LT Capital Gain - Shares - Pledge Invocation by bank

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Manish (Querist)
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25 April 2011 A person had got Loan Against Shares by pledging some shares with a bank.
When the account became irregular, the bank invoked the pledge and having sold the shares through stock exchange, credited the proceeds in his Loan A/c. The Contract Notes are issued in the name of bank as well as the borrower and STT has been charged. It seems that the shares were first transferred into the demat a/c. of the bank before sale through stock exchange.
The conditions for exemption of long term capital gains on transfer of shares u/s. 10(38) Income-tax Act is that the transfer should be a transaction of sale and it is chargeable to STT.
Kindly advice, as per technicalities of Loan Against Shares,
1. what is the point of transfer of the pledged shares – when the shares were transferred into the demat a/c of the bank or when they were actually sold on stock exchange.
2. Who should be treated to have paid STT.

RANGA SRINIVAS

RANGA SRINIVAS (Expert)
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25 April 2011 Dear

The point of sale, in case of pledged shares and later invoked, is at the time when the lender sells the shares. The contract note is generated in the name of both the lender and the borrower. FOr the purpose of sale, the shares are transferred to demat account of the lender.

STT is paid by you only and not by the lender. They would have debited your account along with service tax.

regards

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Manish

Manish (Querist)
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25 April 2011 Thanks Mr Sriniwas. I fully agree and would be thankful if you could provide me any material to substatiate the technicality before the AO, like any scheme of RBI or any law/circular/clarification/judgement/etc.
I am extremely sorry for not adding one more aspect:-
The Loan a/c in qn was held in two names jointly - husband and wife and both of them had pledged their own holding of shares held in seperate Demat a/cs in their respective names. but the contract note reflects the name of only the first named borrower even in the case of shares held by second named borrower in her seperate Demat a/c. How can the fact that some particular shares were owned & sold by the second named borrower and that the STT paid by that 2nd name person. I suspect that the AO can make a case.
Regards.

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