Income from Unlisted Shares to be treated as ‘Capital Gain’: CBDT Clarification

Income from transfer of Unlisted Shares shall be deemed as ‘Capital Gain’, irrespective of holding period: CBDT Clarification

CBDT has decided that the income arising from transfer of unlisted shares would be considered under the head ‘Capital Gain’, irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.

A. Taxability of Income/Loss arising from Transfer of Unlisted Shares: CBDT Press Release dt 5 May 2016

CBDT, vide order dated 2nd May, 2016 has given direction to field formation, with a view to avoid disputes/Litigation and to maintain uniform approach that the income arising from transfer of unlisted shares, irrespective of period of holding, would be taxable under the head ‘Capital Gain’ except in certain circumstances where the Assessing Officer would examine the issue and take appropriate view.

This order is in continuation to the earlier circular of CBDT (circular No.6/2016 dated 29.2.2016), wherein position of Income Tax Department regarding transfer of listed shares and securities was spelt out.

With these initiatives, it is expected that there would be much needed certainty and predictability regarding taxability of income arising from transfer of shares. Consequently, due to uniformity in approach, tax disputes and litigation on this issue would reduce substantially.

B. CBDT Order dt. 2-5-2016

Regarding characterisation of income from transactions in listed shares and securities, Central Board of Direct Taxes (‘CBDT’) had issued a clarificatory Circular no. 6/2016 dated 29th February, 2016, wherein with a view to reduce litigation and maintain consistency in approach in assessments, it was instructed that income arising from transfer of listed shares and securities, which are held for more than twelve months would be taxed under the head ‘Capital Gain’ unless the taxpayer itself treats these as its stock- in-trade and transfer thereof as its business income. It was further stated that in other situations, the issue was to be decided on the basis of existing Circulars issued by the CBDT on this subject.

2. Similarly, for determining the tax-treatment of income arising from transfer of unlisted shares for which no formal market exists for trading, a need has been felt to have a consistent view in assessments pertaining to such income. It has, accordingly, been decided that the income arising from transfer of unlisted shares would be considered under the head ‘Capital Gain’, irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.

3. It is, however, clarified that the above would not be necessarily applied in the situations where:

i. the genuineness of transactions in unlisted shares itself is questionable; or

ii. the transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or

iii. the transfer of unlisted shares is made along with the control and management of underlying business and the Assessing Officer would take appropriate view in such situations.

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