1. IT Appeal No. 267 (Coch.) of 1983 and C.O. No. 135 (Coch.) of 1983 are filed by the department; whereas IT Appeal No. 259 (Coch.) of 1983 is filed by the assessee. The assessment year involved in these matters is 1978-79. Since the questions raised in these matters are common they are taken up together and disposed of by this common order for the sake of convenience.
2. to 9. [These paras are not reproduced here as they involve minor issues.] 10. Another point raised in the assessee's appeal relates to computation of capital gains on the sale of shares held by the assessee. The assessee transferred certain equity shares held by it in other companies. The entire sale consideration was received by the assessee on 29-6-1977. The . board of directors passed the resolution authorising transfer of shares on 27-6-1977 and blank transfer certificates were passed on to the Registrar of Companies for getting his approval on 27-6-1977. The share certificates along with the blank transfer certificates duly signed by the transferor were handed over to the broker on 28-6-1977. The assessee did not admit any capital gains in respect of the transfer of shares on the plea that the legal transfers of the shares took place only after the close of the previous year, viz., 30-6-1977. The ITO did not accept this submission. He held that the transfer has taken place during the previous year ended on 30-6-1977 and further held that the amount of Rs. 14,40,000 deposited on 2-1-1978 will not be available for giving exemption under Section 54E(1) of the Income-tax Act, 1961 ('the Act'). The only amount that was deposited during the stipulated time was Rs. 2,50,000 deposited on 23-12-1977 and, therefore, the ITO held that the assessee would get benefit of exemption under Section 54E(1) on a proportionate basis with reference to that deposit alone.
11. Aggrieved, the assessee filed an appeal before the Commissioner (Appeals) contending that the transfer of shares had been taken place only when the entries were made in the registers changing the names of the shareholders. It was further submitted that the assessee had made a deposit of Rs. 2,50,000 on 23-12-1977 out of which only Rs. 1,05,012 has been considered for the purpose of giving exemption under Section 54E in respect of capital gains arising on the sale of shares and hence the balance amount should be treated as being available for giving exemption in respect of the sale of shares as that deposit was also within the stipulated period of six months. The Commissioner (Appeals) on hearing the assessee and relying upon a decision of the Calcutta High Court in CWT v. Babulal Jatia [1982] 137 ITR 540 and another decision of the Delhi High Court in CIT v. Bharat Nidhi Ltd. [1982] 133 ITR 447 held that the transfer took place during the relevant accounting period. Accordingly, he refused to accept the submissions made by the asse ssee. With regard to the benefit of exemption claimed by the assessee under Section 54E, the Commissioner (Appeals) held that he is in agreement with the learned representative that in addition to the above Rs. 2,25,000 deposited on 23-12-1977 the assessee should also get the benefit of unavailed portion of the deposit of Rs. 2,25,000 on the same date out of the common funds which are not capable of aggregation into sale proceeds of shares or sale price of rubber trees.
Aggrieved, the assessee is in appeal before us.
12. The submission of the learned counsel appearing for the assessee was that the shares get transferred and legal title passes only when the shares are registered in the books maintained by the company. In view of this, it was further submitted that the transfer for purposes of Section 45 of the Act takes place only in the subsequent year that is 1979-80 assessment.
13. We have also heard the learned departmental representative who supported the order passed by the Commissioner (Appeals).
14. As per the contract of sale entered into between the assessee and Subramaniain & Co., Madras, recognised stock brokers on 28-6-1977, the assessee transferred certain equity shares held by it in other companies. The shares thus transferred are as under : Nos.
2. Highland Products Ltd. 12,657 Nos.
The total number of equity shares thus agreed to be transferred is 2,14,744. All the shares were acquired by the assessee prior to 30-6-1973 except 150 shares of Highland Produce Co. Ltd. which were purchased in January 1974. The total cost of acquisition in respect of these shares came to Rs. 12,62,102.57. The total sale consideration received is Rs. 16,83,417.76. The entire consideration has been received by the assessee on 29-6-1977. The board of directors passed the resolution to transfer the shares on 27-6-1977. The blank certificates were produced before the Registrar of Companies for getting the seal affixed on 27-6-1977. The share certificates along with the blank certificates duly signed by the transferor were handed over to the broker on 28-6-1977. The issue that arises for consideration in this appeal is whether there has been a transfer within the meaning of Section 2(47), read with Section 45, of the Act.
