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Income Tax Appellate Tribunal, I.T.A No.410/2017
I.T.A No.410/2017 C/W I.T.A No.409/2017
IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 16TH DAY OF JANUARY 2023 PRESENT THE HON’BLE MR. JUSTICE P.S. DINESH KUMAR AND THE HON’BLE MR. JUSTICE T.G. SHIVASHANKARE GOWDA I.T.A NO.410 OF 2017 C/W I.T.A NO.409 OF 2017
IN I.T.A NO.410 OF 2017
BETWEEN:
THE PR. COMMISSIONER OF
INCOME-TAX, CIT(A)
5TH FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU-560 095.
THE DEPUTY COMMISSIONER OF
INCOME-TAX, CIRCLE-3(1)
PRESENT ADDRESS
CIRCLE-5(2)(1)
2ND FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU-560 095.
.…APPELLANTS
(BY SHRI. K.V. ARAVIND, ADVOCATE)
AND:
SMT. POORNIMA SHAILENDRA BABU NO.9 & 11, 3RD MAIN ROAD KRISHNA TOWERS GANDHINAGAR BENGALURU-560 009. PAN: ABJPB 3721D. …RESPONDENT
(BY SHRI. S.PARTHASARATHI, ADVOCATE)
I.T.A No.410/2017 C/W I.T.A No.409/2017
THIS ITA IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961, ARISING OUT OF ORDER DATED: 19.08.2016 PASSED IN ITA No.292/BANG/2016, FOR THE ASSESSMENT YEAR 2008-2009, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ETC.
IN I.T.A NO.409 OF 2017
BETWEEN:
THE PR. COMMISSIONER OF
INCOME-TAX, CIT(A)
5TH FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU-560 095.
THE ASST. COMMISSIONER OF
INCOME-TAX, CIRCLE-7(2)
PRESENT ADDRESS
CIRCLE-2(3)(1)
2ND FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU-560 095.
.…APPELLANTS
(BY SHRI. K.V. ARAVIND, ADVOCATE)
AND:
SHRI. SHAILENDRA BABU NO.9 & 11, 3RD MAIN ROAD KRISHNA TOWERS GANDHINAGAR BENGALURU-560 009. PAN: AAVPB 6549C. …RESPONDENT
(BY SHRI. S.PARTHASARATHI, ADVOCATE)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED: 19.08.2016 PASSED IN ITA No.291/BANG/2016, FOR THE ASSESSMENT YEAR 2008-2009, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ETC.
I.T.A No.410/2017 C/W I.T.A No.409/2017
THESE ITAs, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 17.10.2022 COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S.DINESH KUMAR J., PRONOUNCED THE FOLLOWING:-
JUDGMENT
These two appeals by the Revenue, directed against ITAT's1 common order dated August 19, 2016 in ITAs No.291 & 292/Bang/2016 have been admitted to consider the following questions of law: "1. Whether the learned Income Tax Appellate Tribunal was justified in holding that the Respondent- Assessee cannot be subjected to capital gains tax relevant to A.Y. 2008-09 even though under the Memorandum of Understanding between the Transferors Shareholders the Assessees dated 16.06.2007 with purchasers and the substantial part of consideration of Rs.40,00,00,000/- [Rupees Forty Crores] was also paid by the purchasers to the Assessees/Transferors in the Financial Year relevant to A.Y.2008-09, even though the shares also be transferred to the purchasers finally only in the year 2013 i.e., 02.04.2013 which transfer was registered by the Registrar of Companies on 04.02.2013?
Whether the transfer of capital assets [shares] held by Transferor took place in the present case in the year relevant to A.Y. 2008-09 or in the
1 Income Tax Appellate Tribunal
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subsequent year of 2013 and whether the Tribunal was justified in reversing the orders passed by the Assessing Authority as well as the First Appellate Authority, in the facts and circumstances of the case? "
Heard Shri. K.V.Aravind, learned Senior Standing Counsel for the Revenue and Shri. S. Parthasarathi, learned Advocate for the assessee.
Brief facts of the case are, respondent-assessees were share holders in M/s. Shailendra Techno Park Ltd., ('STPL' for short) holding 50% shares each. They entered into an MoU2 dated June 16, 2007 agreeing to sell their shares in favour of Shri. G. Somashekara Reddy and his wife Smt. Vijaya for a consideration of Rs.40 Crores.
