Transfer in case of finance company

Tax queries 635 views 5 replies

Rinkal Bansal

proprietor

57 Points Joined March 2010

Dear All,

Please clarify the below mentioned query or give your views on the same:

One of the finance company has given loan to any person and against which they pledge the shares with the Company. Now that person defaults in repayment of his loan and the Finance Company has invoked the pledge and get the shares transferred in his own name. Suppose the shares are transferred in the name of the Finance Company on 21/09/12 and the market value of the shares as on this date is Rs. 50/- and after that they hold the shares for 15 days. After 15 days they sold these shares, now at this date the value becomes Rs. 60/-.

Now my question is:

a) Finance Company should write off the loan on 21/09/2012 i.e. on the date of transfer of shares or on the date of receipt of payment of shares.
b) If loan is written off on the date of transfer of shares then Rs. 10 will be Capital Gain / Business income.

Please reply.

Thanks in Advance

CA. Rinkal Bansal

Replies (5)

MD

AAA

122 Points Joined February 2011

Hi,

The Finance Company should write off loan on 21/09/2012 i.e. the date on which the shares are transferred in the name of Finance Company.

It is a question of fact in each case whether property transferred forms part of the stock in trade of its business.

It depends on whether, after transfer, the Finance Company treats the property as part of the stock in trade of its business by such acts, eg, including the value of the property in the accounts or charging the expenditure incurred in respect of the property to the business or treating the income derived therefrom as income of the business.

Rinkal Bansal

proprietor

57 Points Joined March 2010

Thanks for replying. I want to add on something further to this.

Now the borrower whose shares are transferred is liable to capital gain on those shares on 21.09.2012 but the transaction of pledge isnot subject to STT. Now in such case he is not liable for exemption u/s 10(38), that means borrower (company) has to pay capital gain.

In addiiton to this, At which rate of that date the shares are considered to be sold as consideration is not received?

If anyone has any case law or something on this and above mentioned matter then please reply.

Thanks

CA. Rinkal Bansal

MD

AAA

122 Points Joined February 2011

As per section 48 full value of the consideration received or accruing as a result of the transfer of the capital asset is considered for computing Capital Gains.

Consideration in the ordinary sense means something in lieu of exchange of – CIT v. Jaykrishna Harivallabhdas (1998) 231 ITR 108 (Guj.). Such consideration may be received in cash or in kind.

Cessation of liability amount i.e. loan by transferring shares in the name of the Finance Company shall be treated as adequate consideration.

In view of the above and based on the facts even though the consideration is not actually received the capital gain shall be computed considering the cessation of liability amount as full value of consideration being the fair market value of the shares.

Rinkal Bansal

proprietor

57 Points Joined March 2010

But in my case the loan amount is more than the fair market value of shares and loan is not completely settled after the transaction (like loan is of Rs. 1 lac and the FMV of shares is Rs. 20,000). in such a case FMV will be considered as full consideration. Now to calculate the consideration, what market rate of shares of the date of transfer is to be taken??