Profit On Sale Of Listed Shares Held For More Than 12 Months To Be Taxed As Long-Term Capital Gains: ITAT

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the profit on sale of listed shares held for more than twelve months should be taxed as long-term capital gains.

The bench of G.S. Pannu (Vice President) and Anubhav Sharma (Judicial Member) has observed that provisions of Section 28(iv) of the Income Tax Act per se do not apply to the disputed transaction, as the assessee has held such shares in the capacity of promoter shareholder and not for the purpose of trading and has been consistently showing it as long-term capital investment in the books of accounts and balance sheet. It is established that the assessee has held the shares since inception for more than 25 years as long-term investments, and not a single share has been sold by the assessee during those 25 years.

The appellant/assessee, Hero Honda Motors Ltd. (HHML), is a public listed company, which was incorporated as a joint venture (JV) between Hero Group and Honda, Japan, with the Hero Group and Honda holding 26% equity each, pursuant to shareholder agreement. The parties agreed to participate in the manufacture, assembly, import, sale, and service of motorcycles and parts thereof in India with the technical assistance of Honda.

In order to acquire the shares, apart from utilizing the accumulated reserves and surplus available with the appellant, interest-bearing borrowed funds were sourced through the issue of secured non-convertible debts (NCDs) to the tune of Rs. 2900 crores, which were secured against the shares of HHML. Pursuant to the acquisition of shares from Honda, the appellant also arranged funds to the extent of Rs. 2,580.43 crores by fresh issue of equity shares having a face value of Rs. 100 per share at a premium of Rs. 41,83,486 per share aggregating to Rs. 2,580.43 crores to foreign investors during the immediately succeeding year, which were substantially utilized to prepay the NCDs.

A survey was conducted by the department. During the survey, copies of certain agreements and documents were collected, and statements of various employees were recorded in relation to the transaction of the purchase of shares of HHML by an assessee from Honda.

The reassessment proceedings were initiated against the assessee. The appellant filed legal objections, which were dismissed. The reassessment proceedings were concluded at a total income of Rs. 3650,88,16,576, after making an addition of Rs. 3644,85,20,063 under Section 28(iv), alleging it to be “benefit” accrued to the appellant on the acquisition of a 26% stake in HHML from Honda at a discount.

On first appeal, the CIT(A) agreed to the contentions of the assessing officer in toto and dismissed the appeal of the appellant.

The assessee contended that the original shareholding held by the appellant in HHML and the subject shares acquired from Honda are held as capital assets and not as stocks in trade, as can be gauged from the fact that under the original JV Agreement with Honda, Honda acquired shares in HHML in 1983, which were held over a period of approximately 25 years as capital assets/investments without any dilution or trade therein. Then in the audited financial statement of the appellant prepared since inception, the appellant has shown shares and securities as "investments.". Sales and purchases of shares are not credited or debited to the profit and loss account. Further shares have always been valued at cost and not on NRV, based on Accounting Standard 13 relating to 'Investments'. The income as shown by the appellant in its profit & loss account for the relevant year, under Schedule-G, is in the nature of investment income from long-term investments. The appellant held shares in HHM as a 'promotor' holding substantial interest. The appellant, in order to acquire/strengthen its management rights in HHML, acquired shares from Honda, and, therefore, these shares were acquired for the purposes of controlling/management interest in the company and not for trading.

The tribunal held that when there was no business income from the selling shares held as investments, certainly the provision of Section 28(iv) of the Act could not have been invoked. Thus, bringing the difference in the price of the acquisition of shares with the market price as a benefit arising from business was in a way again holding that the sale and purchase of shares give rise to business income. The AO had fallen in error to invoke the provision of section 28(iv) of the Income Tax Act.

Counsel For Appellant: Ajay Vohra

Counsel For Respondent: T. James Singson

Case Title: Hero Motocorp Ltd. Versus DCIT

Case No.: ITA No. 1053/DEL/2023

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