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TMI Blog1982 (9) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... t lots, between December 15, 1976, and April 30, 1978, subject to the obtaining of necessary sanctions and approvals under the Companies Act and the Foreign Exchange Regulation Act. The agreement also provided that in case the whole block of 1,19,760 shares were not so transferred, the vendor was to repay all moneys received from the purchaser and that the latter was to return or retransfer all the shares delivered or transferred. Shares held by the two petitioners herein were also covered by the agreement and 1,700 shares belonging to each were actually transferred on March 31, 1977. They filed returns under the I.T. Act showing long-term capital gains on the sales so effected, and the ITO assessed them under section 143(1). It so transp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and transferred the machinery to a private limited company in the share capital of which the partners had the same proportional interest. The ITO brought to tax the excess realised over the written down value of the machinery, but the High Court held that the substance of the transaction consisted of only a change from the business of the firm to the business of the company. The Supreme Court disagreed with the High Court, holding that the taxing authorities were bound to go by the legal effect and character of the transaction, and not by the substance of the matter. Referring to the doctrine relating to the substance of a transaction, their Lordships observed that the question of taxability or non-taxability had to be determined on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance was placed by counsel for the petitioner, was in the following terms: "It is further agreed between the parties that this agreement is conditional upon obtaining necessary permissions, approval or sanctions from the Government of India, Reserve Bank or any other authorities and also of the consent of the authorities and also of the consent of the other shareholders mentioned in the schedule hereunder and if in the event of the aforementioned 1,19,760 shares are not transferred to the purchaser and/or its nominees or duly registered in the registers of the said company in the names of the purchaser and/or its nominees, the vendor shall repay all moneys paid by the purchaser and the purchaser shall return or retransfer all shares which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the use of the word "retransfer" in the last paragraph of Ex. P-l postulates only a reversal of a completed process. On the terms of Ex. P-1, therefore, it is impossible to assume that the transfers effected by the petitioners on March 31, 1977, were conditional and had not taken effect at any time The agreement was not for conditional transfer of shares, but for full legal transfer in lots, with a condition added that the lots sold were to be bought back under certain circumstances. The theory that there was no completed transfer and that there was "no taxable point giving rise to capital gains" is also belied by the circumstance that the petitioners themselves had included the long-term capital gains in the returns filed by them. They ..... X X X X Extracts X X X X X X X X Extracts X X X X
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