May 10, 2016

New tax treatment of sale of unlisted shares brings more certainty, less litigation

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As per Income Tax Law, Income earned from Sale of shares could be held as either Business Income or capital gains depending upon the facts of the case which had led to a lot of litigation over the years. The disputes persisted as assesses were finding it difficult to prove the intent of acquiring these shares.

In order to avoid disputes and take a consistent view in assessments of such income, CBDT has decided that income arising from transfer of unlisted shares would be considered under the head ‘Capital Gain’. It may be noted that a similar instruction had earlier been issued by CBDT regarding tax treatment of investment in listed shares but this instruction for unlisted companies is more beneficial as the requirement of period of holding has also been dispensed with.

It is however, clarified that this would not be necessarily applied in 3 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 veil; 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.

How would this move benefit

This is certainly a welcome move for the taxpayer as capital gains are charged at a lesser rate than business income. By taking away the discretion with Assessing Officer, all disputes would be put to rest.

By putting restrictions on bogus transactions and also where the control and management of the underlying business is also taking place, CBDT has not allowed blanket application of this instruction and Assessing Officer has the liberty to decide on these three situations based on facts of the case.

This move would also benefit Angel Funds and Private Equity Funds and other investors as they would have certainty in the quantum of tax upon exit and many of those would also get benefit from favorable treaty jurisdictions like Mauritius or Singapore.

With so much frivolous litigation in tax matters, such steps from Income Tax authorities are surely welcome.

The author, CA. Chander Sawhney is a Partner & Head – Valuations & Deals at Corporate Professionals Capital Pvt. Ltd., a SEBI Registered (Cat-I) Merchant Banker.

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