The unlisted-share direction has its own conditions
CBDT’s F.No.225/12/2016/ITA.II dated 2 May 2016 directs that income from transfer of unlisted shares be considered under Capital Gain irrespective of holding period, to provide consistency. Paragraph 3 identifies situations where this view need not necessarily apply: questionable genuineness, an issue involving lifting the corporate veil, or transfer together with control and management of the underlying business. These are review triggers, not automatic findings of business income or wrongdoing.
Read the applicable text: CBDT direction dated 2 May 2016 Income Tax Department transition guidance.
Separate this from the listed-share circular
The direction follows Circular 6/2016 but addresses unlisted shares specifically. Do not import the listed-share more-than-twelve-month condition as a prerequisite to this unlisted-share direction. Equally, do not extend it indiscriminately to unlisted bonds, debt instruments or every private investment. Identify the actual instrument and its status on the relevant facts.
Build an exception-screening record
For each transfer, document the legal and beneficial parties, acquisition history, transaction agreement, payment trail, share-register or depository evidence, and rights passing to the buyer. Record whether the arrangement raises a genuine corporate-veil issue, rather than assuming every group transaction does. Examine governance and management arrangements where the transfer occurs with control; a share-count percentage alone is not a complete control analysis.
The third exception needs the complete transaction
Read the share purchase agreement with voting arrangements, board rights, management agreements and connected transfers. The direction does not specify a numerical safe harbour that makes every transfer below a fixed percentage free from review. Where the exception arises, the Assessing Officer takes an appropriate view on the facts. Do not convert that reservation into a deterministic tax-head conclusion.
For AY 2026–27, also apply CBDT’s clarification dated 24 January 2017: the control-and-management exception in paragraph 3(iii) does not apply to SEBI-registered Category I and Category II AIFs. This clarification concerns that exception only; it does not remove the separate genuineness and corporate-veil reviews. Establish the transferor’s category and registration before applying it.
Classification does not settle valuation or tax
After classification, separately determine the applicable consideration, cost, transfer expenses, holding-period consequences, rates and any special provisions. The illustrations below use fictional proceeds assumed to be substantiated and assumed simplified costs solely for reconciliation. They are not statutory cost or fair-value calculations. A classification direction is not a rate concession, valuation clearance or permission to disregard a questionable payment trail.
Use the correct year
This article concerns FY 2025–26 / AY 2026–27 under the 1961 Act. The Income Tax Department’s transition guidance distinguishes that earlier-year return from Tax Year 2026–27 under the 2025 Act. Preserve the period-specific computation, the direction and an explicit conclusion on each exception. Explain any unresolved issue before finalising the return rather than relying on a generic investment-ledger heading.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Ordinary transfer population
Assume a genuine unlisted-share investment transfer with no paragraph 3 exception. Proceeds ₹15 lakh less simplified cost ₹11 lakh give a ₹4 lakh spread. The direction concerns classification; ₹4 lakh is not certified as the final statutory gain by this simple working.
Illustrative example 2: Holding length is not this direction’s gateway
A company transfers two otherwise qualifying unlisted lots: one held an assumed three months with ₹2 lakh spread and another held an assumed thirty months with ₹5 lakh spread. Total spread ₹7 lakh remains separated into ₹2 lakh and ₹5 lakh lots. The direction’s classification approach does not impose twelve months as its entry test; subsequent computation consequences need their own review.
Illustrative example 3: Control-related review flag
For a transferor outside that Category I/II AIF clarification, a transfer register contains 10,000 shares: 7,000 in a transaction passing control and management on the assumed established facts, and 3,000 in an unrelated ordinary transfer. Flag the 7,000 for the paragraph 3 review; do not automatically classify the whole 10,000 as business stock or treat 3,000 as a statutory percentage exemption.
Illustrative example 4: Payment evidence gap
Contractual proceeds ₹20 lakh comprise verified bank receipts ₹17 lakh and ₹3 lakh unresolved. The ₹3 lakh gap needs investigation; it is not automatically a discount from sale consideration or proof of sham dealings. Preserve the ₹20 lakh contract and ₹17 lakh receipt reconciliation.
Illustrative example 5: Avoid duplicate transaction imports
One transfer producing an assumed ₹6 lakh spread appears in two data imports, giving ₹12 lakh draft spread. Removing the duplicate restores ₹6 lakh. The duplicated import neither proves a second disposal nor changes the classification rule.
Illustrative example 6: Reconcile unsold shares
Opening 5,000 shares plus 2,000 acquired less 4,500 transferred leave 2,500 shares. Reconcile the 2,500 to ownership records. Untransferred shares should not enter a realised-transfer spread solely because the books contain a fair-value movement.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the year and instrument | FY/AY and evidence the asset is an unlisted share. |
| 2 | Identify legal and beneficial parties | Ownership and transaction records. |
| 3 | Match acquisition and disposal lots | Share quantities and dates. |
| 4 | Test genuine execution | Agreements, registrations and payment trail. |
| 5 | Review corporate-veil issues | Actual facts and reasoned legal analysis. |
| 6 | Review control and management transfer | Connected agreements and governance rights. |
| 7 | Document the direction’s conclusion | Ordinary approach or identified exception review. |
| 8 | Determine computation rules separately | Consideration, tax cost, rate and special provisions. |
| 9 | Remove duplicates and reconcile holdings | Unique transfer IDs and closing ownership. |
| 10 | Preserve evidence and unresolved issues | Signed working, source direction and supporting index. |
Sixteen practitioner FAQs
1. Is the direction limited to listed shares?
No. The 2 May direction specifically concerns unlisted shares.
2. Is a twelve-month holding required by this direction?
No. Its stated classification approach is irrespective of holding period.
3. Does that eliminate all holding-period consequences?
No. The actual computation and applicable provisions still need review.
4. Does the direction cover unlisted bonds automatically?
No. Do not treat a debt instrument as an unlisted share.
5. What is the genuineness exception?
The approach need not necessarily apply where genuineness of the unlisted-share transaction is questionable.
6. Is a bank-reconciliation gap proof of sham dealings?
No. Investigate the evidence rather than assuming the legal conclusion.
7. What is the corporate-veil exception?
A transfer related to an issue of lifting the corporate veil requires the appropriate factual review.
8. Are all related-party transfers automatically within that exception?
No. Identify the actual issue and supporting facts.
9. What does the control exception concern?
Transfer of the shares along with control and management of the underlying business, subject to CBDT’s 24 January 2017 clarification excluding SEBI-registered Category I and II AIFs from this particular exception.
10. Does the direction prescribe a fixed control percentage?
No numerical safe harbour is established by the direction discussed here.
11. Does an exception automatically mean business income?
No. The Assessing Officer takes an appropriate view in the stated situations.
12. Can a ledger heading replace the screening file?
No. Retain transaction-specific evidence and conclusions.
13. Does capital-gain classification establish fair value?
No. Valuation and consideration rules require separate analysis.
14. Are the examples statutory tax calculations?
No. They use simplified spreads to illustrate the preparation record.
15. Why retain connected agreements?
They may establish rights and management arrangements that a share count alone misses.
16. Which framework applies to this article’s AY?
FY 2025–26 / AY 2026–27 is analysed under the 1961 Act transition framework.
Official sources
CBDT direction dated 2 May 2016 Income Tax Department transition guidance