2012 (7) TMI 283 - HC - Income Tax

Liability to pay capital gains tax on the income earned from sale of SEBI shares sold through the public offer - whether at lower rate of 10% or at the normal rate of 20% - Held that - Shares in question having already been transferred from the demat account of the appellant to the demat account of the Registrar to the issue and then to the demat against of the applicants, by 05.01.2006, it is difficult to dispute that at the time of commencement of trading on 6.1.2006, the ownership in the shares vested in the applicants/allottees, and not in the appellant - Once the listing as well as trading approvals had been received from BSE and NSE and the shares were transferred to the demat account of the applicants on 05.01.2006, the applicants in the public issue had no right or lien over the money which they had paid for acquiring these shares - the transfer for the purpose of Income-tax Act being complete prior to 6.1.2006 and the trading in stock exchange having commenced only on 6.1.2006, it cannot be said that the transaction involved in this case had taken place in the stock exchange. capital gain tax at the rate of 10% was payable only in case of listed securities . Since, these shares had been transferred to the applicants in the public offer, by 5.1.2006 before they were actually listed on the stock exchanges on 6.1.2006, they were not listed securities at the time of sale by the appellant and consequently, the transaction would not be eligible for payment of capital gain tax at the lower rate of 10%.

Summary

Issues Involved:
1. Whether capital gains tax is payable by the assessee on the income earned from the sale of SEBI shares.
2. If payable, whether the tax should be at the lower rate of 10% or the normal rate of 20%.

Issue-wise Detailed Analysis:

1. Whether capital gains tax is payable by the assessee on the income earned from the sale of SEBI shares:

The appellant/assessee, a promoter/director of M/S Punj Lloyd Limited (PLL), offered 5,99,693 shares to the public through an IPO in December 2005. The main issue was whether the income earned from this sale was subject to capital gains tax and if the transaction occurred on a recognized stock exchange.

Section 10(38) of the Income Tax Act exempts income from the transfer of equity shares if the transaction is chargeable to Securities Transaction Tax (STT) under Chapter VII of the Finance (No.2) Act, 2004. Section 98 of the Finance (No.2) Act, 2004 specifies that STT is charged on the sale of equity shares entered into on a recognized stock exchange.

The Assessing Officer and the Commissioner of Income-tax (Appeals) concluded that the transaction did not occur on a recognized stock exchange since the shares were transferred before the listing approval on January 4, 2006. The Income-tax Appellate Tribunal upheld this view, stating that the shares were not 'listed securities' at the time of transfer.

The appellant argued that the sale was completed only on January 6, 2006, when the sale price was transferred to his account, and trading commenced on the stock exchange. However, the court found that the shares were transferred to the demat accounts of the applicants by January 5, 2006, and the ownership vested in the applicants by that date. The court emphasized that the listing and trading approvals were received by January 5, 2006, and the applicants had the right to sell the shares from that date.

The court referenced Section 2(a) of the Depositories Act, 1996, which defines "beneficial owner" and stated that the applicants became beneficial owners once the shares were credited to their demat accounts. Section 19 of the Sale of Goods Act was also cited, indicating that property in goods passes to the buyer when the contract is made unless a different intention is evident.

The court concluded that the transaction was complete by January 5, 2006, and the ownership of the shares had passed to the applicants. Therefore, the sale did not occur through the trading system of the stock exchange, and the exemption under Section 10(38) of the Income Tax Act was not applicable.

2. If payable, whether the tax should be at the lower rate of 10% or the normal rate of 20%:

The appellant contended that the capital gains tax should be at the lower rate of 10% applicable to 'listed securities.' However, the court noted that the shares were transferred to the applicants before they were listed on the stock exchange on January 6, 2006. Consequently, the shares were not 'listed securities' at the time of sale by the appellant.

The court referenced the definition of 'transfer' in Section 2(47) of the Income Tax Act, which includes the extinguishment of any rights in a capital asset. Since the shares were transferred from the appellant's demat account to the applicants' accounts by January 5, 2006, the transfer was complete before the shares were listed.

Therefore, the court held that the capital gains tax was payable at the normal rate of 20% and not at the lower rate of 10%.

Conclusion:

The court dismissed the appeal, concluding that no substantial question of law arose for consideration. The capital gains tax was payable at the normal rate of 20%, and the transaction did not qualify for exemption under Section 10(38) of the Income Tax Act. There was no order as to costs.