ACIT (OSD) 1, C.R. 7, MUMBAI vs. RASESH B. KANAKIA, MUMBAI

Order under section 254(1) of Income Tax Act PER BENCH; 1. These two appeals filed by Revenue under section 253 of Income Tax Act (Act) against separate orders of Commissioner (Appeals)-40, Mumbai dated 26.10.1010 for AY: 2007-08. The assessee(s) have filed Cross Objections in both the appeals. As facts of the both the appeals and the cross objections are common, hence both the appeal and the objections were clubbed, heard and are decided by Consolidated order to avoid conflicting decision. First we shall take up appeal C.O. No. 256/M/2014 for Assessment Year: 2007-08.

rate of 20% as the assessee’s case do not fall under the ambit of 2nd proviso of subsection(1) of section 112 of the Act. On appeal before Commissioner (Appeals) the claim of assessee with regard to charge of tax @ 10% was allowed. However, the ground related with the claim of IPO expenses was dismissed. 3. Thus, aggrieved by the order of Commissioner (Appeals) the Revenue has filed present appeal raising the Grounds of appeal that ld Commissioner (Appeals) erred in treating the Long Term Capital Gain on sales of share as a listed security to be taxed at 10% without appreciating the fact that said share were sold much prior to the date of listing in the recognised Stock Exchange and Capital Gain arising out of the same was liable to be taxed at the rate of 20%. On service of the notice of appeal the assessee has filed Cross Objection raising the grounds of objection that ld Commissioner (Appeals) erred in law and on facts in not allowing the deduction of IPO expenses from sale proceeds of share while computing Long Term Capital Gain tax. As per our considered opinion the main issue urged in the appeals are “Whether the assessee have transferred ‘Listed Shares’ or ‘unlisted Shares’?”

4. We have heard Sh. Sh. Rahul Raman Sr. DR (‘ld DR’) for the revenue and Sh. S.E. Dastur ld. Sr Advocate assisted by Sh. Gautam S. Thaeker Advocate (‘ld AR’) for assessee. The ld DR for the revenue strongly supported the order of AO. The ld DR argued that the assessee offered unlisted share for sale along with the public issue. The assessee transferred the shares which were not the listed share when offered for sale. It was further argued that the assessee has canvassed that the assessee transferred the listed shares of the Company in which the assessee is one of the main Directors. The ld DR for the Revenue further relied on the decisions of Delhi Tribunal in Udai Punj Vs DCTI [2011]15 taxman.com 179( Delhi) and further the decision of Hon’ble Delhi High Court in Udai Punj Vs CIT vide dated 09.07.2012 ITA N0.941,942/M/2011 CO No. 256,257/M/2014

