Income Tax Appellate Tribunal - Mumbai
Suresh K. Jajoo, Mumbai vs Assessee on 2 December, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "E"
Before Shri P.M.Jagtap (AM) & N.V. Vasudevan (JM)
I.T.A.No. 474/Mum/09 (Assessment year : 2000-01)
Shri Suresh K. Jajoo ACIT Circle 4(2)
7/10, Botawala Building Aayakar Bhavan
1st Floor, Horniman Circle Vs. M.K. Road
Mumbai-400 001. Mumbai-400 020.
PAN/GIR No. : AAFPJ0070J
APPELLANT RESPONDENT
I.T.A.No. 475/Mum/09 (Assessment year : 2000-01)
Smt. Vimla S. Jajoo ACIT Circle 4(2)
7/10, Botawala Building Aayakar Bhavan
1st Floor, Horniman Circle Vs. M.K. Road
Mumbai-400 001. Mumbai-400 020.
PAN/GIR No. : ADAPJ8747J
APPELLANT RESPONDENT
Assessee by : Shri S.E.Dastur
Department by : Shri Hemant J.Lal CIT
D.R.
ORDER
PER BENCH:-
ITA No. 475/Mum/09 is an appeal by the assessee by name Smt.Vimla S. Jajoo against the order dated 2.12.2008 of learned CIT(A)-IV, Mumbai relating to A.Y. 2000-01.ITA No. 474/Mum/09 is also an appeal by the assessee by name
Shri Suresh K. Jajoo against the order dated 2.12.2008 of learned CIT(A)- IV, Mumbai relating to A.Y. 2000-01.2
Shri Suresh K. Jajoo Smt. Vimla S. Jajoo
2. Issues involved in both the above appeals are identical and arise out of identical facts and circumstances. These appeals were heard together. We deem it convenient to pass this consolidated order.
3. Facts and circumstances under which, these appeals arises for consideration are as follows :-
The Assessee Smt. Vimla S. Jajoo is an individual. She is in the business of dealing in shares and investments. For A.Y. 2000-01, return of income declaring total income of Rs. 9.08,99,794/- was filed by her on 27.10.2000. The return was processed u/s. 143(1) and no scrutiny was done in her case for the relevant assessment year. She had during the A.Y. 2000-01, purchased 1,00,000 equity shares of DSQ software on 9.4.99 on spot delivery basis for a purchase consideration of Rs.
3,39,71,750/-. Out of the above, 63000 share were sold on 24.3.2000 and balance 37,000 was sold on 30-3-2000 as per the brokers contract note dt. 30.3.2000. She claimed that the sale of 63,000 shares were made on 8.4.2000 as per broker bill for sett No. 01. She offered for tax as short term capital gains the capital gain on sale of 63,000 shares in AY 01-02. The sale in respect of 37,000 shares was claimed as long term and offered to tax a sum of Rs. 5,33,85,080/- as long term capital gains in A.Y. 2001-02. According to her the broker raised the bill for this transaction in the broker bill for sett No.02 on 12.4.2000 and delivery of shares and its corresponding pay-in-pay out took place only on 12.4.2000. Since the corresponding sale and delivery had taken place only on 12.4.2000, the capital gain on sale of 37,000 shares was claimed to be a long term capital gain and offered to tax in AY 01-02. The expressions "Long term Capital gain", "Short term Capital gain" "Long term Capital Asset" and "Short term Capital Asset" has been defined in Sec.2 of the Act as follows:
Sec.2(42A)"Short-term capital asset" means a capital asset held by an assessee for not more than twelve months immediately preceding the date of its transfer.
Sec.(29A)"Long-term capital asset" means a capital asset which is not a short term capital asset.3
Shri Suresh K. Jajoo Smt. Vimla S. Jajoo Sec.(29B)"Long-term capital gain" means capital gain arising from the transfer of a long term capital asset.
Sec.(42B)"Short-term capital gain" means capital gain arising from the transfer of a Short term capital asset.
Therefore depending upon the date of sale the capital gain will be "Long term Capital Gain" or "Short Term Capital Gain". The tax implications on the capital gain being treated as Short term or long term are different. By order dated 27.2.2004 u/s. 143(3) of the Act, the Assessing Officer assessed the long term capital gain so offered by the assessee in A.Y. 2001-02 observing as follows :-
"The assessee has disclosed long term capital gains of Rs. 5,11,69,819/- in its original return which has been revised to 5,19,06,039/- as per the revised return. The details of such gain have been filed as per Annexure-I to the computation of income. During the course of assessment, the issue of capital gain has been examined. According to the details filed by the assessee, the assessee has purchased 3,7000 shares of DSQ software on 9.4.2099 for a purchase consideration of Rs. 1,25,60,020/-. The scrips have been purchased in spot market Calcutta Stock Exchange through broking company Herald Equity Pvt. Ltd. These holdings have been sold on 12.4.2000 for Rs. 6,59,45,100/- There is a long term capital gains claim of Rs. 5,33,85,080/- on these transactions. During the course of assessment proceedings the assessee has furnished distinctive number of scrips and details of sale. According to contract note furnished the date of contract is 30.3.2000. However, the transactions has been carried forward as per exchange rules and finally settled in settlement period (30.3.2000 to 6.4.2000). The broker, Herald Equity Pvt. Ltd. has raised a bill on 12.4.2000 for these transactions marking delivery of shares. The assessee has claimed that the broker has raised these bills after schedule pay-in/pay out of securities to Stock Exchange which was completed on 12.4.2000. As per the broker's bills which is claimed by the assessee as broker's note the holding period exceeds one year and therefore there is long term capital gains on the sale of these shares.
The submissions of the assessee have been carefully considered. As per the delivery of share and broker's bill there is an incidence of long term capital gains on the sale of these shares. However, if the transaction is assumed to be completed on the first date of contract i.e. 30.3.2000 and the subsequent formalities are only completion of these transactions then capital gain will 4 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo relate back to the earlier year i.e. A.Y. 2000-01. The assessee has furnished the copy of ledger account in the books of the broker where the sale bill is credited to assessee's account on 12.4.2000. As the assessee has already offered this income in A.Y. 2001-02, the same is assessed in this year to protect the interest of revenue."
4. The Assessing Officer issued notice u/s. 148 of the Act on 22.3.2007 for AY 00-01. Before issue of such notice i.e., on 21.3.2007 the Assessing Officer recorded following reasons u/s. 147 of the Act.
"Smt. Vimla S. Jajoo : A.Y. 2000-01 :-
1) From the A.Y. 2001-02, it is seen that the assessee had purchased 1,00,000 shares of DSQ software on 9.4.1999 (on spot basis) for a purchase consideration of Rs. 3,39,71,750/-.
Out of these 63,000 shares have been sold on 8.4.2000 and the balance 37,000 have been reportedly shown as sold on 12.4.2000. The assessee has claimed the sale in respect of 37,000 shares as long term and offered for tax a sum of Rs. 5,33,85,080 as long term capital gains in A.Y. 2001-02.
2) During the course of assessment proceedings, the assessee furnished the brokers contract notes for purchase and sale. It was seen that the shares had been purchased on 9.4.1999 vide the brokers bill No. SPOTI9992000-00006 dated 9.4.1999. The sale bill No. GROUP a/001/0033 DATED 8.4.2000 shows sale of 63000 shares on delivery basis and simultaneous sale and purchase of 57000 shares (on forward basis). The date of transaction was 30.3.2000. Then again vide Brokers bill No. GROUP A/002/0009 dated 12.4.2000, a sale of further 57000 shares has been shown on delivery basis. But the date of transaction is 30.3.2000 only. The transaction had been carried out on the stock exchange in settlement period (30.3.2000 to 6.4.2000). The bill was reportedly raised by the broker, Herald Equity P. Ltd. (in which the assessee's husband Suresh K. Jajoo is a director) for this settlement on 12.4.2000 for these transactions after completion of the settlement period.
3) Capital gains are taxable on accrual basis, and in the case of listed securities, the date of transaction is the date of sale/purchase of the security. Therefore the shares were transferred on 30.3.2000 i.e. before the completion of one year from the date of purchase. As per Circular No. 704 of CBDT dated 28.4.1995, the date of brokers note is to be treated as the date of transfer provided such transactions are followed by delivery. The extract of the circular is as under :-
5Shri Suresh K. Jajoo Smt. Vimla S. Jajoo "The Board is of the opinion that it is the date of broker's note that should be treated as the date of transfer in cases of sale transactions of securities provided such transactions are followed up by delivery of shares and also the transfer deeds. Similarly, in respect of the purchasers of the securities, the holding period shall be reckoned from the date of broker's note for purchase on behalf of the investors. In case the transactions take 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 it is followed up by actual delivery of shares and the transfer deeds."
4) The broker's bill for settlement period is drawn after the pay-
in/pay out date i.e. after delivery is made and payments received/made. The fact that the CBDT has envisaged a scenario where delivery may not place after issue of Brokers note means that they did not want to treat the broker's bill as the requisite date but the contract note issued by the broker. Accordingly short term capital gains on sale of these shares had accrued on 30.3.2000, i.e. relevant to A.Y. 2000-01.
5) Since, the assessee has offered this income in A.Y. 2001-02 as long term capital gain, the same was accepted in that year by the Assessing Officer protectively, with the office note that the taxability of the same in preceding year on the basis of date of contract be examined by reopening the preceding year, if deemed fit.
6) Accordingly the short term capital gains of Rs. 5,33,85,080 have escaped assessment for the A.Y. 2000-01. As per Explanation 2, clause (c)(ii) also, the capital gains have been assessed at too low a rate as long term capital gains in respect of A.Y. 2001-02. It is, therefore proposed that the A.Y. 2000-01 be reopened since the income has escaped assessment. The tax effect and income escaping assessment exceeds the limits laid as per section 149(1)(b) read with explanation thereto.
SD/-
(CHATURBHUJ DAS) Asst. Commissioner of Income Tax Circle 4(2), Mumbai"
5. In the reassessment proceedings, the assessee took a stand that the transaction of sale becomes complete only when the actual delivery of shares and payment was made. The details of Trading, settlement 6 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo mechanism and carry forward system followed by the stock exchange were given by the Assessee. The Assessee explained that the contract notes issued by the broker for transaction effected in the settlement period were not treated as purchase or sale of shares. The purchase or sale of shares were treated complete only when actual delivery of shares is given and the pay in/pay out are done for the transaction and the broker issues brokers bill for the same. The Assessee relied on the decision of the Hon'ble Calcutta High Court in the case of Haji & Anderson P. Ltd., 47 ITR 790, wherein it was held that in the absence of definition of the term 'sale' under the Income Tax Act, 1961 for determination of the date of sale, one must resort to the sale of Goods Act, 1930, in cases of movable properties. It was submitted that Shares and securities being movable property are treated as 'goods' u/s. 2(7) of the sale of Goods Act, 1930 and that under Section 4 of the sale of Goods Act, 1930 a sale takes place when the property in goods is transferred from the seller to the buyer. It was further submitted that the provisions of Sales of Goods Act, 1930 provides that a property in the goods passes at a time when the parties to the transaction intend it to pass. It was urged that transfer of ownership in goods is complete only with delivery in pursuance of an agreement to sell. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Bhurangya Cool Co., 34 ITR 802 wherein it was held that the title in the movable property passes when they are actually delivered to the buyer. Further reliance was placed on the decision in the case of V.R. Sheiat Vs. Praniant J. Thakur, 45 Comp. Cases 43, wherein the Hon'ble Supreme Court held that the interest under an agreement of sale of shares passes from seller to the buyer, on delivery of the share certificate accompanied with duly executed transfer form. Reliance was also placed on the decision of the Hon'ble Madras High Court in case of CIT Vs. M. Ramaswamy, 151 ITR 122 and Kerala High Court in case of Rajagiri Rubber and Produce Co. Vs. CIT, 203 ITR 663 following the above referred Supreme Court decision, wherein it was held that between the 7 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo transferor and the transferee, the transaction is complete when the share certificate are handed over by delivery.
