2010 (3) TMI 1296 - HC - Income Tax

Transfers excluded bonus share rights; no separate capital asset for gift tax; valuation must use local stock exchange quotation

ACIT Versus Genesis Consultants Ltd. and M/s. Matrix Logistics.

HC held that the transfers did not include a separable, transferable right to bonus shares because bonus shares arose only on the record/allotment date ... Inclusion of Right to Bonus Shares in Transfer - valuation of the shares - Determining the value of deemed gift u/s.4(1)(a) r.w.s. 4(1)(2) of the Gift Tax Act - manner in which the shares are to be valued - Whether on the date of transfer of the shares by the assessee companies to the transferee companies, there was any existing right to get the bonus shares - revenue overlooks the provision of the Explanation to clause (9) of Rule 2 to Schedule III of the Wealth Tax Act​​​​​​​ - The case of the revenue is that the shares were transferred in the name of the transferee company on 30th September 1991. Hence, the said date would be the date of transfer of the shares and as such, the transfer was inclusive of the bonus shares. HELD THAT:- From the language employed in the section 34 and section 108 of the Companies Act, 1913, it is abundantly clear that the same applies to registration of a transfer of shares, which presupposes a previous transfer of shares. Thus, transfer of shares precedes the registration thereof. In the light of the principles laid down in Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1974 (7) TMI 78 - SUPREME COURT] the transfer of shares takes place when the share certificate is given to the transferee along with signed transfer forms whether blank or duly filled in. The respondent admittedly sold the shares on 15.9.1991 and 14.9.1991 respectively and they were lodged with Core Parenterals Ltd. by the transferee companies on 16.9.1991 before the record date. Thus, share certificates along with the blank transfer forms were given to the transferee company before 16.9.1991 and were lodged with the Core Parenterals Ltd. on that date. Thus, the transfer of shares as between the transferor and the transferee stood concluded when the shares were sold to the transferee by handing over the share certificates along with blank transfer forms prior to the record date and not on 30th September 1991 when the shares were registered in the name of the transferee company. Contention raised on behalf of the revenue - Right to receive the bonus shares got matured and crystallized when it was decided in the Annual General Meeting to issue bonus shares, that is, on 4.6.1991 - Following the decision Commissioner of Income Tax, Gujarat I v. Chunilal Khushaldas ​​​​​​​ [1972 (7) TMI 27 - GUJARAT HIGH COURT], would be applicable on all fours to the facts of the present case inasmuch as in the present case, the resolution as provided under Regulation 96 was passed on 4th June 1991 which provided that the record date would be 17th September 1991. In the circumstances, the date of allotment of bonus shares would be 17th September 1991 and the bonus shares would come into existence only on the said date. In the circumstances, it cannot be said that there was any pre-existing right on the date of transfer to get the bonus shares. This Court is of the view that the bonus shares would come into existence only from the date of allotment i.e. the record date and as such, prior thereto, there was no existing right on the date of transfer of the shares to get the bonus shares. Valuation of the shares - It is an admitted position that the respondent-assessees have produced a certificate of the Ahmedabad Stock Exchange to the effect that the shares of Core Parenterals Ltd. are quoted shares within the meaning of clause (9) of Rule 2 and as such, the said certificate is required to be accepted as conclusive. Once a certificate as provided under the Explanation is submitted by the assessee, it is not open for the revenue to go behind the certificate and hold that the quoted shares were not quoted with regularity on the said stock exchange. It is to be deemed that such shares are quoted with regularity on the said stock exchange. In the circumstances, it was not permissible for the Assessing Officer to resort to the value of the quoted shares on the Bombay Stock Exchange when the said shares were already quoted on the Ahmedabad Stock Exchange and a certificate as envisaged under the Explanation to Rule 2(9) of Schedule III to the Wealth Tax Act was provided by the assessee. The contention that there is no prohibition under Schedule II to the Gift Tax Act against invoking Explanation for the quotation from the recognized Stock Exchange where the closest date is not available does not merit acceptance in view of the fact that the Board circular itself makes it explicitly clear that if an assessee is assessed within a State in which there is a recognized stock exchange, the price quoted on that exchange may be taken into account. Thus, under the Board Circular, it is only if there is no recognized Stock Exchange in the State in which the assessee is assessed that the price quoted on the Stock Exchange located in the closest State may be adopted. However, in a case like the present one, where there is a recognized Stock Exchange in the State in which the assessee is assessed and price of the said share is quoted on that Exchange, the question of having recourse to the price quoted on the recognized Stock Exchange located in the closest State would not arise at all. Hence, the Tribunal was justified in holding that the valuation for the purpose of determining the deemed gift has to be based on the quotation of Ahmedabad Stock Exchange and not that of the Bombay Stock Exchange. Accordingly answered in the affirmative, that is, in favour of the assessee and against the revenue. Appeals are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether, for the purpose of section 4(1)(a) of the Gift Tax Act, a transfer of equity shares made prior to the record date for bonus allotment includes an existing, transferable right to receive bonus shares embedded in those shares. 