There has been a constant tussle over classifying income from sale of shares as capital gains or profits, or gains from business. There are judgements in favour of both, and decisions have relied on various parameters such as frequency of trading, classification of shares as investment or stock-in-trade, and the investment’s holding period.

The Bombay High Court recently held that income arising from sale of shares in an unlisted company to its holding company would be taxable as capital gains and not business income, on the grounds that shares of a private limited company are not marketable like other normal trading assets. Consequently, such shares cannot be considered stock-in-trade even if they were acquired for control of a company. The High Court also rejected the Revenue Department’s grounds for denying exemption from capital gains tax arising on transfer of shares by a wholly-owned subsidiary to its parent.

Set-off for Swedish branch losses

In a significant ruling, the Bombay High Court upheld the Income Tax Appellate Tribunal’s decision to allow set-off of losses incurred by the Swedish branch in computing the Indian company’s taxable profits in India.

The assessee substantiated its position based on Article 7 of the India-Sweden tax treaty. Under the treaty, the entire profit of the Swedish branch is liable for tax in India as well as in Sweden. For the taxes paid in Sweden, the assessee can claim a credit in India. Drawing analogy from the same principle, the losses of the Swedish branch were considered for set-off against the business profits in India. The ITAT allowed the assessee’s contention and granted such benefit based on a previous decision under the India-Japan treaty.

As the Revenue Department was unable to bring on record any material difference between the relevant provisions of the India-Sweden treaty and the India-Japan treaty, the Bombay High Court upheld the Tribunal’s decision.

HC spares ‘gift transaction’ from tax

The Delhi High Court recently upheld the non-taxability of a ‘gift transaction’ where shares of an Indian listed company were transferred by its US parent to a Singapore group company. The Authority for Advance Rulings had held that this transaction was not subject to tax, as the capital gains could not be computed. Further, section 56(2)(viia) of the Income Tax Act, 1961 was not applicable to the transferee as the company (whose shares were transferred) was listed. The Revenue Department alleged ‘treaty shopping’ — as the shares were transferred to a Singapore company, it would be eligible for India-Singapore Treaty benefits when it sells the shares in the future. The High Court, dismissing the Revenue’s contentions, held that even if the listed company’s shares were sold for a consideration on the stock exchange, it would not be taxed given the express exclusion under the domestic law. Therefore, a ‘gift’ for nil consideration would also not be subject to tax in India.

NRO account for Bangladeshi nationals

The Reserve Bank of India recently issued a circular whereby Bangladeshi nationals are now permitted to open Non-Resident Ordinary Rupee (NRO) accounts in India without prior approval. However, the authorised dealer banks should ensure that the individual holds a valid visa and residential permit issued by the Foreigner Registration Office/ Foreigner Regional Registration Office concerned. Further, the bank should report quarterly to the Government with details including name, date of arrival, passport number, residential permit reference, name of the FRO/ FRRO concerned, and details of the bank branch. Opening of accounts by entities in Bangladesh will still require prior RBI approval.

— PwC India

Published on March 24, 2013