6. The Assessing Officer relied upon Circular No. 704 dated 28.4.95 of CBDT. The circular gives instructions regarding determination of the date of transfer and holding period for purposes of capital gains qua transactions in securities. The CBDT has instructed Officers of the Revenue to adopt the date of brokers note/bill as date of transfer provided such transaction is followed by delivery. It has to be mentioned that before the Assessing Officer, the assessee did not raise any objection regarding validity of reopening of assessment proceedings. However, before learned CIT(A), the assessee raised Ground No. 1 in which, he raised the issue with regard to validity of initiation of reassessment proceedings u/s. 148 of the Act. However, in course of hearing before learned CIT(A), the assessee did not press for adjudication of this ground of appeal and learned CIT(A) therefore dismissed the aforesaid ground.
7. The Facts in the case of the Assessee Shri Suresh Jajoo is also identical. He is an individual. He is also in the business of dealing in shares and investments. For A.Y. 2000-01, return of income declaring total income of Rs. 11,78,38,800/- was filed by him on 27.10.2000. The return was processed u/s. 143(1) and no scrutiny was done in his case for the relevant assessment year. During the A.Y. 2000-01, he had purchased 2,00,000 equity shares of DSQ software on 5.4.99 and 7.4.99 on spot delivery basis for a purchase consideration of Rs. 7,43,61,500/-. These shares were sold on 24.3.2000 as per broker's contract note in the settlement period 23.3.2000 to 30.3.2000 for Rs. 46,81,22,650/- and a long term capital gain of Rs. 39,37,61,150/- was declared on these transactions in A.Y. 2001-02. According to him the broker raised the bill for this transaction in the broker bill dt.8.4.2000 and delivery of shares and its corresponding pay-in-pay out took place only on 8.4.2000. Since the corresponding sale and delivery had taken place only on 8.4.2000, 8 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo the capital gain on sale was claimed to be a long term capital gain and offered to tax in AY 01-02.
8. The Assessing Officer passed an assessment order u/s. 143(3) of the Act for A.Y. 2001-02 dated 27.2.2004; whereby he assessed long term capital gain as declared by the assessee giving almost identical reasons as were given in case of Smt. Vimla Jajoo, which we have already extracted in the earlier part of this order. The Assessing Officer issued notice u/s. 148 of the Act for AY 00-01 dated 22.3.2007 after recording following reasons :-
"Shri Suresh Jajoo : A.Y. 2000-01 :-
1) From the A.Y. 2001-02, it is seen that the assessee had purchased 2,00,000 shares of DSQ software on 5&7.4.1999 (on spot basis) for a purchase consideration of Rs. 7,43,61,500/-. These holdings have been sold on 24.3.2000 for Rs. 46,81,22,650/- and long term capital gain of Rs. 39,37,61,150/- have been declared on these transactions.
2) During the course of assessment proceedings, the assessee furnished the distinctive numbers and the broker's contract notes dated 24.3.2000. It was found that the date of transaction was as 24.3.2000. The transaction had been carried out on the Stock Exchange in Settlement period (23.3.2000 to 30.3.2000). The bill was reportedly raised by the broker, Herald Equity P. Ltd. ( in which the assessee is a director) for this settlement on 8.4.2000 for these transactions after completion of the settlement period.
3) Capital gains are taxable on accrual basis, and in the case of listed securities, the date of transaction is the date of sale/purchase of the security. Therefore the shares were transferred on 24.3.2000 i.e. before the completion of one year from the date of purchase. As per Circular No. 704 of CBDT dated 28.4.1995, the date of brokers note is to be treated as the date of transfer provided such transactions are followed by delivery. The extract of the circular is as under :-
"The Board is of the opinion that it is the date of broker's note that should be treated as the date of transfer in cases of sale transactions of securities provided such transactions are followed up by delivery of shares and also the transfer deeds. Similarly, in respect of the purchasers of the 9 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo securities, the holding period shall be reckoned from the date of broker's note for purchase on behalf of the investors. In case the transactions take 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 it is followed up by actual delivery of shares and the transfer deeds."
4) The broker's bill for settlement period is drawn after the pay- in/pay out date i.e. after delivery is made and payments received/made. The fact that the CBDT has envisaged a scenario where delivery may not place after issue of Brokers note means that they did not want to treat the broker's bill as the requisite date but the contract note issued by the broker. Accordingly short term capital gains on sale of these shares had accrued on 24.3.2000, i.e. relevant to A.Y. 2000-01.
5) Since, the assessee has offered this income in A.Y. 2001-02 as long term capital gain, the same was accepted in that year by the Assessing Officer protectively, with the office note that the taxability of the same in preceding year on the basis of date of contract be examined by reopening the preceding year, if deemed fit.
6) Accordingly the short term capita gains of Rs. 39,37,61,150/- have escaped assessment for the A.Y. 2000-01. As per Explanation 2, clause (c)(ii) also, the capital gains have been assessed at too low a rate as long term capital gains in respect of A.Y. 2001-02. It is, therefore proposed that the A.Y. 2000-01 be reopened since the income has escaped assessment. The tax effect and income escaping assessment exceeds the limits laid as per section 149(1)(b) read with explanation thereto.
SD/-
(CHATURBHUJ DAS) Asst. Commissioner of Income Tax Circle 4(2), Mumbai"
9. In the reassessment proceedings, Shri Suresh Jajoo took a stand regarding taxability of long term capital gain declared in A.Y. 2001-02 as short term capital gain in A.Y. 2000-01, which were identical as were taken in the case of Smt. Vimla Jajoo. The Assessing Officer, however, rejected the claim of the assessee and brought to tax short term capital gain in A.Y. 2000-01 for identical reasons as were given in the case of Smt.Vimla Jajoo. Before the Assessing Officer, assessee did not raise 10 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo any ground regarding validity of reopening of assessment proceedings; but before learned CIT(A), the assessee raised the ground regarding validity of initiation of reassessment proceedings, which was ground No.
1. However, at the time of hearing, the assessee did not press for adjudication of the aforesaid ground; and therefore the said ground was dismissed.
10. In these appeals in the case of both the assessees, they have filed application seeking admission of four additional grounds of appeal. Out of 4 grounds of appeal, ground No. 1 & 4 relate to validity of initiation of reassessment proceedings. Ground No. 1 & 4 which are identical in both the assessees reads as follows :-
1) The reopening of the assessment for A.Y. 2000-01 on the facts and in the circumstances is bad in law.
2) The learned CIT(A) ought to have hold that assessment for A.Y. 2001-02 though called protective is a substantive assessment as the officer has raised the demand for the capital gains on the sale of 37,000 shares.
11. In the application for admission of addition grounds, assessees have stated that in course of conference with the Senior Counsel, it transpired that reopening of the assessment by the Assessing Officer was bad in law and thereafter the above 2 additional grounds were filed. It is the plea of the assessee that adjudication of these additional grounds do not require examination of any new facts and are mere amplification of the original grounds challenging the validity of assessment of short term capital gain in the hands of the assessees for A.Y. 2000-01.
12. Learned DR opposed the prayer of the assessees for admission of additional grounds of appeal. In this regard, learned DR pointed out that the assessees did not challenge the validity of reassessment proceedings before the Assessing Officer. Before learned CIT(A), assessees challenged the validity of reassessment proceedings but did not press for adjudication of said grounds. According to him, right of an assessee to 11 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo file additional grounds of appeal is dependent on the condition that he/she should adduce reasonable cause for not having raised grounds sought to be raised by way of additional grounds in the original grounds. It was further submitted that it is often said that the revenue cannot have change of opinion on a point of law. The same approach should also be applied when the assessee seeks to raise a point of law. He placed reliance on the decision of Mumbai Bench of the ITAT in the case of Batliboi & Co., Vs. DCIT, 67 ITD 397; wherein it was held that there should be existence of good reasons for not raising the ground at the original stage.
13. Learned counsel for the assessee submitted that the reason for not raising the issue with regard to validity of initiation of reassessment proceedings was that proper legal advice came only when there was a conference with senior counsel and therefore additional ground was filed regarding validity of initiation of reassessment proceedings. It was reiterated that the facts are already available on record; and therefore, additional ground has to be admitted for adjudication. It was also submitted that in Ground No. 1 in both the appeals, the assessees have challenged the action of the revenue in taxing the short term capital gains in A.Y. 2000-01; and this ground would be good enough to cover point of validity of initiation of proceedings u/s.148 of the Act. It was submitted that validity of initiation of reassessment proceedings is an issue with regard to jurisdiction and goes to the root of the case. The fact that it was not raised before the Assessing Officer and not pressed before learned CIT(A) was not a bar to raise the same before ITAT. In this regard reliance was placed by learned counsel for the assessee on the decision of Hon'ble P&H High Court in the case of Vijay Kumar Jain Vs. CIT, 99 ITR 349 (P&H); wherein, it was laid down that the assessee was not precluded from urging a ground before the Tribunal challenging the validity of notice u/s. 148 for the reason that the same ground was raised before learned CIT(A); but was given up. Reliance was also placed 12 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo on the decision of Hon'ble Allahabad High court in the case of J.K. Oil Mills Co. Ltd. Vs. CIT, 105 ITR 53 (All); wherein it was laid down that where a ground was not pressed before learned CIT(A), acting on the legal advice and when the assessee ultimately finds that it was not a correct advice, the Tribunal should allow the assessee to raise the said ground in an appeal before it. The court held that conduct of the assessee in such cases will not amount to estoppel.
14. We have considered the rival submissions. We are of the view that normally the jurisdiction of Tribunal is not confined only to point which was considered by learned CIT(A); but it extends to subject matter of entire tax proceedings. In the present case, the assessee has sought to raise an additional ground challenging the validity of initiation of reassessment proceedings. As rightly contended by learned counsel for the assessee, the issue goes to the root of the case and jurisdiction of the Assessing Officer to pass the order of assessment u/s. 148 of the Act. The issue does not require investigation of any new facts and can be adjudicated on the basis of evidence already available on record. The assessee in our opinion has adduced sufficient reason for not raising this additional ground as part of the original ground of appeal viz., legal advice. It is only in course of conference with the senior counsel that the assessee was enlightened about the merit of the additional ground and therefore present application has been filed. In these circumstances, we admit the aforesaid two additional grounds for adjudication. Since, the aforesaid grounds will go to the root of the matter and validity of assessment framed u/s. 148 of the Act, we deem it proper to consider the aforesaid issue first.
