2007 (10) TMI 293 - HC - Income Tax

Capital Receipt versus Revenue Receipt - During the relevant year, the assessee claims to have sold 5,40,159 shares of M/s. ICDS Limited at the rate of Rs. 220 per share for consideration of Rs. 11,88,34,980 and taking into account the cost of shares, the surplus realised by the assessee was to the extent of Rs. 3,62,25,964. The assessee-company claiming the aforesaid surplus fund as a capital receipt representing the difference on account of a family dispute settlement in accordance with the arbitration award held that - by virtue of the arbitration award if shares of the private limited company are transferred to others for consideration, we are of the opinion that the respondent-assessee being a legal entity is liable to pay the capital gains tax - Tribunal did not consider a question that was raised by the assessee, namely, that it was not liable to pay the capital gains tax since no consideration was passed on such transfer and that there was no proper determination by the Assessing Officer on the cost of acquisition of the shares matter remanded.

Summary

Issues:
1. Whether the transfer of shares by a private limited company for consideration attracts capital gains tax?
2. Does the transfer of shares under the guise of a family arrangement exempt the company from paying capital gains tax?

Issue 1:
The case involved an appeal by the Revenue against the decision of the Income-tax Appellate Tribunal (ITAT) in favor of the respondent-assessee, a private limited company, regarding the tax liability on the sale of shares. The appellant argued that as the shares were sold for consideration, the company should be liable to pay capital gains tax. The Revenue contended that the Tribunal erred in relying on judgments related to Hindu undivided joint family members, as the case involved a private limited company. The court noted that the shareholders, although from the same family group, did not have individual rights over the company's assets unless distributed during liquidation. The court held that the company, as a legal entity, was liable to pay capital gains tax on the transfer of shares, even if done in accordance with an arbitration award.

Issue 2:
The respondent argued that the transfer of shares was part of a family arrangement and should not attract capital gains tax. The court acknowledged the family dispute settlement and the arbitration award that led to the transfer of shares. However, the court emphasized that being a private limited company, the shareholders did not have immediate rights over the company's assets. The court found that the Tribunal failed to consider the argument raised by the respondent regarding the absence of consideration for the transfer and the lack of proper determination of the cost of acquisition of shares. Consequently, the court allowed the appeal in part, setting aside the Tribunal's decision, and remanded the matter back to the ITAT for reconsideration of the unaddressed point.

This judgment delves into the tax implications of a private limited company selling shares under the context of a family arrangement and the application of capital gains tax. The court emphasized the legal entity status of the company and the shareholders' limited rights over the company's assets. The decision highlights the importance of considering all arguments raised by parties and ensuring a comprehensive review before reaching a final judgment.