Recently ITAT Mumbai in the case of Mrs. Hami Aspi Balsara (Taxpayer) v ACIT. [2009-TIOL-789-ITAT-MUM] held that where a transfer of shares is made conditional upon fulfilment of certain covenants by the parties, the transfer can be regarded as complete only upon the fulfilment of such covenants. In the facts of the present case where the Taxpayer entered into an agreement to sell the shares that were held, the ITAT held that the transfer by way of extinguishment of rights did not arise on mere execution of the agreement to sell.
This was because the Taxpayer had the right to revoke the transaction on non- fulfilment of certain covenants by the buyer of the shares. The ITAT held that it was not relevant that the Taxpayer was restricted from exercising any rights over the shares, post the date of agreement to sell, and the transfer took place only when the sale became irrevocable from the Taxpayer’s perspective.
Background and facts of the case
- Under the Indian Tax Law (ITL), profits or gains arising from transfer of a capital asset is chargeable to tax under the head ‘capital gains’. The term ‘transfer’ is defined to include, inter alia, sale, exchange or relinquishment of a capital asset or the extinguishment of any rights therein.
- The Taxpayer, being part of a Promoter Group, held shares in 3 companies (Target Companies). The Promoter Group entered into a share purchase agreement (SPA) on 27 January 2005 with Dabur India Ltd. (Buyer) to sell their shares in the Target Companies, on the terms and conditions as agreed in the SPA. The SPA contemplated that the transaction will be completed on 1 April 2005 after all the parties have fulfilled their obligations under the SPA.
- The Taxpayer did not offer capital gains on the transfer of shares in the return of income filed for tax year 2004-05 for the reason that since the transfer of shares was completed in April 2005, capital gains arose in the tax year 2005-06. The Tax Authority and the first appellate authority rejected the Taxpayer’s claim and held that the capital gains arose in the tax year 2004-05, on the date of signing of the SPA.
- Aggrieved by the first appellate authority’s order, the Taxpayer preferred an appeal before the ITAT.
Issue for consideration :-Whether the capital gains arose on the execution of the SPA on 27 January 2005 or on the completion of the transaction in April 2005.
Contentions of the Taxpayer