15. An initial objection was raised by the learned counsel for the Assessee that the required approval as contemplated by Sec.151of the Act for proceeding to issue notice u/s.148 was not obtained. The learned D.R. produced the relevant approval of the CIT(4), Mumbai. We have perused the same and are satisfied that the required approval u/s.151 13 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo has been obtained and therefore the objection raised by the Assessees in this regard is rejected.
16. We have already noticed that the facts with regard to sale of 37,000 shares of DSQ software purchased by Mrs. Vimla Jajoo on 9.4.1999 and sold by her on 12.4.2000. In A.Y. 2001-02, she claimed that these shares were purchased on 9.4.1999 and sold on 12.4.2000; and therefore capital gain on sale of the above shares were long term capital gain. We have also noticed that the Assessing Officer while framing assessment for A.Y. 2001-02, expressed an opinion that according to contract note of broker furnished by the assessee which was dated 30,3,2000, sale of shares should be considered as having been concluded on 30.3.2000 falling with the previous year relevant to A.Y. 2000-01. The Assessing Officer in the said assessment order has further recorded the submissions of the assessee that the date of broker's bill is the date of sale i.e. 12.4.2000; and therefore, sale should be treated as complete only on 12.4.2000 i.e. period falling within previous year relevant to A.Y. 2001-02. The Assessing Officer did not come to any definite conclusion on this issue. He expressed the opinion that as per the delivery of shares and broker's bill, there is only an incident of long term capital gains on sale of shares. He, however, expressed an opinion that if the date of contract note of the broker is taken, then the transaction will relate back to the A.Y. 2000-01 and the capital gain will also be short term capital gain. Thereafter the Assessing Officer has merely made the following observations "as the assessee has already offered this income in A.Y. 2001-02, the same is assessed in this year to protect interest of the revenue".
17. Facts in the case of Shri Suresh Jajoo are also identical and are not repeated herein for the sake of brevity.
18. Learned counsel for the assessee pointed out to the manner in which, the assessment was completed for A.Y. 2001-02 and firstly 14 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo submitted that the assessment done for A.Y. 2001-02 by the Assessing Officer as above cannot be said to be a protective assessment in the strict sense of the term. According to him, it is an assessment pure and simple. In this regard, he also pointed out that pursuant to the aforesaid order of the assessment, demand for tax was also raised. In this regard, our attention was drawn to page No. 6&7 of the assessee's paper book in the case of Mrs. Vimla Jajoo; and page No. 8-10 in the case of Shri Suresh Jajoo. According to learned counsel for the assessee, whenever, protective assessment is done, notice of demand is not raised and even if a demand is so raised, the Assessing Officer has to make a specific mention that the assessee need not pay the demand attributable to any sum taxed on protective basis. It was further submitted by him that even as on date, order passed by the Assessing Officer for A.Y. 2001-02 stands and has not been disturbed by a process known to law. For the proposition that in the case of protective assessment, no demand is generally raised, learned counsel for the assessee drew our attention to the following two decisions :-
• Jaganath Hanunuman Baksh Vs. ITO, 31 ITR 603 (Cal) • Sunil Kumar Vs. CIT, 139 ITR 880 (Bom)
19. His next submission was that if the assessment done for A.Y. 2001-02 was really a protective assessment, there was no reason for the Assessing Officer to issue a notice u/s. 148 of the Act after delay of more than three years. In this regard, he pointed out that the Assessing Officer passed the order u/s. 143(3) in the case of both the assessees for A.Y. 2001-02 on 27.2.2004. Notice u/s. 148 for A.Y. 2000-01 was issued by the Assessing Officer in the case of both the assessees only on 22.3.2007. According to him, the delay in the issue of notice to make a substantive assessment also points out to the fact that the assessments for AY 01-02 were in fact was not a protective assessment.
20. Learned counsel for the assessee submitted that if really, the Assessing Officer believed that the income offered by the assessee for a 15 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo particular assessment year is to be taxed only in another assessment year, then it is for the Assessing Officer to first reopen assessment year to which, he believes the income relates to and make substantive assessment and then make a protective assessment in other year. In other words, it was submitted that protective assessment should always follow a substantive assessment. According to him, in the above facts and circumstances, it cannot be said that the Assessing Officer entertained reasonable belief that income chargeable to tax for a particular assessment year has escaped assessment. The Learned counsel for the assessee in this regard relied on the decision of Hon'ble Allahabad high Court in the case of Naresh C. Bhargava Vs. ITO, (1974) Tax (LR) 7(All). In the aforesaid case, it was held that where income sought to be assessed by issue of notice u/s. 148 of the Act, has already brought to tax, there cannot be any belief regarding escapement of income and the notice u/s. 148 should be held to be bad in law. Further reliance was placed on the decision of Hon'ble Supreme Court in the case of Lakshmipati Singh Mittal Vs. CIT, 70 ITR (SN-10) (SC); wherein it was laid down that income cannot be taxed twice.
21. It was further submitted that the belief regarding escapement of income entertained by the Assessing Officer is contrary to law as in accordance with the provisions of Sale of Goods Act, sale is complete only on delivery. The issue which we need to examine are on two aspects :-
(i) Whether the capital gain on sale of shares was taxed as long term capital gains in A.Y. 2001-02 only on protective basis?
(ii) If they were taxed not on protective basis, then can it be said that there was escapement of income chargeable to tax?
22. On the above two issues, learned DR submitted that the assessment made by the Assessing Officer for A.Y. 2001-02 only to protect the interest of revenue. In this regard, it was submitted by him that when a particular sum is offered to tax in particular assessment 16 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo year, the Assessing Officer has no option but to tax it. According to him, just because a sum has already been taxed, it cannot be said that there was no escapement of income chargeable to tax. In this regard, it was submitted by him that if the capital gain on sale of shares is considered as short term capital gains then rate of tax payable would be different; and consequently, there would be a greater liability to tax in the hands of the assessee compared to taxing capital gain as long term capital gains in A.Y. 2001-02. Thus, according to him, belief entertained by the Assessing Officer regarding escapement of income was reasonable belief; and therefore, reassessment proceedings has to be held as proper.
23. Before us both the Learned Counsel for the Assessee and the Learned D.R. have relied on the decision of Mumbai Bench of the ITAT in the case of M.P. Ramachandran Vs. DCIT, ITA No. 587/Mum/05. In the aforesaid case, facts were that in assessment u/s. 143(3) for A.Y. 1997- 98 was competed on 25.2.2000. On 3.11.2000, there was a search and consequent there to, notice u/s. 148 dated 26.3.2003 was issued to the assessee. Consequent to the search, block assessment order was framed on 30.11.2008 in which, sum of Rs. 5.27 crores was held to be expenditure not related to the business of the assessee and considered as undisclosed income for the block period. In the reassessment proceedings u/s. 148, very same amount was added on a protective basis. When the Assessing Officer made aforesaid addition in the reassessment proceedings u/s. 148, he noticed that the order of the Assessing Officer in the block assessment making the addition has already deleted by learned CIT(A). The appeal of the revenue before the Tribunal was pending. The Assessing Officer while making addition in the reassessment proceedings u/s. 148 had observed that the addition was being made on protective measure. It is in the aforesaid background of fact, question of validity of initiation of reassessment proceedings had come up for consideration before the Tribunal.
17Shri Suresh K. Jajoo Smt. Vimla S. Jajoo
24. The Tribunal firstly explained the concept of Protective assessment, which was judicially recognized in the case of Lalji Haridas Vs. ITO, 43 ITR 387 (SC). The Hon'ble Supreme Court held that where it appears to the IT authorities that certain income has been received doing the relevant assessment year; but it is not clear who has received that income and prima facie, it appears that income may have been received either by the A or B or by both together, it would be open to the relevant IT authority to determine the said question by taking appropriate proceedings both against A and B. The Supreme Court, however observed that in the proceedings taken against the one or the other, an exhaustive enquiry should be made and the question as to who is liable to pay the tax in question should be determined after hearing objections and that the proceedings against the other person may also continue and be concluded but until proceedings against the one has been finally determined, no assessment order should be passed. A final determination had therefore to be made in one of the proceedings.
25. The Tribunal thereafter opined that a Protective Assessment is not confined to making assessment of same income in the hands of two different persons; but can also be made in the case of income of one person where the Assessing Officer is uncertain as to the year in which the income had been earned. The Tribunal thereafter held that protective assessment cannot be independent of substantive assessment but always has to be later in pint of time to the substantive assessment.
26. Keeping in mind the principles as explained above, let us see whether the assessment for A.Y. 2001-02 can be said to be a protective assessment. We have already extracted the order of the Assessing Officer for A.Y. 2001-02 in para-3 of this order.
27. The gist of the conclusion of the AO in assessment for AY 01-02 is that he refers to the Assessee's submission regarding the date of transfer being on 12-4-2000 when the broker raised the bill dated 12-4-2000 18 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo after scheduled pay-in/pay-out of securities to Stock exchange which was completed only on 12-4-2000. The AO has accepted the above claim of the Assessee but expressed a doubt that the transaction could be said to be completed on 30-3-2000 as per the contract note of the broker because the subsequent events like delivery of share certificate and receipt of payment are only formalities and therefore when these formalities are completed the date of sale would relate back to the date of the brokers contract note. The AO was also satisfied on looking into the ledger account of the Assessees as per the books of the broker that payment was made only on 12.4.2000. Finally the AO taxed the capital gain as a long term capital gain as offered by the Assessee. The AO made the following observations:
"As the Assessee has already offered this income in AY 01-02, the same is assessed n this year to protect the interest of the revenue"
Whether the above observations are enough to conclude that the assessment of the capital gain as long term capital gain in AY 01-02 by the AO was only a protective assessment? We have already seen the ratio laid down by the Hon'ble Supreme Court in the case of Lalji Haridas (Supra) wherein the Hon'ble Supreme Court while recognizing the concept of protective assessment has very clearly laid down that there must be an exhaustive enquiry and the question as to who is liable to pay (in this case which year the capital gain is to be assessed and whether as Long term capital gain in AY 01-02 or short term capital gain in AY 00-01) should be determined after hearing objections. He should determine the question in the case of one person (in this case in one AY) and then conclude the proceedings in the case of the other person( in this case in other year) in whose case assessment has to be made protectively. Thus protective assessment has to be done only after substantive assessment is done. An assessment can be considered as protective only when there is substantive assessment. Thus substantive assessment has to precede protective assessment.
