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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI RAJESH KUMAR, AM
O R D E R
PER RAJESH KUMAR, AM
The appeal filed by the revenue is directed against the order dated 7.10.2014, passed by the CIT(A)-33, Mumbai, for the assessment year allowing exemption of Rs.50 lakhs u/s 54 EC of the Income Tax Act, 1961.
Common issue raised in the various grounds of appeal against the allowing exemption under section 54EC amounting to Rs.50 lakhs by the ld.CIT(A) as disallowed by the AO for the reasons that the investment made 2 in the bonds was made beyond six months from the date of sale of shares and therefore the conditions laid down u/s 54EC of the Act for allowing exemption were not complied with.
Facts of the case are that the assessee filed return of income on 14.1.2011 declaring total income at Rs.5,82,21,197/-. The case of the assessee was selected for scrutiny and statutory notices under section 143(2) and 142(1) of the Income Tax Act, 1961 were issued and served upon the assessee. During the course of assessment proceedings, the AO noticed that the assessee has earned a long term capital gains of Rs.4,20,39,770/- on sale of shares and securities and also claimed exemption of Rs.50 lakhs under section 54EC of the Act qua the investment in bonds of Rural Electric Bonds. The AO observed that the assessee has sold 4589 shares of M/s WWIL Private Limited to M/s Den Network Ltd for a total consideration of Rs.4,20,85,660/-on which he earned Long term capital gains of Rs.4,20,39,770/-. The assessee thereafter subscribed to 500 bonds of Rs.10,000/- each of REC Ltd on 29.6.2010. During the course of assessment proceedings the assessee submitted various documents and information before the AO including the agreements dated 29.7.2009, 30.7.2009, 31.7.2009 and 31.12.2009 which related to transfer of shares of M/s WWIL Private Limited to M/s Den Network Ltd. The AO noted that the 3 first agreement dated 29.7.2009 which was revised by entering into subsequent agreements and shares were finally transferred in terms of agreement dated 31.12.2009. However, according to the AO the transfer of shares took place on 29.7.2009 and investment made under section 54EC 29.6.2010 falls within a period of six months from the date of sale and accordingly issued show cause notice to the assessee. The ld. AR submitted before the AO that the initially the agreement provided for transfer of shares which was provided in the agreement that transfer may carry out due diligence within a period of 60 days from the date of the initial agreement and in view of such understanding it was decided that the transferor shall put the equity shares with duly executed transfer deeds in an escrow account as part of the agreement. Similarly, the transferee was also required to deposit the sale consideration with the escrow agent M/s Nolakha and Associates. Accordingly, after fulfilling all the respective obligations and commitments under the agreement both the parties would approach the escrow agent to finally transfer the equity shares in favour of the transferee and also passed on the consideration to the transferor. The assessee submitted before the AO that vide shares subscription of share, sales and purchase agreement dated 31.12.2009, the assessee and the transferee approached escrow agent to effect transfer of shares who was accordingly effected transfer of shares, and therefore the period of six 4 months should be reckoned from the agreement dated 31.12.2009 and not from the date of first agreement dated 29.7.2009 which provided for mode and mode lines of transfer. The ld. AR of the assessee also submitted before the AO that it is customary in the business of transfer of shares from one company to another company that a period is allowed to carry out due diligence so that the transferee could satisfy itself qua various legal /other formalities that have to be complied with by the transferee during the intervening period and during that period shares to be transferred and consideration for transfer were to be placed with the escrow agent and it is only after fulfilling all these conditions the shares were finally transferred to the transferee. The AO did not agree with the contention of the assessee and accordingly rejected the claim of the assessee made under section 54EC vide assessment framed u/s 143(3) vide order dated 7.3.2013 at Rs.6,33,02,550/-. Aggrieved by the order of the AO, the assessee has preferred an appeal before the ld. CIT(A) who allowed the appeal of the assessee qua the exemption claimed by the assessee under section 54EC of the Act by observing and holding as under: “4.4 I have considered the assessment order and submissions made by the appellant in this regard. On appreciation of the facts of the present case it is observed that appellant has entered into an agreement dated 29/07/2009 for transfer of his shares as a part of