Earlier, vide a Circular No. 6/2016 dated February 29,
2016 ("Circular"), the Central Board of
Direct Taxes ("CBDT") tried to put to
rest the prevailing ambiguity with respect to the taxability of
surplus on sale of shares and securities, by laying down certain
principles to determine whether an income arising on sale of listed
shares and securities shall be treated as business income or
capital gain income.
However, with respect to the treatment of any income arising
from transfer of shares of an unlisted company, there has been
multiple views prevailing among regulatory authorities, judicial
tribunals and various assesses, leading to an unsettled
In order to settle such controversies and have consistent views,
CBDT, Department of Revenue, Ministry of Finance, Government of
India recently came up with a letter No. F.No.225/12/2016/ITA.II
dated May 02, 2016 (the "Letter")
addressed to relevant authorities, to determine the treatment of
such income occurring on transfer of shares of an unlisted company.
Further, a provision is also proposed to be inserted in the Finance
Bill, 2016 to reduce the holding period of unlisted shares for the
purpose of determination of capital gain tax.
THE LETTER AND PROPOSED AMENDMENT IN FINANCE BILL, 2016
The CBDT, with a view to settle the ongoing controversies with
respect to the treatment of income arising from the transfer of
shares of unlisted companies and to maintain consistency and
uniform approach for all the assesses, has stated that any income
arising from such transfer shall be treated as "capital
gains" irrespective of the holding period.
However, the Letter provides for three qualifications and
exceptions, wherein such income would not be necessarily treated as
capital gain, which are as follows:
1) In the event, the genuineness of the transaction with respect
to the shares of the unlisted company is in question,
2) If the shares of the unlisted entity have been transferred
for issues relating to 'lifting of corporate veil',
3) If the control and management of the underlying business is
being transferred along with the transfer of the shares of the
If a transaction pertaining to the sale of unlisted securities
falls in any of the aforesaid exceptions, the Assessing Officer
shall take a view based upon the facts and circumstances of each
Recently, a proviso has also been proposed to be incorporated in
the Finance Bill, 2016 (as passed by Lok Sabha on May 05, 2016) to
amend clause (42A) of Section 2 of the Income Tax Act, 1961. The
proposed amendment is with respect to the holding period of
unlisted shares viz. in order to be categorized as long term
capital asset, the period of holding of unlisted shares shall be
more than twenty four (24) months instead of thirty six (36)
months, as applicable earlier. Therefore, any income arising on
sale of unlisted shares, having holding period of more than twenty
four (24) months will attract long term capital gain tax unless
such transaction falls under the ambit of any of the exceptions
provided in the Letter.
This is a significant move adopted by the CBDT, which will
ideally put an end on the controversies and is a welcome step for
alternative investment funds, offshore investors including private
equity players, who make financial investment in shares of unlisted
Although the treatment of income arising on sale of unlisted
shares as capital gain has been more or less settled by way of the
Letter, the interpretation/implications of the aforesaid three
exceptions to be made by the Assessing Officer is yet to be seen
and will lot depend upon case to case basis. The Assessing Officers
have been given the wide powers to determine the genuineness of
each transaction, to take appropriate view, where he opines to
'lift the corporate veil' of transaction and where whole
business is being transferred through transfer of shares along with
control and management. Any exercise of such power by Assessing
Officer will be subject to interpretation and consequently, may
lead to dispute/litigation.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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