19Shri Suresh K. Jajoo Smt. Vimla S. Jajoo
28. In the present case, we are of the view that the observations of the AO while completing assessment for AY 01-02 which we have extracted above cannot be said to be an expression of his intention to make a protective assessment of the capital gain as long term capital gain. It is an assessment pure and simple. Firstly, the words used by the AO do not express his intention that the long term capital gain is being brought to tax by way of protective assessment. Secondly, there is no substantive assessment already made treating the capital gain as short term capital gain. Therefore there can be no protective assessment. Thirdly, there has been a demand (without any limitation that it should not been recovered) raised pursuant to the above assessment which also shows that the said assessment is not a protective assessment. The decision of the Mumbai Bench of the Tribunal in the case of M.P.Ramachandran (Supra) clearly applies to the facts of the present case. The Tribunal in the aforesaid case held as follows:-
"Coming back to our point we have to examine whether protective assessment/ addition is possible u/s 147 in respect of the same person and for the same period. When a regular assessment is made and later on it comes to the notice of the AO that some income chargeable to tax has escaped assessment, he can resort to these provisions for reassessment. But if, as is the case under consideration, after the passing of the regular assessment order, the AO has passed a block assessment order u/s 158BC pursuant to search and seizure proceedings u/s 132 and included one income in the block assessment, is he empowered to include the same income, on protective basis, in the reassessment of the original regular assessment for the year, which is included in the block period ? Before answering this question, it will be relevant to see the effect of the answer in positive or negative. If the answer is given in affirmative it will mean that the AO is empowered to include it in the reassessment on the protective basis. Thus there will be presumption that though the AO had included such income in the block assessment, but he still has the reason to believe that this income is also taxable in the regular assessment. This presumption will belie the concept of reassessment which is always there to tax an income which is chargeable to tax but has escaped assessment. In order to give a different colour, the ld. DR contended that this disallowance was made on protective basis only and hence cannot be equated with the substantive disallowance. We have noted above about the validity and 20 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo presumption of the protective assessment in general. Protective assessment cannot be independent of substantive assessment. Thus protective assessment is always successive to the substantive assessment. There may be a substantive assessment without any protective assessment, but there cannot be any protective assessment without there being a substantive assessment. In simple words there has to be some substantive assessment/addition first which enables the AO to make a protective assessment/addition. Substantive addition/assessment is made in the hands of the person in whose hands the AO prima facie holds the opinion that the income is rightly taxable. Having done so and with a view to protect the interest of the Revenue, if the AO is not sure that the person in whose hands he had made the substantive addition rightly, he embarks upon the protective assessment. Thus the protective assessment is basically based on the doubt of the AO as distinct from his belief which is there is the substantive assessment. Obviously there is no place for `doubt' in the scheme of reassessment, as it has to be belief of the AO about the escapement of income, which is the foundation for assessment or reassessment u/s 147. Even if for a moment we agree with the ld. DR that the protective addition is different from substantive addition and hence the reassessment proceedings be upheld, we find that ultimately the same conclusion will follow if the substantive addition is struck down at a place where it was made. In such a scenario the protective addition will get converted into substantive addition in the reassessment.
That will also run contrary to the format of reassessment, being to tax an income which has escaped assessment. In that case again it will tantamount to reopening assessment on the basis of an item of income or disallowance, which has already been made in block assessment of the assessee, thereby leaving no income escaping assessment. Under these circumstances we are satisfied that having made addition of Rs.527.85 lakhs in the block assessment, the Assessing Officer was not justified in forming the belief, either on substantive or protective basis, that the same income has escaped assessment in the instant year. In CIT VS. Wipro Finance Ltd. (supra) there was search action on the assessee. Some income was assessed as undisclosed income for the block period. The AO made addition for the same in regular assessment on protective basis. When the matter came up before the Hon'ble High Court, it was held that the same income which was assessed as the undisclosed income for the block period, could not have been assessed even on protective basis in regular assessments under section 143 for those years. In the instant case we are concerned with the reassessment, in which there are more restraints on the power of the AO. We, therefore, hold that the initiation of reassessment proceedings on this count cannot be upheld."21
Shri Suresh K. Jajoo Smt. Vimla S. Jajoo
29. If the above assessment for AY 01-02 is not a protective assessment but assessments pure and simple, can the AO entertain a belief that income chargeable to tax has escaped assessment? The contention of the learned D.R. on the above aspect was placing reliance on the wordings of Expln. 2( c)(ii) to Sec.147 of the Act, which lays down that for the purposes of section 147, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely where an assessment has been made, but such income has been assessed at too low a rate. According to the learned D.R. short term capital gains are taxed at higher rate compared to long term capital gain and if the capital gain is considered as having resulted in the hands of the Assessee in AY 00-01 it would be short term capital gain since the shares were held by the Assessee for less than a period 12 months. Therefore according to the Learned D.R. there was escapement of income and the belief entertained by the AO that there was escapement of income cannot be found fault with.
30. The law on this aspect is very clear. The belief entertained by the AO should be that of a honest and reasonable person based upon reasonable grounds. The reason to believe should be held in good faith and should not be a mere pretence.
31. In the present case, the AO brought to tax the Capital gain as a LTCG in AY 01-02. That treatment of the capital gain in AY 01-02 still remains. We have already held that such assessment is not on a protective basis but on a substantive basis. In such circumstances how can the AO entertain belief that the capital gain in question is short term capital gain. His belief that capital gain has been brought to tax at too low a rate can be said to be held in good faith and not as a pretence only when the contrary belief of the AO in the form of an Assessment of the very same capital gain as long term capital gain in AY 01-02 does not exist. Therefore there cannot be any belief that capital gain has been assessed at too low a rate. The Hon'ble Allahabad High Court in the case 22 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo of Naresh Chandra Bhargava Vs. ITO 1974 Tax L R 7 (All) has held that where income which is sought to be brought to tax by issue of notice u/s.148 is already assessed in another assessment year, the issue of notice u/s.148 is not permissible. The Hon'ble Bombay High Court in the case of CIT Vs. H.N.Shindore 113 ITR 679(Bom) had an occasion to deal with similar issue. The facts in the aforesaid case were that in 1950, the case of the assessee was referred to the Income-tax Investigation Commission. In 1952, the Commission submitted its report and, on the basis of the report, revised assessments were made on the assessee in respect of the assessment years 1943-44 to 1946-47. In 1955, the assessee filed a petition in the Supreme Court challenging the validity of the Taxation on Income (Investigation Commission) Act, 1947, and the revised assessments. In 1956, the Income-tax Officer issued notices for reassessment under section 34(1A) of the Indian Income-tax Act, 1922, for the assessment years 1943-44 to 1946-47. The said notice u/s.34(1A) for reassessment were challenged by the Assessee. The Tribunal held on the facts that the reassessment proceedings had not been validly initiated. On a reference, the Hon'ble Bombay High Court held, that the facts showed that the revenue had not treated the revised assessments or the recovery proceedings as illegal. It was, therefore, impossible for the Income-tax Officer to have entertained a reasonable belief that income had escaped assessment when he issued the notices under section 34(1A). The Income-tax Officer had no jurisdiction to initiate the reassessment proceedings. The Hon'ble Delhi High Court in the case of CIT Vs. R.Dalmia 135 ITR 346(Delhi) had an occasion to deal with identical case. The facts before the Hon'ble Delhi High Court were that in assessment year 1960-61, the ITO sought to tax in the hands of the assessee a sum of Rs. 6,25,000 received as dividend. Of this amount, the assessee had already disclosed the sum of Rs. 3,12,500 in the earlier assessment year 1959-60, and had paid tax thereon. This amount was sought to be taxed on the basis that the declaration of the dividend was at a general meeting held during the previous year relevant to that 23 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo assessment year. It was claimed that the balance of Rs. 3,12,500 belonged to a third party and therefore not taxable in the hands of the Assessee. The Hon'ble Court upheld the order of the Tribunal and held that the sum of Rs. 3,12,500 already assessed for the assessment year 1959-60, could not again be assessed for the assessment year 1960-61, since the orders of the income-tax authorities for the earlier year had become final; the taxing of the same items of income twice in the hands of the same person for the same purpose was not permissible in law. Though this decision was not rendered in the context of validity of initiation of reassessment proceedings, the principle laid down therein that there cannot be taxation of same income twice can only mean that the belief of escapement of income cannot be entertained by the AO.
32. The condition precedent for valid initiation of reassessment prescribed in Sec.147 are meant to ensure that there is finality to assessments and to ensure that there is no arbitrary exercise of power to reopen a concluded assessment. Therefore the existence of condition precedent for re opening have to be satisfied before the AO can proceed to assume jurisdiction to pass an order of reassessment. We are of the view, that in the present case, the condition precedent for valid initiation of reassessment proceedings have not been satisfied in as much as the belief that income chargeable to tax has escaped assessment does not exist. In the circumstances we hold that initiation of reassessment is bad in law and consequently the order of assessment is held to be bad hence annulled.
33. Since the initiation of reassessment is held to be bad in law, there may not be any necessity to deal with the appeal on merits. However as both the parties have made elaborate submissions before us on merits, we deem it proper to decide the case on merits also. The grounds of appeal of the Assessee which is common in both the appeals which relate to the merits of the case are contained in Gr.No.1 which reads as follows:
24Shri Suresh K. Jajoo Smt. Vimla S. Jajoo 1(i) The learned CIT(A) grossly erred in adding a sum of Rs.
5,33,85,030/- as short term capital gains as against the same being offered to tax as long term capital gains by the appellant in A.Y. 2001-02.
(ii) He grossly erred in not following the Circular No. 704 wherein the date of broker note/bill is to be treated as date of transfer provided such transaction is followed by delivery.
34. Additional ground No.2 and 3 also are an amplification of ground No.1 and they are admitted for adjudication. They read as follows:
3) The learned CIT(A) failed to appreciate that the capital gains arising on :
a) sale of 63,000 shares has been assessed for A.Y. 2001-02 on the basis of the brokers bill dated 8.4.2000/actual delivery (the contract note being dated 24.3.2000)
b) in previously as well as subsequent years have been made on the basis of the brokers bill/actual delivery.
c) sale of 20,000 shares out of the total transaction of 57,000/- shares was assessed for A.Y. 2001-02 on the basis of the brokers bill/actual delivery of shares (the contract note being dated 30.3.2000) but the capital gain on the sale of the 37,000 shares impugned in the present appeal and form part of the transaction of 57,000/- shares has been assessed for the A.Y. 2000-01 even though the same stood and stands assessed for A.Y. 2001-02.
4) The learned CIT(A) failed to appreciate that the actual sale took place at the rate of on the brokers bill and not as per the rate on the contract note.
35. On merits the issue that has to be decided is as to what is the point of time at which the transfer by way of sale of shares by the Assessees is complete. Whether the transfer is complete on the date when the contract note is made?
or On the date on which the share certificates together with the transfer deeds are delivered by the Seller to the purchaser and the payment is received by the seller?
