2020 (10) TMI 1208 - HC - Income Tax

Court affirms deemed profits assessment under Income Tax Act for shares, stresses business nexus.

The court upheld the assessment of deemed profits in the hands of the appellant-HUF under Section 28(iv) of the Income Tax Act, 1961, for shares allotted ... Benefit of Vivad Se Vishwas Scheme ('VVS Scheme') - Substantial Questions of Law framed for consideration on account of certain subsequent developments - Option to appeal in case application for settlement is rejected - HELD THAT:- It may not be necessary for this Court to decide the Substantial Questions of Law framed for consideration on account of certain subsequent developments. The Government of India enacted the Direct Tax Vivad Se Vishwas Act, 2020 (Act 3 of 2020) to provide for resolution of disputed tax and for matters connected therewith or incidental thereto. The Act of the Parliament received the assent of the President on 17th March 2020 and published in the Gazette of India on 17th March 2020. In terms of the said Act, the assessee has been given an option to put an end to the tax disputes, which may be pending at different levels either before the First Appellate Authority or before the Tribunal or before the High Court or before the Hon'ble Supreme Court of India. The assessee is given liberty to restore this appeal in the event the ultimate decision to be taken on the declaration to be filed by the assessee under Section 4 of the said Act is not in favour of the assessee. If such a prayer is made, the Registry shall entertain the prayer without insisting upon any application to be filed for condonation of delay in restoration of the appeal and on such request made by the assessee by filing a Miscellaneous Petition for Restoration, the Registry shall place such petition before the Division Bench for orders. We direct the appellant / assessee to file the Form No.I on or before 09.11.2020 and the competent authority shall process the application / declaration in accordance with the Act and pass appropriate orders as expeditiously as possible preferably within a period of six (6) weeks from the date on which the declaration is filed in the proper form. Issues:1. Interpretation of Section 28(iv) of the Income Tax Act, 1961 regarding the assessment of imaginary value of shares as deemed profits in the hands of the assessee-HUF.2. Nexus establishment between the allotment of shares and the business of the assessee for attracting the provisions of Section 28(iv) of the Act.3. Assessment of deemed profits in the hands of appellant-HUF for shares allotted at par value to an individual.4. Examination of benefit arising to the appellant due to restrictive covenant on transfer of unquoted shares.5. Addition of deemed profits in the assessment under Section 153A without any incriminating material found during search.6. Assessment of amount in excess of par value of unquoted shares as deemed profit in the appellant's hands despite the company's financial position not supporting a higher value.Analysis:1. The appeal challenged the Tribunal's order regarding the application of Section 28(iv) of the Act to assess the imaginary value of shares as deemed profits in the hands of the assessee-HUF. The appellant contended that the Tribunal's decision lacked justification, raising concerns about the correctness of the interpretation of the law in this context.2. The issue of establishing a nexus between the allotment of shares and the business of the assessee for invoking the provisions of Section 28(iv) of the Act was raised. The Tribunal's decision to uphold the addition without clear evidence of this connection was questioned for its legal correctness.3. A discrepancy was noted regarding the assessment of deemed profits in the hands of the appellant-HUF for shares allotted at par value to an individual. The Tribunal's decision was scrutinized for its legal validity in this regard, highlighting the need for clarity on the proper assessment methodology.4. The judgment analyzed the absence of findings on the benefit arising to the appellant due to the restrictive covenant on the transfer of unquoted shares. The Tribunal's conclusion was challenged for being deemed perverse without a proper assessment of the advantages or disadvantages accruing to the appellant.5. The addition of deemed profits in the assessment under Section 153A without any incriminating material found during the search was a significant issue. The legality of confirming such additions without relevant evidence was questioned, emphasizing the importance of adhering to procedural requirements.6. Lastly, the assessment of the amount in excess of par value of unquoted shares as deemed profit in the appellant's hands raised concerns about the company's financial position supporting a higher value. The judgment highlighted the necessity of aligning assessments with the financial realities of the company to ensure fair and accurate tax implications.In conclusion, the judgment emphasized the significance of the Vivad Se Vishwas Scheme in resolving tax disputes and provided directions for the appellant to avail of the scheme. The disposal of the Tax Case Appeal with the liberty to restore the appeal based on the outcome of the declaration under the Act underscored the importance of compliance with the statutory provisions for tax resolution.