2012 (10) TMI 328 - HC - Income Tax

Capital gains on transfer of shares - sale versus agreement to sale - selection of assessment year - Held that - The agreement clearly stipulated that though the transfer deeds will be executed and the shares will be transferred in the name of the buyer in the records of the company, the actual delivery of scripts had to await the full payment. The physical custody of the share certificate was to remain with the solicitors until full payment namely the payment of third installment was made by 30.4.1997. Since these shares were to be physically transferred to the buyer company only after payment of the full price, it cannot be said that there was any transfer in the property as contemplated under Section 2 (47) (vi). The enjoyment of the immovable property even after the date of payment of first installment was not in pursuance to the transfer of the shares and controlling interest in the company but as a tenant, under the agreement of tenancy. Tribunal committed error in law in holding that Section 2 (47) (vi) will be attracted, and that immovable properties were transferred with the agreement of sale of shares, which were actually an agreement of sale of immovable properties. - in favour of the assessee.

Issues Involved:

1. Taxability of capital gains on transfer of shares for the assessment year 1997-98.
2. Whether there was a transfer of shares as contemplated under the Companies Act.
3. Whether the agreement was for the transfer of immovable property.
4. Interpretation of the deed of agreement concerning the vesting of proprietary rights in the shares.
5. Consideration of relevant and irrelevant materials by the Tribunal.
6. Perverseness of the Tribunal's conclusion.

Detailed Analysis:

1. Taxability of Capital Gains on Transfer of Shares for the Assessment Year 1997-98:

The Tribunal held that capital gains on the transfer of shares were liable to tax during the previous year relevant to the assessment year 1997-98. The Tribunal's decision was based on the agreement dated 19.8.1996, which stipulated that the proprietary right in the shares would vest in the buyer upon payment of the first installment. The Tribunal found that the intention of the parties was to transfer the shares on receipt of the first installment, thereby making the capital gains taxable in the assessment year 1997-98.

2. Whether There Was a Transfer of Shares as Contemplated Under the Companies Act:

The Tribunal concluded that there was a transfer of shares within the meaning of Section 2(47) of the Income Tax Act, 1961. However, the High Court disagreed, noting that the shares were not physically transferred to the buyer nor were they registered in the buyer's name in the company's records during the relevant assessment year. The High Court emphasized that the shares continued to remain with the appellant till the end of the previous year (31.3.1997), and thus, there was no transfer of shares as per the Companies Act.

3. Whether the Agreement Was for the Transfer of Immovable Property:

The Tribunal viewed the agreement as not only a transfer of shares but also a transfer of immovable property (two flats) owned by the company. The High Court, however, found that the agreement was primarily for the sale of shares, and the transfer of immovable property was incidental to the transfer of shares. The High Court noted that the buyer was already in possession of the flats as a tenant, and no new lease or ownership rights were granted during the relevant assessment year.

4. Interpretation of the Deed of Agreement Concerning the Vesting of Proprietary Rights in the Shares:

The Tribunal interpreted the agreement to mean that the proprietary right in the shares vested in the buyer upon payment of the first installment. The High Court disagreed, stating that the agreement clearly stipulated that the buyer would have no right to deal with or transfer the shares or any assets of the company until the final installment was paid and the shares were released from the solicitors. The High Court found that the transfer of shares was conditional upon full payment, which was completed only in the year 2000.

5. Consideration of Relevant and Irrelevant Materials by the Tribunal:

The High Court found that the Tribunal erred in taking into account irrelevant materials and ignoring essential evidence on record. The Tribunal's conclusion that the agreement was for the transfer of immovable property was not supported by the facts, as the buyer continued to pay rent and did not claim ownership rights in the flats during the relevant assessment year.

6. Perverseness of the Tribunal's Conclusion:

The High Court held that the Tribunal's conclusion was perverse, as no reasonable person correctly informed of the position in law would come to such a conclusion. The High Court emphasized that the transfer of shares and the resulting capital gains could only be taxed in the year when the shares were actually transferred, which was in the year 2000.

Conclusion:

The High Court allowed the income tax appeal, deciding in favor of the assessee and against the revenue. The Court held that the capital gains on the transfer of shares were not taxable in the assessment year 1997-98, as the shares were not transferred during that year. The department was directed to proceed accordingly.

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