TaxTMI 
TaxTMI 
2024 (12) TMI 980
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....ut of allotment of said shares. (iii) The learned CIT(A) ought to have further appreciated that such benefit is on account of the conduct/management of the business of a closely held company by the assessee as a key promoter/ director and hence, the benefit, being non-monetary benefit, arising out of the business nexus is taxable in the hands of the assessee u/s 28(iv) of the IT Act. (iv)The learned CIT(A) ought to have appreciated that the assessee is a Promoter Director in M/s Alpha Villas P Ltd and 30,75,000 shares of the said company were allotted to the assessee at face value of Rs 10/- whereas at the same time the shares were allotted at a premium of Rs 350/- to other investors and therefore the assessee received benefit or perquisite out of allotment of said shares. (v) The learned CIT(A) ought to have further appreciated that such benefit is on account of the conduct/management of the business of a closely held company by the assessee as a key promoter/director and hence the benefit. being nonmonetary benefit, arising out of the business nexus is taxable in the hands of the assessee u/s 28(iv) of the IT Act. (vi) The learned CIT(A) ought ....
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....e urged at the time of hearing." 4. The brief facts of the case leading to the controversy are that, the assessee is a Director of M/s. Alpha Avenues Pvt. Ltd, M/s. Alpha Villas Pvt. Ltd and M/s. Gilchrist Investments Pvt. Ltd. During the previous year relevant to A.Y under consideration, the assessee derives income from house rent, capital gain and other sources being interest from Bank. The assessee filed his return of income on 8/8/2008 declaring total income of Rs. 28,78,260/-. The return of income was initially processed u/s 143(1) of the I.T. Act, 1961. Later on, the Assessing Officer reopened the assessment by issuing notice u/s 148 of the Act on 06/07/2012 for assessing the income on account of allotment of shares to the assessee by the above 3 companies of Rs. 10/- each at par as against the allotment of shares of these companies to M/s. Cornerstone Properties and Investments (P) Ltd at a premium of Rs. 350/- per share. The Assessing Officer while framing the assessment u/s 143(3) r.w.s. 147 of the Act made addition of Rs. 338,73,00,000/- representing the premium charged by these companies from M/s. Cornerstone Properties and Investments (P) Ltd, but benefit was given t....
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....e investments in concerns like MAA TV, Care Hospital, Asian Institute of Gastroenterology, Indu Projects, Annapoorna Studios, Vanpic, Relysis and some other companies of these sectors through our group companies. Both the above concerns also were picked up because they belong to the above sectors. 4 Please explain the specific factors for making investment in both the above companies though there could be a variety of choice in the form of several other companies of similar type? Also how did you know that there was investment opportunity in these two companies because they are not listed companies? Ans: As the investments are made with the active guidance and directions of my elder brother, Shri N. Prasad, I have to check with him on this issue. Also, we have a team of five persons (including me) who are looking into investment opportunities and provide assistance to Shri Prasad. Regarding the specific factors and the knowledge of investment opportunity, I will check with my brother and my team and furnish a reply on this point in 2 to 3 days because I do not readily remember the specific points". (iii) From the above, it is clear that the assessee is ac....
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....es whose shares are allotted to him so that they would make investments using the said funds and realize huge gains. The annual accounts of both the above said companies for FY 2007-08 are attached with these submissions as additional evidence. As they are material for the decision in the case, the same may kindly be admitted as additional evidence under Rule 29 of the ITAT Rules. (ix) It is also a fact on record that the jurisdictional Bench of Hon'ble ITAT in its decision dated 14/02/2018, confirmed the deletion of the addition made u/s 68 in the hand in the cases of M/s Alpha Villas Pvt Ltd and M/s Alpha Avenues Pvt Ltd for AY: 2008-09 in ITA Nos: 1413 & 1424/Hyd/2014. The Hon'ble ITAT held that the amount of Rs 350/- as share premium which is capital in nature and cannot be taxed in the hands of the said companies u/s 68. 8. All the three companies which allotted shares to the assessee are not start-up companies and they are into operation for about 3 years and on own admission earned huge sums on account of transfer of land on 18/04/2007. Therefore, the net worth of the three companies is high which merits the share premium of 350/. It is humbly submitted t....
