2010 (11) TMI 718 - AT - Income Tax

Pledge and loan transaction - RCIL borrowed interest free loan from the chairman and Managing Director - Whether pledging of the shares as against the loan is regarded as transfer in dematerialised form - According to the AO, there was a transfer of ownership in shares by way of sale when the Assessee was recognized as beneficial owner by the Depository participant - There is no material brought on record to show that the claim of the Assessee in this regard is not true. The revenue has further relied on the fact that the transaction of pledge is not grounded on commercial reality because the pledge was taken after disbursement of the alleged loan and the value of security were disproportionate to the amount of loan - he documents on which the Assessee has placed reliance were collected in the course of Investigation by the Investigation Wing of the IT Department in Mumbai on its own - The meeting of the Board of Directors of RCIL and resolution passed on 13.3.2004 as recorded therein authorizing the borrowing of monies by RCIL from the Assessee have therefore to be presumed to be true and there is no material brought on record to show that they were not true whether the entry of the Assessee as beneficial owner of shares in the Depository/Participants register is conclusive that the transaction in question was a sale - It is similar to the presumption of prima facie evidence of title to the shares as contained in Sec.84 of the Companies Act, 1956 regarding certificate of shares and name of the person found on such certificate - It is now well settled that the question as to whether the title from the vendor to the vendee passed entirely depends upon the intention of the parties - In the present case, the parties to the transaction viz., the Assessee and RCIL both of them agree that the shares were given as security by way of pledge for loan given by the Assessee to RCIL and not by way of sale - It can still be shown that no property was intended to pass and that the transaction was really a pledge/bailment Held that it is not possible to have physical delivery of shares after the DPA but parties are at liberty to show that the delivery of shares by the pawnor to the pawnee by treating the pawnee as beneficial owner in the register of the depository was only by way of a pledge and as security and not to constitute such beneficiary as the real owner of the shares - Decided in favor of the assessee

Summary

Issues Involved:
1. Determination of whether the transaction was a pledge or a sale of shares.
2. Applicability of Section 2(24)(iv) of the Income-tax Act, 1961.
3. Compliance with the Depositories Act, 1996 and related regulations.
4. Veracity of the transaction and its commercial reality.
5. Evaluation of evidence and documentation supporting the transaction.

Comprehensive, Issue-wise Detailed Analysis:

1. Determination of Whether the Transaction was a Pledge or a Sale of Shares
The primary issue was whether the transfer of 50 crore shares of Reliance Infocomm Ltd. (RIC) from Reliance Communication Infrastructure Ltd. (RCIL) to the Assessee was a pledge or a sale. The Assessee claimed the transaction was a pledge, providing shares as security for a loan of Rs. 50 crores. The Assessing Officer (AO) argued it was a sale, citing the market value of shares at Rs. 53.71 each, significantly higher than the face value of Re. 1 per share at which they were transferred.

The Tribunal examined the sequence of events, including board resolutions, loan disbursement, dematerialization of shares, and declarations under Section 187C of the Companies Act, 1956. The Tribunal concluded that the transaction was a pledge, not a sale, as the shares were returned to RCIL upon loan repayment.

2. Applicability of Section 2(24)(iv) of the Income-tax Act, 1961
The AO invoked Section 2(24)(iv), which includes the value of any benefit or perquisite obtained by a director from a company as income. The AO argued that the Assessee received a benefit by acquiring shares at face value instead of market value, resulting in a deemed income of Rs. 2635 crores.

The Tribunal disagreed, stating that as a pledgee, the Assessee did not have absolute rights over the shares and could only sell them to recover the loan amount. Therefore, no benefit or perquisite was derived that could be taxed under Section 2(24)(iv).

3. Compliance with the Depositories Act, 1996 and Related Regulations
The AO contended that the pledge was not valid as it did not follow the procedures laid down by the Depositories Act, 1996, and SEBI regulations. The Assessee argued that these regulations were not mandatory and that the transaction was valid under the Contract Act, 1872.

The Tribunal held that the provisions of the Depositories Act were directory, not mandatory, and that a pledge could be created through actual delivery of shares. The Tribunal found that the Assessee had complied with the Companies Act, 1956, and the delay in filing Form No. III with the Registrar of Companies did not invalidate the transaction.

4. Veracity of the Transaction and Its Commercial Reality
The AO questioned the commercial reality of the transaction, citing the disproportionate value of the security compared to the loan amount and the absence of contemporaneous third-party evidence.

The Tribunal noted that the transaction's documentation was collected during an investigation by the IT Department and that the Assessee's compliance with statutory requirements supported the claim of a pledge. The Tribunal found no material evidence to suggest that the transaction was a sale.

5. Evaluation of Evidence and Documentation Supporting the Transaction
The Tribunal evaluated the evidence, including board resolutions, loan agreements, dematerialization records, and declarations under Section 187C of the Companies Act. The Tribunal found that these documents supported the Assessee's claim of a pledge.

The Tribunal also considered the legal provisions under the Sale of Goods Act, 1930, and the Contract Act, 1872, concluding that the Assessee's recognition as a beneficial owner in the depository's register was not conclusive proof of ownership.

Conclusion
The Tribunal held that the transaction was a pledge, not a sale, and that the Assessee did not derive any benefit or perquisite taxable under Section 2(24)(iv) of the Income-tax Act. The appeal by the Revenue was dismissed, and the order of the CIT(A) was upheld.