25Shri Suresh K. Jajoo Smt. Vimla S. Jajoo
36. Before us in the case both the Assessees an application for admitting additional evidence has been filed. The additional evidence is mainly to support the plea of the Assessee as projected in Additional Ground No.2 and 3. It is the plea of the Assessees in the application for admission of additional evidence that the AO while framing assessments in the case of both the Assessees for subsequent years has accepted the date of transfer of shares as the date on which the broker raising a bill after completion of all formalities like delivery of securities etc., and not the date of the brokers note. The Assessees therefore want to rely on the order of Assessment in the case of Assessee's for subsequent A.Y. In the case of Vimla S.Jajoo, the documents sought to be filed are summary of transaction of sale of shares for AY 01-02, 02-03 and 03-04 including the details of the relevant brokers bills, the order of assessment u/s.143(3) for AY 01-02 and 03-04, intimation u/s.143(1) for AY 02-03 and order of the Tribunal in AY 02-03 quashing the order of CIT u/s.263 of the Act. In the case of Suresh K.Jajoo the documents sought to be filed are summary of transaction of sale of shares for AY 01-02, 02-03 and 03-04 including the details of the relevant brokers bills, the order of assessment u/s.143(3) for AY 01-02 and 03-04, order of assessment u/s143(3) read with Sec.147 for AY 02-03 and order of the Tribunal in AY 02-03 and 03-04 quashing the order of CIT u/s.263 of the Act. It was submitted that the documents sought to be filed as additional evidence are already on record of the AO in the earlier and subsequent years and their authenticity cannot be doubted. It was also submitted that these documents surfaced much earlier to the dispute in the present appeals and therefore there cannot be any prejudice to the revenue nor can be there be any objection to their admissibility. Relying on the decision of the Hon'ble Supreme Court in the case of Radhasoami Satsang Vs. CIT 193 ITR 321(SC), it was argued on behalf of the Assessee that where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed 26 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. We will deal with the admissibility as well as the relevancy of these documents later, if necessity arises. At present we will deal with the appeal on merits de hors the additional evidence.
37. We shall now recapitulate the facts in the case of both the Assessees. In the case of Mrs.Vimla Jajoo, she purchased 1,00,000 shares of DSQ Software Ltd. (hereinafter referred to as DSQ) on 9.04.1999 on spot basis. When shares are purchased on spot basis the transaction is settled on the very same day or within next two days. The Brokers contract note evidencing purchase is at page-1 of Assessee's paper book. It is dated 9.4.1999. The brokers bill regarding the above purchase is at page-3 of the Assessee's paper book. Out of the above the Assessee sold 57,000 shares. The Brokers contract note regarding the sale is at page-2 of the Assessee's paper book. It is dated 30-3-2000. It refers to the fact that the contract is a forward contract. It refers to the settlement period from 23-3-2000 to 30-3-2000. The price at which the shares were to be sold was Rs.1778.48 Ps. Per share. In a forward contract the person entering into a contract in specified shares in a settlement cycle of seven days has the option of carrying forward his transaction to the next settlement cycle. He also has an option of offsetting the transaction by an opposite transaction in the same settlement. The Assessee carried forward this transaction of sale of shares. The broker raised a bill dated 8-4-2000 in which the transaction of sale of shares at Rs.1778.48 Ps. is reflected and a corresponding purchase of shares of the same quantity of 57,000 shares for Rs.1782.30 Ps. is shown as carried forward. Thus the transaction was carried forward to be settled in the next settlement period 30-3-2000 to 6-4-2000 at a price of Rs.1782.30 Ps. which is higher than the price at which the shares were to be sold in the brokers contract note dated 30-3-2000. There is another bill of the broker dated 12-4-2000 which evidences the fact that ultimately 57000 shares were sold at Rs.1782.30 Ps. The bill 27 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo refers to date of sale as 30-3-2000 followed by the word "D". This does not mean that there was delivery of shares on 30-3-2000. The transaction being a forward transaction there cannot be delivery on 30-3- 2000. The date of actual delivery of shares was 11-4-2000 and the date of payment is 12-4-2000 as per the finding of the CIT(A). In the order of assessment for AY 01-02, the AO has observed that the transaction could be said to be completed on 30-3-2000 as per the contract note of the broker because the subsequent events like delivery of share certificate and receipt of payment are only formalities and therefore when these formalities are completed the date of sale would relate back to the date of the brokers contract note. The AO was also satisfied on looking into the ledger account of the Assessees as per the books of the broker that payment was made only on 12.4.2000. The above facts are accepted by the AO even in the assessment order for AY 00-01 which is subject matter of the present appeal.
38. In the case of Suresh Jajoo he purchased 1,50,000 shares and 50,000 shares of DSQ Software Ltd. (hereinafter referred to as DSQ) on 5.04.1999 and 7.4.1999 on spot basis. When shares are purchased on spot basis the transaction is settled on the very same day or within next two days. The Brokers contract note evidencing purchase is at page-1 and 2 of Assessee's paper book. It is dated 5.4.1999 and 7.4.1999 respectively. The corresponding brokers bill regarding the above purchase is at page-4 and 5 of the Assessee's paper book. The Assessee sold all the above shares. The Brokers contract note regarding the sale is at page-2 of the Assessee's paper book. It is dated 24-3-2000. It refers to the fact that the contract is a forward contract. It refers to the settlement period from 23-3-2000 to 30-3-2000. The brokers bill regarding the above sale is dated 8.04.2000. The bill refers to date of sale as 24-3-2000 followed by the word "D". This does not mean that there was delivery of shares on 24-3-2000. The transaction being a forward transaction there cannot be delivery on 24-3-2000. The date of delivery and date of pay out was 8.4.2000 as per the findings of the 28 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo CIT(A). In the order of assessment for AY 01-02, the AO has observed that the transaction could be said to be completed on 24-3-2000 as per the contract note of the broker because the subsequent events like delivery of share certificate and receipt of payment are only formalities and therefore when these formalities are completed the date of sale would relate back to the date of the brokers contract note. The AO was also satisfied on looking into the ledger account of the Assessees as per the books of the broker that payment was made only on 8.4.2000. The above facts are accepted by the AO even in the assessment order for AY 00-01 which is subject matter of the present appeal.
39. In the order of assessment for the A.Y.2000-01 in the case of both the Assessees, the AO has come to the conclusion that the brokers note is the date on which the sale of shares takes place. In coming to the above conclusion, the AO has placed reliance on Circular No.704 of CBDT dated 28-4-1995. The provisions of the Act draw a distinction between a short-term capital gain and long-term capital gains and accord different treatment for the purpose of levy of tax on such gain. The issue whether a particular asset is a long-term asset or short-term asset depends on the period of holding of the capital asset by the assessee. In the case of 'Transfer of Shares', there was confusion as what should be considered as date of purchase and date of sale for the purpose of ascertaining whether the capital asset was a short-term capital asset or long-term asset. Therefore, CBDT issued clarification vide Circular No. 704, dated 28-4-1995 where it was mentioned that when shares are trans-acted through stock exchanges, it is the established procedure that the brokers first enter into contracts for purchase/sale of securities and thereafter, follow it up with delivery of shares, accompanied by transfer deeds duly signed by the registered holders. The seller is entitled to receive the consideration agreed to as on the date of contract. In such cases, it was clarified that the date of transfer of shares should be the date of broker's note provided such transactions were followed up by delivery of shares and also the transfer deeds. The Board further clarified 29 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo that in respect of the transactions of shares directly between the parties and not through stock exchange, date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by actual delivery of shares and the transfer deeds.
40. The CIT(A)'s specific findings in the case of Mrs.Vimala Jajoo was that the date of actual delivery of shares was on 11-4-2000 and the date of payment was 12-4-2000. In the case of Suresh Jajoo, the date of actual delivery of shares and date of pay out was 8-4-2000. The CIT(A) relied on the decision of the ITAT Amritsar Bench in the case of Max Telecom Ventures Vs. ACIT 301 ITR (AT) 90 (Amr.) which decision was based on the CBDT Circular No. 704 dated 28.4.1995 already referred to by us in the earlier part of this order. The CIT(A) also held in the case of Vimla Jajoo that the contract of sale was on 30.3.2000 and payment has been received as per the rates prevailing on 30.3.2000 and not as per rates prevailing on 11.4.2000 date of actual delivery or 12.4.2000 as per the date of payment. Therefore date of sale has to be taken as per contract note and the date of sale of shares was 24.3.2000. The CIT(A) also held in the case of Suresh Jajoo that the contract of sale was on 24.3.2000 and payment has been received as per the rates prevailing on 24.3.2000 and not as per rates prevailing on 8.4.2000 date of actual delivery and the date of payment. Therefore date of sale has to be taken as per contract note and the date of sale of shares was 24.3.2000.
41. Consequent to the above conclusions, the capital gain on sale of shares was held to be short term capital gain and brought to tax accordingly. Aggrieved by the orders of the CIT(A), the Assessee has raised the aforesaid grounds of appeal before the Tribunal.
42. The submission of the learned counsel for the Assessee was that u/s.45 profit or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head capital gains and shall be deemed to be income of the previous year in 30 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo which the transfer took place. Sec. 2(47) defines Transfer and among other things also includes transfer by way of sale. The mode of transfer applicable in the case of the assessee is "sale". It was submitted by him that shares are "Goods" within the meaning of the Sale of Goods Act, 1930(SGA) and therefore the provisions contained therein as to the point of time when transfer takes place would be relevant. He referred to the provisions of Sec.4 of the SGA and submitted that there is a difference between sale and an agreement for sale. According to him the brokers note is only an agreement for sale. The condition attached to the agreement for sale s that there will be delivery of share certificates together with instrument of transfer in favour of the transferee. The further condition is that on receipt of the share certificate and instrument of transfer duly signed, the sale consideration has to be paid. It was therefore contended that sale is complete in the case of sale through brokers only when there is delivery of shares together with the instrument of transfer duly signed and consideration for sale is received.
43. The learned counsel for the Assessee relied on the following decisions in support of his contention that sale of shares is complete only when there is delivery of share certificate together with instrument of transfer duly signed by the transferor. CIT Vs. M.Ramaswamy 151 ITR 122 (Madras) Rajagiri Rubber and Produce Co. Ltd. Vs. CIT 203 ITR 663(Ker) and Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975] 45 Comp Cas 43 (SC). The learned counsel for the Assessee drew out attention to the Date of delivery and date of payment in the case of both the Assessees which in the case of Mrs.Vimala Jajoo on 11-4-2000 and 12-4-2000 respectively. In the case of Suresh Jajoo, the date of actual delivery of shares and date of pay out was 8-4-2000. It was his submission that in the case of both the Assessee the date of transfer by way of sale was beyond a period of 12 months from the date of purchase which was 9.4.1999 in the case of Vimla Jajoo and 5.4.99 and 7-4-99 respectively in the case of Suresh Jajoo. Thus the capital gain in the case of both the Assessees was Long Term Capital Gain.
31Shri Suresh K. Jajoo Smt. Vimla S. Jajoo
44. On the reliance placed by the Revenue authorities on Circular No.704 of CBDT dated 28.4.1995, the learned counsel submitted that Circular of CBDT is contrary to the provisions of law regarding when sale can be said to have taken place. To that extent they are bad. It was submitted that Circulars contrary to law are not binding. It was also submitted by him that the Circular to the extent it tones down the rigor of the law to provide relief to the Assessee are binding on the revenue authorities. According to him in cases where it suits an Assessee to claim that dateof brokers contract note is the date of transfer, the revenue has to accept such a claim. Otherwise, the AO is bound to accept the date of transfer in accordance with law which is the SGA in the present case. In this regard reliance was placed by him on the following decisions Hidustan Aeronautics Ltd. Vs. CIT 243 ITR 808(SC) and TISCO Vs. N.C.Upadyaya & another 96 ITR 1 (SC).
