TaxTMI 
TaxTMI 
2020 (12) TMI 1065
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....r referred to as "M/s SGS"). With consent of parties, we shall consider appeal of Shri J. S. Gujral in ITA No.5512/Del/2011 as the lead matter and our finding given therein will apply mutatis mutandis in other 3 appeals. 2. Appellant has challenged the impugned order on following grounds:- "1. That on facts and in law the initiation / culmination of reassessment proceedings u/s 147 is bad in law and void inter alia as: (a) there was no legitimate material to form a reason to believe that income liable to tax has escaped assessment. (b) the assumption of jurisdiction is bad in law, mechanical and without due consideration. (c) the observations of CIT (A) vide order dated 19th December, 2008 in appeal No.183/07-08 could not constitute information leading to escapement of income. 2. That on facts and in law the CIT(A) erred in upholding an addition of Rs. 1,44,24,000/- as income under the head "Salaries". 2.1 That on facts and in law, the CIT (A) erred in upholding that a benefit has been obtained by the appellant as a director of M/s SGS Tekniks Pvt. Ltd. by acquiring shares of M/s Eltek SGS Pvt. Ltd. at face value of Rs. 10/- per share from it, which is taxable as a per....
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....actual sale consideration could not be ignored and substituted. Ld. CIT (A) therefore, deleted the addition in hands of M/s SGS, however, he gave an intimation to the Ld. AO of the four appellants before us for examining the impact of above transaction in their individual capacity. In this regard Ld CIT (A) of M/s SGS held as under:- "4.7 I have carefully considered submissions made on behalf of appellant. I do not have any doubts about the fact that the actual value of the shares of Eltek SGS Pvt. Ltd., which were transferred by the company to its director, was much higher than the face value. According to some basic calculation the fair market price of shares would worked out to about Rs. 250 per shares as discussed in the enhancement order dated 4/11/08 (Annexure A to this order). The AO had discussed application of yield method / profit capitalization method to determine the fair market value, but made wrong calculation. The appellant had in earlier submissions accepted the application of that method subject to the some computation error by AO. The AR had himself worked out the quantum of capital gain which was proposed to be offered to tax (see Annexure A). Since the basic m....
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....amined in their individual cases. The amount of benefit or perquisite may be taxed either as per sec 17(2)(a)(i) or residual sec. 56. The intimation for this purpose may be sent to the concerned authorities." 4. Premised on the information received from the office of Ld. CIT(A)-XI vide order dated 19th December, 2008, the Ld. AO recorded his reasons for reopening u/s 148(2) as under :- "During the course of assessment of M/s SGS Tekniks Pvt. Ltd. a company in which the assessee is one of the directors, it was found that the company had transferred 60100 shares of M/s Eltek SGS Pvt. Ltd. on the face value of Rs. 10/- each. The said company M/s SGS Tekniks Pvt. Ltd. was holding as investment, some shares of another Pvt. Ltd. company namely M/s Eltek SGS Pvt. Ltd. The shares of the company Eltek SGS Pvt. Ltd. were acquired at face value of Rs. 10 in various earlier years and included some bonus shares also. Out of that 240400 shares of Eltek were transferred during the year at face value of Rs. 10/- to four directors. The Assessing Officer in the case of SGS Tekniks Pvt. Ltd. held that transfer of shares to directors at book value was a colorable device to avoid tax and hence m....
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....y for the sole purpose of avoiding tax liability by transferring the shares at face value instead of market value. 5.2 Since M/s Eltek SGS Pvt. Ltd. was a profit making and dividend paying company, the value of the shares of the company would be much higher than the face value and any transaction done at a price which is lower than the market value of shares would amount to providing undue benefit to the recipient. In this case, as per the reasons recorded for reopening the assessment the value of the share of M/s Eltek SGS Pvt. Ltd. should have been taken at Rs. 250/- at the time of transfer of 60100 shares of M/s Eltek SGS Pvt. Ltd. held by M/s SGS Tekniks Pvt. Ltd. to the assessee, who was a director in M/s SGS Tekniks Pvt. Ltd. as per section 2(24)(iv) of the I.T. Act, 1961. "the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which but....
