1. Since common issue is involved in all these appeals, the same are being disposed of by the common order for the sake of convenience.
2. The only issue common to all the appeals is, whether the learned Commissioner (Appeals) is justified in holding that the transfer of interest in the property of shares had not been completed in the year under consideration.
3. At the out set, it may be mentioned that the facts in all the appeals are, identical except the variance in the number of shares or the amount involving therein. All the assessees were shareholder of a company Vasant Sagar Properties Pvt. Ltd. (VSPPL). All of them had agreed to transfer their shares in that company to Veena Investment Ltd. (VIL), vide agreement dated 4-11-1999. Since facts are identical in all these appeals, it would be appropriate to refer to the detailed facts, as recorded by the lower authorities in the case of Mr. Anant G.Shah.
4. VSPPL owned an immovable property somewhere near Churchgate, Mumbai.
This property comprises of 28 flats which were leased to Defence Ministry at Rs. 1.08 lakhs per annum. These flats were allotted to the officers of Indian Navy. The shareholders of VSPPL decided to sell their total shares i.e., 7,500 equity shares of Rs. 100 each and consequently, entered into an agreement with VIL for sale of such shares at a price of Rs. 24,960 per share. The total consideration amounted to Rs. 18.72 crores. At the time of signing the agreement, the transferee paid a sum of Rs. 4,01,99,000 as advance. Subsequently, another sum of Rs. 9.36 crores was paid in the year under consideration and these amounts were shown by the respective shareholders as advance in their respective Balance Sheets. The amount shown by the assessee (Mr. Anant G. Shah) as advance was Rs. 2,15,13,200 pertaining to 1,000 shares held by him. As per the agreement, the assessee had signed the share transfer memos and deposited the same along with share certificates with a Solicitor in the name of Mr. Prakash Shah, who was to handover the shares along with share memos to the transferee on receipt of full consideration by the transferor. The assessee had not offered any income in respect of the amount received by him under the said agreement on the ground that the transfer of shares had not been completed in the year under consideration.
5. In the course of assessment proceedings, the assessing officer examined the terms of the agreement. It was noted by him that no date was mentioned for completion of the deal. The assessee was asked to explain as to why the income by way of capital gain should not be assessed in respect of such transactions. In pursuance to the same, the assessee, vide letter dated 20-1-2003, claimed that the sale transactions had not yet been completed and the amount received was only an advance which should not be treated as income. It was further stated that shares of VSPPL were lying un-transferred in escrow with the Solicitor. Further, the building was still in the possession of the tenants and not in the possession of the purchaser. Apart from this, it was stated that the purchaser was not nominated as Director on the Board of Directors of VSPPL. Since the assessee had not parted with the shares to the transferee, it could not be said that any transfer took place in the year under consideration. According to the assessee, mere receipt of part consideration did not amount to transfer of property in shares. Reliance was placed on the judgment of the Hon'ble Supreme Court in the case of Alapati Venkataramiah v. CIT , judgment of the Honble Patna High Court in the case of Smt. Raj Rani Ramna v. CIT (1993) 201 ITR 103, judgment of the Hon'ble Bombay High Court in the case of Nagpur Electric Light& Power Co. Ltd. v. CIT the judgment of the Hon'ble Kerala High Court inCIT v. F.X. Pariera & Sons (Travancore) (P) Ltd. . On receipt of the reply of the assessee, the assessing officer issued summons under Section 131 of the Act to VIL and the Solicitor Mr. Prakash Shah. Mr. Prakash Shah appeared before the assessing officer and confirmed that all the 7,500 shares were lying with him in escrow and neither party had informed him of the completion of the transaction as per the terms of the agreement. He also produced xerox copies of transfer forms which were not showing the name of the transferee or any amount of consideration received. It was also stated by him that none of the parties had informed him about any payments made subsequent to the date of agreement. Subsequently, the assessee also furnished the copy of the legal opinion dated 15-3-2003 obtained from the Sr. Counsel Mr. S.E. Dastur. The contents of the legal opinion have been recorded by the assessing officer in his order.
