Sec 10(38) - Shares Pledged, Sold by Bank

[subodh]

A and B had jointly taken overdraft facility from Bank under Loan Against Securities scheme jointly. They both pledged their holdings held in their separate demat a/cs.
After three years, when the account became irregular, the pledge was invoked and shares (security) were sold through BSE and NSE. From perusal of contract notes and the DP a/c narrations, it seems that: -
1. The pledged shares were first transferred into the demat a/c. of the bank before sale through stock exchange.
2. In all Contract Notes, the first named person is the HDFC Bank and the second named is A (first named person in loan a/c)
3. There is no mention of B (second borrower) in the Contract Notes even in the shares held in the demat account B.
4. No valid PAN is quoted in Contract Notes.
In view of the provisions of the Income tax Act [also sec 2(47)] and technicalities of the agreement of Loan Against Securities, kindly advice me if A and B are entitled for exemption of Long Term capital Gain u/s 10(38) IT Act.
Thanks and regards

[camanoj2104]

 U ACN TAKE HELP FROM THE FOLLOWING
In Biraj Investment (P) Ltd. v. Asstt. CIT 2000 TaxLR 122 (Ahd-Trib), the assessee had sold 80,200 equity shares of Rustom Mills and Industries Ltd. which were invested by the assessee and were pledged to the IDBI as a collateral security for granting financial assistance to Rustom Mills and Industries Ltd. The assessee had sold the shares at a consideration of Rs. 4,01,000 and thereby claimed long term capital loss Rs. 8,38,798. The long-term capital loss claimed by the assessee was rejected by the assessing officer on the ground that there was no transfer of the shares.
It was held merely because the physical possession was held by IDBI, it would not automatically follow that the person who is entitled to the legal possession, i.e., the assessee would be deprived of his right to deal with such goods until he secures the co operation of the third party. The assessee had right to transfer the shares because the legal title vested in it.
EVEN OTHERWISE THE REGD OWNERS WERE UR ASSESSEES THE BANK HAD SOLD SHARES FOR RECOVERY OF ITS LOAN THE PROCEEDS IF EXCEED THE LOAN AMT WILL GO TO UR ASSESEES

CA MANOJ GUPTA
JODHPUR
09828510543

[subodh]

Thanks CA Manoj for the valued opinion.
May I seek attention of other experts with more case laws and technical aspects of such transactions - what is the point of transfer, who paid STT, etc. Its true that shares were taken out by the bank for the purpose of effecting sale and the proceeds were remitted into the borrwer's a/c only

[sai prasad]

the bank  will not admit gain or loss from the shares but it is only recovery of the loan.The assessee only has to admit  the gain or loss and claim exemption. The charge created in favour of bank is only voluntary and there is no overriding diversion in the hands of the assessee. 305 ITR 24 (All);227/222 SC

[subodh]

Many thanks Mr Sai for the valued citation.