TaxTMI 
TaxTMI 
2007 (2) TMI 240
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....low the market price. The question is whether the difference between the purchase price and market price can be added as unexplained investment under s. 69 of the IT Act or whether it can be treated as a benefit under s. 28(iv) of the Act. Facts in brief: 2. The assessee company M/s Rupee Finance & Management (P) Ltd. is part of the Essel group consisting of various companies mainly Essel Propack Ltd., Zee Telefilms Ltd. and Pan India Paryatan Ltd. and various other finance and investment companies. The promoter group consists of four brothers. During the year it was submitted that the four brothers have arrived at an MoU and family settlement with an object to rationalise and re-organise the share of all group companies in the ratio of 40:20:20:20, among the family members of Shri Subhash Chandra, Mr. Laxminarain Goel, Shri Jawaharlal Goel and Ashok Kumar Goel. It is submitted that the shareholdings in Essel Propack Ltd. and Zee Telefilms Ltd., is scattered among number of entities, individuals, etc. and with an object to consolidate the same in one company and to hold the shares in the abovesaid ratio it was agreed to by way of an MoU, that certain shares of Essel Propack Ltd.....
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....rious submissions made by the assessee and observed that the assessee is engaged in the business of investment in shares and securities and that it is an investment company. He held that it is very clear that there is a huge gap between the purchase price paid by the assessee company for the shares of Essel Propack Ltd. and the market price and this fact is not controverted by the assessee. He observed that the assessee purchased the shares at below the market price and then pledged the same with IL&FS and a loan has been taken by valuing the shares at market price and then amounts have been advanced to group concerns in which directors are interested without charging interest and thus the assessee has derived a benefit out of this transaction. Thus the first appellate authority has come to a conclusion that the benefit derived by the assessee is clearly chargeable to income-tax under the head "Profits and gains of business or profession" for the value of such benefits under s. 28(iv). As per the first appellate authority, the benefit derived by the' assessee is taxable under s. 28(iv) of the Act. He relied on the decision in the case of CIT vs. Alchemic (P) Ltd. (1981) 20 CTR ....
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....e that ss. 69 and 69A and 60 to 63 are not applicable to the facts of the case. A reading of the appellate order suggests that the first appellate authority had difficulty in rejecting the contentions of the assessee on the applicability of these sections but he did not want to specifically say so and in this regard but has upheld the addition by invoking s. 28(iv) of the Act. Aggrieved, the assessee is in appeal. 4. The learned counsel for the assessee, Shri K. Shivram based his arguments on four propositions. Firstly, the family arrangement is recognised by law and is genuine and not a transfer; secondly, the purchase of the shares at cost was a genuine decision and thus the ratio of the judgment in the case of McDowell & Co. Ltd. is not applicable to the facts of his case; thirdly, s. 69 is not at all applicable to the facts of the assessee's case and that provisions of s. 28(iv) are not applicable to the facts of the assessee's case. 4.1 Shri Shivram, elaborating the propositions submitted that, an oral understanding was arrived at between the four brothers during the financial year 2002-03 and this was brought into writing in the form of a MoU and the family arrangem....
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....ly between the family members, but also near relatives or the persons who have some sort of interest or antecedent title. Family arrangement as per Shri Shivram can be made to have harmony in the family members and for this submission he relied on the judgment of the Hon'ble Madras High Court in the case of CGT vs. D. Nagrirathinam (2003) 182 CTR (Mad) 643 : (2004) 266 ITR 342 (Mad). He further submitted that family arrangements may be even oral and no registration is required if it was an oral arrangement brought into writing at a later date. Thus, though the family arrangement is not registered he submits that it has evidentiary value and is binding on the persons who were parties to it and also operates as an estoppel to preclude any of the parties, who have taken advantage from this arrangement, from revoking or challenging the same. He relied on the decision of the Hon'ble Supreme Court in the case of Kale vs. Dy. Director of Consolidation (1976) 3 SCC 119. He further submits that like a partition, family arrangement is not a transfer and on the contrary is a transaction between members and for the benefit of the family, so as to preserve the family property. He submit....
