2025 (5) TMI 1965 - HC - Income Tax

Revenue barred from recharacterizing share cost as intrinsic-value perquisite under s.2(24)(iv) after AO accepted Rs10

Commissioner of Income Tax Versus Naresh K Trehan.

HC dismissed the challenge: where the assessee's AY 2008-09 return was scrutinized and the AO accepted a Rs.10 per share cost and taxed resultant ... Reopening of assessment - Share transactions - intrinsic value of the shares reflected the Assessee’s income that had escaped assessment - Addition on account of the value of the ten per cent shares of EHIRCL - AO calculated the intrinsic value of the said shares at the rate of Rs. 550/- per share, whereas the Assessee had reflected the value of shares at Rs. 10/- per share. ITAT held that the provisions of Section 2 (24) (iv) of the Act were inapplicable, and therefore, the difference between the intrinsic value of the shares and the amount paid by the Assessee for acquiring the shares could not be taxed as perquisites. HELD THAT:- Assessee’s return for AY 2008-09 was selected for scrutiny. The said proceedings culminated in the assessment order dated 30.12.2010 passed under Section 143 (3) of the Act. Assessee’s computation of long term capital gains was accepted by AO and the gains from the shares were brought to tax. Thus, we find that the Revenue, having accepted the cost of acquisition of shares at Rs. 10/- and having taxed the gains arising therefrom, cannot now take a stand that the cost of the shares in the hands of the Assessee was required to be computed based on their intrinsic value. This clearly militates against accepting that the cost of acquisition of the shares as Rs. 10/- in the subsequent assessment years. No substantial question of law arises for consideration of this court. 1. ISSUES PRESENTED and CONSIDERED- Whether the delay of 1563 days in filing the appeal is liable to be condoned.- Whether the reopening of the assessment under Section 148 of the Income Tax Act, 1961 was justified in relation to the acquisition of shares of Escorts Heart Institute & Research Centre Limited (EHIRCL) by the Assessee.- Whether the intrinsic value of the shares (valued by the Assessing Officer at Rs. 550 per share and later enhanced to Rs. 745 per share by the CIT(A)) can be treated as income that escaped assessment, thereby justifying additions to the Assessee's income under the provisions of the Income Tax Act.- Whether the provisions of Section 2(24)(iv) of the Income Tax Act, which deal with perquisites, are applicable to the difference between the intrinsic value of shares and the amount paid by the Assessee.- Whether the cost of acquisition of shares for the purpose of capital gains tax should be the intrinsic value determined by the Assessing Officer or the actual amount paid by the Assessee (Rs. 10 per share).2. ISSUE-WISE DETAILED ANALYSISDelay in Filing the AppealThe application for condonation of delay of 1563 days was considered. The Court found no credible reasons to justify condoning such an extensive delay. However, given that the appeal had been pending since 2011, the Court proceeded to examine the substantive controversy raised by the Revenue.Reopening of Assessment under Section 148The reopening was initiated on the basis that the Assessee had acquired 10% shares of EHIRCL for Rs. 20,00,000, whereas the book value of the total equity shares was Rs. 110,14,12,937, implying an intrinsic value of Rs. 11,01,41,293 for the Assessee's shares. The Assessing Officer treated this difference as income that escaped assessment and made additions accordingly.The ITAT upheld the reopening of the assessment, rejecting the Assessee's challenge to the validity of the notice under Section 148. This was consistent with the legal framework that allows reassessment where income has escaped assessment, provided the AO has tangible material to form a belief.Valuation of Shares and Addition to IncomeThe Assessing Officer valued the shares at Rs. 550 per share, while the CIT(A) enhanced this valuation to Rs. 745 per share based on the book value of the shares. The Assessee had originally valued the shares at Rs. 10 per share.The ITAT examined this valuation dispute on merits. The Assessee contended that the shares were received in exchange for his interest in a not-for-profit organisation (Escort Heart Institute and Research Centre), and hence no profit arose at the time of acquisition. Consequently, the difference in valuation could not be treated as a perquisite or income.The Court noted that the ITAT held the provisions of Section 2(24)(iv) (which define perquisites) to be inapplicable in this case, thereby rejecting the Revenue's contention that the difference in intrinsic value and purchase price should be taxed as a perquisite.Application of Section 2(24)(iv) of the Income Tax ActSection 2(24)(iv) defines perquisites as any benefit or amenity provided by an employer to an employee. The Revenue argued that the difference between the intrinsic value of the shares and the amount paid by the Assessee constituted a perquisite.The ITAT disagreed, finding that the shares were acquired by the Assessee in exchange for his interest in a not-for-profit entity and not as a perquisite from an employer. Therefore, the difference could not be taxed under this provision. The Court accepted this reasoning, emphasizing the inapplicability of Section 2(24)(iv) to the facts of the case.Cost of Acquisition and Taxation of Capital GainsThe Assessee filed an additional affidavit confirming that the shares were sold in Financial Year 2007-08 and that the long-term capital gains arising from the sale were duly declared and taxed in Assessment Year 2008-09. The AO accepted the cost of acquisition as Rs. 10 per share and taxed the gains accordingly.The Court observed that the Revenue, having accepted the cost of acquisition at Rs. 10 per share for the purpose of capital gains taxation, could not now contend that the cost should be based on the intrinsic value determined during reassessment. This inconsistency militated against the Revenue's stand and supported the Assessee's position.Conclusions on Substantial Questions of LawThe Court found no substantial question of law arising for its consideration. The ITAT's findings on the inapplicability of Section 2(24)(iv), the valuation of shares, and the acceptance of cost of acquisition in subsequent assessments were upheld.3. SIGNIFICANT HOLDINGS- 'The provisions of Section 2(24)(iv) of the Act were inapplicable, and therefore, the difference between the intrinsic value of the shares and the amount paid by the Assessee for acquiring the shares could not be taxed as perquisites.'- The Court emphasized the principle that a Revenue authority cannot take inconsistent positions in different assessment years, particularly when it has accepted the cost of acquisition at Rs. 10 per share and taxed capital gains accordingly.- The reopening of the assessment was found to be valid, but the addition on account of intrinsic value was not sustainable on merits.- The appeal was dismissed, affirming the ITAT's order that partly allowed the Assessee's appeal by rejecting the addition made on the basis of intrinsic value of shares.