According to the ITO the shares are movable assets and, therefore, its transfer is guided by the Sale of Goods Act. According to the Sale of Goods Act, the transfer of a movable asset takes place as and when possession is handed over to the transferee and consideration is received. The submission of the learned counsel for the assessee was that since there is a special provision in the Companies Act, 1956, regarding the transfer of shares, the principles of the Sale of Goods Act do not apply in the case of transfer of shares. According to the Companies Act, a person will be deemed as a shareholder only if his name is registered with the company. A holder of share certificate with blank transfer form does not acquire the right of shareholder. Such a person has got only the right of applying to the company for entering his name in the register of shareholders. The company can also refuse to register the name of such person. Under Section 206 of the Companies Act, no dividend shall be paid by a company in respect of any shares therein except to the registered holder of such shares or to his order or to his bankers and in the case of share warrants the dividends could be issued to the bearer of such warrants or their bankers. The assessee relied upon a decision of the Supreme Court in Howrah Trading Co. Ltd. v. CIT [1959] 36 ITR 215, according to which a person who has purchased shares in a company under a blank transfer and in whose name the shares have not been registered in the books of the company is not a shareholder in respect of such shares within the meaning of Section 18(5) of the Indian Income-tax Act, 1922 ('the 1922 Act') notwithstanding his equitable right to the dividend on such shares and is not, therefore, entitled to have this dividend income grossed up under Section 16(2) of the . 1922 Act by the addition of the income-tax paid by the company in respect of those shares, and claim credit for the tax deducted at source, under Section 18(5) of the 1922 Act corresponding to Section 199 of the 1961 Act.
15. There is a decision of the Calcutta High Court in the case of Babulal Jatia (supra). This case was relied upon by the Commissioner (Appeals). According to the facts appearing in that case, the assessee gifted shares of a company to his grandson and a trust deed was executed. Later on, the transfer of the shares was registered in the books of the company. It is under these circumstances that the Calcutta High Court held in the wealth-tax proceedings that the donor ceases to be owner of shares. There is another decision of the Delhi High Court in the case of Bharat Nidhi Ltd. (supra). According to the facts appearing in that case, the assessee-company, a dealer in shares, entered into two transactions for the sale to two purchasers of certain shares which were in the custody of a bank. The transaction was entered into on 5-2-1948. Under the terms of the transactions the purchasers could take delivery of the shares by 31-3-1948 and if the purchasers did not take delivery by that date, dividends after that date were to be for their benefit but the purchasers had to pay interest on that purchase price. While dealing with this fact, the Delhi High Court held that "an agreement to transfer shares in a company accompanied with the actual instrument of transfer which had not been completed so far as the transferor could complete it did not amount to a transfer deed sufficient to cause the title to pass. By itself it would be nothing more than an enforceable agreement to convey and until the transfer endorsement was signed the shares would be unascertained goods and would not be in a deliverable state". (p. 448) 16. However, in Seth R. Dalmia v. CIT [1971] ILR 1 Delhi 30, the Bench accepted that the equitable ownership could pass but held that the equitable ownership in shares can be transferred by the owner by signing a blank transfer form and handing over the share scrips to the transferee. The Bench observed : It would, therefore, follow that equitable ownership in shares can be transferred by the owner by signing a blank transfer form and handing over the transfer form along with the share scrips to the transferee. So far as the company of which the shares are the subject-matter of transfer is concerned, it would not recognise the transferee as the owner of the shares till such time as the transfer is registered and the name of the transferee is entered in its registers as the owner of those shares. It would be only after his name is entered in the registers of the company as the owner of the shares that the transferee would acquire legal ownership in the shires.
