Delhi High Court
Cit vs Vinit Estate (P) Ltd. on 2 August, 2007
Bench: M B Lokur, V Gupta
ORDER
1. After hearing learned Counsel for the parties, the following substantial question of law is framed for our consideration:
Whether the Income Tax Appellate Tribunal was correct in law in allowing the assessed to include interest of Rs. 10,57,192 to the cost of acquisition of the shares for the purposes of computing capital gain?
2. The revenue is aggrieved by an order dated 9-12-2005 passed by the Income Tax Appellate Tribunal, Delhi Bench 'A' in ITA No. 700 (Delhi)/2005 relevant for the assessment year 2001-02.
3. The assessed had entered into an agreement with M/s. Pace Industries Pvt. Ltd. (Vendor) for purchase of 25,000 equity shares of the value of Rs. 10 each of NIIT Ltd. The purchase value of the shares was shown as Rs. 3,06,25,000.
As per Clause 4 of the agreement, the assessed was to pay to the vendor, the consideration amount on or before 31-12-2000 along with interest at the rate of 18 per cent per annum till the day of payment. Clause 5 of the agreement is of considerable importance and this reads as follows:
5. It is hereby further agreed and declared as follows:
(a) As from the date of this agreement, the vendor shall hold the shares and all dividends and interest accrued or to accrue upon the same or any of them upon trust for the purchaser and agrees to pay and deal with the respect of the same in such manner as the purchaser shall from time to time direct.
(b) The vendor will at the request of the purchaser attend all the meetings of shareholders or otherwise which he shall be entitled to attend by the virtue of being the registered owner of the shares or any of them and will vote at every such meeting in such manner as the purchaser shall have previously directed in writing.
4. According to the assessed, payment of the consideration amount was made to the vendor along with interest of Rs. 10,57,192. The assessed sought to include this amount towards the cost of acquisition of the shares. The assessing officer was of the view that the agreement was an afterthought and, therefore, denied the deduction under Section 48 of the Income Tax Act, 1961.
5. In appeal, the Commissioner (Appeals) accepted the view of the assessing officer but the Tribunal disagreed with the view taken by the assessing officer as well as the Commissioner. The Tribunal made a reference to the agreement between the parties and concluded that there was nothing to show that the agreement was not genuine and since it was acted upon, the interest paid by the assessed to the vendor could be included in the cost of acquisition. Learned Counsel for the assessed has informed us that the principal amount payable to the vendor was not borrowed by the assessed.
6. We are not at all in agreement with the view expressed by the Tribunal Clause 5 of the agreement, which we have quoted above, makes it quite clear that the assessed had no right to hold the shares nor had the assessed any right to dividend and interest that had accrued on the shares or that was to accrue. In terms of the agreement, the vendor was to hold the amount in trust. Admittedly, no part of the consideration amount had been transferred to the vendor on the date of signing of the agreement but was transferred much later (sometime in December) along with interest. Consequently, until that time, the assessed had no right or title over the shares. There is nothing in the agreement to suggest the consequence of non-payment of the consideration amount by the assessed.
7. Under these circumstances, it appears to be commercially unsound that the vendor would have put on stake shares worth over Rs. 3 crores without having received anything in return thereof from the assessed. Moreover, since the assessed did not borrow any funds for making; the payment, it appears that it had the capacity to pay the purchase amount. Under the circumstances, we find no error in the view taken by the assessing officer or the Commissioner.
8. We answer the question in the negative, in favor of the revenue and against the assessed.
