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2018 (8) TMI 1772
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....ase. The assessee in the appeal for assessment year 2010- 11, has raised following grounds of appeal; "1. Disallowance under section 14A of the Act: Rs. 9.59.194/- 1.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) ['CIT(A)1] erred in confirming the disallowance made by the Assessing Officer ('AO') under section 14A of the Income-tax Act, 1961 ('Act') to the extent of Rs. 9,59,194/-. 1.2 On the facts and in the circumstances of the case and in law, the Commissioner of Income - tax (Appeals) erred in upholding the disallowance under section 14A of the Act without establishing any nexus between the administrative expenses and earning of tax free income. 1.3 On the facts and in the circumstances of the case and in law, the Commissioner of Income - tax (Appeals) erred in making an ad hoc disallowance of 50% of the administrative expenses presuming it to be relatable to earning exempt income. 1.4 On the fact and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that investments made by the appellant were strategic investments m....
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....ble in the hands of the donors erred in confirming the taxation of the receipt of shares under section 28(iv) or alternatively under section 56(1) of the Act in the hands of the appellant. 2.6 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in making various observations which are factually incorrect and contrary to the facts available on record which the Appellant craves leave to elucidate at the time of hearing, leading to a perverse finding that Appellant is liable to tax in respect of market value of shares of UPL and UEL received as gift. Taxability under section 2(22)(a) of the Act: 2.7 On the facts and in the circumstances of the case and in law, CIT(A) erred in holding that the market value of the shares of UPL Limited ('UPL') and Uniphos Enterprises Limited ('UEL') gifted by Demuric Holdings Pvt Ltd (DHPL) to the appellant ought to be taxed as deemed dividend under section 2(22)(a) of the Act without appreciating the fact that the appellant is not a shareholder of DHPL. 2.8 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not iss....
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....ise was nothing but a sham or a colourable device to transfer the said shares to the appellant for the ultimate benefit of the Shroff family 2.14 Without prejudice to the above grounds of appeal, on the facts and circumstances of the case and in law, it is submitted that taxing the market value of shares of UPL and UEL transferred by way of gift to the appellant amounting to Rs. 1464,54,53,232/- as business income under section 28(iv) or income from other sources under section 56(1) or deemed dividend under section 2(22)(a) of the Act will amount to double taxation since the same amount has held to be taxable in the hands of the shareholders of DHPL as deemed dividend under section 2(22)(a) of the Act in respect of indirect disguised distribution of accumulated profits by the donor companies to their shareholders/members of Shroff family; 3. Non-consideration of claim made in the revised return of income: Rs. 10,17,230/- 3.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the AO in computing income under the head Profits and gains from Business or Profession on the basis of the original return of i....
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....missioner of income tax (Sr. DR) and Ms Kadambri Advocate for the revenue at length and carefully perused the material available on record. We have also gone through various documents and the case law relied by the parties. 4. Ground No.1 relates to the disallowance under section 14A. The ld. Sr. Counsel for the assessee submits that no interest expenditure was incurred by assessee for the purpose of investment in share generating exempt income. No fresh investment was made by the assessee during the relevant financial year. The assessee voluntary disallowed a sum of Rs. 34,215/- pertaining to demat charges. During the assessment proceedings the assessee submitted written note on the expenses attributed for earning exempt income, wherein the assessee has explained the fact. The ld. Sr. Counsel further submits that investments were made in group companies for strategic purpose on which no other expenses or administrative expenses were incurred. In alternative it was submitted that that only those investment which yielded exempt income during the relevant financial year ought to have been considered for the purpose of disallowance under section 14A. The assessing officer erred in ....
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....ary disallowance and thereby calculated/ worked out additional disallowance of Rs. 18,26,890/-. We have noted that the assessing officer has not disputed the disallowance of direct expenses as provided under Rule 8D(2)(i) and the interest expenses under Rule 8D(2)(ii). The dispute is with regard to administrative expenses only as prescribed under Rule 8D(2)(iii). We have noted that the assessee has claimed investment in its group companies for strategic purpose on which no other expenses or administrative expenses were allegedly incurred. We have further noted that recently the Hon'ble Apex Court in Maxopp Investment Ltd. Vs Commissioner of Income-tax [2018] 91 taxmann.com 154 (SC) held that in cases, where shares are held as stock-in-trade, main purpose is to trade in those shares and earn profits therefrom, in the process, certain dividend is also earned, though incidentally, which is also an income. This triggers applicability of section 14A which is based on theory of apportionment of expenditure between taxable and non-taxable income. Therefore, to that extent, expenditure incurred in acquiring those shares will have to be apportioned. We may also refer that Special Bench of D....
