM in the said company in the hope that the equity broking business of the said company would improve ML Group had contacts with various Foreign Institutional Investors. Their increasing Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) the equity stake in DSPML Sec from 8.33% to 40% would, it was felt, reflect a larger commitment to the investee company resulting in manifold increase in its broking business. From the point of view of ML/MLHM, they wanted an option to increase their stake at a later point of time, and not immediately, because they wanted to experience and see the manner in which the economic, legal and other reforms were taking shape in the process of opening up of the Indian economy. This option period would also enable them to gain relevant experience about the joint venture partner. Therefore, there was a possibility of them, not exercising their option of increasing the equity stake if the performance on any of these fronts was not up to their satisfaction. Hence, increasing of equity stake by grant of said option was a strategic decision and not a trading venture.
The ld. CIT DR referred to the various observations made by the ld. AO as well as ld. CIT(A) as elaborated from para 4.4 to 4.6 of the ld. CIT(A) order and also relied upon relevant portion of the said order.
We have heard the rival submissions and perused the relevant finding given in the impugned order as well as material referred to before us. As discussed above, the investment made by the assessee in equity shares of DSPML Sec was a strategic investment to carry on equity brokerage business and the Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) assessee is holding the said company representing from total equity contribution. DSPML Sec was formed as a joint venture vehicle by ML/MLHM as part of corporate strategic business of the said company which assessee claims that such a strategic investment as a part of promoters equity, should be treated as capital asset. Though the assessee transferred the equity shares held by him in DSPML Sec, ML/MLHM, the shares were held as participation in a joint venture. One important thing to be kept in mind that the distinction between equity stake in a joint venture and stock-in-trade is that in the case of joint venture, the share holders interest in these purchases of shares, whereas in the case of stock-in-trade, the seller is neutral. Here, the sale of shares of DSPML Sec by the assessee to MLHM was with a view to increase association by way of equity stake in the said company in the hope that equity broking business of the said company would improve. The reason for making the investment has already been discussed in details in the foregoing paragraphs. 12. Apart from that, in the balance sheet for the previous relevant assessment years 1997-98 and 1998-99, the DSP was reflected as „investment‟ which has been accepted by them in those years. The assessee‟s status of an investor in shares has not been disputed in so far as investment in listed equity shares is concerned. The assessee had acquired the shares of DSPML which was the subject matter of transfer of ML/MLHM was his Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) own funds which was treated as investment. The AO and the ld. CIT (A) have heavily relied upon the letters dated 09/02/1996 addressed by HK and ML to FIPB expressing their intention by the Kothari shareholders for grant of option to ML for purchasing the shares of DSPML Sec from them at a later point of time. However, that exercise of the option was subject to; i. satisfactory negotiation as the price for transfer of the shares was to be determined at the time of exercise of such option.
ii. obtaining all requisite consents and approval - which were to be obtained from FIPB, RBI, SEBI and the Stock Exchange, and iii. documentation of the transaction. According to the AO/CIT (A), the Appellant's intention was clear on 09.02.1996 which was even before the acquisition of shares i.e., he intended to transfer the shares.
However, seeking approval for granting and option to ML for purchase of shares of DSPML Sec did not fulfill the test of intention to be looked at, at the time of acquisition of shares because:- (i) In February 1996 such option was proposed to be granted by Kothari shareholders. At that point of time it was not known whether the assessee would be a shareholder of DSPML Sec or would grant any such option to ML; Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) ii. Further, even after the allotment of shares by DSPML Sec to the assessee on 12/03/1996 it was not known which member of the Kothari shareholders would transfer the shares and quantum thereof. The assessee submitted that, it became clear that he would be transferring 5 lakh equity shares only when the option was exercised by ML/MLHM. Such action cannot have retrospective effect on the expression of intention at the time of acquisition of shares. iii. The grant of option and its exercise by ML/MLHM was, as explained hereafter, subject to various approvals to be obtained before granting the option and also before exercise of the same.
With respect to grant of option to ML / MLHM for purchasing the shares of DSPML from the Kothari Shareholders, various approvals were required to be obtained which has been elaborated above in the foregoing paragraphs. Further from the perusal of the chronology of events, it is seen that these approvals are not just procedural approvals and if authorities reject the application, then grant of option of transfer of shares could not be put through. The Tribunal and the Hon‟ble High Court in the orders passed under A.Y.1997-98 while deciding the issue relating to the year in which gains arising on transfer of shares of DSPML Sec were to be assessed, came to a conclusion that obtaining of the above consents / approvals before grant / Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
exercise of an option are relevant factors had to be taken into account. Thus, seeking approval for grant of option cannot give raise to any intention to hold the shares in stock-in-trade. Further, the ld. CIT (A) has also referred that the name of DSPML were changed to DSP Merrill Lynch Securities Ltd. (DSPMLSL) reflected the intention of exercising the option, but in our opinion that change of name of DSPML is not a very relevant factor, because the change of name had occurred on 20/11/1996 not at the time when assessee has acquired the shares which happened in March 1996 and also it has occurred after the execution of subscription agreement on 29/11/1996. In case the change of name could be for various reasons and the commercial reasons and therefore, nothing turns out on this.
