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Interpretation of an agreement for transfer of shares with conditions leading to capital gains assessment under the Income Tax Act. Analysis: The case involved a dispute regarding the interpretation of an agreement for the transfer of shares and the consequent assessment of capital gains under the Income Tax Act. The petitioner, along with family members, held a significant number of shares in a company and entered into an agreement to transfer these shares to a purchaser in multiple lots by specific deadlines. The agreement stipulated that if the entire block of shares was not transferred, the vendor would repay the purchaser, and the shares would be retransferred. The petitioners transferred a portion of their shares on March 31, 1977, and reported long-term capital gains in their income tax returns. However, due to a delay in obtaining permission for transferring shares held by a non-resident family member, the vendors had to buy back those shares as per the agreement. The petitioners contended that the transfers were conditional and no capital gains were realized. The court analyzed the terms of the agreement and the legal implications of the transfer process. Referring to a relevant Supreme Court case, the court emphasized that the legal effect of a transaction governs its taxability, not its substance. The agreement clearly outlined the schedule for transferring shares in different lots, along with conditions for director appointments and registration of transfers. The court concluded that each lot of shares transferred as per the schedule conferred full title to the transferees, in line with the Companies Act provisions. The terms of the agreement did not support the theory of conditional transfers; instead, they indicated a complete legal transfer with a provision for buyback under specific circumstances. The court also noted that the petitioners had initially reported capital gains, indicating their belief in the effectiveness of the transfers. Ultimately, the court dismissed the petitions, upholding the view that the transfers were legally effective, and the petitioners could not change their stance after initially recognizing the capital gains. The judgment highlighted the importance of interpreting agreements based on their legal consequences and enforcing tax liabilities accordingly.
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