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....e in the books of assessee. Therefore, no adjustment in respect of said receipt by way of gift while computing total income as well as book profit under section 115JB was made. Both the companies are listed on the recognised Stock Exchange in India. The said shares of UPL and UEL were received by the assessee company in the process of restructuring the group organisation to maximise focus on various business areas and to strengthen the organisation with the growth aspiration and other activities of the group. The promoters of the group have decided to restructure and consolidate and regroup its holding in sister concern in one company. Therefore, the shares of UPL and UEL were received by assessee as a gift in the process of restructuring/reorganising and consolidation of the group. The revenue authorities has no occasion to tax the receipt in the form of share of a listed company received by way of gift as income under the Act, the act of receiving gift of shares did not tantamount to income. The assessee company has received shares of listed company without any consideration in the hands of recipient and therefore, the question of taxing of receipt of share of UPL and UEL as a gi....
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....eholder of DHPL was shown to us by drawing our attention to the investment schedule forming part of the Audited accounts of assessee for the year ended 31 March 2006 (page No.134 of PB). Further, even the investment schedule forming part of the audited accounts of assessee for the year ended 31 March 2010 does not show any investment in DHPL during FY 2009-10 and FY 2008-09. It is submitted that in the Related Party disclosure forming part of the audited accounts of assessee for the year ended 31 March 2010 (page 123 of PB), evidences that DHPL is the holding company of assessee. In view of the above, it is submitted that assessee is not a shareholder of DHPL. Accordingly, the basis of invoking the provisions of section 2(22)( a) of the Act, in respect of gift of shares by DHPL to assessee without consideration, fails. 11. For receipt of share without consideration added to the book profit under section 115JB, it was submitted that the assessee company had complied with the requirements of Parts II and III of Schedule VI of the Companies Act and followed the mandatory accounting standards. Accordingly, no adjustment ought to be made in respect of the market value of shares wh....
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....essee entered into a pre-ordained series of transaction with a particualr motive disguised as to streamline the group holding which is not the real motive. There are numebr of lapses in the transfer deed in respect of certain doners, copy of which are placed on record in the form of paper-books. The ld. Special Counsel pointed out that in case of donor companeis the amendments were made to validate the gifts of share to assessee. The Memorandum of Associationa and Article of Assocation were amended to enable them to receive and for making gift. All amendemnts were made in Memorandum of Assocaition and Article of Assocaition around the same time when the game of gift of share took place. The ld. Special Ccounsel for revenue also pointed out in case of donor firm some retired partners had signed the transfer agreement while the other partners have not signed the said docuemtns. In case of doner trust only one trustee had signed the agreement and not the other trustee, which is in violation of the law. In supprot of his submission, the ld. Special Counsel for the Revenue relied upon the decision of Supreme Court in case John Tinson & Co. Pvt. Ltd. V/s Surjeet Malhan [(1997) 9 SCC 651]....
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....pined that there are series of issues to be considered and needs further investigation. The decision of Gujarat High Court in Prakriya Pharmacham (supra) was decided in the light of section 45 and was a case of validity of re-opening and the facts of that case are not applicbale in the present case. Further, the orders of Tribunal in Bloom Packaging and Unifos International Ltd. does not decide the isuse on merit. The ld. DR further submtis that the Hon'ble Supreme Court in case of Padma Sundara Rao & Ors V/s State of Tamil Nadu & Ors (2002) 3 SCC 533 held that decision should not be relied upon without considering whether the facts of the case are identical. In case of KDA Enterprises (supra) the issue for consideration was taxability of the gift of right to receive dividend income and therfore, fact are differet and cannot be relied. 18. In support of addition under section 28(iv) the ld. Special Counsel submits that section 28(iv) be read with the provision of section 2(24)(vd) and relied upon the decision of CIT vs. Calcutta Knitwears (362 ITR 673) (SC), it was submitted that provision of section section 28(iv) should be tested on touchstone of six conditions viz (i) benefit....
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....2(22)(a) of the Act in the hands of the members of Shroff family and brought to tax under section 115-O of the Act in the hands of Bloom Packaging and Uniphos International by the CIT(A) was deleted. 20. For submission of ld. Special Counsel that order of Tribunal in case Ultima was based on different fact, it was submitted that in the case of Ultima Search vs ACIT (ITA No. 4646/Mum/2015), the addition made under section 45(4) read with section 48 of the Act was deleted by Tribunal. Further, the addition in respect of 28(iv) in respect of the alleged benefit received by the partners of Ultima in the course of business was also deleted by the Tribunal. For the submission related with the decision of Padma Sundara Rao (supra) it was submitted that observation and finding of the said decision are not only relevant but also binding to some extent. In reply to the decision of KDA Enterprises (supra) that the issue in that case were taxability of gift of the right to receive dividend income and that fact were different and cannot be relied, the ld. Sr. Counsel for assessee replied that the said decision the right to receive dividend, which is undoubtedly a capital asset was transferre....
