Sale of shares invite capital gain or would be business income, is mixed question of law and facts : HC

Pr. CIT Vs Vernan Pvt. Trust (Bombay High Court)

Whether the Assessee is engaged in the business of buying and selling of shares or is a mere investor, would depend on the range of factors. In the present case, the Tribunal has noted the relevant facts and analyzed such facts in proper perspective. To reiterate, the shares in question were not purchased by the Trust at all. They were settled by the settler of the Trust. The Settler himself had not purchased the majority of these shares but had received by way of Employee Stock Option Plan. The shares so received, as well as small numbers of shares purchased by the settler, were held by himself for over two years before settling them in the Trust. No question of law therefore arises.

FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT

Revenue is in Appeal against the Judgment of the Income Tax Appellate Tribunal (for short “the Tribunal”), dated 31^st July, 2015. Following questions were presented for our consideration:­

“(a) Whether on the facts and circumstances of the case and in law, the Tribunal ‘F’ Bench, Mumbai was right in treating the addition made of Rs.14,69,09,814/­ as Capital Gains exempt u/s. 10(38) of the IT Act, 1961 instead of Business Income as assessed by the Assessing Officer?

(b) Whether on the facts and circumstances of the case and in law, the Tribunal ‘F’ Bench, Mumbai should not have considered the income of Rs.14,69,09,814/­ as Business Income in light of the facts brought on record by the Assessing Officer examining the transaction in light of various parameters laid out by CBDT Instructions and Judicial pronouncements?”

2. This Appeal concerns the Assessment Year 2010-11. Respondent­Assessee is a registered Trust. The Respondent­Assessee during the previous year, relevant to Assessment Year in question, had sold certain shares and earned income of Rs.14,69,09,814/­ therefrom. The Assessing Officer taxed the income as the Assessee’s business income, rejecting Assessee’s contention that the sale of shares would give rise to capital gains.

3. Assessee carried the issue in Appeal. The Commissioner of Income Tax (Appeals) (for short “CIT[A]) allowed such Appeal, upon which the Revenue preferred Appeal before the Tribunal. The Tribunal by the impugned Judgment, dismissed the Respondent’s Appeal. Tribunal noted that the settler of the Trust had transferred 6 lacs equity shares of one M/s. Tech Mahindra to the Trust. 96% of these shares were alloted to the settler by way of Employees Stock Option Plan. Remaining 4% or 26,600 shares were purchased by him. It was noticed that the bulk of shares i.e. 96% were alloted by way of Employee Stock Option Plan on 26^th March, 2007 and such shares were settled in the Trust only on 24^th March, 2010 i.e. after holding shares for nearly three years. Even the balance shares i.e. 26,600 were acquired on 24^th October, 2008 and were held by the settler till 24^th March, 2010.

4. The Tribunal thus noted that, majority of the shares were not purchased by the settler from the market and whether the shares received by way of Employee Stock Option Plan or purchased from the market, were held by the settler for a long period of time. The Tribunal also recorded that, Department did not question the existence of the Trust, as being sham or bogus. The Tribunal also noted that the principal object of the Trust was to ensure an effective succession planning mechanism and intergenerational transfer of Trust corpus and income. The Tribunal, therefore, was of the opinion that, the Revenue was not correct in holding that the sale of shares of the Trust, would be its business income. The Tribunal in the process made the following observations:­

“12:­ Further, it is seen that, it is nowhere the case of the Department that the Trust is sham or bogus Trust. The validity of the corpus of the Trust, correctly noted by the ld. CIT(A), has never been doubted. Apropos the activity of sale of shares, in the fact, as discussed, we do not find it to be a business activity. The shares were treated as an investment all through and not as stock-in­trade. The balance sheet says so. No funds were borrowed for the activity. Only one sale/transfer took place during the year under consideration. The sales were affected for diversification of portfolio, so as to secure the investment and to take advantage of the bullish trend of the Tech Mahindra shares, prevailing at the relevant time. The price movement of the shares, as brought on record before the taxing authorities buttresses the decision of sale of the shares immediately on constitution of the Trust, to be a prudent decision. Too, it is also on record that soon after the sale of the Tech Mahindra shares, the price thereof dipped substantially. All this is an indication to the fact that the activity was not a business activity, nor an adventure in the nature of trade. It has also been taken note of, correctly, by the ld. CIT(A) and not refuted by the Department, that the Trust is expressly prohibited from undertaking any business activity. Moreover, the avowed intention of the Trust as discussed herein above, has never been disproved and it is only that the alleged intention of carrying on business has been superimposed thereon. This has rightly been rectified by the ld. CIT(A) by making detailed observations regarding the observations of the A.O. that the intention of the Settlors themselves was to carry on business activity, being extraneous, a valid Trust having come into existence and such Trust having not been found to be ingenuine; that the acquisition of shares was not a voluntary purchase made by the assessee Trust, but they were contributed to its corpus at the time of the very inception of the Trust; that the assessee’s claim holding pattern by way of diversification of asset was also not repelled by the A.O.; that the fact that a Portfolio Manager was appointed is synchronous with the intent and objective of the creation of the Trust; and that holding the shares of just one corporate entity not being desirable was a decision as per the prudence of the Trust.

13:- We, for the above discussion, are ad idem with the ld. CIT(A), in arriving at the conclusion that from the sale of shares undertaken by the assessee during the year under consideration, no business activity stands made out.”

5. Whether sale of shares by Assessee would invite capital gain or would be business income, is mixed question of law and facts. Whether the Assessee is engaged in the business of buying and selling of shares or is a mere investor, would depend on range of factors. In the present case, the Tribunal has noted the relevant facts and analyzed such facts in proper perspective. To reiterate, the shares in question were not purchased by the Trust at all. They were settled by the settler of the Trust. The Settler himself had not purchased majority of these shares but had received by way of Employee Stock Option Plan. The shares so received as well as small numbers of shares purchased by the settler were held by himself for over two years before settling them in the Trust. No question of law arises.

6. Accordingly, Appeal dismissed.