2011 (1) TMI 92 - AT - Income Tax

Capital gain - Shares - shares which are in investment portfolio of the assessee have been lent to the another company - assessee as per companies auditor s reported the transactions has been reported as such in the books of account by the auditor in his note to the accounts - Consequent to the blocking of transactions of company subsequently the assessee could not get back the shares as such but sold them through the company to another third party and offered the capital gains in A.Y. 2004-05 which the A.O. has accepted - assessee did undertake a loan transaction and not sale of shares during the year under consideration company sold the shares in the market borrowed shares from the assessee company delivered them when it was due and subsequently when the said company was held in the securities scam and operations were barred assessee has no other option than to sell those shares which are lent by them earlier to a third party sale of which was recorded and the capital gains was offered - no basis for Revenue s contention that assessee has sold shares in the year - assessee s appeal allowed

Summary

Issues Involved:
1. Addition of Rs. 16,06,23,687/- on account of long-term capital gains by treating lending of shares as a transfer.
2. Non-adjudication of credit of Rs. 2,50,000 tax paid on regular assessment.
3. Charging of interest of Rs. 88,93,733 under section 234B.
4. Charging of interest of Rs. 40,56,632 under section 220(2).

Issue-wise Detailed Analysis:

1. Addition of Rs. 16,06,23,687/- on Account of Long-term Capital Gains:
The primary issue was whether the lending of shares constituted a "transfer" under section 2(47) of the Income-tax Act, thereby attracting capital gains tax under section 45. The assessee argued that the shares of Global Trust Bank (GTB) were lent and not sold, maintaining ownership and beneficial interest, including dividends and other benefits. The assessee highlighted that lending and borrowing of shares are common practices in the stock market and referred to Circular No. 751 dated 10.02.1997, which states that lending of shares does not constitute a transfer. The CIT(A) and the Assessing Officer (A.O.) had treated the transaction as a sale, calculating capital gains based on the sale value of Rs. 20.76 crores and the cost of Rs. 4.70 crores. The Tribunal found that the shares were indeed lent and not sold, as evidenced by the sequence of events and the lack of any agreement or security other than a deposit of Rs. 15,00,000/-. The Tribunal concluded that the transaction was genuine and not a colorable device to avoid tax, allowing the assessee's grounds.

2. Non-adjudication of Credit of Rs. 2,50,000 Tax Paid on Regular Assessment:
The assessee contended that the A.O. erred in not allowing credit for Rs. 2,50,000 tax paid on regular assessment. The Tribunal did not provide a detailed analysis of this issue but implicitly allowed the appeal, indicating that the credit should be given.

3. Charging of Interest of Rs. 88,93,733 under Section 234B:
The assessee challenged the interest charged under section 234B, arguing that no interest was charged in the original order under section 143(3) and that the A.O. did not provide an opportunity to contest the interest charge, violating principles of natural justice. The Tribunal's decision to allow the appeal suggests that the interest charge was not justified and should be reconsidered.

4. Charging of Interest of Rs. 40,56,632 under Section 220(2):
The assessee also contested the interest charged under section 220(2), claiming that they were not given an opportunity to contest the charge and that it was not in accordance with the law. The Tribunal's decision to allow the appeal indicates that the interest charge under section 220(2) was not warranted.

Conclusion:
The Tribunal allowed the appeal, concluding that the lending of shares did not constitute a transfer, thereby nullifying the addition of Rs. 16,06,23,687/- as long-term capital gains. The Tribunal implicitly acknowledged the errors in not allowing credit for tax paid and charging interest under sections 234B and 220(2), directing the A.O. to reconsider these aspects. The order was pronounced on 21st January 2011.