6. However, the assessing officer was not satisfied with the submissions of the assessee. The assessing officer expressed his agreement with the opinion of the Sr. Counsel of assessee that the transaction was governed by the provisions of Sale of Goods Act inasmuch as the transaction involving the sale of shares and not the immovable property. But considering the facts of the case, he was of the view that transfer took place in the year under consideration. In coming to this conclusion, he took into consideration various factors namely (i) that, assessee had handed over the shares, (ii) that, the substantial amount had been received, and (iii) that, the conduct of the assessee in not putting the date for completion of the transaction was not bona fide. He relied on the decision of the Honble Madras High Court in the case of CIT v. M. Ramaswamy , for the proposition that "where all formalities have been gone through such as execution of 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 companys 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." He relied on the Gujarat High Court judgment in the case of CIT v. Mormasji Mancharji Vaid , for the proposition that transfer of immovable property can be said to have been effected on the date of execution of the document. The assessing officer observed that there is no reason as to why the principle laid down in the above cases would not apply to the present case. It has been also observed by the assessing officer that no reason has been given as to why the date of completion of agreement was not mentioned in Clause 4 of the agreement. According to him, it was a deliberate attempt on the part of both the parties to postpone the payment of tax. According to him, it was a mere device to evade the tax liability. It was also observed by him that the mere fact that, the company had not registered the transfer of shares in its books would not justify the contention of assessee that the transfer took place in the later years. It was also observed by him that the fact that shares were lying with the Solicitor in escrow is not relevant for deciding the issue since, according to him, the transfer of shares was completed the moment the shares along with transfer deed was handed over by the assessee. In view of the above observations, the assessing officer held that assessee was exigible to tax in respect of capital gains arising on the transfer of shares which took place in the year under consideration. Accordingly, he computed the longterm capital gain of Rs. 2,46,82,143 in the case of Mr. Anant G. Shah. Similar computations were made in respect of other assessees.
7. On appeal, the learned Commissioner (Appeals) considered the provisions of Section 45 and observed that the date of transfer is the deciding factor for the purpose of deciding previous year in which capital gain is to be taxed. He also considered the definition of the word "Transfer" provided in Section 2(47) of the Act and then observed that the case of assessee falls within the ambit of Sub-clause (i) of Section 2(47) of the Act. Thereafter, he observed that the word "sale" has not been defined in the Income Tax Act, 1961 and, therefore, its meaning has to be understood as defined under the Sale of Goods Act, 1930 (Act of 1930). After referring to the provisions of Section 4 of the Act of 1930, he made a distinction between the contract of sale and agreement to sale. According to him, the contract can be either absolute or conditional. Therefore, where the property in goods is transferred from seller to the buyer, the contract is called "sale". An agreement to sell becomes a sale, when the condition is fulfilled subject to which the property in goods is to be transferred. He also referred to the provisions of Sections 14 to 24 of the Act of 1930, which lay down the rules for ascertaining the intention of the parties.
Considering such legal position, the learned Commissioner (Appeals) posed a question whether on the facts of the case, can it be said that transfer took place in the year under consideration. Reverting to the facts of the case, it was observed by him that intention of both the parties as reflected in the agreement was absolutely clear i.e., the payment of the full price of the shares was the condition precedent for the performance of the contract. The delivery of the shares to the transferee was dependent on the full payment of the price. Therefore, once such condition was fulfilled, directions were to be issued to the Solicitor to handover to the buyer the shares along with the transfer forms duly signed and stamped. It was noted by him that the shares were handed over to Mr. Shah, a Solicitor, along with blank transfer deeds but the shares were to be transferred to the purchaser only on the receipt of full consideration. According to him, delivery to the solicitor could not be considered as delivery to the buyer. Since this condition was not fulfilled during the year under consideration, it could not be said that property in shares had been transferred.
Consequently, no capital gain could be said to arise in this year. It was also pointed out by him that the Solicitor did not hold the shares on behalf of the buyer. On the contrary, he held the same in escrow account as a neutral person. Therefore, so long as the shares remained with the Solicitor, it could not be said that shares were delivered to the buyer. Hence, there was no sale within the ambit of the Act of 1930. He also distinguished the case law relied upon by the assessing officer. Accordingly, addition made by the assessing officer was deleted in all the cases. Aggrieved by the same, the revenue is in appeal before the Tribunal in all the cases.
8. Both the parties have been heard at length. The learned D.R. has reiterated the reasonings given by the assessing officer, which have already been narrated by us and, therefore, need not be repeated.
However, he tried to make out a new case that it was a case of extinguishment of rights in shares but he could not substantiate his argument by reference to any material/evidences. Then he submitted that there was substantial compliance of the terms of the agreement as major portion of the consideration had been received by the assessees in the year under consideration and the delivery of shares to Mr. Shah was made irrevocably and, therefore, amounted to delivery to the transferee. Thus, the transfer of shares completed in the year under consideration irrespective of non-payment of full price. Reliance was placed by him on the judgments T.V. Sundaram Iyengar & Sons Ltd. v. CIT , K.N. Narayanan v. ITO. (Ker.), Mormasji Mancharji Vaids case (supra) and Chaturbhuj Dwarkadas Kapadia v. CIT . On the other hand, the learned Counsel for the assessee relied on the reasonings given by the learned Commissioner (Appeals). Case law relied upon by him are given in the paper book, which are placed on record.
