Assistant Commissioner Of Income Tax V. Biraj Investment (P) Ltd [Guj]

Section 108 of the Companies Act,1956 read with Section 2(47) of the Income Tax Act, 1961 – transfer of shares – assessee transferred pledged shares and showed capital gains as well as loss – AO rejected the claim on the ground that pledged shares cannot be transferred – whether tenable- Held, No.

Brief facts


  • BIRAJ INVESTMENT (P) LTD, The assessee had sold certain shares during the Financial Year 1992-93 of Rustom Spinners Ltd (Rustom Spinners) and had earned  long term capital gain and short term capital gain.
  • The assessee had also sold some equity shares of Rustom Mills and Industries Ltd (RMIL) in the same financial year to its group Company resulting in long term capital loss which it used to offset capital gains.
  • The Assessing Officer noted that the shares of Rustom Mills which the assessee sold were pledged with the IDBI Bank along with an undertaking it would not transfer such shares.
  • The assessee however transferred shares in RMIL to a group company under an agreement dated 24th March, 1993 and the purchase company was given an irrevocable power of attorney to deal with the shares in any manner. The assessee received the entire consideration.

The AO was of the opinion that full transaction was intended for creating loss to the assessee so that its capital gains resulting from sale of shares of Rustom Spinners can be set off. The assessee carried the matter in appeal which was dismissed. The assessee carried the matter further in appeal before the Tribunal.

The Tribunal by the impugned order reversed the orders passed by the Revenue Authorities, by placing reliance on a decision of the Madras High Court rendered in the case of A.M.P. Arunachalam v. A.R. Krishnamurthy, 49 Comp Cas 662 (Mad). The Tribunal on the basis of such decision concluded that merely because the physical possession of the shares was with IDBI, it would not automatically follow that the person who is entitled to legal possession, that is, the assessee would be deprived of his right to deal with such goods until he secures the cooperation of the third party. The Tribunal was of the opinion that the assessee had the right to transfer the shares because legal title vested in the assessee.

Decision: Appeal dismissed.


  1. The assessee having entered into the agreement with the purchaser Company and further having given power of attorney and received the full sale consideration from the purchaser company, by virtue of section 2(47) of the Act for the purpose of income tax, transfer of share was complete.
  2. Sale of shares would be possible, even if the share certificates evidencing the ownership of such shares were pledged with the bank. Though this may have other legal repercussions, which is outside the purview of this judgement.
  3. There is no provision in the act which prevents the assessee from selling loss making shares to a group company. Also there is no bar on the assessee effect such a sale in year in which it incurred gain.
  4. Tax avoidance cannot include every case where reduction of tax liability is involved as per the judicial pronouncements. It is permissible for the assessee to enter into transaction which has the effect of diminishing his income in order to reduce his tax liability.

In the result, the question was answered in the affirmative, i.e. in favour of the assessee and against the Revenue. Tax Appeal is accordingly dismissed.

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