(arising out of the appeal in the same case). On the other hand ld AR for the assessee argued that assessee is one of the promoter of M/s Cinemax Private Ltd, a company incorporated under the provisions of Companies Act. The assessee was Managing Director of M/s Cinemax P. Limited. The said company decided to issue a public issue of 7000000 shares. The assessee along with another co-director Sh. Himanshu Kanakia decided to offer their share aggregating 19,20,000 shares (960000 shares each) in the same public issue. In the offer document the promoter were referred as the selling shareholders. In the offer prospectus contained an equity shares offered are proposed to be listed on Stock Exchanges and referred that in principle approval from the Exchanges are received on 20 September 2006 from National Stock Exchange and on 11 November 2006 from Bombay Stock Exchange. The ld AR for the assessee further argued that on 23 October 2006 in principle approval was received from National Stock Exchange. On 16th Nov 2006 in principle approval was received from Bombay stock exchange. And on 08th January 2007 the issue was opened. The issue was closed on 24 January 2007. All the shares were transferred from De-mat account of promoters to Escrow account of Registrar. On the 7th Feb 2007 the allotment of shares were finalised. On 8th Feb 2007 new share and shares of promoters were mingled and credited to investors account. On 12 February 2007 listing information was received. On 14th Feb 2007 trading of shares commenced in Stock Exchange. The ld. AR of the assessee further argued that the offer of sale of shares was subject to the condition of listing with the National stock exchange and Bombay stock exchange and it was a condition precedent in the prospectus of public issue, that the listed share would be transferred to the prospecting buyer. The concerned Bank also released the fund after submission of the listing permission on 15th Feb 2007 and the assessee also received the sale proceeds after 15 February 2007. Hence, the assessee transferred the listed share to the buyers and is liable for long- ITA N0.941,942/M/2011 CO No. 256,257/M/2014 term capital gain tax @ 10%. The learned AR for the assessee further is relied on the decisions of Hon’ble Apex Court in CIT Vs J.H. Golta 156 ITR 323( SC), Bajaj Tempo Ltd Vs CIT 196 ITR 188( SC), Rishyashringa Jewellery Ltd Vs Stock Exchange Bombay ( 1995) 6 SCC 714, decision of Bombay High Court in CIT Vs Smt Darshna A. Shah of 2008 dated 19th Sept 2008 and the decision of Mumbai Tribunal in DCIT Vs Rajiv A. Shah [2007] 12 SOT 84(Mum), 5. We have considered the rival contentions of the parties and gone through the orders of the authorities below. Before appreciating the facts of the case, we may first refer the certain statutory provision related with the transfer of movable property. The Sales of Goods Act 1930, Indian Contract Act 1872 and The Companies Act 1956. The sales of Goods Act; Section 2(7) ‘Goods’ means any kind of moveable property other than actionable claims and money; and includes stock and share, growing crop, grass, and things attached to forming part of the land which are agreed to be severed before sale or under the contract of sale. Section 4. Sale and agreement to sale. - (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyers for a price. There may be contract of sale between one part- owner and other. (2) A contract of sale may be absolute or conditional. (3) Where under the contact of sale the property in goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of property in the goods is to take place at future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapsed or the conditions are fulfilled subject to which the property in the goods is to be transferred. Section 5. Contract of Sale how made.- (1) A contract of sale is made by an offer to buy or to sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of goods or immediate payment of the price or both, or for the delivery or payments by instalments, or that the delivery or payment or both shall be postponed. (2) Subject to the provisions of any law for the time in force, a contract of sale may be made in writing, or by word of mouth, or partly in writing and partly by words of mouth or may be implied from the conduct of the parties. The Indian contract Act; ITA N0.941,942/M/2011 CO No. 256,257/M/2014

Section 2 interpretation clause.- in this Act the following words and expressions are used in the following senses, unless a contrary intention appears from the context:- (a) When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is set to make a proposal; (b) When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted, become a ‘promise’ ; (c) ........... (d) ........... (e) Every promise and every set of promises, forming the consideration for each other, is an agreement; (f) ........... (g) ........... (h) An agreement enforceable by law is a contract; Section 31. ‘Contingent Contract’- A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Companies Act 1956 Allotment of shares and debentures to be dealt in on a stock exchange. Section 73. (1) Every company intended to offer shares, debentures to the public for subscription by the issue a prospectus shall, before such issue, make an application to one or more recognised stock exchange is for permission for the shares or debenture intending to be so offered to be dealt with in the stock exchange or each such stock exchange. (1A) Where a prospectus, whether issued generally or not, he states that an application under sub-section (1) has been made for permission of the shares or debentures offered thereby to be dealt in one or more recognised stock exchanges, such prospectus shall state the name of the stock exchange or, as the case may be, each such stock exchange, and any allotment made on an application in persons of such prospectus shall, whenever made, be white, if the permission has not been granted by the stock exchange or each such stock exchange, as the case may be, before the expiry of 10 weeks from the date of the closing of the subscription lists: Provided that where an appeal against the decision of and a recognised stock exchange refusing permission for the shares or debentures to be dealt in on that stock exchange has been referred under section 22 of the Securities Contract(Regulation) Act 1956, such allotment shed not devoid until the dismissal of the appeal. (2) The permission has not been applied under sub-section(1), or such permission having been applied for, has not been granted as aforesaid, the company shall forthwith repay without interest all money received from the applicants in persons of the prospectus, and, if any such money is not repaid within 8 days after the company ITA N0.941,942/M/2011 CO No. 256,257/M/2014 become liable to pay it, the company and every director of the company who is an officer in default shell, all and from the expiry of the 8th day be jointly and severally liable to pay that money with interest at such rate, not less than 4% and not more than 15%, as may be prescribed, having regard to the length of the period of delay in making the repayment of such money. (2A) Where permission has been granted by the recognised stock exchange or stock exchanges for dealing in any share or debenture in such a stock exchange or each such a stock exchange and the money received from the applicants for share or debenture are in excess of the aggregate of the application money rejecting to the shares or debenture in respect of which allotment have been made, the company shall repay the money to the extent of such access forthwith without interest, and if such money is not repaid within 8 days, for the day of the company become liable to pay it, the company and every director of the company who is an officer in default, on and from the expiry of its day, be jointly and severally liable to pay that money with interest at such rate, not less than 4% and not more than 15%, as may be prescribed, having regard to the length of the period delay in making the repayment of such money. (2B)......... (3) All money received as aforesaid shall be kept in a separate bank account maintained with their scheduled bank, until the permission has been granted, or where an appeal has been preferred against the refusal to grant such permission, until the disposal of the appeal, and the money standing in such separate account shall, where the permission has not been applied for the aforesaid or has not been granted, be repaid within the time and in the manner specified in sub- section (2), and if default is made in complying with this sub-section, the company and every officer of the company who is in default, shall be punishable with fine which may be extent to Rs. 50,000/- (3A)--------- (4) Any condition purporting to require or bind any applicant for share or debenture to waive compliance with any of the requirement to this section shall be void.