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....f tax to an assessee, the same cannot be brushed aside on the ground that the underlying motive of entering into the transaction by the assessee was to reduce its lax liability. He relied on some more case laws in support of his proposition that the AO as well as the first appellate authority was wrong in applying the propositions laid down in McDowell & Co. Ltd. 's case to the facts of the case. 4.3 On the application of s. 69 the learned counsel submits that the CIT(A) has agreed that s. 69 cannot be invoked on the facts and circumstances of the case and that the Revenue has not come in appeal disputing such findings of the CIT(A). On s. 69 he submits that the section is applicable only when such investments are not recorded in the books of account, the assessee offers no explanation about the nature and source of investment or in case where such explanation is not satisfactory. He submits that the investments have been recorded in the books and the assessee has given full explanation and produced all evidences and thus s. 69 is not attracted. The AO as per the learned counsel for the assessee has not given any evidence or instance of any investment made out of the books of ....
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....Revenue was denied the benefit of raising an additional ground as regards the applicability of s. 41(4). 4.6 Shri Shivram vehemently contended that in the present case the assessee has not received any benefit at all in terms of s. 28(iv) and further the quantification of the benefit based on price difference is erroneous and that the benefit, if any, would accrue only on the date of sale. He once again relied on the family arrangement and submitted that the purchase of shares were made with specific purpose and there was neither any contemplation of immediate sale of the shares or plans to procure shares from the market at the market price. He referred to the fluctuation of the market value of the shares. He further relied on the decision of the Hon'ble Hyderabad Bench of the Tribunal in the case of KNB Investments (P) Ltd. vs. Asstt. CIT (2004) 89 TTJ (Hyd) 561 : (2001) 79 ITD 238 (Hyd) for the proposition that s. 28(iv) does not apply. Similarly he relied on the case law Dy. CIT vs. Chand Merchant (P) Ltd. (2006) 99 TTJ (Mumbai) 712 to buttress his point that s. 28(iv) is not applicable in cases where shares are purchased or received by an assessee at a cost which is below ....
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....ed counsel for the assessee and submitted that the CIT(A) has basically stressed on two points on p. 7 at para 3 of his order. The first is that the assessee is engaged in the business of investments in shares and securities and thus the purchase of shares at a value less than the market value is a benefit flowing out of the business of the assessee and thus attracting s. 28(iv). The second point, as per the learned Departmental Representative is that the entire arrangement is a colourable device for the detailed reasons mentioned both by the AO as well as the CIT(A). He pointed out that the very fact that the assessee company after purchasing the shares at a price which is much lower than the market value, had pledged these shares at market value, and obtained loans for being funnelled as interest-free advances to group concerns, demonstrates that this is a device to evade tax. He vehemently contended that there is nothing in praesenti calling for a family arrangement. He submits that the assessee company is a juristic entity and cannot be considered as part of any family so as to get affected by a family arrangement. As per Shri Srivastava, most of the parties involved in those a....
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....l Shah vs. ITO (1996) 56 ITD 476 (Ahd). In this case a private limited company had two groups of shareholders managing its affairs as directors also. The first group consisted of three persons including the assessee, while the second group consisted of four members. By virtue of an agreement, the company agreed to allow the purchaser to develop its property and also for that purpose of sale to the purchaser of its available and unutilised floor space index of the entire property. In order to resolve the differences between two groups, the matter was referred to arbitration. In pursuance to the arbitration award the assessee received certain amounts as price of her share. The AO levied capital gains. The first appellate authority upheld the same. Under these circumstances the Bench observed that the existence of a family dispute is a sine qua non for the family settlement and that family arrangement is made by the parties belonging to the same family in a bona fide manner so as to put an end to various disputes among themselves in respect of properties in which their interest is common, but such interest cannot be determined in specie or severally. It is also held that there should ....
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....nd transactions so as to find out the truth of the matter. In this decision the Tribunal has surveyed and summarised the legal position vis-a-vis the powers of the IT authorities in relation to sham transactions. 5.6 Shri Srivastava vehemently contended that a plain reading of the MoU does not suggest that there was a family arrangement or settlement. As per him it simply points out to corporatisation of assessee's activities and there was no partition by meets and bounds. Only the shares in a particular set of corporate concerns were re-aligned under the guise of family arrangement. He stressed on the point that there was neither a dispute nor there was a necessity for writing a MoU and that the same was not registered and the transfers have taken place between two independent juristic legal entities and that the shares purchased were pledged at market rate and a loan was taken and this amount has been passed on to sister-concern as interest-free advances. Thus he submits that once the assessee is not covered by a family arrangement, then the obvious conclusion is that this is a transfer and that it is in pursuance to and in furtherance of carrying on all the business of the ....
