Unregistered Share Transfer Agreements Cannot Be Treated as Colourable Devices Without Evidence of Tax Evasion: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) Pune has held that unregistered agreements for transfer of shares cannot be branded as colourable devices merely because they were not registered or executed on substantial stamp duty in the absence of any evidence establishing tax evasion or sham transactions.

The dispute arose after the assessee sold 3,50,000 equity shares of Lord Ganesh Minerals Pvt. Ltd. to KSL Holding Pvt. Ltd. for ₹21.87 crore. Prior to the transaction, the assessee had entered into agreements with Dhanlaxmi TMT Bars Pvt. Ltd. and Nilesh Steel & Alloys Pvt. Ltd. for sale of the same shares. Subsequently, those agreements were cancelled and compensation aggregating to ₹7.84 crore was paid to the two companies.

The Revenue treated the arrangement as a colourable device intended to reduce LongTerm Capital Gains (LTCG). According to the Department, the agreements were suspicious because they were unregistered, executed without substantial stamp duty and settled privately without litigation. It was further alleged that the recipient companies had losses and were used to absorb taxable income.

The Assessing Officer therefore disallowed the compensation claimed as deductible expenditure while computing LTCG.

The assessee argued that there was no legal requirement mandating registration of agreements relating to transfer of shares. Reliance was placed on Section 17 of the Registration Act, 1908, to contend that compulsory registration applies primarily to immovable property transactions.

The assessee also pointed out that the agreements and cancellation deeds were duly notarised and executed on stamp papers in accordance with the Bombay Stamp Act.

The assessee further submitted that both recipient companies were reputed steel manufacturers with turnovers exceeding ₹218 crore and ₹131 crore respectively, and were regularly assessed to tax. The compensation received by them had already been disclosed in their income tax returns and subjected to taxation.

The Tribunal observed that the Revenue failed to produce any material proving that the transactions were sham or fictitious. The Bench noted that even during search and post-search proceedings conducted against the recipient companies no incriminating material had surfaced to support the allegation of accommodation entries or tax evasion.

The Bench comprising R. K. Panda and Astha Chandra dismissed the Revenue appeal held that absence of registration alone could not invalidate share transfer agreements or justify treating the transaction as a colourable device.

Accordingly, the ITAT upheld the deletion of the ₹7.84 crore addition and ruled in favour of the assessee.

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