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.... Rule 29 of Income-Tax (Appellate Tribunal) Rules for admission of additional evidence. The ld Special Counsel for the revenue argued that the application under Rule 29 be decided first, before deciding the issue related with the taxability of gift of shares. 24. We have perused the contents of the application under Rule 29 of Incometax (Appellate Tribunal) Rules. In the application for additional evidence, the Revenue has pleaded that main issue involved in the appeal involve the receipt of share of two companies by way of gift from sixteen different entities of the group. The two companies, whose shares were received in gift, are listed companies. The market value of the gifted share is Rs. 1464,54,53,232/-, which has been accounted for by the recipient in its books of account at a nominal value of Rs. 100/-. The assessee has claimed the gift of share as exempt being capital receipt and rational for this transaction is claimed to be the process of restructuring of the group to maximise focus in various business area. The Revenue has treated the transaction as colourable devise. It is further pleaded in the application that subsequent to the assessment order passed under sectio....
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....to conduct necessary further enquiry within a period of two months or more, (ii) additional evidence further required by the Revenue like bank transaction and share purchase agreement with M/s Timberlane Pte. Ltd., Singapore acquiring 48% share in DHPL may be called by the Tribunal, or (iii) additional evidence may be admitted by Tribunal and further allow two months further time in order to enable the Revenue to collect evidence from Bank at Singapore/India, share purchase agreement and then decide the appeal on merit. The ld. Special Counsel for the Revenue argued on similar line as per the contention of his application and further relied upon the decision of (i) New Delhi Television Ltd. (83 Taxmann.com 282), (ii) Khairunnissa Ebrahim (201 ITR 903),(iii)Jansampark Advertising (375 ITR 373) (Del HC),(iv) Maruti Udyog (161 CTR 81) (Del HC) and (v) Union of India vs Ibrahim Uddin (2012) 8 SCC 148. 26. On the other hand the ld. Sr. Counsel for the assessee objected for the admission of the additional evidence, it was submitted that it is not open to the Revenue to make an application for admission of additional evidence. The scope of Rule 29 postulates that additional evidence ca....
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....rom doing directly. The ld. Sr. Counsel also relied on the decision in CIT Vs Kamal C Mahboobani (214ITR 15) (Bom), CIT Vs Rao Raja Hanumant Singh 252 ITR 528(Raj). The ld. Sr. Counsel prayed that the additional evidence filed by the revenue at this stage in the form of various paper books are not relevant for deciding the issue before this Tribunal. 27. We have considered the rival submissions of the parties and have gone through the various documents sought to be relied as additional evidence and the decisions relied by the ld. representatives. We have also deliberated on the judicial pronouncement cited the ld. Special Counsel for the revenue and the ld Senior Counsel for the assessee during the course of hearing before us. For appreciation of Rule 29 we may refer the provision thereof, which is as under: "29. Production of additional evidence before the Tribunal.- The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any documents to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause,....
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....refusing) to entertain the additional evidence sought to be produced by the Revenue at the time of hearing of the appeal." 30. The Hon'ble Rajasthan High Court in CIT Vs Rao Raja Hanut Singh (252 ITR 528) (Raj) held as under: "Production of additional evidence at the appellate stage is not matter of right to the litigating party but within the discretion of the Court which is to be exercised judiciously...... Secondly, even if it be a question of law, if answer is evident or is settled by the decisions of the Supreme Court, such question need not be referred to the Court for its opinion. There is no dispute about the fact that litigant cannot claim as a matter of right to lead additional evidence before appellate authority and the power of the Tribunal in the matter of taking additional evidence on record is circumscribed by the rule. Exercise of such power to permit a party to produce additional evidence before the Tribunal is absolutely within the discretion of the Tribunal and cannot be claimed as a matter of right. There is statutory mandate that parties are not entitled to produce additional evidence, oral or documentary, before the Tribunal. The discretion of the ....