The Assessing Officer noticed in their returns for the A.Y 2008-09, that a sum of
2 Memorandum of Understanding
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Rs.13.50 Crores was shown in the Balance Sheet of Shri. Shailendra Babu as advance consideration received towards sale of shares from Shri. Somashekara Reddy under the 'sundry creditors'. The Assessing Officer has recorded that a sum of Rs.35 Crores was received between June 08, 2007 and October 16, 2007 and the assessee Shri. Shailendra Babu was liable to pay Long Term Capital gains tax on sale of the STPL.
In the case of Smt. Poornima Shailendra Babu (ITA No.410/2017), the Assessing Officer has recorded that Rs.17.5 Crores was received by her and held that she was also liable to pay Long Term Capital gains. Feeling aggrieved, assessees challenged AO's orders before CIT(A) and the same stood dismissed. On further appeal, the ITAT, by the impugned order has held that the Share Certificates were not delivered to the transferee
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during the previous year relevant to assessment year namely 2007-08. Hence, these appeals.
Shri. K. V. Aravind, learned Senior Standing Counsel for the Revenue submitted that: admittedly, the assessees had received a sum of Rs.35 Crores (Rs.17.5 Crores each) before 16.10.2007; letter dated 13.06.2007 was addressed to the KIADB3 stating that the Board of Directors had decided to relinquish and transfer the management to the new entrepreneur Shri. Somashekara Reddy and Smt. G. Vijaya, who had offered to take over the Company. The Board had resolved to transfer 100% equity shares in their favour and requested for permission to transfer the shares. By its letter dated 06.07.2007, the KIADB accorded permission to transfer the shares. On
3 Karnataka Industrial Area Development Board
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16.08.2007, KIADB entered into a Supplementary Agreement with the Company represented by Shri. G. Somashekara Reddy and Smt. G. Vijaya; On July 29, 2009, the Company represented by Shri. G. Somashekara Reddy has executed a lease deed in favour of M/s. KPIT Cummins Global Business Solutions Ltd.
In substance, Shri. Aravind argued that with the receipt of Rs. 35 Crores, the entire management of the Company was transferred in favour of Shri. G. Somashekara Reddy and Smt. G. Vijaya. Therefore, the AO has rightly held that assessees are liable to pay Capital gains Tax during A.Y. 2008-09.
Opposing the appeal, Shri. Parthasarathi submitted that what is relevant to hold an assessee liable for Capital gains tax is, transfer of shares.
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The ITAT has recorded a finding in para 6 of its order that Share Certificates were not delivered in the year prior to A.Y. 2007-08. Shri. Parthasarathi, produced the Share Transfer Agreement dated 01.04.2013, the copies of the Share Transfer Forms dated 02.04.2013 and copies of the Share Certificates. He contended that in view of the settled position of law and the finding of fact recorded by the ITAT, no interference is called for.
We have carefully considered rival contentions and perused the records.
The AO's view is, assessees are liable to pay Capital gains tax for A.Y. 2007-08. The law on the point with regard to the transfer of shares in this case, is governed by Section 108 of Companies Act, 1956 which reads as follows:
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"108. TRANSFER NOT BE REGISTERED EXCEPT ON PRODUCTION OF INSTRUMENT OF TRANSFER (1) A company shall not register a transfer of shares in, or debentures of, the company, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company along with the certificate relating to the shares or debentures, or if no such certificate is in existence, along with the letter or allotment of the shares or debentures " (Emphasis Supplied)
It is also settled that transfer of shares shall take place only after registration by the Registrars of the Company. (See. Mannalal Khetan v. Kedar Nath Khetan.4 LIC v. Escorts Ltd.5)
In Vasudev Ram Chandra Shelat Vs. Pranlal Jayanand Thakar and Others 6, it is held as follows:
4 (1977) 2 SCC 424, para 16. 5 (1986) 1 SCC 264, para 84. 6 (1974) 2 SCC 323.
