Capital gain: Exemption u/s.10(38): A. Y. 2006-07: Assessee company and other group companies held 98.73% shares in BFSL which owned a land: They sold those shares to DLFCDL for a consideration of Rs. 89,28,36,500/- and claimed exemption u/s. 10(38): AO denied exemption holding that it is a sale of land: Denial of exemption not proper:

The assessee company and other group companies were holding 98.73% of the shares in BSFL which owned a land. They sold those shares to DLFCDL for a consideration of Rs. 89,28,36,500/- and claimed exemption u/s10(38) of the Income-tax Act, 1961. The Assessing Officer held that land was transferred to DLFCDL by way of said circuitous transaction, and the shareholders being owners of the land to the extent of their shareholdings in the company, the gains arising to the assessee are chargeable to tax as short term capital gain on sale of land. Accordingly, he disallowed the claim for exemption u/s. 10(38) of the Act. The Tribunal allowed the assessee’s claim for exemption.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under: “
i) The assessee and other group concerns holding 98.3% shares of BSFL having sold their entire shareholding in that company to another company for valuable consideration after complying with the legal requirements, the transaction cannot be said to be a colorable device to avoid payment of tax on the basis that the effect of the transfer of shares is transfer of immovable property belonging to BFSL in favour of the purchaser of the share.

ii) The assessee having fulfilled all the conditions stipulated u/s. 10(38), the benefit of tax exemption cannot be denied merely because in case a registered sale deed had been executed by BFSL selling the land in favour of the purchaser, tax would have been paid on the capital gain.”