2024 (4) TMI 581 - AT - Income Tax

US Delaware company wins appeal on long-term capital gains treatment for equity share sales

Citicorp International Finance Corporation C/o. A.F. Ferguson & Co. Versus The Addl. DIT (International Taxation) Range-1, Mumbai

The ITAT Mumbai ruled in favor of a US Delaware-incorporated company regarding capital gains treatment on equity share sales. The assessee argued shares ... Capital gain on sale of equity shares - period of holding of shares - LTCG OR STCG - short term capital gain (STCG) as held by the AO - date of transfer of shares - as argued said shares were held by the assessee for more than 12 months preceding the date of transfer - assessee company incorporated under the laws of the state of Delaware, USA is a tax resident of the Unites States of America - assessee’s preposition before us is that the period of holding of equity shares to be taken from original allotment of CCPS, through which it was converted into equity shares that were sold by assessee. HELD THAT:- As observed that there exists a clause for condition precedent to the sale which has to be fulfilled by both the vendor and the purchaser as specified in clause (4) of the said agreement. It is also evident that clause 4.3.7 of the said agreement either the purchaser or the vendor can rescind the said agreement within 120 days from the date of the agreement where either of the parties have failed to fulfill the conditions precedent to the satisfaction of either of the parties. It is also evident that sub clause 1 specified in clause 5 for delivery of shares to the purchaser is also fixed by the parties to be after the satisfaction of all the condition precedent but in any event has to be after 03.07.2006 and not later within 120 days from the date of execution of the said agreement. These clauses have categorically specified the date of contract of sale as declared by the parties which has been mandated by the board in Circular No. 704 which has been heavily relied upon by the lower authorities. The above position has justified the fact that the date of the agreement by no stretch of imagination could be the date of sale of the shares by the assessee to the purchaser. As per the decision of Bharti Gupta Ramola [2012 (4) TMI 438 - DELHI HIGH COURT] 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. We would also like to draw our support from the decisions relied upon by the ld. AR where in case of Mrs. Hami Aspi Balsara [2009 (5) TMI 920 - ITAT MUMBAI] the co-ordinate bench on identical facts have decided that the date of contract of sale would be the date of fulfillment of the conditions specified in the share purchase agreement and only upon the fulfillment of the said conditions, the date of contract of sale is said to have crystallized. Thus we hold that there is merit in the submission of the assessee and, therefore, we deem it fit to hold that the sale of shares by the assessee would attract LONG TERM CAPITAL GAIN (LTCG) and, hence, allow the grounds raised by the assessee. Issues Involved:1. Determination of the nature of capital gain (short-term vs. long-term) on the sale of equity shares.2. Penalty under Section 271(1)(c) of the Income Tax Act for alleged wrong disclosure of capital gain.Summary:Issue 1: Determination of the nature of capital gain on the sale of equity sharesThe assessee challenged the order of the CIT(A) upholding the AO's decision that the capital gain of Rs. 428,96,85,892 on the sale of equity shares in Progeon Ltd. was a short-term capital gain (STCG). The assessee contended that the shares were held for more than 12 months, qualifying the gain as long-term capital gain (LTCG).The AO determined the date of sale as the date of the share purchase agreement (20.04.2006), making the holding period less than 12 months, thus classifying the gain as STCG. The AO relied on Circular No. 704 dated 28.04.1995 and the decision in Max Telecom Ventures Ltd. vs. ACIT. The CIT(A) upheld the AO's decision, stating that the sale was completed on 20.04.2006, and the subsequent procedural requirements did not alter the nature of the gain.The assessee argued that the actual transfer of shares occurred on 30.06.2006, making it a long-term capital gain. The assessee cited various judicial precedents and contended that the conditions precedent in the share purchase agreement were fulfilled only on 30.06.2006, making it the effective date of transfer.The Tribunal observed that the share purchase agreement included conditions precedent that had to be fulfilled before the sale could be completed. The Tribunal noted that the agreement allowed either party to rescind the contract if the conditions were not met within 120 days. The Tribunal concluded that the date of transfer should be considered as 30.06.2006, when the conditions were fulfilled and the shares were actually transferred. The Tribunal relied on the decision in Bharti Gupta Ramola vs. CIT and other relevant cases to support its conclusion.The Tribunal held that the sale of shares by the assessee attracted long-term capital gain (LTCG) and allowed the grounds raised by the assessee.Issue 2: Penalty under Section 271(1)(c) of the Income Tax ActThe assessee challenged the penalty of Rs. 44,84,86,660 levied under Section 271(1)(c) for allegedly wrong disclosure of capital gain as LTCG. Since the Tribunal held that the assessee was liable for LTCG and not STCG, the corresponding penalty had no basis. The Tribunal allowed the assessee's appeal on this ground.Conclusion:Both appeals filed by the assessee were allowed, with the Tribunal concluding that the capital gain on the sale of shares was long-term and deleting the corresponding penalty.