2. Whether valuation of quoted shares for determining a deemed gift under the Gift Tax Act must be based on quotations of the local recognised stock exchange (where a certificate of quotation is produced) notwithstanding irregularity of trading there, or whether valuation may be taken from a stock exchange in the nearest State where quotations are regular. ISSUE-WISE DETAILED ANALYSIS - I. Inclusion of Right to Bonus Shares in Transfer Legal framework: The concept of property and transfer (Transfer of Property Act) and company law provisions governing transfer and registration of shares (Form of transfer, and section on registration in the Companies Act) determine when transfer takes place. Company law/regulatory provisions and the mechanics of issuing bonus shares (company resolution, record date, allotment/appropriation and board action) govern when bonus shares come into existence as identifiable capital assets. Precedent treatment: The Court relied on established authorities holding (a) shares constitute transferable property and rights in shares may be split into antecedent rights enforceable prior to registration where certificates and transfer forms have been delivered; (b) bonus shares come into existence only upon appropriation/allotment as per company law/regulations, and accumulated profits capitalised do not become bonus shares until issue/allotment; (c) earlier decisions distinguishing facts where resolutions themselves amounted to immediate allotment. Interpretation and reasoning: The Court examined (i) the factual chronology - resolution for bonus on 4.6.1991, record date/allotment fixed as 17.9.1991, sale and delivery of share certificates with transfer forms on 14-15.9.1991 and lodging on 16.9.1991, and formal registration later in September 1991; (ii) the meaning of transfer under company law form (Form 7-B) and section on registration which presupposes a prior transfer; and (iii) statutory/regulatory mechanics of bonus issue (Regulations 96-97, Table A/Companies Act framework): bonus shares materialise only when the board/allotment formalities are executed in accordance with the record date and allotment procedure. The Court held that delivery of share certificate with signed transfer forms completes the transfer between transferor and transferee as between the parties (antecedent right to be registered), but that does not import a pre-existing right to bonus unless bonus shares have been allotted or the resolution unambiguously makes allotment effective from the date of resolution. In the present facts the record date/allotment was 17.9.1991, after the transfer; thus, no distinct bonus shares existed on the transfer date and no separate identifiable capital asset (right to bonus) passed as part of the transfer. Ratio vs. Obiter: Ratio - where bonus issue is subject to a record date/allotment later than the transfer date, bonus shares do not exist as distinct capital assets on the transfer date and hence are not part of the transferred property for taxation as deemed gift. Distinguishing/obiter - decisions where the resolution itself operated as effective allotment from the resolution date are distinguishable on their specific language and facts; holdings about accretions forming part of pledged property in different contexts are inapplicable here. Conclusion: The Court concluded that the right to receive bonus shares did not exist as a separable, transferable capital asset on the dates of sale; therefore, the value of deemed gift cannot be enhanced by treating embedded right to bonus shares as having been transferred. ISSUE-WISE DETAILED ANALYSIS - II. Valuation: Choice of Stock Exchange Quotation Legal framework: Section 6 of the Gift Tax Act and Schedule II prescribe valuation rules for gifts; Rule 2 of Schedule II mandates use of quoted value on the date of gift or the immediately preceding closest quotation. The Explanation to Rule 2 incorporates definitions from Rule 2(9) of Schedule III to the Wealth Tax Act, which defines 'quoted share' and provides that a certificate from the concerned stock exchange in prescribed form is conclusive as to whether a share is a quoted share. Precedent/treatment and administrative guidance: Board circular guidance permits adoption of the price from the nearest State's recognised stock exchange only where there is no recognised stock exchange in the State where the assessee is assessed. The Explanation in Schedule III gives conclusive effect to a stock-exchange certificate that a share is a 'quoted share'. Interpretation and reasoning: The Court read Rule 2 of Schedule II together with Rule 2(9) of Schedule III to conclude that the valuation must be taken from a recognised stock exchange on which the share is a 'quoted share' (i.e., quoted with regularity based on ordinary-course transactions). Where the assessee produces a certificate from the local stock exchange certifying that the share is a quoted share, the Explanation deems that certificate conclusive on the question of quotation. The revenue's reliance on a Board circular to adopt prices from a nearest-State exchange overlooked that the circular applies only where there is no recognised stock exchange in the State of assessment. Here, a certificate from the local exchange (Ahmedabad) was produced; the statute and Explanation prevent the revenue from going behind that certificate to assert irregularity. Thus the Tribunal correctly used the Ahmedabad quotation for valuation; it was not open to the revenue to substitute Bombay quotations when the local exchange had issued the conclusive certificate. Ratio vs. Obiter: Ratio - for valuation under Rule 2 of Schedule II, a certificate from the concerned stock exchange that the shares are 'quoted shares' is conclusive; where such local certification exists, valuation must be based on the local exchange quotation and the revenue cannot adopt quotation from a different exchange under the nearest-State principle. Distinguishing/obiter - the statutory and circular rules permitting resort to a nearest-State exchange apply only when no recognised exchange exists in the State of assessment. Conclusion: The Court held that valuation for determining the deemed gift must be based on the local recognised stock exchange quotation certified by that exchange; consequent use of the Bombay Stock Exchange quotation in place of the Ahmedabad Stock Exchange quotation was impermissible in the circumstances. FINAL CONCLUSIONS (CROSS-REFERENCES) 1. Cross-reference to Issue I: Because bonus shares came into existence only on the record/allotment date (after the transfers), there was no transferable right to bonus on the transfer dates and no addition to deemed gift on that ground. 2. Cross-reference to Issue II: Because a conclusive certificate of quotation was produced from the local stock exchange, valuation had to be based on that exchange; resort to quotation of another exchange in the nearest State was not permissible where a recognised local exchange exists and has certified quotation. 3. Net result: The Tribunal's conclusions - (a) not to include right to bonus in valuation of transferred shares, and (b) to adopt the local (Ahmedabad) stock exchange quotation for valuation - were upheld as legally correct.