By TIOL News Service

MUMBAI, JAN 03, 2019: THE ISSUE BEFORE THE HIGH COURT IS - Whether when shares has been settled by the settler of the trust by way of employee stock option plan and not direct purchase from market, then income generated therefrom can be construed as 'business income' of trust. NO IS THE VERDICT.

Facts of the case:

The Assessee is a registered Trust. During the year under consideration, it had sold certain shares and earned income of Rs.14,69,09,814/- there from. The AO taxed the same as Assessee's business income, rejecting Assessee's contention that the sale of shares would give rise to capital gains.On appeal, the ITAT 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 and such shares were settled in the Trust only after holding shares for nearly three years. 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.

High Court held,

++ 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 therefore arises.

(See 2019-TIOL-25-HC-MUM-IT)