ITO, NEW DELHI vs. SHRI UMESH UPADHYAY, NEW DELHI

Brief facts of the case are that the assessee is an individual. He is associated with electronic media. He had cordial relations with founders of M/s Rockland Hospital Ltd. and to strengthen the relations M/s Rockland Hospital allotted one lac equity shares to the assessee with the face value of Rs.10/- each at a premium of Rs.190/- per share as Sweat Equity with a rider that assessee shall remain associated with the Organization for a specific period and the lock in period for shares was 10 years. However, subsequently on 26.2.2010, at the instance of the company, the Hon’ble Delhi High Court held that the shares issued by M/s Rockland Hospital were wrongly issued and directed the company to reverse the entry of Sweat Equity shares as a result of which the assessee surrendered all the shares. On 7.2.2011, assessee quit his association with the company much before the lapse of 10 years.

Assessee filed the original return of income for the AY 2007-08 on 31.7.2007 declaring professional income of Rs.3,22,053/- and it was processed u/s 143(1) of the Income-tax Act, 1961 (“the Act”). Later on 18.8.2006 by recording reasons, the learned AO issued notice dated 1.2.2011 u/s 148 of the Act. Assessee filed his objections on 12.12.2013. Learned AO disposed of such objections in the assessment order dated 4.3.2014 itself through which he made an addition of Rs.2 crore u/s 28(iv) of the Act.

Aggrieved by the said addition, assessee challenging the order filed an appeal before the learned CIT(A) on two additions. Firstly, assessee challenged the addition on the ground that Section 28(iv) of the Act cannot be invoked in this case. He alsochallenged the legality and validity of the notice u/s 148 of the Act.

Learned CIT(A) upheld the legality and validity of the reopening but deleted the addition on the ground that there is no relationship of employer-employee before the company and the assessee, which allotted the Sweat Equity shares to the assessee; that the equity allotted was not specified security and from such an angle it does not answer the description of perquisites u/s 17(2) of the Act; that the valuation of the equity at artificially jacked up prices without any economic basis would not help to sustain the addition inasmuch as any income based on that is not real income; and lastly that the share offer was a condition one with riders attached to the effect that even when the assessee was not an employee of the company, he was required to remain associated with the organization for a period of 10 years and, therefore, no income accrued to the assessee. Further, learned CIT(A) held that in view of the orders of the Hon’ble High Court, the total shares allotted to the assessee were surrendered at the time of leaving the organization and therefore, the agreement shall not to be executed by the assessee rendering it to be null and void. In that terms, learned CIT(A) held that the income assessed by the learned AO was not amenable to tax as perquisites and the addition cannot be sustained.

Revenue is, therefore, aggrieved by the deletion of Rs.2 crore, which was added by the learned AO u/s 28(iv) of the Act stated that the learned CIT(A) failed to see the apparent nexus between the assessee and M/s Rockland Hospital Ltd., who engaged the assessee as professional for the benefit and expanding its business.

It is the argument of the learned DR that it is an admitted fact that under an agreement, the assessee derived the benefit of allotment of sweat shares and the subsequent reversal of the entries pursuant to the orders of the High Court or the assessee quitting the association of the Company do not alter the position as on the date of allotment. Learned DR basing on the analogy given by the AO argued that if one Mr. ‘A’ received a gift of Rs.50 lacs in FY 2008-09 from a person who is not relative, as per Section 56(2), the amount is taxable in AY 2009-10, the assessee, however, pleads that as soon as he was made aware of his tax liability in his hands, he returned that amount in FY 2009-10 to that person, but the subsequent/future event cannot affect the taxability in the year of its accrual.

On the contention of the assessee that the disposal of the objections by way of composite order of assessment is bad under law, Ld. DR submitted that no such ground was taken by the assessee. He submits that even otherwise, in view of the decision of the Hon’ble Kerala High Court in the case of Palakkad Distt. Cooperative Bank Ltd. vs ACIT (2017) 392 ITR 539; MohammedallyNoorbhoyBandukwala Trust vs ITO (2017)2017- TIOL-341-HC-Mum-IT; and Home Finders Housing Ltd. vs ITO (2018) 404 ITR 611 (Madras) as confirmed by the Hon’ble Supreme Court in 256 Taxman 59 (SC), non compliance of directions of Hon’ble Supreme Court in GKN Driveshafts(India) Ltd. vs ITO (2003) 259 ITR 19, that on receipt of objections given by the assessee to notice u/s 148, ld. AO is bound to dispose of objections by passing a speaking order, would not make re-assessment order void ab initio and also that the assessment cannot be termed as invalid for non consideration of the assessee’s objections if there was undue delay on the part of the assessee in objecting to the reasons. He submitted that in this case, there was delay of 2 years in the assessee’s filing the objections since notice u/s 148 was issued on 1.12.2011 and the assessee filed the objections on 12.12.2011 and the assessee filed the objections on 12.12.2013.

