2016 (10) TMI 173 - AT - Income Tax

Chargeability of capital gains arising on sale of shares - assessment year selection - Held that - The AO as well as the CIT(A) were driven by the fact that there was a change in the management and control of the company pursuant to share transfer of agreement between assessee and Shri G.Somashekara Reddy & others and also full consideration was received during the financial year relevant to assessment year under consideration. In our considered opinion these are not conclusive to determine whether transfer of shares has taken place or not. The underlying purpose of share transfer agreement was only to transfer shares in the company STPPL. It is not the case of the AO that relevant share transfer Forms duly signed by the assessee were handed over to the buyer during the previous year relevant to assessment year under consideration. Needless to say shares are movable assets and therefore transfer thereof is guided by the Sale of Goods Act. The transfer took place as and when possession was handed over to the transferee and consideration was received. In this case substantial amount of consideration was received during the previous year relevant to assessment year under consideration. But it is nobody s case that possession of share certificates was handed over to the transferee. As in the present case since it is undisputed fact that share certificates were not delivered to the transferee during the previous year relevant to assessment year 2007-08 it cannot be said that transfer of shares is complete during the previous year. Accordingly we hold that no capital gains are chargeable to tax on account of sale of shares in the company STPPL during the previous year relevant to assessment year under consideration. Therefore we direct AO to delete the addition on account of sale of shares in STPPL. As regards other addition on account of interest-free loans given the AO though made a bald statement that the assessee incurred interest on borrowings he has not rendered any categorical finding that the assessee has diverted interest-bearing funds to non-business purpose. As a matter of record it is during the relevant assessment year the assessee has received a sum of Rs. 13.50 crores as advance for sale of shares. Therefore presumption has to be drawn that the assessee has advanced loans to others out of his own fund and therefore the question of any addition does not arise. Hence we direct the AO to delete the addition made on account of interest free loan. Assessee appeal allowed.

Summary

Issues:
1. Validity of reopening and computation of capital gains.
2. Transfer of shares and levy of capital gains tax.
3. Consideration of evidence for no transfer of shares.
4. Incidence of transfer of shares vs. assets of the company.
5. Omission to offer income for taxation.
6. Management of the company as decisive incidence for transfer of shares.
7. Sale consideration determination.
8. Estimation of interest in total income.
9. Inclusion of estimated interest in total income.
10. Arbitrary and excessive additions.
11. Levy of interest under Section 234B of the Act.

Analysis:

Issue 1: Validity of reopening and computation of capital gains
The appeals challenged the validity of reopening and computation of capital gains for the assessment year 2008-09. The CIT(A) upheld the reopening and the computation of capital gains, leading to the appeals before the ITAT Bangalore. The AO concluded that the transfer of shares was complete and computed capital gains based on the consideration received. However, the ITAT found that the transfer of shares was not complete as the share transfer forms were not handed over to the buyer during the relevant assessment year. Citing legal precedents, the ITAT ruled that possession of share certificates must be handed over for the transfer to be complete, directing the AO to delete the addition on account of sale of shares.

Issue 2: Transfer of shares and levy of capital gains tax
The central issue revolved around the transfer of shares and the levy of capital gains tax. The AO had considered the transfer complete based on the change in management and control of the company and the receipt of full consideration. However, the ITAT emphasized that the transfer of shares is guided by the Sale of Goods Act and is complete only when possession of share certificates is handed over to the transferee. As the share transfer forms were not delivered during the relevant year, the ITAT ruled that no capital gains were chargeable for the sale of shares in the company, directing the AO to delete the addition on this account.

Issue 3: Consideration of evidence for no transfer of shares
The ITAT considered the evidence presented by the assessee to support that there was no transfer of shares in the relevant year, emphasizing the importance of handing over share certificates for a transfer to be deemed complete. The ITAT's decision was based on the lack of delivery of share certificates to the transferee during the relevant assessment year, leading to the conclusion that no capital gains were chargeable for the sale of shares.

Issue 4: Incidence of transfer of shares vs. assets of the company
The ITAT analyzed the distinction between the transfer of shares and the transfer of assets of the company, highlighting that the transfer of shares is a separate transaction governed by specific legal requirements. The judgment emphasized that the transfer of shares is complete only upon the delivery of share certificates to the transferee, as per legal precedents and the Sale of Goods Act.

Issue 5: Omission to offer income for taxation
The ITAT considered the argument that there was no omission to offer income for taxation, as the appellant had already offered capital gains on the transfer of shares in the year of transfer. This point was raised to contest the levy of tax in the relevant assessment year, emphasizing that the transfer of shares was not complete within that year.

Issue 6: Management of the company as decisive incidence for transfer of shares
The ITAT addressed the contention that the management of the company by the transferee was not a decisive factor in determining the transfer of shares. The judgment emphasized that the critical aspect for the transfer of shares is the delivery of share certificates to the transferee, rather than the change in management or control of the company.

Issue 7: Sale consideration determination
The ITAT examined the determination of the sale consideration and found that the transfer of shares was not complete based on the non-delivery of share certificates to the transferee. This aspect was crucial in deciding the chargeability of capital gains tax for the relevant assessment year.

Issue 8: Estimation of interest in total income
Regarding the estimation of interest in the total income, the ITAT directed the AO to delete the addition made on account of interest-free loans given, as there was no evidence to show that the loans were diverted for non-business purposes. The judgment highlighted that the presumption should be that the loans were advanced out of the assessee's own funds.

Issue 9: Inclusion of estimated interest in total income
The ITAT ruled that the addition of interest-free loans in the total income was unwarranted, as there was no finding that the loans were diverted for non-business purposes. The judgment emphasized that the receipt of a substantial sum as advance for the sale of shares indicated that the loans were advanced from the assessee's own funds.

Issue 10: Arbitrary and excessive additions
The ITAT dismissed the grounds of appeal that were deemed consequential in nature, indicating that the additions confirmed by the CIT(A) were arbitrary and excessive. The judgment directed the deletion of the addition made on account of interest-free loans given, emphasizing the lack of evidence for diversion of funds for non-business purposes.

Issue 11: Levy of interest under Section 234B of the Act
The ITAT upheld the levy of interest under Section 234B of the Act, as mentioned in the grounds of appeal. The judgment did not provide specific details on the rationale behind this decision, as it was not elaborated upon in the summary provided.