2007 (3) TMI 661 - AT - Income Tax

Sale of shares - Long-term capital gains - Whether the date of transfer of shares in this case should be reckoned as March 17, 1998, i.e., the date of execution of the agreement for sale of shares on April 23, 1998, i.e., when delivery of share certificates along with transfer deeds were handed over to the purchaser - HELD THAT - We find that the entire agreement executed on March 17, 1998, among the parties was acted upon. It was conceded before us by learned counsel that the approval of the Government authorities had been received in the accounting period relevant to the assessment year under consideration. The entire shares were delivered along with transfer deeds on April 23, 1998. Thus, the present case stands on stronger footings in favour of the Revenue and against the assessee because in the case before the hon ble Kerala High Court, the entire shares, subject-matter of transfer in the agreement, could not be transferred because of non-receipt of Government approval in respect of 40,000 shares. This is not the case here. Therefore, we are of the considered opinion that this was not a conditional sale as was also understood by the parties at the time when resultant capital gains on sale of shares was included in the original return filed by the assessee. Therefore, the case of the assessee is fully covered by the aforesaid circular of the Board as the date of transfer for the purpose of section 45 would be March 17, 1998 and not April 23, 1998. Thus, we are of the considered opinion that the authorities below were justified in taking the date of transfer of shares as March 17, 1998, falling in the accounting period relating to the assessment year under consideration. Accordingly, we confirm the order of the CIT (A) and reject the various grounds of appeal of the assessee. In the result, the appeal of the assessee is dismissed.

Issues Involved:
1. Applicability of Board's Circular No. 704 to the sale of shares of private limited companies and unlisted securities.
2. Determination of whether the share purchase agreement dated March 17, 1998, is a contract of sale or an agreement to sell.
3. Determination of the date of transfer of shares for the purpose of capital gains taxation.
4. Applicability of Section 10(23G) exemption of the Income-tax Act, 1961.
5. Interpretation of the provisions of the Sale of Goods Act, 1930, and the Securities Contracts (Regulation) Act, 1956.

Issue-wise Detailed Analysis:

1. Applicability of Board's Circular No. 704:
The assessee did not press the issue regarding the applicability of Board's Circular No. 704 on the sale of shares of private limited companies and unlisted securities. Hence, this issue was dismissed as not pressed.

2. Determination of Contract of Sale vs. Agreement to Sell:
The Commissioner of Income-tax (Appeals) held that the share purchase agreement dated March 17, 1998, was a contract of sale and not merely an agreement to sell. The assessee argued that the sale was conditional and subject to certain prerequisites that were fulfilled only on April 23, 1998. However, the Commissioner observed that the intention of the parties was clear from the agreement, which conferred specific rights and obligations on both the purchaser and the seller. The verification signed by the appellant in the return of income filed on November 30, 1998, was binding unless subsequent events made the declaration incorrect.

3. Determination of the Date of Transfer of Shares:
The key issue was whether the date of transfer of shares should be March 17, 1998 (the date of the agreement) or April 23, 1998 (the date of delivery of shares). The Assessing Officer and the Commissioner of Income-tax (Appeals) both held that the date of transfer was March 17, 1998, based on Board's Circular No. 704, which states that the date of contract of sale shall be treated as the date of transfer if it is followed by actual delivery of shares and transfer deeds. The Tribunal upheld this view, stating that the agreement was acted upon and followed by the delivery of shares, making March 17, 1998, the effective date of transfer.

4. Applicability of Section 10(23G) Exemption:
The Assessing Officer disallowed the assessee's claim for exemption under Section 10(23G) of the Income-tax Act, 1961, on the grounds that the project for providing telecommunication services came into existence before March 31, 1995. The Tribunal did not specifically address this issue in detail, as the primary focus was on the date of transfer of shares for capital gains purposes.

5. Interpretation of the Sale of Goods Act, 1930, and the Securities Contracts (Regulation) Act, 1956:
The assessee argued that the sale was conditional and should be governed by Section 4 of the Sale of Goods Act, 1930, which defines a contract of sale and an agreement to sell. However, the Tribunal held that the definition of "transfer" under Section 2(47) of the Income-tax Act, 1961, has a much wider meaning and is not confined to the definition of sale under the Sale of Goods Act. The Tribunal relied on the judgment of the Bombay High Court in CIT v. Tata Iron and Steel Co. Ltd., which held that the word "transfer" in Section 2(47) of the Act has a very wide meaning and cannot be narrowed down by referring to provisions of other statutes.

Conclusion:
The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) and held that the date of transfer of shares was March 17, 1998, making the capital gains taxable in the assessment year 1998-99. The appeal of the assessee was dismissed. The decision was pronounced in the open court on March 23, 2007.

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