No tax as revenue receipts if shares are held by trust in fiduciary capacity and trust had acted as mere SPV of settler company: HC
Proceeds from sale of shares cannot be taxed as revenue receipts in hands of trust, if shares were held in fiduciary capacity and trust had acted as mere SPV of settler company: HC
Whether when a trust is holding the shares in its fiduciary capacity and is acting as Special Purpose Vehicle of the settler company, then proceeds from sale of those shares cannot be treated as trust’s business income. YES IS THE VERDICT.
Facts of the case:
The assessee is a Trust created by the employer, and as per the Trust deed, it was established for the welfare of the employees of the settler company. The activities of the Trust included investing in equity shares, to hold equity shares of the company and to administer the fund as instructed by the Compensation Committee for the benefit of the eligible employees. The Committee would recommend granting of options to the eligible employees. Such options would include a right to choose Employees Stock Option Scheme. The AO noted that during the year under consideration, several employees had exercised such option and the Trust had allotted shares to such employees in terms of their options. The proceeds received from the employees were recognized by the Trust as revenue receipt and shown as its long term capital gain. The AO however held that the same should be taxed as assessee’s business income.
When the matter reached the Tribunal, it was held that the assessee was holding the shares in fiduciary capacity and that the proceeds could not be taxed as business income. The Tribunal observed that the AO had failed to appreciate complete facts in the right context.
High Court held:
this Court is in agreement with the view of the Tribunal. The nature of allotment of shares, the nature of stock option offered to the eligible employees as per the recommendation of the Compensation Committee and the corresponding revenue generated upon the eligible employees opting for such stock options, would be sufficient to hold that the proceeds cannot be treated as the Trust’s business income. The Tribunal has observed that the assessee trust has been holding the shares in the fiduciary capacity. It could also be said, in other words, that the assessee trust is like a Special Purpose Vehicle (SPV) of the settler company, which has been formed for the special purpose of holding the shares of the settler company and issuing the same to the eligible employees, interalia, for the benefit of settler and its employees. It is acting as an extended arm of the settler company. It is not holding the shares in its own absolute rights, as has been contended by the Revenue also. Under these circumstances, it will be very difficult to categorise these shares as business assets, meant for trading by the assessee trust. No question of law in this respect therefore arises.