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....ion of the Mumbai Bench of the Tribunal in the case of Priyanka Chopra vs. Dy. CIT (169 ITD 1). The learned DR has submitted that there is a nexus between the business activity of the assessee and allotment of shares at a face value which resulted a non-monetary benefit to the assessee in comparison to the fair market value of the shares at which allotted to 3rd person and the said benefit is an income of the assessee u/s 28(iv) of the I.T. Act, 1961. 11. On the other hand, the learned AR of the assessee has submitted that, it is a well settled proposition of law that, for any receipt to be taxed under the I.T. Act, 1961, it must have a character of income, as generally understood or defined in the Act and falling under the charging section. A receipt which is a capital receipt and not a revenue receipt, cannot be charged to tax. A receipt to be charged must squarely fall within the four walls of the charging section either directly or by a deeming provision enacted by the legislature. Except the specific deeming provisions for treating a receipt as income, there cannot be a fiction or Court can fill the gap in legislation. There is no room for any intendment under the fiscal st....
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....s,, the alleged benefit for allotment of shares at lesser price than the 3rd party cannot be treated as income of the assessee u/s 28(iv) of the Act in the absence of any business nexus. 13. The learned AR further submitted that the Coordinate Bench of this Tribunal in the case of KNB Investments Pvt Ltd, and the Bombay Bench of the Tribunal in the case of Rupee Finance and Management Ltd have held that there is no perquisite u/s 28(iv) when shares were allotted at concessional rates and the benefit if any is notional and is taxable on sale of shares as capital gains. Tribunal's decisions were upheld by the high courts. The perquisite should arise from business and not merely accrue. Unless shares are liquidated, no income would arise, though it may have accrued (AP High Court in case of KNB Investments). For a particular item to be charged as perquisite, the provider should have a corresponding liability or should incur expenditure. In this case since it is allotment, the conditions would not be met and hence, shares cannot be perquisite as held by the Hon'ble Supreme Court in case of Excel Industries. 14. Any perquisite to be taxed, there shall be valuation rules to....
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....egory of 'capital transactions' and hence cannot be taxed u/s 28(iv) as held by the Kolkata Bench of this Tribunal in case of Shreyans Investments Pvt Ltd. Section 28(iv)covers fringe benefits that are availed in addition to consideration earned in carrying out a profession or while doing business. A benefit that is passed on by one party to another in addition to cost or sale price, is covered in this proviso as reported in the case of Softner Traders & Consultants Pvt Ltd of the Bombay Bench of the Tribunal. 16. The learned AR of the assessee further relied upon the following judgments: i) CIT vs. Excel Industries Ltd (358 ITR 2956)(S.C) ii) CIT vs. B.C Srinivasa Setty (128 ITR 294) iii) Income Tax Officer vs. Undavalli Constructions (191 ITD 749) iv) CIT vs. Infosys Technologies Ltd (Civil Appeal No.3725 of 2007) v) Add. CIT vs Bharat V. Patel (civil appeal No.24888 of 2015) (S.C) vi) ITO vs. Shreyans Investments Pvt. Ltd, 31 Taxmann.com 71 (Kol). 17. Relying upon the above cited judgments/decision, the learned AR of the assessee has submitted that prior to the amendment in the provisions of section 56(1)(x) w.e....