45. On the reliance placed by the Revenue authorities on the decision of the Amritsar Bench of ITAT in the case of Max Telecom Ventures Vs. ACIT 301 ITR (AT) 90 (Amr.), the learned counsel brought to our notice the decision of the ITAT Mumbai Bench in the case of Mrs. Hami Aspi Balsara (Taxpayer) v ACIT. [2009-TIOL-789-ITAT-MUM], wherein the decision of the Amritsar Bench in the case of Max Telecom Ventures Vs. ACIT 301 ITR (AT) 90 (Amr.) was distinguished and held to be not good law.
46. Our attention was also drawn to the manual on the working of the Stock Exchange, Mumbai to highlight the mode of effecting delivery after sale in a settlement period and the manner in which the buyer of shares pays-in the money and how the seller of the shares is paid-out the money.
47. Reference was also made to the decision of the Hon'ble Supreme Court in the case of The Installment Supply Ltd. Vs. STO 1974(4) SCC 32 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo 739, which explains the difference between sale and an agreement for sale and the point of time when sale is complete in a hire purchase transaction.
48. Per contra, the learned D.R. submitted that Brokers note is sale not agreement for sale. According to him brokers note evidences purchase or sale of shares as the case may be. It is a legally enforceable document. It was submitted by him that an investor cannot directly transact in a stock exchange and has to transact only through a broker who is a member of the stock exchange. It was further submitted by him that before a broker transacts on behalf of a client he has to enter into a client broker agreement as per the norms prescribed in the Securities and Exchange Board of India (SEBI). According to him, when an investor places an order for sale of securities and when the broker sells it on behalf of the client and issues a brokers note, which is a document issued by the broker immediately on conclusion of the sale by him on behalf of his client, sale is complete. According to him sale is complete when the broker issues contract note or brokers contract note. He placed strong reliance on the provisions of SGA. Sec.19 lays down the general rule that there is transfer of ownership in goods in a contract of sale at the point of time as the parties to the contract intend as per the agreement between the parties. Such intention of the parties shall be gathered from the terms of the contract, the conduct of the parties and circumstances of the case. Unless a different intention appeas rules contained in Sec.20 to 24 are to be applied for ascertaining the intention of the parties regarding the time of passing of ownership in goods. The learned D.R. placed strong reliance on sec.20 of SGA which lays down that in an unconditional contract for sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed. According to him shares are specific goods in a deliverable state and therefore property in goods passed to the buyer when the contract is 33 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo made when the seller places order for sale and the same is executed by the broker by actually selling it. Therefore the sale is completed when the broker issues brokers note. Further reliance was placed by him on the decision of the Hon'ble Supreme Court in the case of Gurbax Singh Vs. Kartar Singh & others 254 ITR 112 (SC) wherein it was held that in view of the provisions of section 47 of the Registration Act, 1908, a document on subsequent registration will take effect from the time when it was executed and not from the time of registration. He placed strong reliance on the decision of the decision of the ITAT Amritsar Bench in the case of Max Telecom Ventures Ltd.(Supra). He thus submitted that the decisions of the CIT(A) has to be upheld.
49. The learned counsel for the Assessee submitted in rejoinder that transfer of ownership in goods is necessary to conclude that there was a sale and in this regard relied on the decision of the Hon'ble Supreme Court in the case of Alapathi Venkatramaiaha Vs. CIT 57 ITR 185 (SC) wherein it was held that before capital gain could be brought to tax title must pass by any of the modes viz., sale, exchange or transfer. In the context "transfer" means effective conveyance of the capital asset to the transferee.
50. We have heard the rival submissions. There is no dispute regarding facts of the case. They are as follows. The Assessee Mrs.Vimla Jajoo, purchased 1,00,000 shares of DSQ Software Ltd. (hereinafter referred to as DSQ) on 9.04.1999 on spot basis. When shares are purchased on spot basis the transaction is settled on the very same day or within next two days. The Brokers contract note evidencing purchase is at page-1 of Assessee's paper book. It is dated 9.4.1999. The brokers bill regarding the above purchase is at page-3 of the Assessee's paper book. Thus there is no dispute that date of purchase was 9-4-1999.
34Shri Suresh K. Jajoo Smt. Vimla S. Jajoo
51. Out of the above the Assessee sold 57,000 shares. The Brokers contract note regarding the sale is at page-2 of the Assessee's paper book. It is dated 30-3-2000. It refers to the fact that the contract is a forward contract. It refers to the settlement period from 23-3-2000 to 30- 3-2000. The price at which the shares were to be sold was Rs.1778.48 Ps. Per share. In a forward contract the person entering into a contract in specified shares in a settlement cycle of seven days has the option of carrying forward his transaction to the next settlement cycle. He also has an option of offsetting the transaction by an opposite transaction in the same settlement. The Assessee carried forward this transaction of sale of shares. The broker raised a bill dated 8-4-2000 in which the transaction of sale of shares at Rs.1778.48 Ps. is reflected and a corresponding purchase of shares of the same quantity of 57,000 shares for Rs.1782.30 Ps. is shown as carried forward. Thus the transaction was carried forward to be settled in the next settlement period 30-3-2000 to 6-4-2000 at a price of Rs.1782.30 Ps. which is higher than the price at which the shares were to be sold in the brokers contract note dated 30-3- 2000. There is another bill of the broker dated 12-4-2000 which evidences the fact that ultimately 57000 shares were sold at Rs.1782.30 Ps. The bill refers to date of sale as 30-3-2000 followed by the word "D". This does not mean that there was delivery of shares on 30-3-2000. The transaction being a forward transaction there cannot be delivery on 30-3- 2000. The date of actual delivery of shares was 11-4-2000 and the date of payment is 12-4-2000 as per the finding of the CIT(A).
52. In the case of Suresh Jajoo he purchased 1,50,000 shares and 50,000 shares of DSQ Software Ltd. (hereinafter referred to as DSQ) on 5.04.1999 and 7.4.1999 on spot basis. When shares are purchased on spot basis the transaction is settled on the very same day or within next two days. The Brokers contract note evidencing purchase is at page-1 and 2 of Assessee's paper book. It is dated 5.4.1999 and 7.4.1999 respectively. The corresponding brokers bill regarding the above purchase is at page-4 and 5 of the Assessee's paper book. Thus there is 35 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo no dispute regarding the date of purchase which is 5.4.1999 and 7.4.1999.
53. The Assessee sold all the above shares. The Brokers contract note regarding the sale is at page-2 of the Assessee's paper book. It is dated 24-3-2000. It refers to the fact that the contract is a forward contract. It refers to the settlement period from 23-3-2000 to 30-3-2000. The brokers bill regarding the above sale is dated 8.04.2000. The bill refers to date of sale as 24-3-2000 followed by the word "D". This does not mean that there was delivery of shares on 24-3-2000. The transaction being a forward transaction there cannot be delivery on 24-3-2000. The date of delivery and date of pay out was 8.4.2000 as per the findings of the CIT(A). Under Sec.45 profit or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head capital gains and shall be deemed to be income of the previous year in which the transfer took place. Sec. 2(47) defines Transfer as follows:
'Transfer', in relation to a capital asset, includes,-
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishments of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or
(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.
Explanation.-For the purposes of sub-clauses (v) and (vi), 'immovable property' shall have the same meaning as in clause (d) of section 268UA."
54. As per the definition of Transfer u/Sec.2(47) transfer in relation to a capital asset, among other modes of transfer, to include sale, exchange 36 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo or relinquishment of the capital asset. The mode of transfer applicable in the case of the assessee is "sale". Shares are "Goods" within the meaning of the Sale of Goods Act, 1930(SGA) and therefore the provisions contained therein as to the point of time when transfer takes place would be relevant. The provisions of Sec.4 of the SGA is as follows:
4. Sale and agreement to sell (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-
owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
(4) An agreement to sell becomes a sale when when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.
55. A reading of Sec.4(1) shows that when a person wants to sell shares he has to offer to transfer his right, title and interest in favour of an intending buyer. The seller has to therefore deliver share certificates together with the instrument of transfer duly signed by him so that transfer of ownership can be effected in favour of the purchaser. Presently shares are not held in physical form and are evidenced by entry with the depository participants regarding ownership of shares in a particular company. Nevertheless evidence regarding ownership in the form of details of Depository Participant and instrument of transfer have to be given to the broker by the seller. The sellers broker in turn has to deliver it to the Purchasers broker and such delivery would be subject to the condition that the purchaser has made payment. Till such time delivery is effected and documents are handed over by the seller to his broker there cannot be a concluded sale. In other words the brokers contract note is only an agreement to sell subject to the condition that 37 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo the seller will deliver the documents to his broker. On such delivery by the seller the broker will effect payment. It is only thereafter can it be said that the sale is complete. The issue has come up for consideration in several cases and the leading case is the decision of the Hon'ble Supreme Court in the case of Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975] 45 Comp Cas 43 (SC). In the said case there was a gift of shares by the donor to the donee under a gift deed which was followed by delivery of share certificates to the donor together with blank transfer forms (instrument of transfer). The donor died before the registration of the transfer in the register of the company. The question before the Hon'ble Court was whether the transfer was complete. The Hon'ble Supreme Court held that the transfer is complete on the delivery of share certificate together with the instrument of transfer duly signed to the donee by the donor. The aforesaid ruling has applied in cases decided under the Income Tax Act, 1961. In CIT Vs. M.Ramaswamy 151 ITR 122 (Madras) the facts were that the assessee sold certain shares in a company to another company consisting of himself, his brother and father and incurred a capital loss. The ITO held that as the alleged transfer did not find a place in the share certificate register maintained by the company, the sale could not be considered as complete and the assessee continued to be the owner of the shares. Consequently, he rejected the assessee's claim for adjustment of the capital loss arising in the transaction, against the capital gains arising on account of sales of other shares. The Tribunal held that once the sale was effected, the transaction between the transferor and the transferee would be complete and, merely because the company had not recognised the transfer and made entries in its register, it cannot be said that the transfer was incomplete. In this view, the Tribunal upheld the claim of the assessee that he was entitled to the adjustment of the capital loss against the capital gains. On a reference the Hon'ble Madras High Court held that where, as between the transferor and the transferee, all formalities have been gone through, such as the execution of a document of transfer and 38 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo the physical handing over of the shares by the transferor to the transferee, the shares should be taken to have been transferred to the transferee, though until the transfer of shares is registered in the company's books in accordance with company law, the transfer would not enable the transferee to exercise the rights of a shareholder vis-a-vis the company. The decision in the case of Shelat (V.R.) v. P.J. Thakar [1975] 45 Comp Cas 43 (SC) was followed. In the case of Rajagiri Rubber and Produce Co. Ltd. Vs. CIT 203 ITR 663(Ker), the Hon'ble Kerela High Court had to deal with a case where the assessee-company which held shares of other companies passed a resolution and the share certificates were delivered and consideration was also received during the accounting period relevant to the assessment year 1978-79. As between the transferor and the transferee, the transaction was complete. The Hon'ble Court held that in the case of transfer of shares, for purposes of section 45 of the Income-tax Act, 1961, as between the transferor and the transferee, the transaction is complete when the share certificates are handed over. The mere fact that the company has not registered the transfers in its books would not justify the claim that the transfer took place only later. The sale of shares would therefore be complete only when the share certificate together with the relevant instrument of transfer duly signed is delivered and sale consideration is received.
