2017 (2) TMI 280 - HC - Income Tax

Claim of long-term capital loss - Held that - The assessee had not taken permission of the relevant statutory authority regarding sale of said shares. The assessee s reply to the Assessing Officer remained silent on the issue of statutory permission. Section 536(2) of the Companies Act, 1956 is very clear regarding the avoidance of transfers after commencement of winding up. In the case of a winding up by or subject to the supervision of the court, any disposition of the property (including actionable claims) of the company, and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall unless the court otherwise orders, be void. Section 536(2) of the Companies Act declares the transfer of shares during the liquidation proceedings as void. The transfer of shares includes transfer of rights in shares which is declared void under section 536(2) of the Companies Act and therefore, it is not a transfer at all and therefore, the question of capital gains/losses on the said transaction does not arise. Therefore, the transfer of 27410 shares of M/s Rustom Mills Industries Ltd by the assessee company by way of deed of assignment is held as void and not falling under section 2(47) of the Income-tax Act with no consequences as to the claim of long-term capital loss is not allowed to the assessee. - Decided in favour of the Revenue

Summary

Issues:
Validity of transfer of pledged shares for claiming long-term capital loss.

Analysis:
Issue 1: Validity of Transfer of Pledged Shares
The case involves a dispute over the validity of the transfer of 27410 pledged shares by the appellant to its sister concern, leading to a claimed long-term capital loss of ?19,61,617. The Assessing Officer deemed the transfer invalid due to the shares being pledged with IDBI bank, disallowing the claimed loss. The Commissioner of Income-tax (Appeals) initially allowed the loss, but the Tribunal overturned this decision. The appellant contended that shares are movable property transferable through a deed of assignment, citing relevant legal precedents. However, the respondent argued that the transfer was void under Section 536(2) of the Companies Act, as it occurred after the commencement of winding up, making any disposition of property or transfer of shares invalid unless court ordered otherwise.

Issue 2: Ascertainment of Cost of Pledged Shares
Additionally, the Tribunal found that even if the transfer were valid, the cost of the pledged shares could not be ascertained, rendering the claimed loss disallowable. Citing the Supreme Court's ruling in Sunil Siddharathbhai v. CIT, the Tribunal emphasized that if the machinery provisions of law do not encompass a specific circumstance, the transaction falls outside the charging provision. Comparing the case to A. M. P. Arunchalam, where the transferee discharged the entire liability of the pledged shares, the Tribunal concluded that in the present case, only limited/residuary rights in the shares were transferred, making the cost unascertainable under the Income-tax Act.

Conclusion:
The High Court held that the transfer of pledged shares was void under Section 536(2) of the Companies Act, making the question of capital gains or losses irrelevant. Additionally, even if the transfer were considered valid, the cost of the shares could not be determined, aligning with the Supreme Court's interpretation of the law. Consequently, the Court ruled in favor of the Revenue, dismissing the tax appeal and denying the appellant's claim for long-term capital loss.