But, on further appeal, the Supreme Court in Seth R. Dalmia v. CIT [1977] 110 ITR 644 though leaving open the question of transfer of equitable title referred with approval to the said observations of the Privy Council and said : It would appear from the observations of the Privy Council that even though the transaction may not amount to acquisition of equitable interest, ... the terms regarding payment of the declared dividend would be fully effective ... even though there may not have been any transfer of equitable title to the purchaser .... (p. 649) There is also another decision -of the Madras High Court in the case of CIT v. M. Ramaswamy [1985] 151 ITR 122, wherein it was held as under : ... since the transfer forms had been signed by the transferor and handed over to the transferee along with the share certificates, and the transferee had sought registration in the books of the company and the company had not refused to recognise the transfer, the transaction as between the transferor and the transferee was complete. The mere fact that the company had not registered the transfers in its books would not justify the claim for setting off the capital loss against the capital gain being negatived.... (p.
122)Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975] 45 Comp. Cases 43, the Supreme Court has clearly laid down that where, as between the transferor and the transferee, all formalities have been gone through, such as the execution of a document of transfer and the physical handing over of the shares by the transferor to the transferee, the shares should be taken to have been transferred to the transferee, though until the transfer of shares is registered in the company's books in accordance with the company law, the transfer would not enable the transferee to exercise the rights of a shareholder vis-a-vis the company.
17. In fact, the learned counsel appearing for the assessee has given details with regard to the dates of transfer deeds and the dates on which the transfer was registered. The particulars are as under : Particulars Date of Transfer transfer deed registered on1. Equity shares in Nelliampathy Tea & 1-7-1977 4-8-1977 Produce Co. Ltd. 28-6-1977 12-8-1977 1-7-1977 19-8-19772. Equity shares in Highland Produce Co.
28-6-1977 3-8-1977 Ltd.3. Equity shares in Madras Caffeine 29-6-1977 12-9-1977 Products Ltd.4. Equity shares in Midland Rubber & 29-6-1977 8-8-1977 Produce Co. Ltd.6. Equity shares in Neelamalai Tea & 29-6-1977 11-8-1977 Coffee Estates Ltd. 18. It remains to be seen that according to the facts appearing in this case as per the contract of sale entered into between the assessee and Subramaniam & Co., recognised brokers, on 28-6-1977 the assessee transferred certain equity shares held by it in other companies. The total sale consideration received was Rs. 16,83,417.76. The entire consideration has been received by the assessee on 29-6-1977. The board of directors passed the resolution to transfer the shares on 27-6-1977 and blank transfer certificates were passed on to the Registrar of Companies for getting his approval on 27-6-1977. The share certificates along with the blank transfer certificates duly signed by the transferor were handed over to the broker on 28-6-1977. On these facts if we apply the principle laid down by the Madras High Court in M.Ramaswamy's case (supra) and that of the Calcutta High Court in Babulal Jatia's case (supra) and that of the ratio of the judgment of the Supreme Court in Seth R. Dalmia's case (supra), it is clear that the transaction as between the transferor and the transferee was complete.
The mere fact that the company had not registered the transfers in its books would not justify the assessee to contend that no capital gain tax is leviable in the assessment year under consideration. Apart from this legal position, we have also seen that the transfer of shares was registered in the year 1977, the particulars of which are given hereinabove. If that is so the completion of the transaction by having the name entered in the register of members relates it back to the time when the transfer was first made -- Nagabhushanam v. Ramachandra Rao [1922] ILR 45 Mad. 537. This legal position was pointed out by the Supreme Court in the case of Howrah Trading Co. Ltd. (supra). In fact this legal position was obtained from a judgment of the Chancery Division in the case of Nanney v. Morgan [1888] 37 Ch. D. 346, 356, wherein it was indicated by Lopes, L.J. in the following passage : Therefore the transferor, until the delivery of the deed of transfer to the secretary, is subject to all the liabilities and entitled to all rights which belong to a shareholder or a stockholder, and, in my opinion, until the requisite formalities are complied with, he continues the legal proprietor of the stock or shares subject to that proprietorship being divested, which it may be at any moment, by a compliance with the requisite formalities. (p. 219) Therefore, when the transfer of shares was registered in the year 1977 it will relate back to the original dates when the transfer deeds were executed by the assessee to Subramaniam & Co. If that is so the assessee cannot contend that there is no transfer of shares in the case of the assessee for the purpose of Section 45 in the assessment year 1978-79. In that view of the matter, we uphold the order passed by the first appellate authority on this point and dismiss the appeal filed by the assessee.
19 to 21. [These paras are not reproduced here as they involve minor issues.]