9. Rival submissions of the parties have been considered carefully. The question for consideration is whether, considering the facts of the case, can it be said that the transfer of shares took place in the year under consideration. At the outset, it may be mentioned that, it is a case of sale of shares as admitted by the assessing officer himself in Para-10 of his order and, therefore, shares being goods within the meaning of definition Clause 7 of Section 2 of the Act of 1930, the issue under consideration has to be adjudicated in accordance with provisions of the said Act. Even the assessing officer, in para 9 of his order, has not disputed this legal position.
10. It would, therefore, be appropriate to refer to the relevant provisions of the Act of 1930. As per Clause 4, a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Such contract of sale may be absolute or conditional. Where, under a contract of sale, the property in goods is transferred from seller to the buyer, the contract is called the "sale" but where the transfer of property in goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to "sale". An agreement becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in goods is to be transferred.
Section 19 provides that where there is a contract for the sale of specific or ascertains goods, the property in them is transferred to the buyer at such time as the parties to the contract intended it to be transferred. For the purpose of ascertaining the intention of parties, regard shall be had to the terms of the contract, conduct of the parties and the circumstances of the case. It further provides that unless a different intention appears, the rules contained in Sections 20 to 24 would be the rules for ascertaining the intention of the parties as to the time at which the property in goods is to pass to the buyer. Section 20 provides that, where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in goods passes to the buyer when the contract is made and it is immaterial whether time of payment of the price or the time of delivery of the goods or both is postponed. Section 21 provides that where there is a contract for sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into deliverable state, the property does not pass until such thing is done and the buyer has notice thereof. According to the definition Clause 3 of Section 2, goods are said to be in a "deliverable state" when they are in such state that the buyer would, under the contract, be bound to take delivery of them. Clause 2 of Section 2 defines the word "delivery" as voluntary transfer of possession from one person to another. Chapter-IV contains the provisions regarding performance of contract. Section 32 provides that it is the duty of seller to deliver the goods and of the buyer to accept and pay for them in accordance with the terms of contract of sale. Section 32 of the Act provides that unless otherwise agreed, delivery of the goods and payment of the price would be concurrent conditions for the performance of the contract.
Section 33 provides that delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyers or of any other person authorised to hold them on his behalf. Section 35 provides that apart from any express contract the seller of goods is not bound to deliver them until the buyer applies for delivery. The combined reading of these provisions clearly reveals that where the contact is for sale of specific goods, the transfer takes place immediately on the delivery of the goods. However, where contract is not absolute but conditional one then, the contract would become sale when the condition is fulfilled and the sale would complete when ultimately delivery of goods is affected.
11. Let us now apply the legal position, as mentioned above, to the facts of the present case. The perusal of the agreement shows that agreement was made on 4-11-1999, wherein the sellers of the shares have been described as "transferor" while the "purchaser" has been described as the "company". Clause 1 of the agreement provides that the shares would be transferred for a price of Rs. 24,960 per share. The total consideration for sale of 75,000 shares amounted to Rs. 18.72 crores.
Clause 2 provides that the transferors admitted to have received the sum of Rs. 4,01,99,000 at the time of agreement. Clause 4, on which much reliance has been placed by the assessing officer, reads as under: Transaction of sale and purchase of shares herein will be completed on/ or before...." Both the parties have signed the above Clause. Clauses 5, 6, 9 and 10, which are also relevant for our purposes, are being reproduced as under: 5. Upon payment of the balance of the purchase price mentioned above, the transferors shall hand over transfer forms duly executed by them with share certificates and ensure that shares hereby agreed to be sold shall be transferred to the name of the transferors or its nominee.
6. Upon full payment of the purchase price as aforesaid the transferor Nos. 1 and 2 hereto being the present Directors of the Company will continue as directors for such period as the transferors may require them to continue and shall resign as Directors of the Company on being called upon to do so by the transferee or its nominee. The transferor No. 3 shall resign immediately on payment of the balance of the purchase price. The transferor and the Company shall appoint the nominee of the transferee as the Directors of the Company and custody and possession of all the assets of the Company including statutory records shall be handed over to the nominee of the transferee.
9. The transferors and the Company agree and confirm that all the original share certificate in respect of the said 7,500 shares hereby agreed to be sold together with transfer form duly signed by each of the transferors and all the original title deed of the property mentioned in Clause 6(g) above shall remain in the custody of Mr. Prakash Shah, Solicitor. The transferors and the Company hereby irrevocably authorize Mr. Prakash Shah to hand over the same to the transferee upon the transferee making payment of the balance of the purchase price.