56. The next aspect that needs to be examined is regarding the Circular No.704 dated 28.4.1995. The provisions of the Act draw a distinction between a short-term capital gain and long-term capital gains and accord different treatment for the purpose of levy of tax on such gain. The issue whether a particular asset is a long-term asset or short- term asset depends on the period of holding of the capital asset by the assessee. In the case of 'Transfer of Shares', there was confusion as what should be considered as date of purchase and date of sale for the purpose of ascertaining whether the capital asset was a short-term capital asset or long-term asset. Therefore, CBDT issued clarification vide Circular No. 704, dated 28-4-1995 where it was mentioned that when 39 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo shares are trans-acted through stock exchanges, it is the established procedure that the brokers first enter into contracts for purchase/sale of securities and thereafter, follow it up with delivery of shares, accompanied by transfer deeds duly signed by the registered holders. The seller is entitled to receive the consideration agreed to as on the date of contract. In such cases, it was clarified that the date of transfer of shares should be the date of broker's note provided such transactions were followed up by delivery of shares and also the transfer deeds. The Board further clarified that in respect of the transactions of shares directly between the parties and not through stock exchange, date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by actual delivery of shares and the transfer deeds.
57. The Circular of CBDT is contrary to the provisions of law regarding the point of time when sale can be said to have taken place. According to the learned D.R., the Circular is conclusive as to the point of time when sale of shares can be said to have taken place. The law is well settled that Circulars issued by the CBDT can neither impose a burden on the taxpayer or otherwise put him in a worse position than he was under the Statute, nor can it pre-empt or override any judicial interpretation of a provision by the Courts. The CBDT can relax the rigour of the law or grant relief which is not to be found in the terms of the statute and to that extent they are binding on the income tax authorities. In the case of Hindustan Aeronautics Ltd. Vs. CIT 243 ITR 808(SC) the Hon'ble Supreme Court has held that Circulars or instructions given by the Board are no doubt binding in law on the authorities under the Act but when the Supreme Court or the High Court has declared the law on the question arising for consideration it will not be open to a court to direct that a circular should be given effect to and not the view expressed in the decision of the Supreme Court or the High Court. In TISCO Vs. N.C.Upadyaya & another 96 ITR 1 (SC) identical proposition has been laid down. It is thus clear that Circulars to the extent of giving relief to 40 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo the Assessee are binding but where they impose an additional burden not contemplated in the Act they are not binding. There may be cases where it would suit an Assessee to claim the date of brokers note as the date of sale. If they do so, the circular can help them to support their plea and the same will be binding on revenue authorities and they cannot say that date of transfer is not the date of brokers note. It is only in such a situation the circular will be beneficial to the Assessee and therefore binding on the AO. In a situation where adopting the date of brokers note as the date of transfer is not advantageous to an Assessee he can fall back upon the correct date of transfer in accordance with law ignoring the circular.
58. We are also of the view that even Circular No.704 dated 28.4.1995 recognises the fact that transfer of shares is complete only on delivery and payment. If in law the position is otherwise there was no need to have issued the circular at all. The Circular became necessary because there was confusion as what should be considered as date of purchase and date of sale for the purpose of ascertaining whether the capital asset was a short-term capital asset or long-term asset. The Circular took note of the procedure when shares are trans-acted through stock exchanges that brokers first enter into contracts for purchase/sale of securities and thereafter, follow it up with delivery of shares, accompanied by transfer deeds duly signed by the registered holders followed by payment. The circular clarified that the date of transfer of shares should be the date of broker's note provided such transactions were followed up by delivery of shares and also the transfer deeds. The Board further clarified that in respect of the transactions of shares directly between the parties and not through stock exchange, date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by 41 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo actual delivery of shares and the transfer deeds. The Circular thus recognizes the fact position in law that transfer is complete only when share certificates together with transfer deed duly signed are delivered and payment received by the seller.
59. The learned D.R.'s reliance on sec.20 of SGA which lays down that in an unconditional contract for sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed is again not acceptable. We have already held that the transfer by way of sale through a share broker in a stock exchange is complete only when the delivery of share certificate together with instrument of transfer duly signed is delivered and consideration for the transfer is paid. Thus when the broker issues a contract note there is no sale. The contract is subject to the condition that the seller will deliver share certificate together with instrument of transfer duly signed. Thus it cannot be said that the contract is unconditional. Therefore Sec.20 of the SGA will not apply since the contract is not unconditional contract for sale. The reliance placed by the learned D.R. on the decision in the case of Gurbax Singh Vs. Kartar Singh & others 254 ITR 112 (SC) is in the context of the point of time when a registered document will take effect and the Hon'ble Supreme Court referred to the provisions of section 47 of the Registration Act, 1908, to hold that the registered document will operate from the date of the document and not from the date of registration. We are of the view that the said principle cannot be applied in a case of sale of shares which does not require any registration.
60. In the decision of the Amritsar Bench of ITAT in the case of Max Telecom Ventures Ltd.(supra), the material facts were that the assessee, entered into an agreement titled "Share Purchase Agreement" with Telecom Investments India Private Limited (In short 'TIP') on 17-3-1998 42 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo for sale of Rs. 40 lakhs equity shares of Rs. 10 each for a consideration of Rs. 5,49,51,32,184. In the return of income filed for the assessment year 1998-99, the assessee had shown capital gains arising on the sale of 40 lakhs equity shares to M/s. TIP. However, the assessee had claimed exemption in respect of such capital gains under section 10(23G) of the Income-tax Act, 1961 ( In short 'the Act'). The assessment was taken up under scrutiny. During the course of assessment proceedings, the assessee filed a revised return of income on 29-10-1999 with a Note stating that the long-term capital gain on the sale of shares was disclosed in the return as an abundant precaution. However, the agreement for sale of shares contained certain conditions to be complied with before the sale. Since some of the conditions had not been complied with and transfer deeds of shares and share certificates were handed to the purchaser on 23-4-1998 along with receipt of consideration, the assessee stated that long-term capital gain on sale of shares was liable to be considered in the assessment year 1999-2000. The conditions were complied with in April, 1998. The Assessing Officer held that the offer not to sell and acceptance of the parties to purchase became final as soon as the same was signed by all the parties. The sale was followed by delivery of shares in pursuance of the agree-ment. Thus, the Assessing Officer held that the transaction was covered by CBDT's Circular No. 704 and, therefore, the date of contract of sale shall be the date of transfer provided the same was followed up by actual delivery of shares and the transfer deeds. Accordingly the Assessing Officer held that the material date for sale of shares was 17-3-1998, i.e., when a contract document was executed by all the parties concerned. In the appeal before the Tribunal, the Tribunal relied on the judgment of Hon'ble Kerala High Court in the case of K.N. Narayanan v. ITO [1988] 173 ITR 61. The facts of that case before the Hon'ble High Court were that 'N' entered into a contract on behalf of himself and his relatives and nominees whereby he agreed to sell a total of 1,19,760 shares not later than 31-3-1979, at an agreed price. The sale of shares was conditional upon the vendor 43 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo obtaining the necessary sanction of the Government of India and other authori-ties. The contract laid down that in the event of failure to sell the totality of shares, the shares already sold had to be resold to the original vendor and the money had to be returned to the original vendee. 40,000 shares could not be sold for want of sanction of the concerned authorities. The assessees submitted their returns and included therein the capital gains arising from sale of shares. Subsequently, however, they claimed that no capital gains arose because the sale being conditional could not take place until the entire number of share were sold. However, the Assessing Officer rejected such submissions and brought capital gains to tax which was declared in the respective returns by the assessees. On appeal, the Ld. CIT(A) upheld the order of the Assessing Officer. The assessee filed a writ petition before the Hon'ble Kerala High Court. The writ petition was dismissed by the Hon'ble Kerala High Court. While dismissing the writ petition, the Hon'ble High Court held that in the event of the totality of 1,19,760 shares not being transferred by reason of the failure to get the necessary sanction of the authorities, even the shares transferred are to be retransferred and the amount paid was to be returned. The Hon'ble Kerala High Court held that what had been sold, had to be resold and the money paid had to be repaid in the event of even one share out of the totality of shares covered by the agreement remaining unsold. The High Court further observed that this was how the parties understood transaction at all material times and this was the reason for the filing of the returns showing capital gains. Thus, it was held that the Assessing Officer was justified in bringing to tax the resultant capital gain on transfer of shares on the date of execution of the contract. Following the said decision the Tribunal held that the entire agreement was executed on 17-3-1998 among the parties was acted upon. The approval of Government authorities had been received the shares were delivered along with transfer deeds on 23-4-1998. Therefore, the case of the assessee was fully covered by the aforesaid circular of the 44 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo Board as the date of transfer for the purpose of section 45 would be 17- 3-1998 and not 23-4-1998.
61. Recently the Mumbai Bench of the ITAT in the case of Mrs. Hami Aspi Balsara (Taxpayer) v ACIT. [2009-TIOL-789-ITAT-MUM] had an occasion to consider the decision of the Amritsar Bench in the case of Max Telecom Ventures Ltd. (Supra) and Circular No.704 dated 28-4- 1995. The facts in the aforesaid case was that the Assessee, being part of a Promoter Group, held shares in 3 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 3 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 Assessee did not offer capital gains on the transfer of shares in the return of income filed for AY 2004-05 for the reason that since the transfer of shares was completed in April 2005, capital gains arose in AY 06-07. The AO and the CIT(A) held that the transfer was complete on the date when the agreement was entered into. The Assessee preferred an appeal before the ITAT. The issue before the Tribunal was as to 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. The tribunal held as follows:
"Revenues' main contention is that on account of substantial extinguishment of rights in pursuance to share purchase agreement, the transfer took place on 27.1.2005. Per contra, the assessee's claim is that when the delivery of shares was over and all the convents contemplated in the share purchase agreement became irrevocable on 1.4.2005 then only transfer was complete and, accordingly, the investment made by the assessee in the specified securities within six months reckoned from 1.4.2005 entitled the assessee for exemption under section 54EC. In the first place, we are in agreement with the contention of Id Counsel for the assessee that sale as contemplated u/s. 2(47)(i) and extinguishment rights as contemplated u/s. 2(47)(ii) are not mutually inter changeable. If a particular transaction is the transaction of sale then unless the sale is complete, no transfer can be said to have taken place because, as rightly pointed out by 45 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo ld Counsel for the assessee, there will always be extinguishment of rights in case of sale and if a single right out of the entire bundle of property in capital asset is extinguished, then, the transfer would be taken as complete. This will lead to absurd situation. Had it been the intention of legislature to treat the transfer on the basis of extinguishment of any right in capital asset then there was no necessity of including sale and exchange in the definition of transfer under section 2{47). It is well settled principle of interpretation that no word in an statute is superfluous and each word has to be assigned specific meaning in the context in which it is used. We further find lot of substance in the argument of Id Counsel in this regard with reference to inclusion of clause (v) in the definition of transfer under section 2(47} only with reference to immovable property and not with reference to movable property. In the present case when final delivery of shares took place on 1/15-4-2005 and, therefore, in view of the decision in the case of M.Ramaswamy (supra) and Rajgiri Rubber and Produce Co.(supra), in our opinion, transfer of shares took place on 1/15.4.2005. This view is fully supported by the decision of the Hon'ble Supreme Court in the case of Shellate VR v. PJ Thakkar, 45 Company case 43 wherein, it was held that procedure required by law was to be complied with and, accordingly, delivery of share certificate alongwith transfer deed had to be handed over to purchaser in order to complete the transfer."