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....pport the belief. Reference is also made to the case of ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 291 ITR 500 (SC) which states if the Assessing Officer for whatever reason has reason to believe that income has escaped asstt he has jurisdiction to reopen the asstt. In the case of Bawa Abhai Singh v. Dy. CIT 253 ITR 83 the portion relevant to the issue is reproduced below:- "Section 147 with effect from 1-4-1989 provides that where the assessing officer has reasons to believe that any income chargeable to tax has escaped assessment for any assessment year, he may apply the provisions of section 148 to 153 of the Act. Conditions precedent for initiation of action under section 147(a) or 147(b) of the pre-amended section are highlighted above. The only condition for action is that the assessing officer should have reasons to believe that income has escaped assessment, which belief can be reached in any manner and is not qualified by a pre-condition of faith and true disclosure of material fact by an assessee as contemplated in the pre-amended section 147(a) and the assessing officer can under the amended provisions legitimately reopen the assessment in respect of an inc....
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....S Tekniks Pvt. Ltd. for AY 05-06 dated 19/12/08 has calculated in the very logical way what the value of share should be. I find no reason to disagree with this valuation determined by the Ld. CIT(A). In my opinion, therefore the value of shares should be taken as Rs. 250/- per share and the benefit of Rs. 240/- per share (250-10) may be treated as perquisite/benefit of value received by the appellant. The action of the Assessing Officer is on the same lines, is therefore is found to be justified and the order of the AO is confirmed." 5. Before us, at the outset Mr. Tarandeep Singh, Ld. Counsel on behalf of the Appellants submitted by that the Ld. AO has erred in assuming jurisdiction to reassess by invoking provision of section 147 inasmuch as there is no application of mind by the Ld. AO while recording of reasons, rendering assumption of jurisdiction as bad in law. He submitted that the observations of Ld. CIT(A) while disposing off the appeal of M/s SGS were not binding upon the Assessing Officer of the appellant and therefore he was duty bound to apply an independent mind and conduct necessary investigations before issuing notice u/s 148. In support of his submissions, Ld. Co....
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....lied upon the decision of Hon'ble Apex Court in the case of M/s Infosys Technologies reported in 297 ITR 167 (SC) in support of his contention that provisions like section 17(2)(iiia) and section 17(2)(vi) are not applicable to the year under consideration, Ld. AO was not justified in charging to tax notional benefit by taking into consideration the FMV. 8. Without prejudice, Ld. Counsel also challenged the action of AO assuming that FMV of shares of M/s Eltek as on date of transfer at Rs. 240 per share. 9. Lastly, the Ld. Counsel also challenged the action of Ld. AO in levying interest u/s 234B of the Act. In this regard it was submitted that income in dispute is tax deductible and therefore, as per decision of Hon'ble Delhi High Court in GE Packaged Power reported in 373 ITR 65 (Del) interest u/s 234B cannot be levied. 10. On the other hand, Ld. Sr. DR vehemently opposed the above argument of the Ld. Counsel and submitted that the Ld. AO has correctly assumed jurisdiction to re-assess u/s 147 of the Act. He submitted that the order passed by Ld. CIT (A) in the case of M/s SGS was an information "material" enough justifying formation go belief and recording of reasons. Ld. Sr. ....
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....of sections 15 and 16 and of this section,- .... .... (2) "perquisite" includes- (i) the value of rent-free accommodation provided to the assessee by his employer; (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer; ... .... (iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases- (a) by a company to an employee who is a director thereof; (b) by a company to an employee being a person who has a substantial interest in the company; (c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income under the head "Salaries" (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds fifty thousand rupees: Explanation.-For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from suc....
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....as a benefit within the meaning of section 2(24)(iv). 13. The Tribunal has also recorded a finding of fact that there was a clear arrangement between the assessee and the said company not to charge interest on either side in terms of a resolution of the board of directors and that in the past, the assessee had substantial credit balances with the company on which the company never paid any interest to the assessee. In this background too, it cannot be said that the assessee derived any benefit by not paying any interest on the overdrawn amount in the two years under consideration. Where the company borrows funds on interest for the specific purpose of providing loans to its directors but does not charge interest from them, or where the financial condition of the company is such that utilisation of the funds of the company by its directors in the form of loan without payment of interest to the company will be detrimental to the interest of the company, in such cases, grant of interest-free loan to the directors may be regarded as a benefit provided by the company to its directors." 14. It will be relevant to note that the above decision of Hon'ble Calcutta High Court has been app....