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....d., at face value of Rs. 10/-. Similarly, he got allotted 30,75,000 shares at face value Rs. 10/- in M/s. Alpha Villas (P) Ltd.. whereas at the same time the shares were allotted at a premium of Rs. 350 /- to other investors. Also, he got allotted 32,50,000 shares in M/s. Gilchrist Investments Private Ltd., tor Rs. 10/- and the same shares were allotted at a premium of Rs. 350/- per share to other investors. It was also noticed that the said M/s. Alpha Avenues Pvt Ltd., issued 4,16,666 shares at a premium of Rs. 350/- per share to M/s. Cornerstone Properties Investments Pvt Ltd. The Addl. CIT has conducted proceedings u/s. 144A in the case of M/s. Alpha Avenues Pvt Ltd during which assessee has justified the premium charged to M/s. Cornerstone Properties Investments Pvt Ltd. The assessee is a promoter director and also the family member which runs the business of M/s. Alpha Avenues Pvt Ltd., which is a closely held company. It can be said that M/s. Alpha Avenues Pvt Ltd is run by both the brothers Sri Nimmagadda Prakash and Sri Nimmagadda Prasad. Therefore, it is their sweat and hard work that brought business to the company which in turn resulted in issue of shar....
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.... profession. Therefore, the benefit from business or exercise of profession is an essential condition for bringing the said benefit in the ambit of section 28 of the I.T. Act, 1961. The investment in the shares of a company does not fall in the definition of income chargeable to tax under any head of the income provided under the I.T. Act, 1961 prior to the amendment to section 56(2) by Finance Act, 2017 w.e.f.1/4/2017 whereby clause (x) has been inserted. For the sake of ready reference, we quote clause (x) of sub-section 2 of section 56 as under: "56(2) I particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "income from other sources' namely:- (i) dividends; x x x x x x x x x (ix) ..xx xxxxxx (x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,- (a)any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum; (b)any immovable property,- (A)without consideration,....
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....s the case may be; or (V) from any local authority as defined in the Explanation to clause (20) of section 10; or (VI) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or (VII) from or by any trust or institution registered under [section 12A or section 12AA or section 12AB]; or (VIII) by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or subclause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or (IX) by way of transaction not regarded as transfer under clause (i) or clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii)[or clause (viiac) or clause (viiad) or clause (viiae) or clause (viiaf)] of section 47; or (X) from an individual by a trust created or established solely for the benefit of relative of the individual; *(XI) from su....
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.... to that effect might, in certain circumstances, have been made in the books of account." 18. The above passage was cited with approval in Morvi Industries Ltd. v. CIT (Central), [1971] 82 ITR 835 (SC) in which this Court also considered the dictionary meaning of the word "accrue" and held that income can be said to accrue when it becomes due. It was then observed that: "....... the date of payment ....... does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately." 19. This Court further held, and in our opinion more importantly, that income accrues when there "arises a corresponding liability of the other party from whom the income becomes due to pay that amount." 20. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. 21. In so far as the present case is concerned, even if it is as....
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....ual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made "no income".' 26. This Court then considered the facts of the case and came to the conclusion (in Godhra Electricity) that no real income had accrued to the assessee in respect of the enhanced charges for a variety of reasons. One of the reasons so considered was a letter addressed by the Under Secretary to the Government of Gujarat, to the assessee whereby the assessee was "advised" to maintain status quo in respect of enhanced charges for at least six months. This Court took the view that though the letter had no legal binding effect but "one has to look at things from a practical point of view." (See R.B. Jodha Mal Kuthiala v. CIT[1971] 82 ITR 570 (SC)). This Court took the view that the probability or improbability of realisation has to be considered in a realistic manner and it was held that there was no real accrual of income to the assessee in respect of the disputed enhanced charges for supply of electricity. The decision of the High Court was, accordingly, set aside. 27. Applying the three tests laid down by various decisions of ....
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....provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income-tax Act, whereunder each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section, there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference....
