M.P. Menon, J.
1. K. N. Narayana Iyer and the members of his family were holding 1, 19,760 out of the 3,12,800 fully paid up equity shares of Boileyburia Tea Estate Ltd., Kottayam. By Ex. P-1 dated December 15, 1976, he agreed to transfer all the aforesaid shares to the Sales & Allied Industries (India) Ltd., Calcutta, in four different lots, between December 15, 1976, and April 30, 1978, subject to the obtaining of necessary sanctions and approvals under the Companies Act and the Foreign Exchange Regulation Act. The agreement also provided that in case the whole block of 1, 19,760 shares were not so transferred, the vendor was to repay all moneys received from the purchaser and that the latter was to return or retransfer all the shares delivered or transferred.
2. Shares held by the two petitioners herein were also covered by the agreement and 1,700 shares belonging to each were actually transferred on March 31, 1977. They filed returns under the I.T. Act showing long-term capital gains on the sales so effected, and the ITO assessed them under Section 143(1). It so transpired, however, that permission was not obtained from the Reserve Bank in time for transferring 40,000 shares held by another member of the family, who was a non-resident Indian. The vendors were thus obliged to buy back the shares in terms of Ex. P-1 agreement. A contention was then raised by the petitioners that the transfers effected on March 31, 1977, were only conditional and that no capital gains were actually made. The Commissioner rejected the contention in proceedings under Section 264 and the two writ petitions are directed against such rejection.
3. The controversy is about the scope of the transaction covered by Ex. P-1. According to the petitioners, the agreement has to be read as a whole to discover its true legal effect, and when so read, it only disclosed an intention that property in all the shares would pass only when the process was completed by April 30, 1978. The sales effected on March 31, 1977, were thus non est due to the non-fulfilment of the above basic condition. There were no completed sales in law, and no taxable point giving rise to capital gains had arisen on March 31, 1977. The transferees could have obtained full title only if the whole of the 1,19,780 shares had been transferred by April 30, 1978.
4. The correct approach to be made in cases like these is indicated by the Supreme Court in CIT v. B. M. Kharwar : 72ITR603(SC) . There, a firm engaged in the manufacture, purchase and sale of cloth closed down the manufacturing side of the business and transferred the machinery to a private limited company in the share capital of which the partners had the same proportional interest. The ITO brought to tax the excess realised over the written down value of the machinery, but the High Court held that the substance of the transaction consisted of only a change from the business of the firm to the business of the company. The Supreme Court disagreed with the High Court, holding that the taxing authorities were bound to go by the legal effect and character of the transaction, and not by the substance of the matter. Referring to the doctrine relating to the substance of a transaction, their Lordships observed that the question of taxability or non-taxability had to be determined on the basis of the legal rights and liabilities Sowing from the contract of the parties, and not on the basis that they were different from what they were in law.
5. What then were the legal rights and liabilities of the parties under Ex. P-1 contract? Paragraph 1 of Ex. P-1 provided for the transfer of shares in accordance with the following schedule :
(i) 19,250 shares to be transferred on or before December 15, 1976;
(ii) 33,600 shares to be transferred on or before 31-3-77;
(iii) 35,132 shares to be transferred on or before 30-4-77; and
(iv) the remaining 28,758 shares to be transferred on or before 30-4-78.
6. It was also provided that as soon as the respective lots were transferred by duly executing the transfer deeds and delivering the share certificates to the purchaser, the latter was to pay consideration at the rate of Rs. 20 a share. Paragraphs 2 and 3 laid down that three named directors of Hoileyburia were to vacate office by April 30, 1977, to make room for two nominees of the purchaser, and that the managing director himself was to continue up to April 30, 1978, acting in consultation with the purchasers in respect of all policy matters affecting the management of the company. Paragraph 4 contained an assurance that the vendor would duly register all the transfers and perform ' all acts, deeds, things required or necessary ' for the purchasers to fully enjoy the rights and interests in the shares agreed to be transferred. And the last paragraph, on which reliance was placed by counsel for the petitioner, was in the following terms :
' It is further agreed between the parties that this agreement is conditional upon obtaining necessary permissions, approval or sanctions from the Government of India, Reserve Bank or any other authorities and also of the consent of the authorities and also of the consent of the other shareholders mentioned in the schedule hereunder and if in the event of the aforementioned 1, 19,760 shares are not transferred to the purchaser and/or its nominees or duly registered in the registers of the said company in the names of the purchaser and/or its nominees, the vendor shall repay all moneys paid by the purchaser and the purchaser shall return or retransfer all shares which have been transferred or delivered to the purchaser or its nominees. '
7. On a careful examination of the above terms, it is difficult to reach any conclusion other than that as and when each lot was transferred in accordance with the schedule, the transferees were to get full title in respect of the shares concerned, under the provisions of the Companies Act and under the general law as well. When an instrument of transfer duly stamped and executed by the transferor and the transferee is delivered to the company along with the concerned share certificate, and when the transfer is registered in the books, the transferee gets full title for the purposes of the Companies Act, under Sections 108 - 112 of the said Act. Even in cases where the company refuses to register a transfer, the transferee becomes owner of the shares in equity, with a right to claim dividends from the transferor when they are declared by the company, and also a right to give directions to the transferor as to how he should vote at the meetings of members. So far as I could see, paras. 1 to 4 of Ex. P-1 are consistent with the above legal effect, and there is nothing in para. 6 to defeat it. The provision in para. 2 for inducting two nominees of the purchasers as directors of the company from April 30, 1977, and the assurance held out by the vendor in para. 4, are clear indications that the parties intended that the transfers were to take effect as and when they were made, and long before April 30, 1978. Even the use of the word ' retransfer ' in the last paragraph of Ex, P-1 postulates only a reversal of a completed process. On the terms of Ex. P-1, therefore, it is impossible to assume that the transfers effected by the petitioners on March 31, 1977, were conditional and had not taken effect at any time The agreement was not for conditional transfer of shares, but for full legal transfer in lots, with a condition added that the lots sold were to be bought back under certain circumstances.
8. The theory that there was no completed transfer and that there was ' no taxable point giving rise to capital gains ' is also belied by the circumstance that the petitioners themselves had included the long-term capital gains in the returns filed by them. They themselves were then of the view that the transfers had become effective, and in proceedings under Article 226 of the Constitution, this court cannot also now permit them to take up a different stand.
9. The original petitions are, therefore, dismissed. No costs.