Sale of Right & Interest in Shares Not Taxable If Same Were Acquired Through Agreement Executed Outside India | ITAT

Case Details: Nikesh Arora vs. Deputy Commissioner of Income-tax - [2024] 165 taxmann.com 195 (Delhi-Trib.)

Judiciary and Counsel Details

• G.S. Pannu, Vice-President & Saktijit Dey, Vice-President
• Ajay Vohra, Sr. Adv., Vijay Mehta, Ms. Asmita Dsovza & Dinesh Kanabar, CAs for the Appellant.
• Vijay B. Vasanta, CIT-(DR) for the Respondent.

Facts of the Case

The assessee, a non-resident individual, was employed by a Japanese company in the USA. As part of his employment, the assessee was entitled to receive certain shares of Indian companies. The shares were held by the employer’s Singapore entities. Later, the employer transferred the rights and benefits of such shares to the assessee through an assignment deed. The assessee offered the compensation value of shares in his US tax return.

Assessee submitted that he transferred his interest/rights over the shares, which were situated outside India. Thus, the capital gain was not taxable in India. On the contrary, the Assessing Officer (AO) treated the capital gain as short-term. He believed that the shares were acquired by the assessee at a later date through an employment agreement. The AO also issued notices to the Indian companies to prove the ownership of shares. As per the response received from the companies, the assessee was not registered as a shareholder of the company.

Aggrieved by the order, the assessee preferred an appeal to the Delhi Tribunal.

ITAT Held

The Tribunal held that the assessee was a resident of the USA. As per the employment agreement, the assessee was entitled to receive shares of the Indian company. The Singapore entities of the employer held the shares. Later, the employer transferred the rights and benefits of such shares to the assessee through an assignment deed. It was a fact on record that the assessee had offered to tax the compensation value of shares in his US tax return. Subsequently, the assessee entered into a termination agreement with the employer for termination of his Employment. Pursuant to which the employer paid the amount, subject to which the assessee’s interest in the shares would stand fully extinguished.

Therefore, it cannot be said that the capital gain derived by the assessee was through transfer of capital assets situated in India. Patently, the capital asset in the nature of rights and interests accrued to the assessee as part of employment benefit and was acquired by him through assignment deed. Thus, the source of assessee’s rights and interests constituting a capital asset was through aforesaid agreement executed in USA.

Accordingly, the situs of capital asset in the nature of rights and interests acquired by the assessee, which were subsequently transferred and subjected to capital gain, was in the USA and not located in India. Therefore, in terms of section 9(1)(i)(a) of the Act, the income derived from the transfer of such capital asset is not taxable in India.

List of Cases Referred to

• Commissioner of Wealth-tax v. C. Rai [1979] 119 ITR 553 (Bombay) (para 13)
• DES RAJ NAGPAL v. ITO [1985] 13 ITD 800 (Delhi) (para 13)
• Mysore Minerals Ltd. v. CIT [1999] 106 Taxman 166/239 ITR 775 (SC) (para 13)
• Vodafone International Holdings B.V. v. Union of India [2012] 17 taxmann.com 202/204 Taxman 408/341 ITR 1 (SC) (para 15)
• A & F Harvey Ltd. v. Commissioner of Wealth-tax [1977] 107 ITR 326 (Madras) (para 15)
• Commissioner of Wealth-tax v. Mrs. O.M.M. Kinnison [1986] 28 Taxman 8A/161 ITR 824 (SC) (para 15).