Assessability of capital gains on transfer of shares
Sale as contemplated u/s 2(47)(i) and extinguishment of rights as contemplated u/s 2(47)(ii) are not mutually inter-changeable; if a particular transaction is the transaction of sale then unless the sale is complete, no transfer can be said to have taken place because there will always be extinguishment of rights in case of sale and if a single right out of the entire bundle of property in capital asset is extinguished, then, the transfer would be taken as complete; this will lead to absurd situation; thus, the transfer of share is complete when the share certificate along with duly executed transfer deed is handed over to the transferee.
ITAT, ‘H’ BENCH, MUMBAI
Hami Aspi Balsara
v.
ACIT
ITA No. 6402 & 6403/Mum/2008
May 22, 2009
RELEVANT EXTRACTS:
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9. We have considered the rival submissions and perused the record of the case. The facts as noted earlier in detail in the arguments of Ld Counsel for the assessee are not disputed. Admittedly, it is a case of sale of shares. In this regard, share purchase agreement was entered into on 27.1.2005 and final delivery of shares took place on 1/15.4.2005. In the share purchase agreement, detailed provisions were made restricting the vendors from exercising various rights in relation to shares. Revenues' main contention is that on account of substantial extinguishment of rights in pursuance to share purchase agreement, the transfer took place on 27.1.2005. Per contra, the assessee's claim is that when the delivery of shares was over and all the convents contemplated in the share purchase agreement became irrevocable on 1.4.2005 then only transfer was complete and, accordingly, the investment made by the assessee in the specified securities within six months reckoned from 1.4.2005 entitled the assessee for exemption under section 54EC. In the first place, we are in agreement with the contention of Id Counsel for the assessee that sale as contemplated u/s. 2(47)(i) and extinguishment rights as contemplated u/s. 2(47)(ii) are not mutually inter changeable. If a particular transaction is the transaction of sale then unless the sale is complete, no transfer can be said to have taken place because, as rightly pointed out by ld Counsel for the assessee, there will always be extinguishment of rights in case of sale and if a single right out of the entire bundle of property in capital asset is extinguished, then, the transfer would be taken as complete. This will lead to absurd situation. Had it been the intention of legislature to treat the transfer on the basis of extinguishment of any right in capital asset then there was no necessity of including sale and exchange in the definition of transfer under section 2{47). It is well settled principle of interpretation that no word in an statute is superfluous and each word has to be assigned specific meaning in the context in which it is used. We further find lot of substance in the argument of Id Counsel in this regard with reference to inclusion of clause (v) in the definition of transfer under section 2(47} only with reference to immovable property and not with reference to movable property. In the present case when final delivery of shares took place on 1/15-4-2005 and, therefore, in view of the decision in the case of M.Ramaswamy (supra) and Rajgiri Rubber and Produce Co.(supra), in our opinion, transfer of shares took place on 1/15.4.2005. This view is fully supported by the decision of the Hon'ble Supreme Court in the case of Shellate VR v. PJ Thakkar, 45 Company case 43 wherein, it was held that procedure required by law was to be complied with and, accordingly, delivery of share certificate alongwith transfer deed had to be handed over to purchaser in order to complete the transfer.
11. The AO has pointed out that assessee had received substantial part of sale consideration at time of share purchase agreement which was not refundable. In this regard, Ld Counsel has referred to section 65 of Indian Contract and Specific Relief Act, which reads as under:
"Section 65. Obligation of person who has received advantage under void agreement or contract that becomes void - When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it."
This section makes it very clear that if, for any reason, the terms of contract can not be fulfilled then assessee is bound to restore the benefits she had received including consideration to the purchaser.
12. Now coming to the decision of the Amritsar ITAT in the case of Maxtelecon Ventures (supra). We are of the opinion that the said decision was rendered with reference to KN Narayanan (supra) without considering the subsequent decision of the same High Court in the case of 203 ITR 663(supra). Moreover, said decision has not taken into consideration the ratio laid down by the Hon'ble Supreme Court in the case of Shellate VR v. PJ Thakkar, 45 Company case 43(supra). in this case the Supreme Court has clearly laid down that where, as between the transferor and the transferee, all formalities have been gone through, such as the execution of document of transfer and a physical handing over of the shares by the transferors to the transferee, the shares should be taken to have been transferred to the transferee, though until the transfer of share is registered in accordance with the Companies Law, the transfer could not enable the transferee to exercise rights of the shareholder vis-a-vis the company. Thus, in sum and substance, the transfer of share is complete when the share certificate alongwith duly executed transfer deed is handed over to the transferee. Therefore, we, respectfully, do not agree with the proposition laid down in the said decision.
13. Now coming to the Circular No.704 dt.28.4.1995. This circular deals with two situations. Firstly, shares listed on stock exchange and transfer taking place through brokers. Secondly, transactions taking place directly between the parties and not through stock exchange. We are concerned with the second situation. In this regard, it is mentioned in the circular as under
"In case the transactions take place directly between the parties not through stock exchanges the date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by the actual delivery of shares and the transfer deeds."
This clearly shows that the date of contract of sale will be the date which the parties have agreed to. No other date can substitute the date as declared by the parties. In the present case, the date of contract of sale as understood by the parties is 1.4.2005 and the same cannot be substituted by the date of share purchase agreement because completion date was specified in Article 6 of the Share purchase agreement, which was not later than 4.4.2005 or such other later date that was mutually agreed in writing. As per Article 6, on the completion date the attorney was to receive letters of discharge from the lenders recording the unconditional and irrevocable discharge of the guarantees and the cancelled the original guarantees. This occurred on 1.4.2005. Therefore, the date of contract of sale as declared by the parties in the share purchase agreement was 1.4.2005. The directors resigned on the date as per the said Article. Therefore, the contract was completed on fulfillment of conditions contemplated in Article 6 which took place on 1.4.2005. Thus, from the very beginning, the parties had declared the date of contract of sale subject to fulfillment of conditions and, therefore, on the date of fulfillment of above conditions, the date of contract of sale crystallized. We are, therefore, of the opinion that this circular in no way prejudice the asses see's claim. It is pertinent to note that Dabur India Limited, the purchaser has also recognized the purchase of shares in F.Y. 2005-06 and not F.Y. 2004-05. The Ld CIT(A) has observed that the entire sale consideration was Rs. 10,65,06,753/- but the fact is that it was not the entire sale consideration as the assessee had received Rs.5 lakhs on completion of sale. In view of the above discussion, we are of the opinion that as the transfer of shares of target companies was completed on 1/15-04-05, the capital gains were to be taxed in assessment year 200&-07 and there is no merit in including the income from capital gain on sale of shares of target companies in the A.Y 2005-06. Ground Nos.l, 2& 3 stand allowed.
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