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2006 (6) TMI 149 - AT - Income TaxCapital Gains or not - amount on sale of shares, by the lender, of the NUT shares owned by the appellant but pledged to the lender - noyt applying the ratio of V.S.M.R. JAGADISHCHANDRAN (DECD.) VERSUS COMMISSIONER OF INCOME-TAX 1997 (7) TMI 6 - SUPREME COURT - ignoring the fact that the assessee can legally recover the amount from the third party for whose benefits the assessee pledged his shares and sale proceeds of which were appropriated by the financial institution - ignoring the provisions of section 2(47) and section 45. Whether the ratio of the judgments of Hon'ble Supreme Court in the cases of RM. ARUNACHALAM VERSUS COMMISSIONER OF INCOME-TAX 1997 (7) TMI 5 - SUPREME COURT and V.S.M.R. Jagdishchandran/ COMMISSIONER OF INCOME TAX VERSUS ATTILI N. RAO 2001 (10) TMI 5 - SUPREME COURT cover the case before us against the assessee? HELD THAT - The criteria is the perfection of title in order to effect the sale. In this present case, without removing the liability of the Allahabad Bank, the title of the purchaser could not be perfected. Having regard to the facts and circumstances of this case and the position in law as discussed above, the meeting of the liability of the Allahabad Bank relating to the assets of Gobindo Sheet Metal was an expenditure incurred wholly and exclusively in connection with the transfer. We should follow the judgment of Hon'ble Calcutta High Court in the case of GOPEE NATH PAUL AND SONS AND ANOTHER VERSUS DEPUTY COMMISSIONER OF INCOME-TAX. 2005 (3) TMI 73 - CALCUTTA HIGH COURT and of Hon'ble Kerala High Court in the case of COMMISSIONER OF INCOME-TAX VERSUS SMT. THRESSIAMMA ABRAHAM (NO. 1) 1996 (9) TMI 60 - KERALA HIGH COURT in preference to the judgment of Hon'ble Bombay High Court in the case of COMMISSIONER OF INCOME-TAX VERSUS ROSHANBABU MOHAMMED HUSSEIN MERCHANT, FANCY CORPORATION LIMITED VERSUS DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER. 2005 (1) TMI 53 - BOMBAY HIGH COURT for the following reasons (1) Both in the cases of R.M. Arunachalam and V.S.M.R. Jagdishchandran, the Hon'ble Supreme Court were not considering a situation pertaining to loss of capital asset on account of guarantee for a third party loan. In the case of R.M. Arunachalam the question was whether estate duty paid can he treated as a part of cost of acquisition of asset to the inheritor. In the case V.S.M.R. Jagdishchandran and Attill N. Rao encumbrance was created by the owner of the capital asset for his own benefit and those assessecs had already received value corresponding to mortgage liability. Thus, in none of the cases there was any loss or erosion in the value of capital asset without any benefit whatsoever to the owner. (2) In the case of Smt. Thressiamma Abraham the Tribunal held that the amount paid by that assessee to discharge the debt was an expenditure incurred by the assessee for removing the encumbrance. Hon'ble Kerala High Court, though upheld the decision, clarified that the Tribunal appeared to have been proceeding in wholly unnecessary direction by resorting to the provisions relating to the deduction from the full value of the consideration provided under section 48 of the Act According to the view taken by the Hon'ble Kerala High Court in the case of Smt. Thressiamma Abraham the crux of the matter was not any expenditure for removal of encumbrance but the reduction in the full value of consideration on account of diversion of amounts at source. (3) In the case of Roshanbabu Mohammad Hussein Merchant the assessee had sought permission from the bank and voluntarily deposited part of the sale proceeds of the plot of land towards discharge of the debt so as to have clear title over the remaining plot of land; whereas in the case of Smt. Thressiamma Abraham as well as in the case before us the mortgaged property had been sold by the credit institutions. (4) In the instant case the assessee had already handed over share certificates in original along with duly signed bank transfer deeds to the credit institutions. Thus, the assessee had already completed his part of transfer at the time of the pledge of the shares and in the event of the failure on the part of Pertech and Swati the credit institutions could freely sell the shares in the open market. (5) During the course of arguments in the case of Smt. Thressiamma Abraham, the revenue had placed reliance on the earlier judgments of Kerala High Court in the cases of Ambat Echukutty Menon; Salay Mohd. Ibrahim Sail and K.V. Idiculla, but the same were distinguished by the Hon'ble High Court in the case of Smt. Thressiamma Abraham. These three judgments relied upon by revenue have been expressly over-ruled by Hon'ble Supreme Court in the case of R.M. Arunachalam. (6) In the instant case what appears to us to be clinching the issue is the fact that the assessee before us has not received a single paisa from out of sale proceeds of the assessee's shares running into crores of