URGENT Tax Advice requested - Share transfer / sale

 
Dear Experts,
 
Could you please share your views / perspectives on the following scenario? 
 

ABC pvt. ltd. is in the middle of a reverse merger with XYZ Ltd.
Employee of ABC pvt. ltd. gets some shares of XYZ Ltd. transferred to his/her name (for a consideration of X/ share) as per management's instructions  - However, these shares are not DIRECTLY paid for by the employee (paid for by ABC's mgmt (probably by cash) to original shareholder).

- How the treatment of payment is done in employee's hands? coz without payment they can not be owner of the shares. 

ABC Pvt. Ltd. asks employee to sell the shares of XYZ Ltd. after a few months - share is at a higher price now

- if the employees get the shares in their hands FREE, and did not accounted the sum towards cost, then the cost is to be treated as income from other sources and taxable in year of purchase. 

Employee is asked to transfer the amount realized from the sale to someone else (an individual)
ABC says they will bear the Capital Gains tax when it is due
- depends on the employees, coz the capital is now in possession of employees and they can do with the money whatsoever they want, but capital gain tax is liability of them. 
 
Now, the questions are:
 

From an audit / legal compliance point of view, how does this transaction stand?
From an Income Tax point of view, how would this be recorded / reported? Since the employee never actually paid from his/her account for the shares (simply signed a share transfer form), how would he/she even report the BUY transaction as there is no debit from their bank account - is it possible to explain share purchase by cash?
Finally, if the employee transfers the entire money (fairly large sum) from the transaction to some individual, how does one legally explain it to tax authorities if/when the need arises?

 
Thanks in advance for the help.

- How the treatment of payment is done in employee's hands? coz without payment they can not be owner of the shares. 

The co. may have paid the original shareholder in cash on behalf of employee. The employee isn't exactly aware of how the payment happened. How should the employee report this transaction for the purpose of taxation?

ABC Pvt. Ltd. asks employee to sell the shares of XYZ Ltd. after a few months - share is at a higher price now

- if the employees get the shares in their hands FREE, and did not accounted the sum towards cost, then the cost is to be treated as income from other sources and taxable in year of purchase. 


Employee is asked to transfer the amount realized from the sale to someone else (an individual)
ABC says they will bear the Capital Gains tax when it is due
- depends on the employees, coz the capital is now in possession of employees and they can do with the money whatsoever they want, but capital gain tax is liability of them. 

The money is to be transferred to another employee (possibly in the lower tax bracket) and maybe from him to someone else identified by mgmt. 

The question is - in the event of an audit, would this cause problems as the co. is still in the process of the reverse merger with the public co. whose shares have been traded by the employee. Or is the employee not at wrong as long as he/she just pays their capital gains tax?

 
these are bogus transactions held between the employer and employee as either employees are not subject to tax or they are in primary low bracket of tax. so the employer is taking advantage of income by book entry. its between the employer and employee and incometax has nothing to in it, except the collection of tax at cost of purchase as "income from other sources" and capital gain on sale proceeds. 

What does the co. actually achieve as the employee actually pays full Capital Gains tax which would be paid to him by the co.? Or, could this be a strategy to buy out shares of the target public co. indirectly?

Thanks for the help! Here are a few more queries based on your responses. Please answer if possible.

 




Originally posted by : U S Sharma










- How the treatment of payment is done in employee's hands? coz without payment they can not be owner of the shares. 

The co. may have paid the original shareholder in cash on behalf of employee. The employee isn't exactly aware of how the payment happened. How should the employee report this transaction for the purpose of taxation?

- in such cases employees are taken in confidence and offered % for such transactions, its not right that employee is not aware of the cost and payment, coz in absence of "Cost of Acquisition" how the capital gain tax will be paid? ask the employee he will accept the facts. 

ABC Pvt. Ltd. asks employee to sell the shares of XYZ Ltd. after a few months - share is at a higher price now

- if the employees get the shares in their hands FREE, and did not accounted the sum towards cost, then the cost is to be treated as income from other sources and taxable in year of purchase. 


Employee is asked to transfer the amount realized from the sale to someone else (an individual)
ABC says they will bear the Capital Gains tax when it is due
- depends on the employees, coz the capital is now in possession of employees and they can do with the money whatsoever they want, but capital gain tax is liability of them. 

 

The money is to be transferred to another employee (possibly in the lower tax bracket) and maybe from him to someone else identified by mgmt. 

The question is - in the event of an audit, would this cause problems as the co. is still in the process of the reverse merger with the public co. whose shares have been traded by the employee. Or is the employee not at wrong as long as he/she just pays their capital gains tax?

- audit is not for the employee, audit is for company and company books are not effected with such transactions. 

 
these are bogus transactions held between the employer and employee as either employees are not subject to tax or they are in primary low bracket of tax. so the employer is taking advantage of income by book entry. its between the employer and employee and incometax has nothing to in it, except the collection of tax at cost of purchase as "income from other sources" and capital gain on sale proceeds. 

What does the co. actually achieve as the employee actually pays full Capital Gains tax which would be paid to him by the co.? Or, could this be a strategy to buy out shares of the target public co. indirectly?

- its curb trading, to accumulate a % of voting rights by accumulating the same through multiple channels.