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"13. The Companies Act of 1913 was meant “to consolidate and amend the law relating to trading companies and other associations”. It is concerned with the Acts and proceedings relating to the formation, running, and extinction of companies, with rights, duties, and liabilities of those who are either members or officers of such companies, and of those who deal with companies in other capacities. Its subject-matter is not transfer of property in general. It deals with transfers of shares only because they give certain rights to the legally recognised shareholders and imposes some obligations upon them with regard to the companies in which they hold shares. A share certificate not merely entitles the shareholder whose name is found on it to interest on the share held but also to participate in certain proceedings relating to the company concerned. It is for this purpose that Section 34 of the Companies Act 1913 enables the making of “an application for the registration of the transfer of shares in a company … either by the transferor or the transferee”. A share certificate is a prima facie evidence, under Section 29 of the Act, of the title to a share. Section 34 of the Act does not really prescribe the mode of transfer but lays down the provisions for “registration” of a transfer. In other words, it presupposes that a transfer has already taken place. The manner of transfer of shares, for the purposes of Company law, has to be provided, as indicated by Section 28, by the articles of the Company, and, in the absence of such
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specific provisions on the subject, regulations contained in Table ‘A’ of the 1st Schedule of the Companies Act apply." (Emphasis Supplied)
It is not in dispute that assessees have received Rs.35 Crores as advance sale consideration towards sale of their shares. It is also not in dispute that the Company had written to the KIADB and the KIADB had permitted transfer of shares. The principal argument advanced on behalf of the Revenue is, as back as on July 29, 2009, Shri. G. Somashekar Reddy has executed a Lease Deed in favour of M/s. KPIT Cummins and thus, he was functioning as the owner of the Company. Though this argument is attractive, it is relevant to note that transfer of shares shall happen only in accordance with Section 108 of Companies Act. So far as the lease agreement in favour of KPIT Cummins, we may record that
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the lessor is the Company namely M/s. Shailendra Techno Park Pvt. Ltd., and Shri. G. Somashekara Reddy is only described as a Director of the said Company.
We may also profitably note that in para 39-07 of Palmer's Company Law, dealing with transfer of shares in England, it is stated that: " A transfer is incomplete until registered. Pending registration, the transferee has only an equitable right to the shares transferred to him. He does not become the legal owner until his name is entered on the, register in respect of these shares."
Shri. Parthasarathi has placed the Share Transfer Agreement dated April 1, 2013 for our perusal. The relevant portion of the agreement reads as follows:
" Now therefore this agreement witnesseth as follows:
The Parties of the First Part shall transfer the shares and the parties of the Second Part shall
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purchase the shares in the company namely M/s.Shailendra Techno Park(P) Ltd., held by the parties of the First Part free and clear of the encumbrances upon the terms mutually agreed to in accordance with the terms and conditions of the MOU dt.16.6.2007.
The aggregate consideration for the purchase of all the equity shares held by the Party of the First Part for a sum of Rs.37,50,00,000/- (Rupees Thirty Seven Crores Fifty Lakhs only).
The First Party of the Second Part - Purchaser had made payment of Rs.35,00,00,000/- to the parties of the First Part as provided herein below.
Sl. No Date Cheque/DD No. Amount 1. 08.06.2007 068706 90,00,000.00 2. 18.06.2007 068708/16.06.2007 2,10,00,000.00 3. 18.06.2007 044343/16.06.2007 3,00,00,000.00 4. 07.07.2007 044346/05.07.2007 2,00,00,000.00 5. 10.07.2007 068709/05.07.2007 1,00,00,000.00 6. 13.07.2007 068710/14.07.2007 1,00,00,000.00 7. 21.08.2007 044347/20.08.2007 3,00,00,000.00 8. 23.08.2007 044947/20.08.2007 3,00,00,000.00 9. 16.10.2007 087225/15.10.2007 9,50,00,000.00 10. 16.10.2007 087226/15.10.2007 9,50,00,000.00
TOTAL…… 35,00,00,000.00
The Second Party of the Second Part shall transfer the land more fully described in the Schedule annexed hereunder and hereinafter referred to as SCHEDULE 'A', 'B' AND 'C' PROPERTY to the parties of the First Part jointly whose value has been
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considered at Rs.2,50,00,000/- (Rupees Two Crore Fifty lakhs only) and until the date of transfer is executed and registered, the Parties of the First Part continued to hold and own the shares held by them in the company."
The ITAT in para 6 of its order has recorded a finding of fact that the Share Certificates were not delivered to the transferee during the previous year relevant to A.Y. 2007-08.
In view of the settled position of law and the factual matrix of the case recorded by the ITAT that Share Certificates were not delivered during the previous year of relevant assessment year, no exception can be taken to the ITAT's view.
Resultantly, these appeals must fail. Hence, the following:
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ORDER
(a) Appeals are dismissed.
(b) The questions of law are answered in favour of the assessee and against the Revenue.
No costs.
Sd/- JUDGE
Sd/- JUDGE
SPS