Apart from that, the ld. CIT (A) had relied on A.Y.1997-98 that the assessee had received 1/3rd of sale consideration for transfer of 5 lakhs equity shares of DSPML Sec as an advance payment in November, 1996. However, such receipt of advance payment is also not a relevant factor to ascertain the intention for holding the shares because:- i. One has to look at the intention at the time of acquiring the shares which was 12/03/1996 and the fact of receipt of advance payment towards sale consideration in November, 1996 is irrelevant.
Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari) ii. Even in November, 1996 when the assessee received 50% of the total advance payment of USD 25 lakh i.e., USD 12,50,000 it was not known which shareholder in the Kothari group would be honouring the exercise of option by ML and what would be the quantum of shares that would be transferred by that shareholder. iii. Even the Tribunal and the Hon‟ble High Court in their orders for AY 1997-98 have held that receipt of this advance payment is an irrelevant factor while deciding the issue relating to the year in which the gains arising on transfer of shares of DSPML Sec needs to be assessed.
16. Thus, it will not be held that simply because of aforesaid facts, the intention of the assessee was to treat the shares as „stock-in-trade‟ and not as „capital asset.
One very important contention which has been raised by the ld. Counsel before us by relying heavily upon the CBDT Circular in F.No.225/12/2016 dated 02/05/2016 in respect of tax treatment of income arising from transfer of unlisted shares wherein the CBDT has clarified in case of unlisted shares. Income should be considered under the head „capital gains‟ irrespective of period of holding. The relevant Circular reads as under:- “Regarding characterisation of Income from transactions in listed shares and securities, Central Board of Direct Taxes ('CBDT) had issued a clarificatory Circular no 6/2016 dated 29 Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
February, 2016, wherein with a view to reduce litigation and maintain consistency in approach in assessments, it was instructed that income arising from transfer of listed shares and securities, which are held for more than twelve months would be taxed under the head Capital Gain' unless the tax-payer itself treats these as its stock- in trade and transfer thereof as its business income. It was further stated that in other situations, the issue was to be decided on the basis of existing Circulars Issued by the CBDT on this subject.
Similarly, for determining the tax-treatment of income arising from transfer of unlisted shares for which no formal market exists for trading a need has been felt to have a consistent view in assessments pertaining to such income. It has, accordingly, been decided that the income arising from transfer of unlisted shares would be considered under the head 'Capital Gain', Irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.
It is, however, clarified that the above would not be necessarily applied in the situations where: (i) the genuineness of transactions in unlisted shares itself is questionable, or (ii) the transfer of unlisted shares is related to an issue pertaining to lifting of corporate viel; or iii) the transfer of unlisted shares is made along with the control and management of underlying business and the Assessing Officer would take appropriate view in such situations.
4. The above may be brought to the notice of all for necessary compliance.”
It is an undisputed fact that the equity shares of DSPML Sec is an unlisted shares and therefore, the principle laid down in the said Circular will apply to its case. The exceptions referred Late Shri Mathradas Kothari (By the Executor of his Estate Shri Hemendra M. Kothari)
to paragraph of the said Circular will not apply as there is no doubt about the genuineness of the transfer, nor does the issue pertain to lifting of corporate veil. The third exception being transfer of shares along with the control and management of the underlying business is also not applicable to its case because, the AO has himself noted that Myrill Lynch had 4 members on the Board of Directors of DSPML when they held only 8.33% equity stake and there was no change in this position even after they acquired 40% stake. Even the ld. AO in the assessment report dated 01/01/2015 has accepted this position, accordingly, in view of the CBDT Circular itself, we hold that transfer of unlisted shares of DSPML is to be taxed under the head “capital gains” irrespective treating it as business income is set aside and the transfer of shares is treated as capital gains. Once, the gains arising of transfer of shares of DSPML is capital gains, then, the assessee is entitled for exemption u/s.54EA of the Act. Accordingly, the claim of deduction / exemption u/s.54EA is allowed.
In the result, appeal of the assessee is allowed. Order pronounced on 27th June, 2023.