112 of Income Tax Act. The said proviso prescribes concessional rate of 10% in case of transfer of ‘Listed Shares”. The assessee was show cause as to why the Long-Term Capital Gain of Rs. 13.92 Crore should not be taxed at special rate of 20% without applying the proviso as the AO felt that the assessee transferred ‘Unlisted Shares’. The assessee filed his reply, explaining the facts leading to the earning of the Capital Gain. In the reply the assessee specifically contended that the prospectus of public issue contained the statement that equity shares offered are proposed to be listed on stock exchanges and in principle approval from the stock exchange have been received from the stock exchanges concerned. It was further contended that on the basis of necessary permission the allotment was finalised on 7 Feb 2007 and finally listed on 14/02/2007. The assessee transferred the listed share. The case of assessee is that the shared offered to the public cannot be considered as transferred until completion of final listing of shares. Accordingly, it was contended that the assessee is liable to long-term capital gain at the concessional rate of 10% instead of 20%. The contention of assessee was not accepted by AO. The AO concluded that shares held by the assessee are Capital Asset. The assessee’s right in the share were transferred on the date when the same were handed over to the Registrar. The date of transfer is to be determined which falls before the date of share when listed. The AO further concluded that the allotment of shares to the general public has been done before listing of the share on the recognised Stock Exchange and that assessee has already transferred the share before listing. The ld CIT(A) while considering the contention of the assessee observed that for the liability of Capital Gain tax arise on sale, exchange or relinquishment of the asset, one needs to decide as to when the sale has taken place for deciding the status about the time of transfer. In case of assessee ITA N0.941,942/M/2011 CO No. 256,257/M/2014 the sale of the share were transacted through IPO. The various formalities were complied before issuance of shares to the public. The assessee took necessary permission from recognised stock exchange, issued a Red herring prospectus, entered into Escrow mechanism with the bankers and entering into underwriting arrangements and following the guidelines issued by SEBI. Most of the documents through which the permission was granted are public documents. The shareholders subscribing to the share has to read the offer document and only in cases satisfied he will apply to the share. The ld CIT(A) further considered that the offer document is a sort of contract whereby the assessee shareowners have to fulfil certain condition and issuing company has also to carry certain obligations. Under the Sale of Goods Act, the transactions is completed only when the condition are fulfilled by the parties. The ld CIT(A) further examined the case of assessee, if all the legal requirement and formalities attached to the sale of shares through public issue were fulfilled or not. In the prospectus it was proposed that shares will be listed on the recognised stock exchange and it was the responsibilities of the assessee to get the share listed, and in case of failure to get the shares listed, the amount received from the prospective shareholders was to be refunded with interest. The ld Commissioner (Appeals) while relying upon the decision of CIT Vs Rajiv A Shah(supra) concluded that that the sale of the shares of assessee was of a listed security and liable to tax at the concessional rate of 10% instead of 20%.

