Introduction

Section 10(38) aims to provide relief from the long-term capital gain tax chargeable on the transfer of equity shares or unit of an equity oriented fund on the satisfaction of two essential conditions stated below:

a.      The transaction of sale of such equity shares or units is entered into on or after 1^st October, 2004 and

b.     Such transaction is chargeable to Security Transaction Tax (STT) under that Chapter.

Similarly, Section 111A provides for chargeability of short-term capital gain tax at a lower rate of 15% on income arising consequent to transfer of equity share or units of an equity oriented fund, once the conditions mentioned above are fulfilled. 

Further, the condition (b) mentioned above, for the purpose of Section 10(38) as well as Section 111A, provides only for the chargeability of the Security Transaction Tax on eligible transaction thus, actual payment of security transaction tax is not insisted and therefore, it is sufficient that the transaction is chargeable to STT.

Facts of the Case of        

Uday Punj vs. Commissioner of Income Tax, Central- III [2012] 23 taxmann.com 148 (Delhi)

The appellant, happened to be a promoter and Director of M/s Punj Lloyd Limited (PLL), which came out with an IPO in December, 2005. However, along with IPO, the existing shareholders of the company, including the appellant, offered their shares to the public. The offer opened on 13.12.2005 and closed on 16.12.2005. Further, on 28.12.2005, money was transferred by the bankers to the public offer account and the shares were also transferred from the promoter’s demat account to the account of Registrar to the issue. The trading in the Stock Exchange commenced on 06.01.2006. The Revenue, challenged the chargeability of the capital gain that arose to the assessee due to the sale of his shares through offer for sale at normal rate of tax, on the ground that the transaction of sale did not take place in recognized stock exchange, which is the very essence of Sec 10(38). On appeal by the assessee, both Appellate Authorities i.e. CIT (A) and ITAT, held that as the shares were not listed securities at the time of transaction and thus, the transaction was not entered into through the recognized Stock Exchange, therefore, capital gain tax was chargeable at the normal rate, so it was neither exempted nor to be taxed at a lower rate and hence, was outside the purview of Sec. 10(38) as well as Sec. 111A. Consequently, the assessee filed an appeal before the Hon’ble High Court of Delhi, on the ground that the sale of shares cannot be said to be completed before 06.01.2006 i.e. the date when the amount of sale consideration of shares was received by the assessee and secondly, due to the Escrow Agreement signed, the money could not have been transferred to the account of the appellant without the completion of the prescribed procedure and therefore, the appellant had no control over the money till 06.01.2006, thus, counsel for the assessee was of the view that the argument of the completion of sale before the said date was not acceptable.  

Analysis of the case

The Hon’ble Court gave due importance to the below mentioned facts and accordingly, made analysis of the above-said, for giving a prudent judgment of the case:

1.     that the shares in question were transferred from the demat  account of the appellant to the account of the Registrars to the issue on 29.12.2005.

2.     that shares to the applicants in the public offer were allotted on 30.12.2005 and  that on the same day, application was filed for listing and trading approvals after completing all formalities including identification of allottees and commencement of dispatch of refunds of excess bid amount etc.

3.     that the shares had been transferred to the account of the allottees by 05.01.2006.

At the same time, question of ownership as on 05.01.2006 with respect to said shares was raised taking into consideration the facts of allotment of shares to the applicants, refund of excess money and above all, transfer of shares to their accounts by 05.01.2006. The belief that as on 05.01.2006, the ownership in shares vested with the applicants/ allottees was further strengthened by the fact of transfer of shares from the demat account of the appellant to the account of registrar to the issue and finally to the demat account of the applicants. Thus, it was apparent that it was only the allottees, who were entitled to sell their respective shares on the commencement of trading of shares through Stock Exchanges which started on 06.01.2006. Moreover, the date of receiving the payment by the appellant was opined to be irrelevant as far as question of transfer of property in shares was concerned, which in turn happened to be the most important factor to conclude whether the shares were sold by the appellant through the recognized stock exchange or not, to decide on the taxability issue of the same.

In addition, reference was made to the Depositories Act, 1996, Sales of Goods Act, 1930 and Income Tax Act, 1961. The said Acts also confirmed the justification of transfer of property in shares to the applicants by the appellant by 05.01.2006 and thus, leaving no right vested with the appellant on 06.01.2006.

As the property in shares was transferred from the appellant to the applicants of the public issue by 05.01.2006 and trading of shares through stock exchange commenced w.e.f.  06.01.2006 only, the ground of appeal by the applicant with respect to the share transaction through the recognized stock exchange was held to be unacceptable.  In other words, when the shares were already transferred by the appellant by 05.01.2006 and trading of share through stock exchange commenced on 06.01.2006 only, the transfer of shares could not be treated as made through recognized stock exchange and hence, were not eligible for the benefit provided under Sec 10(38).

Another contention of the assessee regarding the ground that the transaction could not be said to be completed by 05.01.2006 i.e. before the activation of ISIN as required by SEBI Circular issued on 19.01.2006, according to which, the activation of ISIN has to be on the day of trading only i.e. 06.01.2006, was also rejected stating that activation of ISIN is required only if the shares are to be transferred through stock exchange and not otherwise i.e. there is no restriction on the transfer of shares by modes other than through recognized stock exchange. 

Conclusion

As the transaction of sale of shares by the appellant to the applicants of the public issue was held to be made otherwise than through recognized stock exchange, the shares under consideration being not listed securities at the time of sale, and thereby not chargeable to Securities Transaction Tax, which is the very essence of Sec 10(38), the claim of the assessee regarding the taxation of capital gain consequent to such transfer, was rejected altogether.