Per contra, Ld. AR submitted that as on the date of issuance of notice u/s 148, the event giving rise to any reopening was not existing and in view of the order dated 26.2.2012 passed by the Hon’ble Delhi High Court, the assessee had already returned the shares issued to him and he also quit his association with M/s Rockland Hospitals Ltd. on 7.2.2011 and thereby no income could be derived by the assessee under the agreement to allot sweat equity and in the absence of any real income, there cannot be any addition to be made by the learned AO. He submitted that the income assessed by the learned AO is hypothetical in nature in view of the fact that the assessee did not receive any benefit whatsoever under the sweat Equity share Agreement, and long prior to the issuance of the notice under section 148 of the Act, the reason for issuance of such notice ceased to exist and the time limit for enforcing the agreement was 10 years during which the assessee had to associate with the company and such a condition came to an abrupt end due to the orders of the Hon’ble High Court and the assessee quitting the association of the Company. Further such an allotment of sweat shares does not answer the description of a perquisite in view of Sections 17(2) read with Section 28(iv) of the Act.

In respect of the legality of the composite order disposing the objections filed by the assessee along with the assessment of income, that in view of the decision of the Hon’ble Gujarat High Court in the case of General Motors India P. Ltd. vs DCIT, 353 ITR 244 (Guj) which was followed by coordinate benches of the Tribunal in several cases including in the case of Suresh Chandra vs ITO, (order dated 13.3.2015) and in the case of M/s Bharuch Envoir, ITA Nos.731 & 732/Ahd/2007 (order dated 5.8.2014), the composite order disposing of the objections along with the assessment order is bad in law. He submits that as against the inaction of the learned AO to decide the objections or rejecting the objections, a writ u/s 226 of the Constitution lies and because of this composite order, the assessee lost a valuable right and on that premise, the composite order is bad.

We have gone through the record in the light of the submissions on either side. Insofar as the merits are concerned, there is no denial of any of the facts pleaded on behalf of the assessee that the sweat equity share agreement was on 26.2.2007 in accordance with which certain number of shares of face value Rs.10/- each were allotted to the assessee at a premium of Rs.190/- without any consideration and subsequently, in view of the decision of the Hon’ble Delhi High Court on 26.2.2011 such shares were returned and the entires were reversed whereas the assessee quit the association of the company on 7.2.2011, which is the essential condition under the ‘Sweat Equity Share Agreement’ to derive the benefit thereunder. Learned CIT(A) also noted the fact that on 20.5.2011, Board of Directors of M/s Rockland Hospitals ltd. has passed a resolution and accepted the surrender of shares by the assessee. Therefore, at the latest by 18.6.2012, the entire process of reversing the entries and acceptance of the surrender pursuant to the directions of the Hon’ble High Court was complete.

In this factual situation, as rightly contended by the assessee, even before the issuance of the notice u/s 148, it was clear that the assessee did not receive any benefit whatsoever under the sweat Equity share Agreement. We find force in the submissions made on behalf of the assessee that the reversal of the share premium account pursuant to the orders of the Hon’ble High Court would relate back to the date of allotment.

Further, learned CIT(A) adverted to four circumstances to say that there is no real income. Firstly, the entries in the books of the company about allotment are once sided and they are not sufficient to assume that any transaction had taken place actually. Secondly, in so far as there is no employer-employee relationship between the company and the assessee, in view of the provisions of Section 17(2) read with Section 28(iv), the allotment of sweat equity cannot be brought to tax. Thirdly, there is no economic crises for the valuation of the equity shares at Rs.2 crores when the value of the share was only Rs.9.88 per share on the date of allotment and Rs,10 on the date of surrender, therefore, there is no real income and lastly, the offer of shares was a conditional one with a rider that the assessee must associate himself with the Association for a period of 10 years which is lock in period and since the assessee quit the association by 7.2.2011 much before the minimum 10 years of required association, no benefit accrued to the assessee and, therefore, there is no income to the assessee.