The tribunal observed as follows on the decision of the Amritsar Bench in the case of Max Telecom Ventures Ltd. (Supra) and CBDT Circular No.204 dated 28-4-1995:
"12. Now coming to the decision of the Amritsar ITAT in the case of Maxtelecon Ventures (supra). We are of the opinion that the said decision was rendered with reference to KN Narayanan (supra) without considering the subsequent decision of the same High Court in the case of 203 ITR 663(supra). Moreover, said decision has not taken into consideration the ratio laid down by the Hon'ble Supreme Court in the case of Shellate VR v. PJ Thakkar, 45 Company case 43(supra). in this case the Supreme Court has clearly laid down that where, as between the transferor and the transferee, all formalities have been gone through, such as the execution of document of transfer and a physical handing over of the shares by the transferors to the transferee, the shares should be taken to have been transferred to the transferee, though until the transfer of share is registered in accordance with the Companies Law, the transfer could not enable the transferee to exercise rights of the shareholder vis-a-vis the company. Thus, in sum and substance, the transfer of share is complete when the share certificate alongwith duly executed transfer deed is handed 46 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo over to the transferee. Therefore, we, respectfully, do not agree with the proposition laid down in the said decision.
13. Now coming to the Circular No.704 dt.28.4.1995. This circular deals with two situations. Firstly, shares listed on stock exchange and transfer taking place through brokers. Secondly, transactions taking place directly between the parties and not through stock exchange. We are concerned with the second situation. In this regard, it is mentioned in the circular as under:-
"In case the transactions take place directly between the parties not through stock exchanges the date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by the actual delivery of shares and the transfer deeds."
This clearly shows that the date of contract of sale will be the date which the parties have agreed to. No other date can substitute the date as declared by the parties. In the present case, the date of contract of sale as understood by the parties is 1.4.2005 and the same cannot be substituted by the date of share purchase agreement because completion date was specified in Article 6 of the Share purchase agreement, which was not later than 4.4.2005 or such other later date that was mutually agreed in writing. As per Article 6, on the completion date the attorney was to receive letters of discharge from the lenders recording the unconditional and irrevocable discharge of the guarantees and the cancelled the original guarantees. This occurred on 1.4.2005. Therefore, the date of contract of sale as declared by the parties in the share purchase agreement was 1.4.2005. The directors resigned on the date as per the said Article. Therefore, the contract was completed on fulfillment of conditions contemplated in Article 6 which took place on 1.4.2005. Thus, from the very beginning, the parties had declared the date of contract of sale subject to fulfillment of conditions and, therefore, on the date of fulfillment of above conditions, the date of contract of sale crystallized. We are, therefore, of the opinion that this circular in no way prejudice the assessee's claim."
62. The above decision clearly supports the plea of the Assessee raised before us that the CBDT Circular No.304 dated 28-4-1995 cannot be the basis to conclude that the date of sale is the date of the Brokers contract note. As already stated it is contrary to the provisions of law and therefore to that extent not biniding in the case of the Assessees.
47Shri Suresh K. Jajoo Smt. Vimla S. Jajoo
63. For the reasons given above, we hold that the date of transfer shares was 12-4-2000 in the case of Vimla Jajoo and 8-4-2000 in the case of Suresh Jajoo and consequently the capital gain on transfer by sale was a long term capital gain which was already assessed to tax by the AO in AY 01-02. The assessment of the capital gain as short term capital gain in AY 00-01 is therefore held to be incorrect. The relevant grounds of appeal of the Assessee are allowed. In view of the above conclusion, we are not going into the admissibility of the additional evidence sought to be filed before us and the argument regarding applicability of the rule of consistency.
64. Ground No. 2 raised by both the assessees in their original grounds of appeal read as follows :-
"The learned CIT(A) grossly erred in directing the Assessing Officer to recompute the disallowance u/s. 14A by applying Rule 8D and ignored that :
a) by virtue of proviso to section 14A of the I.T. Act, 1961 (which is w.r.e.f. 11.5.2001) the Assessing Officer cannot reassess u/s. 147 so as to make disallowance u/s. 14A.
b) without prejudice to the above, learned CIT(A) grossly erred in giving direction to apply rule 8D and ignored that the insertions of sub-section (2) and (3) to section 14A by the Finance Act, 2006 are w.e.f. 1.4.2007 and not retrospective in nature."
65. Facts necessary for adjudication of Ground No. 2 are as follows :-
We have already noticed that the assessment in the case of both the assessees for A.Y. 2000-01 was reopened to bring to tax capital gain on sale of shares, which were treated as long term capital gain, assessment year 2001-02 as short term capital gain in A.Y. 2000-01 i.e. assessment year involved in this appeal.
66. We have also seen that in the reasons recorded for reopening assessment there were no other reasons assigned except the reason that 48 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo capital gain on sale of shares was wrongly taxed as long term capital gain. In the re-assessment proceedings, the Assessing Officer, made a disallowance of Rs. 70,466/-( in the case of Vimla S. Jajoo) and Rs.10,000/- (in the case of Suresh K. Jajoo) out of interest expenses claimed in profit and loss Account, on the ground that these were expenses incurred in earning income which does not form part of the total income. The Assessing Officer invoked the provisions of section 14A of the Act. The Assessing Officer did so because both the assessees had income under the head 'dividend', which was tax free. Learned CIT(A) confirmed the addition made by the Assessing Officer.
67. Before us, learned counsel for the assessee raised preliminary objection. He referred to the proviso to section 14A of the Act and submitted that the proviso specifically barred reopening of an assessment for invoking provision of section 14A of the Act. On behalf of the revenue, it was submitted that proviso to section 14A only bars reopening of an assessment to make a disallowance u/s. 14A of the Act but in a case, where the assessment is otherwise validly re-opened, there is no bar on the part of the Assessing Officer to invoke provisions of section 14A of the Act. Learned counsel for the assessee in this regard brought to our notice that similar objection was raised and considered by the Tribunal in the case of Thacker & Co. Ltd. Vs. ITO, 106 ITD 141 (Mum) and this Tribunal held that even if an assessment is invalidly reopened, that does not give a license to the Assessing Officer to invoke section 14A in respect of an assessment for assessment prior to 1.4.2001. He also relied on the decision of Mumbai Bench of the ITAT taking a similar view in the case of JCIT Vs. Bombay Dyeing Manufacturing Co. Ltd., 125 TTJ 263.
68. We have considered the rival submission. Sec.14-A(1) of the Act provides that for the purposes of computing the total income under Chapter IV no deduction shall be allowed in respect of expenditure incurred by the Assessee in relation to income which does not form part 49 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo of the total income under the Act. Proviso to Sec.14-A provides as follows:
" Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under Sec.147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Sec.154, for any assessment year beginning on or before the 1st day of April, 2001."
The issue that arises in ground No. 2 is regarding the power of the AO to make a disallowance in reassessment and is similar to the issue which was considered by the Mumbai Bench of the ITAT in the case of Thacker & Co. Ltd. (supra). The aforesaid case relates to A.Y. 1999-2000. Assessment was reopened u/s. 148 of the Act for the reasons which did not relates to making a disallowance u/s. 14A of the Act. However, in course of reassessment proceedings, the Assessing Officer sought to invoke section 14A of the Act. The revenue took a stand that when assessment was validly reopened, there is no bar under the proviso to section 14A of the Act on the part of the Assessing Officer to make a disallowance. The Tribunal considered the issue and held as follows :-
"The Circular No. 11 dt. 23rd July, 2001, the Board has reduced the rigor of the provisions of s. 14A by providing in para 4 of the Circular that where assessment proceedings have become final before 1 April, 2001, then such proceedings should not be reopened under s. 147. The Board has referred to the finality of the assessment proceedings, which is different from the completion of the assessment proceedings by formal order of assessment. It is the settled legal position that assessment proceedings are initiated by filing of the returns. Now, therefore, the question arises whether the assessment proceedings became final after the expiry of the period of limitation provided under s. 143(2). Even where intimation is not issued but the period of limitation provided in s. 143(2) has expired, the assessment proceedings became final. Therefore, such cases would fall within the ambit of para 4 of the Board Circular. Consequently, the AO is prohibited from taking any action under s. 147. It is a settled legal position that what cannot be done directly cannot be done indirectly. If the AO is prohibited to take any action under s. 147 in terms of the proviso to s. 14A, then he is also prohibited from reassessing the income even though the notice under s. 148 was valid. If the AO is permitted to take action in the valid reassessment proceedings, then the purpose of the proviso would 50 Shri Suresh K. Jajoo Smt. Vimla S. Jajoo be defeated. The object of the proviso is to stop the AO completely from taking any action where the assessment proceedings have become final. According to the settled rule of interpretation, the interpretation in which augment the object should be preferred rather than the interpretation which frustrate the same. In view of the above discussion, the action of the AO in disallowing the expenditure in the reassessment proceedings was not justified since the period of limitation under s. 143(2) had already expired before 1st April, 2001.--Vipin Khanna vs. CIT (2002) 175 CTR (P&H) 335 : (2002) 255 ITR 220 (P&H) relied on. (underlining by us for emphasis)
69. Similar view has been expressed by the Mumbai Bench of the ITAT in the case of Bombay Dyeing Manufacturing Co. Ltd. (supra). In view of the above, we hold that the disallowance made u/s. 14A deserves to be deleted and the same is hereby deleted.
70. In the result, both the appeals of the assessees are allowed.
Order has been pronounced on 31st Day of March, 2010.
SD/- SD/-
(N.V.VASUDEVAN) (P.M.JAGTAP)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 31st March, 2010
Copy to : 1. The Assessee
2. The Respondent
3. The CIT(A)-concerned.
4. The CIT, concerned.
5. The DR concerned, Mumbai
6. Guard File
BY ORDER
True copy
ASSTT. REGISTRAR, ITAT, MUMBAI
PS