rupees. At the cost of repetition we may state here that there is not a whisper in the order of the Assessing Officer or the learned CIT(A) that the assessee, at any stage before, during or after the pledge of shares in question, received anything in terms of money or money's worth in relation to parting with of the assessee's shares for the benefit of Pertech and Swati. There is thus no force in the contention of the learned CIT(DR) that under clause 6 of the agreement the assessee could receive surplus sale proceeds after credit institutions satisfied their rights in full. Fact of the matter is that there was no surplus. Having regard to the huge amount involved it may also be safely assumed that the assessee should have been reasonably aware of the very likelihood of loosing the capital asset. If these hazards did not deter the assessee, the assessee was within his legal rights to do whatever he felt like to do with his absolute property. The assessee was even entitled to throw these shares from the window of a running train if he so wished because he was absolute owner of these shares. In the case before us there is not even a wishper of any advantage received by the assessee. On the facts of the case as they have emerged before us the only possible inference is that the assessee made a kind of gift of these shares in favour of Pertech and Swati. The profits or gains arising from the sale of 11,72,900 shares of NIIT Ltd. in question cannot be charged to tax in the hands of the assessee before us because no value of the consideration was either received or accrued as a result of the transfer of those shares. Moreover, even if notionally any consideration on sale of transfer accrued to the assessee, there was diversion of the entire consideration at source before it became income in the hands of the assessee. This appeal filed by the revenue fails and is accordingly dismissed.
Issues Involved:
1. Capital gains tax liability on the sale of pledged shares. 2. Application of Supreme Court judgments. 3. Recovery rights of the assessee from third parties. 4. Interpretation of sections 2(47) and 45 of the Income-tax Act. Detailed Analysis: 1. Capital Gains Tax Liability on the Sale of Pledged Shares: The primary issue was whether the sale of shares pledged by the assessee, which were sold by the lender to recover dues, resulted in capital gains taxable in the hands of the assessee. The assessee argued that since it did not receive any proceeds from the sale, no income accrued to it under section 45(1) of the Income-tax Act. The Assessing Officer, however, contended that the sale of shares, even if conducted by the lender, constituted a transfer resulting in capital gains taxable in the hands of the assessee. 2. Application of Supreme Court Judgments: The Assessing Officer relied on the Supreme Court judgment in V.S.M.R. Jagdishchandran's case, where it was held that a self-created mortgage could not reduce the liability for capital gains tax. The CIT(Appeals) and the Tribunal, however, found this judgment inapplicable as the facts differed significantly. The assessee's case was distinguished from Jagdishchandran's because the shares were pledged as collateral for a third party's loan, not for the assessee's benefit. 3. Recovery Rights of the Assessee from Third Parties: The Assessing Officer argued that the debtor, whose debts were discharged by the sale of the assessee's shares, became a debtor to the assessee for the amount of the sale proceeds. This was contested by the assessee, who argued that there was no legal basis for such a claim, and no material evidence was provided to establish that the assessee received or was entitled to receive any consideration from the debtors. 4. Interpretation of Sections 2(47) and 45 of the Income-tax Act: The Tribunal examined whether the transfer of shares by the lender constituted a "transfer" under section 2(47) and whether any capital gains accrued to the assessee under section 45. The Tribunal concluded that the transfer of shares was complete at the time of pledging, and the sale proceeds were entirely appropriated by the lender, resulting in no consideration received by the assessee. Therefore, no capital gains tax was applicable. Separate Judgments: The Tribunal's decision was influenced by the judgment of the Kerala High Court in Smt. Thressiamma Abraham's case, which held that where the entire sum was appropriated towards discharge of mortgage debt and the assessee did not receive any proceeds, no capital gains could be taxed. The Tribunal preferred this judgment over the Bombay High Court's decision in Roshanbabu Mohammed Hussein Merchant's case, which supported the revenue's stance. Conclusion: The Tribunal held that no capital gains tax was applicable on the sale of the pledged shares as the assessee did not receive any consideration from the transfer. The appeal filed by the revenue was dismissed, and the order of the CIT(Appeals) was upheld.
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