10. The transferors and each of them agree and confirm that the transferee has agreed to purchase the said shares believing that the representation made by them and contained in this agreement are true and correct and in the event it being found that any of the representation made by the transferor to be false or incorrect, the transferee shall have option to avoid this agreement and seek refund of the price paid by the transferee to each of the transferors and the Transferors and each of them doth hereby agree to indemnify and keep always indemnified against all the loss suffered by the transferee by reason of any of the representation being found to be incorrect or false at any time hereafter." 12. The combined reading of the above clauses of the agreement clearly shows that intention of the parties was not to transfer the shares on the date of agreement but the intention in reality was to transfer the shares on the date when balance payment of the consideration was to be paid at a future date by the buyer to the sellers. Clause 9 specifically provides that till the payment is made, the shares would remain in custody of Mr. Prakash Shah, Solicitor, who was irrevocably authorised to handover the shares to the transferee only upon the transferee making payment of the balance consideration of the purchase price. The terms of the agreement clearly shows that it was a conditional contract and, therefore, the sale would be complete only when such condition is fulfilled. The payment of purchase price in full was the condition precedent for completion of the sale transaction. Mr.
Prakash Shah, Solicitor, was holding the shares merely as a trustee and, therefore, he could not deliver the same to the trustee unless the full payment was received from them. If the transferee does not make the payment, then Mr. Prakash Shah, as a Trustee, was bound to return the shares to the seller. Mr. Prakash Shah was examined by the assessing officer under Section 131 of the Act who, in clear terms, deposed that shares were still lying with him and he was unaware of any payment being made by the transferee. In these circumstances, we are of the view that no transfer took place in the year under consideration inasmuch as the condition under which the contract was to be performed had not been fulfilled in the year under consideration. Since the taxable event did not take place in the year under consideration, the question of capital gain under Section 45 of the Act did not arise.
13. Much emphasis was laid by the assessing officer on Clause 4 of the agreement, wherein date of completion of transaction has been left blank. According to the assessing officer, it was a deliberate attempt on the part of the assessees to postpone the date of completion of the agreement so as to evade the tax on capital gains. We are unable to accept such reasoning given by the assessing officer. In a commercial transaction, the payment is of utmost importance and in the present case, parties were not aware of exact date of payment. For that reason alone, Clause 9 was inserted in the agreement so as to ensure the interest of both the parties. Mr. Prakash Shah was appointed as a custodian who was under obligation to keep the shares in his custody till the payment of price. In our opinion, this clause cannot be considered as a deliberate attempt to postpone the taxable event with a view to evade the tax. When the parties were unaware of the exact date of the performance of the contract, they were compelled to keep the Clause 4 blank vis-a-vis the date of completion. We have been informed that the final payment has been made in April 2005 and the income would be offered in assessment year 2006-07. Therefore, it cannot be said that intention was to postpone the payment of tax indefinitely.
14. The contention of the revenue that delivery to the solicitor amounted to delivery to the transferee also cannot be accepted since the solicitor was acting merely as a trustee. In law, he could not deliver the shares to the transferee unless the full payment was made by the transferee. There is nothing on record to show that the solicitor was an agent of the transferee. Therefore, in our opinion, delivery of shares to the solicitor could not be considered as delivery to the transferee.
15. The case law relied upon by the learned DR are distinguishable on facts. The judgment of the Honble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra), of Honble Gujarat High Court in the case of Mormasji Mancharji Vaid (supra), relate to the transfer of immovable properties and, therefore, cannot be applied to the present case since the event for transfer of shares is different from the event for transfer of immovable property. The judgment of the Hon'ble Kerala High Court in the case of Rajagiri Rubber & Produce Co. Ltd. v. CIT , is distinguishable on facts since shares were duly handed over to the buyer in that case. The only dispute was whether date of transfer could be treated as the date on which shares were registered in the books of company or when the shares were transferred by delivery. The court held that transfer was completed the day when shares were delivered. The date of registration in the books of company was not relevant. This decision, therefore, does not help the revenue.
Further, in the case of K.N. Narayanan (supra), it was held that transfer of shares took place when the transfer deed duly stamped and executed by both the parties is delivered to the company along with concerned share certificates, and when transfer registered in the books, the transferee gets full title for the purpose of Companies Act.
This ruling goes against the revenue as in the present case even the shares were not delivered to the transferee. The decision of the Hon'ble Madras High Court in the case of T.V. Sundaram Iyengar & Sons Ltd. (supra), is not on the point of taxable event.
16. In view of the above discussion, it is held that transfer of shares did not take place in the year under consideration. Consequently, the provisions of Section 45 of the Act could not be applied. The orders of learned CIT (Appeals) in all the cases are therefore upheld.