Date Events / details Paper Book / pg No 28.09.2006 Cinemax India Ltd entered in MOU 1-22 with Enam Financial Consultant Pvt and JM Morgan Stanley P.Ltd and Eldelwiss Capital Ltd and Ambit Corporate Finance P Ltd for public issue of 8,920,000 ( 7,000,000 fresh issue plus 1,920,000 of Shareholders) 23.10.2006 In principle approval received from 22-25 NSE 16.11.2006 In principle approval received from 26-27 BSE 18.01.2007 Issue opened (copy of Red herring 13-21 prospects) 24.01.2007 Issue closed and Shares were ---- transferred from De-mat account of promoters to Escrow account of Registrar 07.02.2007 Basis of allotment was finalised ------ 08.02.2007 New shares & promoters shares ----- mingled and credited to investors accounts 12.02.2007 Listing permission was received ----- 14.02.2007 Day of formal listing and trading started ----- 15.02.2007 Sale consideration of share was transfer ----- to the account of assessee There is no dispute about the various dates and events and the sale of shares through public offer. The purchaser accepted the public offer. Further, there is no dispute about the gain arising out of sale of share. The only dispute is if the shares were listed or unlisted on the date of transfer. The transactions of shares have to be effected as per the guidelines of SEBI. The assessee offered his share for sale along with the Public issue. The offer of the assessee was shown as conditional as referred in the prospectus.

Sub-section (2) of Section 4 of the Sales of Goods Act, signify that sale may be absolute or conditional. Further, Section 5 of the sales of Goods Act prescribed that the sale becomes absolutes if the conditions are fulfilled. Section 31 of the Indian Contract Act also defines the contingent contract. Section 31 of Indian Contract Act specify that the party may agree to do some event, collateral to such ITA N0.941,942/M/2011 CO No. 256,257/M/2014 contract if it does or does not happen. Further section 73 of the Companies Act also prescribed certain conditions which are mandatorily to be complied. As per our considered opinion the assessee has to comply all the conditions contained u/s 73 of the Companies Act. There is no dispute regarding dates and the events as referred in para 7 (supra). On careful consideration of rival submission, we are of the view that there are two important questions for our consideration is; (i) what was the nature and character of securities offered by the assessee to the General Public and (ii) when the transfer of the Shares can be said to have completed. To find out the answer of first question, we may note that when the assessee offered his shares for offer to sale, the shares were not listed. On 08.02.2007 the shares were mingled with new shares of promoters and credited to the account of investors. Moreover, the listing permission was received only on 12.02.2007. Thus, we are of the view that when the assessee offered his shares, the shares were not listed in any Stock Exchange and also when shares were credited to the accounts of investors on 08.02.2007. Hence, the nature and character of shares offered by the assessee were “unlisted” shares. The listing permission was received only on 12.02.2007. The listing permission only completes the sale transaction and in our view it does not change the nature and character of shares offered by assessee. Hence, we hold that the assessee transferred the unlisted shares. As per our opinion the ratio of the decision of Hon’ble Delhi High Court in Udai Punj Vs CIT (supra) is squarely applicable on the facts of the present case. In the result we accept the appeal filed by revenue and allow the ground of appeal in favour of Revenue.

No.941/M/2011. As we have accepted the appeal of the Revenue on the identical grounds hence, this appeal is also allowed with the same observation.

belief. It is specifically pleaded that the delay is deserves to be condoned.

ground for condonation of delay. As we have already dismissed the application for condonation of delay in CO No.256/M/2014, thus the application for condonation of delay filed in this CO is dismissed with similar direction. In the result the CO is not maintainable being barred by time limit.

Order announced in open court on this 25th day of January 2017.