2008 (1) TMI 581 - HC - Income Tax

High Court rules market value difference in share as income; employee considered promoter.

Commissioner of Income-tax Versus Kirtivan D. Kotian

The High Court of Karnataka ruled in favor of the Revenue in a case concerning the treatment of a difference in the market value of shares as escaped ... Income- The assessee who is an employee of M/s. Manikya Plastichem Pvt. Ltd. as an individual filed return of income on July 1, 1996, for the assessment year 1996-97 declaring total income of Rs. 4,68,520. The return was processed under section 143(1)(a) of the Income-tax Act. During the course of assessment, it was noticed by the Revenue that M/s. Manikya Plastichem Pvt. Ltd. had issued 50,000 equity shares at a face value of Rs. 10 each to the assessee herein and in the same year the said company had issued 4,00,000 equity shares at Rs. 25 per share to TDICI. The Assessing Officer having found the difference in the market value of the shares allotted to the assessee, treated the difference amount of Rs. 15 per share as an escaped income. The Commissioner (Appeal) dismissed the appeal. The Tribunal held that the shares were allotted to the assessee as a promoter of the company and pursuant to an agreement, and set aside the order of the Commissioner (Appeals). Held that- the assessee was the employee of M. Though the Tribunal had given a finding that the shares had been allotted to the assessee by virtue of an agreement in favour of the assessee as a promoter of the company, he could not be considered as promoter of M. The assessee being an employee of the company having got shares at the rate of Rs. 10 each, had been benefited out of such allotment when the same shares were sold at the rate of Rs. 25 per share. Thus the Tribunal was not justified in allowing the appeal. Issues:1. Challenge to order passed by Income-tax Appellate Tribunal by Revenue.2. Treatment of difference in market value of shares as escaped income.3. Dispute regarding benefit derived by the assessee from share allotment.4. Appeal filed by assessee before Commissioner of Income-tax (Appeals).5. Second appeal filed by assessee before Income-tax Appellate Tribunal.6. Appeal by Revenue against Tribunal's order.7. Substantial questions of law raised by Revenue.8. Interpretation of agreement between companies.9. Determination of whether assessee qualifies as a promoter.10. Application of section 17(2)(iii) of the Income-tax Act.11. Tribunal's decision and its justification.12. Final decision of the High Court.Analysis:1. The High Court of Karnataka heard an appeal by the Revenue challenging the order of the Income-tax Appellate Tribunal regarding the treatment of a difference in the market value of shares as escaped income. The assessee, an employee of a company, had filed a return of income declaring total income, which led to the Revenue noticing discrepancies in share allotments by the company to the assessee and another entity.2. The Assessing Officer issued a notice under section 148 of the Income-tax Act, leading to a dispute over whether the assessee derived any benefit from the share allotment. The Assessing Officer treated the difference in share value as an escaped income, which was contested by the assessee through appeals to higher authorities.3. The Tribunal found that the shares were allotted to the assessee as a promoter of the company based on an agreement, leading to the appeal being allowed and the previous orders being set aside. The Revenue raised substantial questions of law challenging the Tribunal's decision, including the reopening of assessments and the application of relevant provisions of the Act.4. The High Court analyzed the agreement between the companies and the status of the assessee, concluding that the assessee did benefit from the share allotment as per section 17(2)(iii) of the Act. The Court disagreed with the Tribunal's interpretation of the facts and held in favor of the Revenue, setting aside the Tribunal's order and confirming the Assessing Officer and Commissioner of Income-tax (Appeals) decisions.5. The Court emphasized that the term 'promoters and associates' did not categorize the assessee as a promoter, and as an employee, he had indeed benefited from the share allotment. Therefore, the Tribunal's decision was deemed incorrect, and the appeal by the Revenue was allowed, resulting in the restoration of the initial assessment order.