INCOME TAX ACT 1961

Section 45 Section 2(47)

Capital gains - Taxability - Neither income received nor accrued to assessee on shares given as loan vis-a-vis contingent deferred income -

Assessee (now merged with Vahanvati Consultant Pvt. Ltd.) was an investment company belonging to the Global Telesystems Ltd. (GTL). The business of the assessee during the year under consideration was investment in stocks and shares. The assessee had 31,34,000 shares of GTL as on 31-3-2000 as opening balance. During the year, the assessee had sold its 5,94,100 shares on which capital gains was offered to tax. Further, during the year, the Classic Credit Ltd. (CCL) had requested assessee vide Letter, dt. 19-10-2000 to advance 5,00,000 shares as a loan. CCL had stated that it would return on 4-11-2000. However, the same was not returned to the assessee. On 1-12-200, the assessee wrote a letter to CCL and requested to adjust delivery of 1,50,000 shares against the loan shares 5,00,000. It was found that the assessee received its part loan, i.e. 1,50,000 shares through adjustment against sale of shares. However, balance outstanding loan of 3,50,000 shares was not returned by CCL, despite several request of the assessee. During the original assessment proceedings, the AO treated whole transaction of 5,00,000 shares of GTL as Long Term Capital Gains (LTCG). In respect of 1,50,000 shares, the AO held that it was sold by the assessee and computed capital gains at Rs. 12,07,50,000 and shares of 3,50,000 were never received by the assessee and thus treated the same as sale consideration and computed capital gains at Rs. 35,23,75,000. Commissioner (Appeals) accepted the contention of the assessee and deleted the addition of Rs. 35,23,75,000 in respect of 3,50,000 shares ; in respect of 1,50,000 shares, the Commissioner (Appeals) confirmed the addition made by the AO treating the same as a sale consideration. CIT(A) observed that assessee still holds these 1,50,000 shares. He had also pointed out from the copies of relevant assessment orders that the capital gain arising from sale of these 1,50,000 shares had already been offered and taxed in the hands of the said two group companies. Also it was found that for remaining 3,50,000 shares, the assessee filed before the AO subsequent year's balance sheet wherein 3,50,000 shares were reflected in the 'Investment Schedule'. Held: In Reliance Communication Infrastructure Ltd., the Bombay High Court has held that where there was no transfer of shares but only a pledge of shares for purposes of obtaining a loan and revenue has not disputed the fact of return of loan and also receipt of pledged shares creditor, no capital gain could be charged. The Tribunal in the impugned order had correctly held that what has to be taxed is the amount received or accrued and not any notional or hypothetical income. As observed by the Apex Court in CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) : 1962 TaxPub(DT) 307 (SC) 'income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which liability to tax is attracted, viz., the accrual of its income or its receipt; but the substance of the matter is income. In this case the impugned amount was neither received nor it had accrued to the respondent-assessee during the subject assessment year. The Tribunal was informed that for the subsequent assessment year (save assessment year 2007-08 for which there was no deferred consideration on application of formula), the assessee had offered to tax the amounts which have been received on the application of formula provided in the agreement dt. 25-1-2006 pertaining to the transfer of shares. In view of the above factual scenario and position of law, the order of the CIT(A) was affirmed.

Followed:CIT v. Hemal Raju Shete (2016) 239 Taxman 176 (Bom) : 2016 TaxPub(DT) 2102 (Bom-HC). Relied:CIT v. Texspin Engg. & Mfg. Works (2003) 263 ITR 345 (Bom-HC) : 2003 TaxPub(DT0 108 (Bom-HC), CIT v. Reliance Communication Infrastructure Ltd. (2012) 254 CTR 251 (Bom) : 2013 TaxPub(DT) 128 (Bom-HC), CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) : 1962 TaxPub(DT) 307 (SC), K.P. Varghese v. ITO (1981) 131 ITR 597 (SC) : (1981) 7 Taxman 13 (SC) : 1981 TaxPub(DT0 972 (SC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2001-02

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