UDAY PUNJ Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The appellant/assessee is a promoter/director of M/S Punj Lloyd Limited (PLL), which came out with an Initial Public Offering (IPO) of its shares in December, 2005. Alongwith the Public Issue, the existing shareholders, including the appellant/assessee, also offered shares held by them in PLL, to the public. The appellant before this Court offered 5,99,693 shares to the general public through the said offer. Red-Herring Prospectus, with Securities and Exchange Board of India (SEBI), was filed on 29.11.2005, after provisional approval from Bombay Stock Exchange on 04.11.2005 and National Stock Exchange (NSE) on 14.11.2005. An Escrow Agreement between the company, and selling shareholders on the one hand and bankers to the issue, Registrars to the issue and managers to the issue on the other hand, was signed on 03.12.2005. The offer opened on 13.12.2005 and closed on 16.12.2005. The basis of allocation of the shares was approved by the BSE on 28.12.2005 and on the same date, the money was transferred from the account of the bankers to the public offer account. On the very same date, the shares were also transferred from promoter's demat account to the account of the Registrar to the issue. On 30.12.2005, the company filed an application for listing and trading approval, after it had completed all formalities, including the commencement of dispatch of the refunds of excess bid amount to the applicants. The Listing Approval by the NSE and BSE was granted on 04.01.2006, whereas the Trading Approval from both the Stock Exchanges was received on 05.01.2006. The trading in the Stock Exchange commenced on 06.01.2006, followed by transfer of money to the bank account of the sellers.

(2.) The main issue involved in this appeal is as to whether capital gains tax is payable by the assessee or not, on the income earned by him from sale of SEBI shares which he sold through the public offer, and if payable, whether at lower rate of 10% or at the normal rate of 20%.

(3.) Section 10(38) of the Income Tax Act exempts, from payment of tax, any income which arises from transfer of equity shares in a company, where the transaction is chargeable to Securities Transaction Tax, under chapter VII of the Finance (No.2) Act, 2004. To the extent it is relevant, Section 98 of Finance (No.2) Act, 2004 provides for charging of Securities Transaction Tax on sale of an equity share in a company, where the transaction of such sale is entered into in a recognized stock exchange . Therefore, the question which comes up for our consideration is as to where the transaction of sale of shares by the appellant, through the public issue, was entered into in a recognized stock exchange or not. If the transaction was entered into, in the stock exchange, STT was chargeable on the transaction and in that case, it would be immaterial whether STT has been actually charged or not. On the other hand, if the transaction was not entered into in the stock exchange, it would be out of the purview of Section 98 of Finance (2) Act, 2004 and consequently, would not be eligible for exemption under Section 10(38) of the Income Tax Act.