1999 (8) TMI 113 - AT - Income Tax

Summary

Issues Involved:
1. Interpretation of "share held in a company" under the proviso to section 2(42A) of the Income-tax Act.
2. Classification of the capital asset as short-term or long-term.
3. Nature of the transaction involving preference shares and occupancy rights.
4. Applicability of sections 27 and 269UA(d) of the Income-tax Act.
5. Determination of capital gains and related tax benefits.

Issue-wise Detailed Analysis:

1. Interpretation of "share held in a company" under the proviso to section 2(42A) of the Income-tax Act:
The core legal issue revolves around the interpretation of the phrase "share held in a company" as used in the proviso to section 2(42A) of the Income-tax Act. The proviso modifies the general rule that a capital asset held for not more than thirty-six months is a short-term capital asset by stating that shares held in a company are considered short-term if held for not more than twelve months before the date of transfer.

2. Classification of the capital asset as short-term or long-term:
The assessee transferred preference shares held for twenty-five months and claimed the resulting capital gain as long-term, subject to deductions under sections 48(2) and 54F. The revenue argued that the transfer involved an inherent right to occupy a flat, thus classifying it as a short-term capital asset.

3. Nature of the transaction involving preference shares and occupancy rights:
The Assessing Officer contended that the transaction was not a mere transfer of shares but involved the transfer of occupancy rights in a flat through the medium of preference shares. The Articles of Association of the company specified that holding preference shares conferred the right to occupy designated premises, making these shares non-participating but granting specific occupancy rights.

4. Applicability of sections 27 and 269UA(d) of the Income-tax Act:
The CIT(A) accepted the assessee's claim, noting that the judgments relied upon by the Assessing Officer were under different acts and did not affect the interpretation of the Income-tax Act. The CIT(A) emphasized that section 27(3) is a deeming provision applicable only for sections 22 to 26 and not for capital gains provisions. However, the tribunal noted that sections 27 and 269UA(d) include rights in properties to be constructed, not just existing properties, and these definitions are declaratory/clarificatory in nature.

5. Determination of capital gains and related tax benefits:
The tribunal concluded that the preference shares in question were non-participating and carried occupancy rights, making the transfer one of occupancy rights rather than shares simpliciter. The tribunal referenced various legal precedents, including the Supreme Court and Bombay High Court decisions, to support the view that such transactions are effectively transfers of occupancy rights. Consequently, the tribunal held that the benefit under the Explanation to section 2(42A) could not be granted to the assessee, reversing the CIT(A)'s order and restoring the Assessing Officer's decision.

Conclusion:
The tribunal's judgment emphasized that the transfer of preference shares with attached occupancy rights constitutes a transfer of occupancy rights rather than mere shares, classifying it as a short-term capital asset. The appeal by the revenue was allowed, and the CIT(A)'s order was reversed, restoring the Assessing Officer's view.