2014 (8) TMI 461 - HC - Income Tax

Benefit of section 54E Transfer of bonus shares - Whether the sale of the bonus shares ought to be taxed as short term gains or as long term gains - The entire sale proceeds were invested in the eligible assets - President held that the transaction had resulted in the transfer of shares, and transfer of certain interest was only a consequence and incidence of the transfer of the shares - the sale of bonus shares resulted in short term capital gain Relying upon Manecklal Premchand (Deceased) v/s Commissioner of Income Tax 1989 (9) TMI 15 - BOMBAY High Court - there was a failure on the part of the Assessee to disclose fully and truly all material facts necessary for the assessment in the original returns filed for the AY 1978-1979, and re-assessment was justified in law - the bonus shares issued by a company are acquired by a shareholder when they are issued, and they must be taken to be held by the shareholder from the date of their issue, and not from the date when the original shares in respect of which they are issued, were acquired by the shareholder Decided in favour of revenue.

Issues:
1. Validity of re-opening of assessment under Section 147(a) of the Income Tax Act.
2. Interpretation of the agreement dated 28.11.1977 between the assessee and Thadani Group.
3. Whether controlling interest in PEFCO LTD was an asset independent of transfer of shares.
4. Interpretation of the question referred to the learned Third Member regarding the transfer of shares.
5. Taxation of bonus shares as short term gains or long term gains and entitlement to benefit under Section 54E of the Act.

Validity of Re-opening of Assessment:
The High Court considered whether the re-opening of assessment under Section 147(a) of the Income Tax Act was valid. The Assessee contended that the re-opening was invalid as the date of bonus shares was not disclosed and the entire controlling interest with shareholding was transferred. The Income Tax Officer re-opened the assessment, alleging that the Assessee failed to disclose material facts regarding the period of holding bonus shares. The Commissioner upheld the re-opening, stating that bonus shares are considered acquired by shareholders from the date of issue. The Court found that the Assessee failed to fully and truly disclose material facts, justifying the re-assessment.

Interpretation of Agreement:
The Court analyzed the agreement dated 28.11.1977 between the Assessee and Thadani Group to determine whether the transfer involved only rights of shareholders or control over the company. The Judicial Member held that control was transferred along with shares, disqualifying the Assessee from benefit under Section 54E. In contrast, the Accountant Member viewed the transaction as transferring 100% controlling interest, qualifying for long term capital gains benefit under Section 54E. The Hon'ble President concluded that the sale of bonus shares resulted in short term capital gain due to the transfer of shares.

Nature of Controlling Interest:
The issue of whether controlling interest in PEFCO LTD was an independent asset was deliberated. The Tribunal concluded that controlling interest was not an asset separate from the transfer of shares, necessitating separate calculation of capital gain for original and bonus shares based on the holding date.

Interpretation of Question Referred to Third Member:
The Court examined whether the Third Member was justified in referring to the wording of the question and in determining the existence of an agreement regarding the transfer of shares. The analysis centered on the specific language used in the question referred by the differing Members.

Taxation of Bonus Shares:
The main issue revolved around the taxation of bonus shares as short term or long term gains and eligibility for Section 54E benefit. The Court referenced a previous judgment, holding that bonus shares are considered acquired by shareholders from the date of issue. Consequently, the Court ruled in favor of the Revenue, affirming that the bonus shares should be taxed as short term gains and denying the Assessee's claim for benefit under Section 54E.

This detailed analysis of the High Court judgment covers the various legal issues involved and the Court's reasoning behind the decisions rendered on each issue.

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