India: Purchase And Sale Of Shares As An Intermediary Will Be Taxable As Business Income And Not Capital Gain

Facts of the case

The assessee is a wholly owned Indian subsidiary of Tractebel S.A., Belgium ('TSA'). In India, TSA had entered into Joint Venture ('JV') with Jindal Thermal Power Company Ltd ('Jindal group'). Further, TSA had also entered into two agreements with the said JV for providing engineering assistance and legal & financial assistance.

During the course of completion of project undertaken by the JV, a dispute arose between partners of the JV i.e., TSA and Jindal group. The warring JV partners reached a settlement whereby Jindal group agreed to buyout the shares held by TSA in the JV and TSA agreed to forgo the payments due to them on account of engineering assistance and legal & financial assistance provided to the JV.

The assessee was appointed to act as an intermediary for the sale of shares held by TSA to Jindal group. As per the settlement agreement, the assessee bought shares from TSA and sold them to various companies identified by Jindal group. In its return of income, the assessee declared long term capital gains from the acquisition and sale of shares of the JV and claimed exemption under section 10(23G) of the Act. The main contention of the assessee was that since shares were acquired from parent company, the cost of acquisition and holding period of shares would be taken from the parent company (TSA in this case).

The Assessing Officer and CIT(A) did not agree with the contention of the assessee and denied the assessee the benefits of long term capital gain and exemption under section 10(23G) of the Act. Further, the CIT(A) held that out of the total capital gain, a part should be taxable as fees for technical services in lieu of the amount forgone by TSA and such sum should be protectively assessed in the hands of the assessee.

Aggrieved, the assessee filed an appeal with the Tribunal. After hearing the rival contentions, the Tribunal observed that the assessee merely played a limited role of an intermediary in the entire transaction. At no point of time the assessee stood invested in the said shares. This was also apparent from the fact that some of the shares were sold immediately i.e., on the same date as per the settlement agreement. According to the Tribunal, since the assessee never acquired the shares as investment, the surplus arising from transfer of the shares could not be considered as capital gain. The Tribunal concluded that the surplus is nothing but earning from an adventure in the nature of trade and should be taxable as business profits. Thus, the matter was remanded back to the Assessing Officer for a fresh look.

Nangia's take

Since the matter has been remanded back to the Assessing Officer it has not yet gained any finality. However, this decision has rekindled the age old debate of the head under which surplus on sale of shares should be taxable. Currently, there are no clear guidelines in the Indian tax laws and even the Income Tax Simplification Committee, headed by Justice R.V. Easwer, recommended for clear guidance on this issue.

Source: [TS-432-ITAT-2016(Bang)]

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