Capital gains on share transfer taxed only proportionately where transfer was completed in stages and later conditions remained pending.

A composite share-transfer arrangement was treated as giving rise to capital gains only in proportion to the shares actually transferred in the relevant year. Because only 50% of the shares passed in assessment year 2007-08 and the balance of consideration and transfer depended on later conditions and completion of the transaction, the entire gain could not be brought to tax in that year. The deeming principle of transfer and part performance was held inapplicable on the facts, as complete conveyance and possession had not been obtained in the relevant sense. Accordingly, capital gains were taxable only to the extent attributable to the 50% shares transferred in assessment year 2007-08, with the balance taxable in the later year.

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Issues: Whether the capital gains arising from the transfer of shares had to be assessed wholly in assessment year 2007-08 or only proportionately in assessment years 2007-08 and 2008-09.

Analysis: The agreement was a composite business arrangement and not a simple sale of immovable property. Only 50% of the shares were transferred in the relevant previous year, while the remaining consideration and transfer depended upon fulfilment of further conditions and completion of the later stage of the transaction. The underlying land and property had not been conveyed to the company in a manner that would justify treating the entire transaction as completed in the earlier year. The deeming principle of transfer and part performance did not apply on the facts because the transferor company itself had not obtained complete conveyance and possession in the relevant sense. The later amendment in the Income-tax Act did not govern the present situation.

Conclusion: The capital gains were taxable only to the extent relatable to the 50% shares transferred in assessment year 2007-08, with the balance taxable in the later assessment year.

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