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....ovisions of section 28 in Para 7 to 9 as under: "7. Section 28 sets out the incomes which are chargeable to income-tax under the head 'Profits and gains of business and profession', and clause (iv) thereto refers to "the value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of a profession". It is thus clear that besides the profits and gains from business and profession carried on by the assessee at any time during the previous year, any other benefit or perquisite, whether convertible into money or not, is also chargeable to tax under this head of income. A plain reading of this provision shows two conditions precedents for such taxability i.e. (i) that there should be benefits or perquisites; and that (ii) that such benefits or perquisites should arise from the business or exercise of the profession. The expression 'arising from the business' essentially implies that the benefit or perquisite must be in the nature of a business receipt or revenue receipt. No matter how wide be the scope of Section 28(iv), the difference between a capital receipt and revenue receipt cannot be overlooked. In the ca....
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.... which can be taxed under section 28(iv), and Hon'ble Bombay High Court, in the case of Mahindra & Mahindra Ltd. (supra) also holds so. As to what constitutes capital receipt, we find guidance from Hon'ble Madras High Court's judgment in the case of CIT v. Seshasayee Bros. (P.) Ltd. [1996] 222 ITR 818/89 Taxman 13 wherein Their Lordships, after elaborately surveying the legal precedents on this issue, concluded that, "Thus, a combined reading of the abovesaid judicial pronouncements would go to show that when a receipt is referable to fixed capital, it is not taxable, and it is taxable as a revenue receipt when it is referable to circulating capital or stock in trade". To sum up, unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv). The reference to benefits which can be brought to tax under section 28(iv) for benefits 'arising from the business' also indicates that such benefit must be a business receipt, or revenue....
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....uct business more dynamically and earn more profit. So, the enhancement of its capital reserve, as a result of this amalgamation can only be construed as a benefit accrued to the assessee...", but then it is not even the case of the Assessing Officer that the benefit is in the revenue field, and unless the Assessing Officer is to discharge the onus of demonstrating that the benefit is in the revenue field, there cannot be any occasion to invoke Section 28(iv). Applying the test laid down by Hon'ble Madras High Court, in the case of Seshasayee Brothers (supra), also, we find that the benefit is referable to the capital, and is thus not of an income nature. Even if, as the Assessing Officer observes, "it can be surmised that the assessee is benefited in a myriad ways by way of amalgamation", it does not lead to the conclusion that the benefit is in revenue field which alone can be treated as income and thus be considered for taxability under section 28(iv) of the Act. The onus is on the Assessing Officer to demonstrate that the receipt is of the revenue nature. 9. We have noted that the Assessing Officer's observations to the effect that 'business' under sect....
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....lli Constructions (Supra) has again considered this issue in Para6 to 6.4 as under: "6. We have heard both the parties and perused the material placed on record. The AO made the addition in this case, invoking the provisions of section 28(iv) of the Act. Section 28(iv) envisages to tax the benefit or the perquisite arising from the business or exercise of profession. The benefit must accrue or arise in the course of carrying on such business. For the sake of clarity, we extract relevant part of 28(iv) of the Act which reads as under : "Profits and gains of business or profession. 28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession,- (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;" 6.1 The Ld.CIT(A) has discussed the issue of taxing the sum u/s 28(iv) in detail and held that the extra land received by the assessee on partition does not fall under the benefits received or accrued to the assessee during the course of carrying on the business in para No. 10 and 11 which reads as under ....
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.... illusionary or imaginary. The benefit or perquisite contemplated by sec. 28(iv) must necessarily have a live connection with the business carried on by the assessee and the benefit must accrue or arise in the course of carrying on of such business. The benefit or perquisite should be in the nature of trade receipt. (3) The future gain or benefit when actually denied by the assessee, the same certainly will be assessed as business income and only because a transaction now undertaken will bring more commercial gain or benefit to the assessee in future does not entitle to treat the present transaction itself as benefit or perquisite arising from business and bring the value of the said transaction to tax by deeming he same. The future benefits when actually realized, received or accrued to the assessee, depending upon the system of accounting adopted, will certainly be includible in the assessable income of the assessee at that point of time. 11. Coming to the issue whether on the partition of land as a co-owner, arise any benefit or perquisite to the appellant-firm u/s 28(iv) of the Act as opined by the A.0, has to be ensured into. It is known from the foregoing th....
