JCIT vs. Mukesh D. Ambani (ITAT Mumbai)

Though assessee shown as “owner” of demat shares in depository’s books, if he shows to be mere “pledgee”, there is no “benefit” u/s 2(24)(iv)

The assessee, Chairman & Managing Director of Reliance Industries Ltd, was appointed Managing Director of Reliance Communication and Infrastructure Ltd (RCIL) w.e.f. 11.3.04. On 13.3.04 RCIL decided to take an interest-free loan of Rs. 50 crores from the assessee and offered by way of security 50 crore equity shares of Reliance Infocom Ltd (RIC). Each share of RIC had a market value of Rs.53.71 per share and the 50 crore shares received by the assessee were worth Rs.2685 crores. The said RIC shares were dematerialized and transferred to the assessee’s demat account. Within a few weeks, RCIL repaid the loan and the assessee transferred the shares of RIC to RCIL. The AO took the view that there was a necessity for the assessee to acquire the 50 crore shares of RIC because of a struggle to have control and management of RIC and that the transaction was wrongly shown as a loan and pledge. He also held that as the assessee was recognized as beneficial owner by the Depository, the result was that there was a transfer of ownership in shares by way of sale and that the assessee was to be considered as owner for all purposes. As the assessee was a director, it was held that the difference between the market value of shares (Rs. 2,685 crores) and the amount paid by the assessee (Rs. 50 crores) was a “benefit” assessable u/s 2(24) (iv). On appeal, the CIT (A) reversed the AO on the ground that the transaction was a “pledge” and not a “sale”. On appeal by the department, HELD dismissing the appeal:

(i) Prior to the concept of dematerialisation, a valid pledge of shares could be created by delivery of the shares to the pawnee either physically or constructively. With respect to demateriaized shares, though s.12 of the DP Act provides for the manner of creating a pledge, this is not the only method. Dematerialized shares continue to be “goods” and the law laid down in the Companies Act and the Sale of Goods Act for deciding whether a sale of shares has taken place or not will continue to govern;

(ii) Though a person is shown as the beneficial owner in the register of a depository participant, this is not conclusive and he can show that he is not the beneficial owner of shares but only holds the shares as a pawnee and as security for repayment of debts due by the real beneficial owner;

(iii) On facts, the assessee had shown that he held the shares not as beneficial owner but as Pawnee as security for repayment of debts. The allegations made by the AO that the assessee needed to own the shares to overcome the power struggle were vague and unsubstantiated. As a pawnee/pledgee, the assessee does not have absolute rights over the shares. He could sell the security in a manner contemplated by law. In case the proceeds were greater than the amount due to him, he had to pay the surplus to the pawnor. Consequently, there was no “benefit” assessable u/s 2(24)(iv).