Date Of Agreement Can't Be Construed As Date Of Sale Of Shares, For Purpose Of Computation Of Capital Gains: Mumbai ITAT

The Bench of Prashant Maharishi (Accountant Member) and Kavitha Rajagopal (Judicial Member) observed that “As per the decision of Bharti Gupta Ramola v. CIT [2012] 20 taxmann.com 762 the date of transfer is 30.06.2006 for computing the holding period of assets from both the date, i.e., of acquisition and sale are not to be excluded”. (Para 16)

As per the brief facts of the case, the assessee company, a tax resident of the Unites States of America, is engaged in maintaining foreign direct investment (FDI) account and has its main source of income in India from income from capital gains. The assessee, pursuant to share purchase agreement with Progeon Ltd. was holding 87,50,000 equity shares of Progeon ltd. It was original subscription of CCPS converted later on into equity shares. Later, the assessee entered into an agreement to sale of shares to Infosys Technologies Ltd. for a consideration of USD 115,131,000/-. If the conditions are not fulfilled, there was a right to rescind the contract. There was also an escrow agreement and consideration were to be released after share transferred to depository account. The assessee had shown capital gain on sale of shares as long-term capital gain as date of acquisition of shares and date of sale, being such shares held for more than 12 months.

The AO observed that the assessee has computed long term capital gain on sale of shares of Progeon Ltd. amounting to Rs.428,96,85,892/- and had paid tax on the same @ 20.91%. The assessee has also declared LTCG of Rs.1415,04,15,499/- on sale of shares of Indian companies claiming exempt u/s. 10(38) and dividend income of Rs.19,99,95,035/- claiming as exempt income u/s. 10(34). The AO held that date of sale is date of agreement to sale and, therefore, shares are held for less than 12 months, so it is short term capital gain referring to section 2(29B) of the Act.

The Bench referred to the CBDT Circular No. 704 dated Apr 28, 1995, to note that when the transaction takes place directly between the parties and not through stock exchanges, the date of contract of sale as declared by the parties shall be treated as the date of transfer, provided the same is followed by the actual delivery of shares and the transfer deeds.

From a perusal of the share purchase agreement, the Bench observed that there exists a clause for condition precedent to the sale which has to be fulfilled by both the vendor and the purchaser.

The Bench also referred to the decision of Coordinate Bench, to reiterate that the date of contract of sale would be the date of fulfilment of the conditions specified in the share purchase agreement and only upon the fulfilment of the said conditions, the date of contract of sale is said to have crystallized.

Hence, the ITAT allowed the appeal of assessee and concluded that the sale of shares by the assessee would attract long term capital gains.

Counsel for Appellant/ Assessee: Farrokh V. Irani

Counsel for Respondent/ Revenue: Krishna Kumar

Case Title: Citicorp International Finance Corporation Verses Addl. DIT

Case Number: ITA No. 2545 /Mum/2011

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