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....IT (Appeals), cannot be approved or upheld." 32. In the aforesaid case as the addition was made on account of unexplained credits under section 68 of the Act. The material furnished by the assessee during the course of reassessment proceedings was not properly scrutinized by the AO. Further, the CIT (A) and Tribunal decided the case without examining the information submitted before them by the assessee. In this context, it was held by the High Court that the CIT (A) and Tribunal ought to have made further enquiry into the transaction entered into by the assessee if deemed necessary. Accordingly, the High Court remanded the matter back to the CIT(A) to examine the material submitted by the assessee and decide the matter in light of the said material. Accordingly, it was not a case of admission of any additional evidence but it was restored back directing an enquiry to be made on the material that was already before the lower authorities. The decision in Maruti Udyog Vs ITAT (supra) deals with admission of additional ground and not additional evidence. The two are governed by different independent principles and accordingly, the aforesaid decision has no applicability in the pres....
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....t in issue before the Tribunal. Moreover, there is no dispute about the transfer of share by way of Gift and about the identity of the donor and volumes of the shares. The assessee besides the other issues has raised issues only on the taxability of the shares under various provisions of Act. Therefore, the application filed by the revenue under Rule 29 is dismissed 36. Now we shall proceed to discuss Ground No.2 relates to validity of taxability of gifted shares to Assessee Company, under various sections of Income-tax Act. We have considered the rival submissions of the ld Counsels of the parties. We have also deliberated on various judicial pronouncement referred by the lower authorities in their orders as well as various decisions cited and relied by the parties during the course of hearing in context of factual matrix of the case. 37. The Assessing Officer while passing the assessment order treated the transfer of share as taxable receipt holding that assessee is a beneficiary in the ordinary course of its business and the receipt of share is taxable under section 28(iv). The Assessing Officer alternatively treated the market value of shares received by assessee without ....
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....s of section 28(iv) cannot be applied. Not every receipt is taxable under head 'Income from other Sources' but only those which can be shown as 'income' can be brought to tax under this head, if it does not fall directly under other heads of income specified in section 14. Thus, the transaction was held to be nothing but a gift and thus a non taxable capital receipt. 39. Further, the Coordinate bench of Tribunal in DCIT Vs KDA Enterprises (supra) held section 2(24) defines 'income'. The definition of 'income' provided in section 2(24) although an inclusive definition, but it specifically provides the income which are intended to be taxed under the provisions of the Act. Even the income in the nature of capital gains as per section 45, and gifts received as per section 56(2)(v), (vi), (vii) etc. are included in the definition of income. Thus under the Act only the receipts which are in the nature of 'income' are subjected to tax. Any other receipts which are not in the nature of 'income' are not liable to tax under the provisions of the Act. Section 5 provides for scope of total income chargeable to tax in India on the basis of receipt, accrual and....
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....56(2) of the Act. 41. Now, first, we shall examine the taxability of the gift of shares by making addition under section 2(22) (a). The section 2(22)(a) in the statute book is as under: Section 2(22) "dividend" includes (a) Any distribution by a company of accumulated profit, whether capitalized or not if such contribution entails the relief by company to its shareholder of all or any part of asset of the company 42. In our view, in order to fall within clause (a) of section 2(22), two conditions must be satisfied; (i) it must be a distribution of accumulated profits, whether capitalized or not; and (ii) it must be such as entails the release of all or any of assets of the company. The two conditions are manifestly cumulative and it is only if both conditions are satisfied, a distribution can be said to be dividend within the meaning of the section. We have noted that the assessee is not a shareholder of DHPL and therefore, the taxing of receipt of gift from DHPL is not sustainable. Even while making submission ld. counsel for assessee invited our attention to the investment schedule of assessee-company as on 31.03.2008 which shows that assessee is not a sha....
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....es, certain shares of a group company were transferred to assessee at cost, and the purchase was by way of investment only and it was not a case of revenue that there was any business connection or business done between seller and purchaser or that any privilege or benefit or concession had been passed by seller to assessee. Therefore, mere purchase of shares as an investment with lock-in period of holding, for a consideration which is less than market value, cannot be brought to tax as a benefit or perquisite under section 28(iv). 46. In DCIT Vs Manish M Chheda (29SOT 138 Mum) it was held "17.----- one of the condition necessary for applicability of s. 28(iv) is the benefit or perquisite sought to be taxed must be arising in the course of business carried on. In the case of Smt. Chetanaben B. Sheth (Minor) (supra), Hon'ble Gujarat High Court has held that amount received by an assessee partner of a firm towards valuation of goodwill and assets of a firm at the time of retirement from the firm does not attract provisions of s. 28(iv) of the Act, since, the same cannot be said to be a perquisite arising from the business and that even otherwise it would not partake the c....
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....ficially held by- (i) the Government, or (ii) a corporation established by a Central, State or Provincial Act, or (iii) any company to which this clause applies or any subsidiary company of such company [if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year. Explanation.-In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words "not less than fifty per cent", the words "not less than forty per cent" had been substituted; 'Section'- 56. Income from other sources - (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section ....
