The CBDT has issued a directive dated 2nd May 2016 in which it has been directed 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
F.No. 225/12/2016/ITA.II
Government of India
Ministry of Finance
Department of Revenue (CBDT)
North Block, New Delhi, dated the 2nd of May, 2016To Principal Chief-Commissioners of Income-tax/ Principal Directors General of Income-tax
Subject: – Consistency in taxability of income/loss arising from transfer of unlisted shares under Income-tax Act, 1961-regd.-
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 29th 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.
2. 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.
3. 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 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.
4. The above may be brought to the notice of all for necessary compliance.
Copy to:
(Rohit Garg) Deputy Secretary to the Government of India
“3. It is, however, clarified that THE ABOVE WOULD NOT BE NECESSARILY APPLIED in the situations where:……….”
“4. The above may be brought to the notice of all FOR NECESSARY COMPLIANCE”
Should that be so,is not very objective/intent to “AVOID disputes/litigation and to MAINTAIN UNIFORM approach” going to be thwarted ab initio; making no sense, being prima facie self-erasing, offensive and faulty to the core.
The classification of listed and unlisted shares into different categories for the purpose of tax treatment may not stand scrutiny of law and constitution. Merely because tax authorities find it difficult to find out or determine genuineness of transactions in unlisted shares, the honest tax payer holding shares for more than a year cannot be punished by levy of capital gain tax.
OFFHAND
That is a new development in the form of a directive from the CBDT to its subordinates; which purports, in substance, to have been issued with a view to reducing scope for disputes and litigation. However, when it comes to AO / any other authority following and implementing the directive as per the given broad guidelines, because of its entailing grey areas riddled with subjectivity, the likelihood of difference in views, leading to a dispute, could not be ruled out. Obviously, a further study from all possible angles is called for, for professionals in field practice to offer any comment , for or against , meriting due consideration from the view point of taxpayers’ concern.