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....ught to tax in the hands of the assessee company under s. 28(iv). 7.2 We take up third and fourth issues first. Sec. 69 reads as follows: "69. Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the AO, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year." The undisputed facts in this case are that the assessee company has purchased certain shares at a price which is below the market value. There is no dispute of the fact that the price paid for the shares by the assessee company were the cost incurred by the purchaser. It is also not disputed that all these investments were recorded in the books of account. Under s. 69 only such value of the investments may be deemed to be the income of the assessee for the financial year, if they are not recorded in the books of account. Thus s. 69 is not applicable in this case. The first ....
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....im to that company, will be assessable in the hands of the assessee as his income under the head 'Profits and gains of business or profession'." [Emphasis supplied] The condition of invoking s. 28(iv) is that the chargeable income of the assessee should arise from the business or in the exercise of profession. There must be a nexus between the business of the assessee and the benefit the assessee derived. The assessee in this case purchased certain shares at a certain price and was required to hold these shares for a period of three years. It is not in dispute that this was an investment made by the assessee company hence irrespective of the fact as to whether these investments were made in pursuance of the MoU or not, we arc of the consideration opinion that such investments cannot be said to be a benefit arisen out of the business of the assessee. Moreover the assessee is the purchaser of the shares and there is no event that has taken place during the current accounting year which can be said to have resulted in any income being accrued or arisen to the assessee company during the year. If at all the assessee transfers the shares, then the benefit of profit in questio....
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....preted in the same manner, that is, at the time of execution of the business transaction one party should give to the other party an irretrievable benefit or advantage, as an obligation or facility or a concession. In our opinion, only if the seller had incurred an expense or a liability or had provided a facility to the purchaser, then the value in cash of such expenses or benefit or perquisite shall be treated as income. In this case, the seller has not incurred any expenses or liability or has provided a facility. It sold its shares at a reduced price. 7.5 Applying these propositions to the case on hand, the purchase of shares at a particular price which is below the market price as an investment is not income by any stretch of imagination. It cannot also be deemed as income under s. 28 (iv) as it is neither benefit nor perquisite that has arisen to the assessee from the business or in the exercise of a profession. The Hon'ble Gujarat High Court in the case of CIT vs. Bhavnagar Bone & Fertiliser Co. Ltd. (1987) 59 CTR (Guj) 116 : (1987) 166 ITR 316 (Guj) has upheld the Tribunal's finding that there must be a nexus between the business of the assessee and the benefit whi....
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....saction is not borne out of record. By now it is well-settled that the taxing authorities are not entitled in determining whether a receipt is liable to be taxed, by ignoring the legal character of the transaction, which is the source of the receipt and to proceed on what they regard as 'the substance of the matter'. The taxing authority is entitled and is duty-bound to determine the true legal relationship resulting from the transaction. If the parties have chosen to conceal income by a device, it is open to the taxing authorities to unravel the device and determine the true charactership of the relationship. But at the same time the legal effect of a transaction cannot be displaced by probing into the substance of the transaction. Coming to the facts of this case, it is not known who are the owners of shares of the companies which have transferred shares in Essel Propack Ltd. to the assessee company. What is the family holdings in each of the companies, prior to sale and after sale is not known. What is the loss or sacrifice of each family member and the gain of the other due to the MoU is not known. The apparent fact is only that one company sold shares to another compan....
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....08 : (1986) 159 ITR 71 (SC) and other case laws and has come to a conclusion that the transfer of shares have been made by the company and not by family members and the company certainly is a distinct entity and cannot be a part of the family arrangement. He also held that the assets said to have been transferred in pursuance to a family members arrangement, are not family assets with the common interest of the family members therein and thus cannot come within the ambit of a family arrangement. He held that the shares of Essel Propack Ltd. held by the assessee company are not family property of Goel group. Thus, he upheld the order of the AO to the extent it is held that these shares cannot be said to have been transferred under a family arrangement so as to bring them out of the ambit of s. 2(47) of the Act. 10. He further referred to the computation of capital gain under s. 48 of the Act and after extracting the observations of the apex Court in the case of K.P. Varghese struck down the addition on the ground that the AO has not demonstrated that the assessee has received more than what consideration has been shown by the assessee in the records. At para 7.6 of the CIT(A)'s....