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.... of a closely held company whose value exceeds Rs. 50,000 without consideration or for inadequate consideration by any firm or company subject to certain exclusions. sub section 2 clause (viib) was inserted w.e.f. 1 April 2013 to tax the excess of consideration over the fair value where the receipt of consideration for issue of shares by a private company exceeds the face value of shares issued subject to certain exclusions. sub section 2 clause (x) was inserted w.e.f. 1 April 2017 to tax the receipt of money or any property whose value exceeds Rs. 50,000 without consideration or for inadequate consideration by any person subject to certain exclusions. 50. As we have seen that corresponding amendments were made to the definition of income in section 2(24) to cover the aforesaid receipts as income i.e. insertion of clauses (xiii), (xiv), (xv), (xvi), (xvii) and (xviia) in section 2(24) of the Act. In view of the above, history, the intention of the legislature has been to cover a particular transaction in the tax net; the law has been suitably amended. The fact that the gift of shares of a company in which the public is substantially interested between two compa....
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.... the taxability of gift remained outside the tax net for a long time until section 56(2) was brought on statue book for bringing to tax gift received by individual and by Hindu Undivided Family (HUF) under certain circumstances from 1st April 2005. 52. In our considered view, by virtue of the introduction of the section 56(2)(viia) the transfer of shares of unlisted company either for inadequate consideration or without consideration is deemed to be income chargeable to tax as income from other sources which was otherwise not taxable under the Act. It is important to note here that after the amendment to section 56(2)(viia) of the Act, only the transfer of shares of an unlisted company without consideration or for inadequate consideration is deemed to be income chargeable to tax and not the transfer of shares of listed company. In the present case the assessee has received gift of shares of UPL and UEL being listed Companies, and therefore, the same cannot be treated as income chargeable to tax. In the present case the shares were gifted even prior to the aforesaid proposal made vide the Finance Bill, 2010 applicable w.e.f 01.06.2010, therefore, no addition can be made in the as....
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.... by one person, called the donor, to another, called the donee and accepted or on behalf of the donee." As the issue was equalization of wealth which was made in pursuance of a family arrangement, it was held that the transfer could not be called voluntary and without consideration and therefore not a valid gift. The facts of the said decision are not applicable to the present case. Further, in the said case the receipt of gift was credited to the Profit and Loss account and not to Capital Reserve. However, the gift of share in the present case is shown as Capital receipt. Further, Hon'ble Bombay High Court in B.A. Mohata (supra) dealt with a family dispute and an arrangement to resolve such dispute. The transfer of property was done pursuant to a family arrangement. This decision does not lay down the proposition that a Company cannot make a gift. They only state that a company cannot be part of a family arrangement. Accordingly, the facts of the aforesaid case are not applicable to the facts of the present case. Hence, Ground No.2 of the appeal is allowed. 57. Ground No 3 relates to deduction in respect of interest expenditure amounting to Rs. 10,17,230/-. The ld. Counsel for ....
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....le force in the submission of ld. Sr. Counsel for assessee. Thus, this ground of appeal is restored to the file of assessing officer and direct the assessing officer to verify the fact and pass the order in accordance with law. In the result this ground of appeal is allowed for statistical purpose. 60. In the result, appeal of the assessee is partly allowed. ITA 4850/Mum/2016 for A.Y. 2011-12 The grounds of appeal raised in this appeal read as under: "1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in confirming the disallowance made by the Assessing Officer under section 14A of the Income-tax Act, 1961 ('Act') as per Rule 8D of the Income-tax Rules, 1962 amounting to Rs. 14,84,896/-. 2. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in confirming the action of the AO in the following respects while computing the average value of investments for the purpose of computing the disallowance under section 14A as per rule 8D(2)(ii)of the Income Tax Rules: a) In not excluding the investments made in group comp....
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.... associate company is done on account of business expediency in order to promote business and profits of the Group Companies and not to earn dividend income. 4. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the AO in not allowing deduction in respect of employees' contribution to provident fund paid before the date of filing the return of income but beyond the due date under the respective law. 5. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the AO in not allowing deduction in respect of interest expenditure amounting to Rs. 10,17,230/- inadvertently disallowed in the return of income." 63. Ground No. 1 to 3 relates to disallowance under section 14A. We have noted that these identical to the grounds of appeal in appeal for assessment year 2010-11, which we have restored to the file of assessing officer for deciding afresh, therefore, considering the principles of consistency these grounds of appeals are also restored to the file of assessing officer with similar direction. In the result all the grounds of appeal in these appeals are allow....