2011 (9) TMI 488 - AT - Income Tax

Long term capital Gains benefit of exemption u/s 10(38) & relief in rate of tax u/s 112 not available - sale of unlisted securities - sale made on 29/30.12.05 by transferring it to escrow a/c listing approval received on 04.01.06 - STT was also not charged on the transaction Held that - The listing approval on 04.01.2006 cannot be related back to 04.11.2005 or 14.11.2005 as provisional approval given by BSE & NSE respectively was only for using the name of the exchanges in the offer document without any obligation on the part of the exchanges. Accordingly, it is held that the transaction undertaken by the assessee was not chargeable to STT. Consequently, the assessee is not entitled to exclude the gains from his total income. Proviso to section 112 uses the words being listed securities . The shares of company had not been listed on the date of sale of shares by the assessee on any recognized stock exchange. Thereby, this transaction of sale was not the transfer of long-term capital asset, being a listed security. Thus, the assessee is not entitled to concessional rate of tax @ 10% on LTCG. -Decided against the assessee.

Summary

Issues Involved:
1. Taxability of sale of shares of Punj Lloyd Ltd. (PLL) as a taxable transaction.
2. Applicability of tax rate (20% vs. 10%) on long-term capital gains (LTCG).

Issue-wise Detailed Analysis:

1. Taxability of Sale of Shares:
The assessee, a promoter-director of PLL, sold 599,693 shares during the company's IPO, receiving Rs. 39,78,86,740/-. The shares were not listed on any stock exchange at the time of sale, and no Securities Transaction Tax (STT) was paid. The assessee claimed that the gains were not includible in total income under section 10(38) of the Income-tax Act, 1961, arguing that the transaction was chargeable to STT. The Assessing Officer (AO) and the CIT(Appeals) held that section 10(38) was not applicable as the shares were unlisted and STT was not paid.

The Tribunal examined the provision of section 10(38), which requires two conditions: (a) the transaction must occur after the enactment of Chapter VII of the Finance (No. 2) Act, 2004, and (b) the transaction must be chargeable to STT. The Tribunal found that while the first condition was met, the second was not, as the shares were not listed at the time of sale, and STT was not applicable. The sale was deemed to have occurred on 29.12.2005, when the shares were transferred to the escrow account, and the corporate action for credit of shares to allottees was taken. The Tribunal concluded that the transaction was not chargeable to STT, and thus, the gains were includible in the total income, dismissing the first ground of appeal.

2. Applicability of Tax Rate on LTCG:
The second issue concerned the applicable tax rate on the LTCG. The assessee argued for a 10% tax rate, citing in-principle approvals from BSE and NSE in November 2005, which he claimed should relate back to the listing approval date. However, the CIT(Appeals) and the Tribunal found that the shares were not listed on any recognized stock exchange on the date of sale (29.12.2005 or 30.12.2005). The approvals granted in November 2005 were provisional and did not equate to actual listing. The shares were officially listed on 04.01.2006, post the sale date.

The Tribunal referred to the proviso to section 112 regarding the tax on LTCG, which specifies a 10% tax rate for listed securities. Since the shares were unlisted at the time of sale, the assessee was not entitled to the concessional tax rate. The Tribunal upheld the 20% tax rate applied by the AO and dismissed the second ground of appeal.

Conclusion:
The Tribunal dismissed the appeal, confirming that the sale of shares was taxable and the applicable tax rate on the LTCG was 20%, as the shares were unlisted at the time of the transaction.