The Bombay High Court has held that when the settlement of shares was done by the settler of Trust by way of employee stock option plan and not a direct purchase from the market, then income generated therefrom cannot be construed as ‘business income’ of trust.
The assessee-Trust sold certain settlement shares and earned an income of Rs.14,69,09,814/- therefrom. The AO taxed the same as Assessee’s business income, rejecting Assessee’s contention that the sale of settlement shares would give rise to capital gains.
On the second appeal, the Tribunal held 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 allotted 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 allotted 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, a 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.
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The Tribunal refused to treat the amount as business income for the reason that the Department did not question the existence of the Trust, as being sham or bogus and the principal object of the Trust was to ensure an effective succession planning mechanism and intergenerational transfer of Trust corpus and income.
The bench comprising Justices Akil Kureshi and M S Sanklecha noted that the question of whether the sale of shares by Assessee would invite capital gain or would be business income is a 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 the 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 the 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,” the bench said.
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