Further, we are unable to consider the analogy drawn by the Ld. AO and the Ld. DR to say that subsequent/future event cannot affect the taxability in the year of its accrual, because in this matter certain factors which are stipulating constraints on the availment of benefit under the agreement. Firstly, there is a condition of 10 years’ association, which has failed; that secondly, the Hon’ble High Court directed the cancellation of the allotment and to reverse the entries which shall relate back to the date of agreement itself; that thirdly, there is no economic basis for the valuation of the shares to assess the income of the assessee. For these reasons, we are of the considered opinion that the learned CIT(A) rightly reached a conclusion that this is a case of hypothetical income of the nature of perquisite and more so, the very basis of the valuation is not scientific without any financial back up data to justify the valuation.

In these circumstances, we are in agreement with the submission on behalf of the assessee that the decision of the Hon’ble Supreme Court in the case of CIT vs Infosys Technology Ltd. (2008) 297 ITR 167 (SC) wherein the issue involved was that whether allotment of Sweat Equity Shares to an employee is a perquisite or not and it was held that where the lock in period was involved, the perquisite would be treated only in the year in which the lock in period ends. Since in this case the agreement came to an end, shares were surrendered and the entries were reversed long prior to the lock in period, no case of taxing the allotment as perquisite in the hands of the assessee in the AY 2007-08.

Be that as it may, in this matter, in so far as the legality of the assessment order without disposing of the objections filed by the assessee are concerned, we have two sets of decisions cited on either side. First line of decisions is the decision of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) P. Ltd. (supra) and the decision of the Hon’ble Gujarat High Court in the case of General Motors India P. Ltd. (supra) followed by the coordinate benches of Delhi Tribunal in many cases. The second set isthe cases relied upon by the learned DR reported in the case of Palakkad Distt. Cooperative Bank Ltd. vs ACIT (supra); MohammedallyNoorbhoyBandukwala Trust (supra); and Home Finders Housing Ltd. (supra). In this situation learned AR submits that none of the decisions relied upon by the parties is of the Hon’ble jurisdictional High Court. However, the decision of the Hon’ble Gujarat High Court is followed by the Delhi benches of the Tribunal in the case of Suresh Chandra (supra). He, therefore, submits that when this is a debatable issue and there is conflict of judicial opinion, in the absence if any decision of the jurisdictional High Court, in view of the decision of the Hon’ble Supreme Court in the case of CIT vs Vegetable Products Ltd., 88 ITR 192(SC), the view favourable to the assessee has to be normally accepted.

In General Motors case 353 ITR 244 Guj, the Hon’ble Gujarat High Court held that, that a writ petition under Article 226 of the Constitution of India is maintainable where no order has been passed by the Assessing Officer deciding the objection filed by the assessee under Section 148 of the Act and assessment order has been passed or the order deciding an objection under Section 148 of the Act has not been communicated to the assessee and assessment order has been passed or the objection filed under Section 148 has been decided along with the assessment order; that if the objection under Section 148 has been rejected without there being any tangible material available with the Assessing Officer to form an opinion that there is escapement of income from assessment and in absence of reasons having direct link with the formation of the belief, the writ Court under Article 226 can quash the notice issued under Section 148 of the Act; that the Assessing Officer is mandated to decide the objection to the notice under Section 148 and supply or communicate it to the assessee; that the assessee gets an opportunity to challenge the order in a writ petition; and that thereafter, the Assessing Officer may pass the reassessment order. It was, therefore, hold that it was not open to the Assessing Officer to decide the objection to notice under section 148 by a composite assessment order, which deserves to be quashed.

Having regard to the facts and circumstances of the case and in view of the submissions made on either side, we are of the considered opinion that in view of the conflict of opinion expressed by the Hon’ble Gujarat and Madras High Court, the view favourable to the assessee had to be accepted and while respectfully following the decision of the Hon’ble Apex court in the case of Vegetable Products Ltd. (supra), we find that the composite order cannot be sustained.

For these reasons, we are of the considered opinion that either on facts or on law, there is no need to interfere with the findings of the learned CIT(A) in deleting the addition made by the learned AO on the premise that the allotment of shares to the assessee are to be taxed as perquisites or profession income.

In view of our above finding and upholding of the order of CIT(A), Cross Objection becomes infructuous and dismissed as such.

In the result, whereas appeal of the Revenue is dismissed, Cross Objection filed by the assessee is also dismissed as infructuous.