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2020 (12) TMI 1065
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....rs of M/s SGS Tekniks Pvt. Ltd. (hereinafter 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 Elt....
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....e order dated 19th December, 2008 decided the issue in favour of M/s SGS by observing that on facts of the case 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 him....
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....es at substantially less than fair market value. Therefore the issue of taxability of benefit obtained by directors from the appellant company is to be examined 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 direc....
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....this issue and has also not explained the reason or the rationale behind this transfer of shares at face value. It can therefore be inferred that the said transfer of shares was done only 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....
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....he assessing officer must have formed the belief that income had escaped asstt and there must be some basis for forming such a belief. From the order of the A.O. it is clear that the AO had a belief and there was material on record to support 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 qua....
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....a price which is lower than the market value of shares would amount to providing undue benefit to the recipient. The issue is what should be the value of shares which should be taken to determine what amount of benefit will accrue to the appellant. 4.5 The Ld. CIT(A) in his order in the case of SGS 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 submit....
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....ments Pvt. Ltd. reported in 79 ITD 238 (Hyd) which has also been upheld by the Hon'ble Andhra Pradesh High Court in 367 ITR 616 (AP). Ld. Counsel further submitted that where legislature intended that FMV be taken as a relevant criteria for taxability of a "perquisite" it has specifically provided for that in section 17(2)(iiia) and section 17(2)(vi). He also relied 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 levie....
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....he transfer of shares at face value has been approved by the management of and Eltek company also". 12. Premised above factual position, we will now examine, whether on the present facts, provisions of section 17(2)(iii) are applicable and whether the Ld AO was justified in initiating action u/s 147 of the Act. Provisions of section 17(2)(iii) are reproduced below for sake of ready reference: "17. For the purposes 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) o....
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....nal go to support the case of the assessee. The Tribunal has clearly recorded that there was nothing on record to show that Oberoi Hotels (I)(P.) Ltd., the company, borrowed any money for making advances to the assessee and/or paid any interest on the overdrawn amount which, but for such payment, would have been paid by the assessee. In the absence of any finding that the company has paid any interest on the overdrawn amount which, but for such payment, would have been paid by the assessee, the amount cannot be treated 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 provid....
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....money or not, arising from business or the exercise of a profession" In a like situation, it has been held that there is no legal basis of valuing the amount of "benefit" derived by looking at the Fair Market Value of shares. Coordinate bench held as under: "32. The appellant-companies have acquired the shares at Rs. 90 per share through the preferential allotment made by Dr. Reddy's Laboratories Ltd. The prevailing market price at that time was Rs. 455 per share. The differential price is Rs. 365 per share. Whether this price differential 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 ....
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.... The above principle is in no way overlooked in the provisions contained in section 28 of the Income-tax Act, 1961. For the purpose of our discussion, the relevant portion of section 28 is quoted below: .... ..... The statute has listed about six items of income chargeable to tax under section 28. The opening words are "The following income shall be....". The words are not, "The following items shall be...........". The word 'income, is very important and purposeful. All the six different items should satisfy the character of 'income' so as to be taxed under section 28. Those six items as such are not sufficient; 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 conce....
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....too well known that in its complex nature, the Act covers not only the "income" that, in fact, has arisen, but also the one that has accrued. 12. When Parliament has consciously chosen to restrict the taxation of benefit only when it has arisen, it is not permissible to tax the benefits by treating them as "accruals". A close scrutiny of the concept of "arising of income" discloses that, it, in fact, must flow into the assets of the assessee, during previous year, and thereby, it became taxable in the financial year. The Income-tax Officer was not even able to show, much less demonstrate, that the income in the form of "benefit" has arisen to the respondents at all. 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. F....
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....ion has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme; (b ) "sweat equity shares" means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called; (c ) the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from the assessee in respect 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....
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....hat in the 'reasons recorded' u/s 148(2), he holds that benefit is taxable in hands of the 'A' u/s 17(2)(a)(i) r.w.s. 2(24)(iv) of the Act. Clearly there is no section 17(2)(a)(i) in statute. Even if it is presumed that CIT (A) of M/s SGS and the current Ld Assessing Officer intended to mention section 17(2)(i), then too it is applicable to Rent Free Accommodations and hence not relevant and applicable. This error is noted by Ld CIT (A) in the impugned order. In fact, Ld AO while passing the final order realized this and has therefore upheld taxability u/s 17(2)(iii) and not either u/s 17(2)(a)(i) or 17(2)(i) or section 56. In our considered opinion existence of a "Benefit" is a "Jurisdictional Fact" which at the outset must be demonstrated by the Ld. AO by determinative 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 fac....