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....nce the capital asset was divided on partition of co-ownership. The coordinate bench of ITAT, Kolakata in ITO v. Shreyans Investments (P.) Ltd. [2013] 31 taxmann.com 11/141 ITO 672 has considered the issue of taxing the capital receipt u/s 28(iv) and given ruling that unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv) of the act. For the sake of clarity, we extract relevant part of the order of the coordinate bench supra as under: "7. Section 28 sets out the incomes which are chargeable to income-tax under the head 'Profits and gains of business and profession', and clause (iv) thereto refers to "the value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of a profession". It is thus clear that besides the profits and gains from business and profession carried on by the assessee at any time during the previous year, any other benefit or perquisite, whether conve....
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.... receipt or vice versa. The crucial distinction between capital and revenue cannot be blurred or nullified by even the most liberal interpretation of expression 'income'. It is also important to bear in mind that, as held by Hon'ble Supreme Court in the case of Dr K George Thomas v. CIT [1985] 156 ITR 412/23 Taxman 46, "the burden is on the revenue to establish that the receipt is of a revenue nature" though "once a receipt is found to be of revenue character, whether it comes under exemption or not, it is for the revenue to establish". It is thus clear that capital receipts are inherently outside the scope of an income which can be taxed under section 28(iv), and Hon'ble Bombay High Court, in the case of Mahindra & Mahindra Ltd. (supra) also holds so. As to what constitutes capital receipt, we find guidance from Hon'ble Madras High Court's judgment in the case of CIT v. Seshasayee Bros. (P.) Ltd. [1996] 222 ITR 818/89 Taxman 13 wherein Their Lordships, after elaborately surveying the legal precedents on this issue, concluded that, "Thus, a combined reading of the above said judicial pronouncements would go to show that when a receipt is referable to fixed c....
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....if the alleged benefit is also in respect of transaction which falls in the capital field being investment in shares, then in the absence of any real income, the same cannot be brought to tax by invoking the provisions of section 28(iv) of the Act. It is pertinent to note that the income arising from sale of these shares would be taxed under the head Capital Gain then the transaction of acquisition of shares can't be held in revenue field. The learned CIT (A) has decided the issue in para 9.1 to 9.7 of the impugned order as under: "9.1 Ground No. 2 to 8 relate to taxing differences in the prices of share allotment as perquisites u/s. 28(iv) in the hands of the appellant. The views of the Assessing Officer, submissions of the appellant, were duly considered. 9.2 It is noticed that the appellant, on his own, did not carry on any business during the previous year. On perusal of the return of income it is seen that there was no business between the appellant and the three companies. As seen from the assessment record, the return of income of the appellant for the AY 2008-09 Consists of the following heads of income: (i)) Salary Income (ii) Income fro....
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....defines cost. In the absence of such provisions, the value of the benefit in the form of shares allotted at face value, cannot be ascertained and taxed. In this regard the decision of the Supreme Court in the case of CIT Vs. Infosys Technologies Ltd (297 ITR 167) has been duly considered. 9.6 It is a vital aspect in tax jurisprudence that in a taxing Act one has to look at what is clearly said. There is no room any intendment. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. It is a constitutional mandate that no tax can be levied without the authority of law. If these cardinal principles are taken into consideration, it will appear that liability under section 28(v) has been attached on the appellant by implication without the authority of law. It would be pertinent to refer to the Hon'ble Apex Court judgements which are reproduced in brief below: (a) In this case the observations of Rowlatt, J in the case of Cape Brandy Syndicate Vs Indian Revenue Commissioner are relevant. "In a taxing statute one has to look at what is clearly said. There is no element of intendment. The....