business purchase agreement where the transferee was to acquire 50 per cent of the diluted shares of the company. As a part of business purchase agreement, it was also understood that the transferee may 5 carry out due diligence within 60 days of the aforesaid effective date and in view of such understanding, it was decided that the transfer or shall put his equity holding in an escrow account as part of the business purchase agreement. Similarly, transferees were also required to deposit their part of consideration with an escrow agent namely M/s Nolakha Associates. It was also understood that on completion of due diligence and obligation attached to each party commitment, they would approach the escrow agent to give effect to the transfer of shares. It is also observed that vide share subscription, share purchase and share holders agreement dated 31st December, 2009, the parties to the agreement approached the Escrow Agent for effective transfer of shares. It is on the basis of this agreement that the transfer was actually effected.' In view of the said facts, I am in agreement with the appellant that principal agreement dated 29/07/2009 was an agreement to transfer and not the deed of transfer per se. Therefore, in the instant case, capital gain arises on the effective date of transfer i.e 31st of December, 2009 and since the appellant has already deposited an amount in eligible security within six months there from, he is entitled to claim exemption u/s 54EC of the Income-tax Act, 1961. The A.O is, therefore, directed to allow exemption u/s 54EC amounting to Rs.50 Lac being a sum deposited by appellant in eligible security”
The ld. DR submitted before us that the order passed by the ld. CIT(A) is incorrect as the ld.CIT(A) failed to appreciate the fact that the investment in bonds under section 54EC was made beyond a period of six months from the date of sale. The ld. DR submitted that the transfer of shares took place on 29.7.2009 as per the initial agreement entered into by the assessee and therefore the investments has to be made within a period of six months from that date and not from 31.12.2009 as claimed by the assessee. Therefore, the order passed by the ld.CIT(A) suffered from several infirmities and should be set aside and that of AO be restored.
6 5. On the other hand, the ld. AR opposed the arguments of the ld.DR and submitted that the actual date of transfer was 31.12.2009 which has been accepted by the ld.CIT(A) after examining the various documents and agreement produced during the appellate proceedings and recorded the findings of facts that the shares were deposited with escrow account by the transferor and so was the sale consideration by the transferee pending due diligence. The ld. AR submitted that it is customary in such type of deal that due diligence is carried out by the customer intending to purchase shares to examine whether the shares which are intended to be purchased are free from any encumbrances and charges, litigation etc and during the period of due diligence the share transfer deeds duly executed are deposited with the escrow agent. It is only after completion of these formalities shares are finally transferred and the consideration is passed on to the transferor. Similarly in the case of the assessee due diligence was carried out and the shares were finally registered on 31.12.2009 and accordingly, recorded in the books of account of the assessee. The ld. AR finally submitted that in view of these facts, the assessee has rightly invested in the bonds of REC Ltd and claimed exemption of Rs.50 lakhs which should be allowed to the assessee by upholding the order of FAA.
7 6. We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below. We find that the shares were registered in the name of the transferee on 31.12.2009 and accordingly recorded in the books of account of the transferor. The said shares after complying with the formalities as per the original agreement which provided for carrying out all due diligence within a period of 60 days from the date of original agreement dated 29.7.2009 which was revised from time to time. We also find that during the pendency of due diligence the shares with duly executed transfer deeds and consideration for shares were deposited with the escrow agent by both transferor as well as transferee. After completion of all the formalities both the parties approached the escrow agent to finally transfer the shares as all the formalities were completed and consequently all the equity shares were transferred in the names of transferee on 31.12.2009. We are in agreement with the finding of facts recorded by the ld.CIT(A) as has been reproduced above that the shares were transferred on 31.12.2009 and therefore the investment was made within a period of six months from the date of transfer on 29.6.2010. We therefore inclined to uphold the order of ld. CIT(A) by dismissing the appeal of the revenue.