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....l availed by the appellant-companies amounts to benefit arising from business or not, is the issue to be decided in these appeals. .... ... 37. When the shares were acquired by the appellant-companies with the specific objective of retaining the controlling interest in Dr. Reddy's Laboratories Ltd., there cannot be a presumption that those shares were acquired for resale in the stock market and earn profit out of that. If a person acquires a large block of shares with the object of the acquisition of the controlling interest of the company whose shares are to be purchased, the inference is inevitable that the intention was not to acquire them as part of the person's stock-in-trade. Subsequent disposal of some of the shares so acquired does not make the transaction an adventure in the nature of trade. This was the view of the Hon'ble Supreme Court in the case of Ramnarain Sons (P.) Ltd.(supra). Where sale of those shares was not contemplated, there is no justification in comparing the market price of existing Dr. Reddy's Laboratories shares with the preferential issue price of shares. One of the strongest arguments of the Revenue is that the appellant companies have derive....
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....ient; every one of them should be in the nature of income. The income, obviously need to be real. Clause (iv), if edited for our purpose reads as follows: "The value of any benefit arising from business....". That is, the benefit must be one arising from business during the relevant previous year. While defining the scope of total income in section 5 of the Act, the law has made a twofold characterisation, viz. income accruing or arising. But while dealing with benefit in the nature of income in the context of section 28, law has conspicuously omitted the concept of "accruing" and has prescribed only "arising". "Benefit arising" implies benefit arising in the previous year. In other words, the law has made the nature of benefit under section 28(iv) very clear and precise. That is, the benefit must be income in character; and it should be arising in the relevant previous year. In the present case, the income is prospective on the condition of the future sale of shares. That income which is prospective in nature cannot be construed as "benefit arising" to the appellant-companies in the relevant previous year." 43. The basis of the argument that the appellant-companies have derive....
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....The sole basis for levying income-tax on the amount was on the assumption that in case the shares are sold, they would have yielded the differential price and that, in turn, can be treated as "income". Even if the exercise contemplated by the Income-tax Officer is taken as permissible in law, at the most, it amounts to "accrual" and not "arising" of income. Here again, the Tribunal has explained the subtle distinction between the two, in a perfect manner and arrived at the correct conclusion." 17. Further, where legislature intended that for taxation of "perquisite", especially in cases of issuance/allotment/transfer of share by an employer to his employee the value of "perquisite" is determined by taking into consideration the FMV then it has specifically provided for that. One may refer to provisions of section 17(2)(iiia) which was inserted by Finance Act, 1999, w.e.f 01-04-2000 and thereafter was omitted by Finance Act, 2000 w.e.f 01-04- 2001 and provisions of section 17(2)(vi) by Finance Act (No.2) 2009 inserted w.e.f. 01-04-2010. These are reproduced below: Section 17(2)(iiia) Section 17(2)(vi) Section 17(2)(iiia) the value of any specified security allotted or transfer....
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....of such security or shares; (d ) "fair market value" means the value determined in accordance with the method as may be prescribed; (e ) "option" means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price; 18. In the present case, we are concerned with law applicable for AY 2005-06 when provisions of section 17(2)(iiia) or 17(2)(vi) are not applicable. In this regard reference can be made to the judgment of Hon'ble Apex Court in case of M/s Infosys Technologies reported in 297 ITR 167 (SC). In this case issue involved was taxation of ESOP's as Perquisites. Since provisions of section 17(2)(iiia) were inserted later revenue invoked provisions of section 17(2)(iii). Hon'ble Apex Court rejected the argument raised by revenue seeking valuation of perquisite comparing benefit derived with FMV. Apex Court also held that provision of section 17(2)(iiia) are not retrospective and concluded as under: "16. Be that as it may, proceeding on the basis that there was 'benefit', the question is whether every benefit received by the person is taxable as income? In our view, it is not so. Unless the be....
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....tive rules while assuming jurisdiction. Hon'ble Apex Court in case of Arun Kumar reported in 286 ITR 89 (SC) has held as under: "68. A "jurisdictional fact" is a fact which must exist before a Court, Tribunal or an Authority assumes jurisdiction over a particular matter. A jurisdictional fact is one on existence or non-existence of which depends jurisdiction of a court, a Tribunal or an authority. It is the fact upon which an administrative agency's power to act depends. If the jurisdictional fact does not exist, the court, authority or officer cannot act. If a Court or authority wrongly assumes the existence of such fact, the order can be questioned by a writ of certiorari. The underlying principle is that by erroneously assuming existence of such jurisdictional fact, no authority can confer upon itself jurisdiction which it otherwise does not possess. .... .... 78. From the above decisions, it is clear that existence of 'jurisdictional fact' is sine qua non for the exercise of power. If the jurisdictional fact exists, the authority can proceed with the case and take an appropriate decision in accordance with law. Once the authority has jurisdiction in the matter on existenc....