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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI AMARJEET SINGH
Per Rajesh Kumar, Accountant Member: The present appeal has been preferred by the assessee against the order dated 14.08.2017 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2010-11.
The various grounds raised by the assessee are against the order of Ld. CIT(A) confirming the addition of Rs.49,02,00,000/- as made by the AO by treating the gift of shares as taxable income under the head income from other sources.
2 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. 3. The facts in brief are that the assessee filed a return of income on 23.09.2010 declaring a loss of Rs.51,19,27,590/- which was processed under section 143(1) of the Act. Thereafter the case of the assessee was selected for scrutiny and statutory notices were duly issued and served upon the assessee. During the course of assessment proceedings, the AO observed from the perusal of the balance sheet of the assessee that assessee has received shares of M/s. CCI Projects Pvt. Ltd. (formerly known as M/s. Entertainment India Pvt. Ltd.) of face value of Rs.10/- and showed the same under the head investment at Rs.Nil. The AO accordingly, asked the assessee to furnish the details of such shares which was replied by the assessee vide letter dated 28.08.2012 submitting that Mr. Rajiv Saxena has gifted 9908 equity shares to the assessee which is a capital receipt and have been accounted for accordingly and therefore not liable for tax. Thereafter, the AO issued show cause notice to the assessee as to why the said gift of shares of Rs.49.02 crores should not be taxed under section 56 of the Act as income from other sources as the assessee got richer by the said amount which was replied by the assessee by reiterating his stand that said is a capital receipt and is not liable to tax. The AO rejected the contentions and submissions of the assessee by observing as under: “5.2 In view of the above, vide order sheet noting dated, the assessee was "show-caused as follows: "Why the revenue of Rs.49.02 crores transfer from Advance against Equity to General Reserves should not be so taxed u/s.56 as assessee has got richer by the same. In response to the same, the assessee's AR reiterated that the shares are received by way of gift and hence not eligible for tax.
5.3. The submissions of the assessee has been considered and found unacceptable. In Income Tax Act, income has been defined u/s.2(24), however, same has been defined on inclusive basis rather than exclusive basis, therefore, the income defined in Income Tax Act is not exhaustive in itself. Income Tax Act, is an enactment relating to entry no. 82 in the list I of the seventh schedule to the constitution,
3 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. which has very liberal and wide horizon, and include every income, other than agriculture income In basic accounting, income is defined as increase in wealth of the person, which has been accrued, therefore, if by any transaction, if a person becomes richer, same has to be considered its income only. If one receipt has been classified as income, in accounting terms, same has to considered as income, in normal terms, therefore, has to be considered as income, for income tax purpose, otherwise, same is already, taxed in earlier year or exempted in the statute, by specific provision of the I.T. Act. In this light it becomes amply clear that, receipt of gift, is taxable.
5.4 In instant case, if we adopt the assesses version, that same is capital receipt and not taxable, if accepted, will make a way, for transferring, the money, from one party to another, party. As every body will give gift to other party, and than giver will write off the same, other party will not pay any tax on same. Now, in new amended provision of section 56, even, gifts, from non-relatives, are taxable as income In Income Tax Act, even capital receipts, are taxable, as in case of capital gain. And legislature from time to time, tried to plug the loopholes, which has been, misused, by the assesses, by taking, the benefit of language of section, while leaving aside the spirit of legislature. Spirit of legislature, is very clear, that every things that comes in definition of income, under commercial, or accounting principle, has to be considered as income, depending upon the facts, under which head.
5.5 Further, S.56(1) of the Act reads as follows:
"(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E".
5.6 Thus, the scope of S.56 is very wide and encompassing. It covers every income and has no scope for leaving out anything. Further S.56(2) is merely an inclusive section and is not restrictive as is evident from the words, "In particular, and without prejudice to the generality of the provisions of subsection (1),". Therefore, as discussed above that receipt of gift is clearly an income under the accounting norms as the profits of the assessee as well by the same, therefore, same has to be considered as income only. And the ambit of Section 56 is very wide, it includes every income which is not covered otherwise under any other head. Therefore, if we consider that receipt of gift is not falling under any head of income from A to E then, same will certainly be covered u/s.56 of the IT. Act, It is again worthwhile to mention here that after amendment u/s.56 even the gifts has become taxable.
5.7 Section 56(1) of the Act reads as follows; "(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income- tax under the head "-Income from other sources'1, if it is not chargeable to income- tax under any of the heads specified in section 14, items A to E".
4 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. 5.8 Thus, the scope of Section 56 is very wide and encompassing It covers every income and has no scope for letting out anything Further S.5G(2) is merely an inclusive section and is not restrictive as is evident from the words, "In particular, and without prejudice to the generality of the provisions of sub-section (1),".
5.9 In the instant case, the assessee company has received shares by way of gift in the form of equity shares of Rs.49.02 crores. The entire shares was originally made by CCI Projects Pvt. Ltd (formerly known as M/s. Entertainment India Pvt. Ltd.), the parent company of the assessee company. As is evident from the above transactions, the assessee has indulged in colourable device of tax evasion. Tax planning may be legitimate provided it is within the framework of the law. Colorable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid the payment of tax by dubious methods. It is obligation of every citizen to pay the taxes honestly without resorting to subterfuges (M/s McDowell's Co Ltd Vs. CTO in 154 ITR 148). There is behind taxation laws as much moral sanction as is behind any other welfare legislation and it is a pretense to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. The proper way to construe a taxing statue, while considering a device to avoid tax. is not to ask whether the provisions should be constructed literally or liberally nor whether the transaction is not unreal and not prohibited by the statue, but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation.
5.10 All items of income, be they capital or revenue in nature are taxable. While income arising out of capital asset is taxable under "Capital Gains", income arising out of other items is taxable under either ''Salary" or 'House Property" or "Business and Profession". The residual income is taxed under "income from Other Sources". In the instance case, the fact of the matter is that; the assessee has got himself enriched by a sum of Rs.49 02 crores , during the year.
5.11 Thus, the entire transaction has been, structured in a way so that the Assessee Company is benefited as also its related parties, and all the while by evading taxes. The assessee has neither produced proof as to why the advance was given against equity.”
Finally, the AO added the gifts received by the assessee in the form of shares in the assessment framed under section 143(3) dated 26.03.2013 by making an addition of Rs.49,02,00,000/- inter alia other additions.
5 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. 5. In the appellate proceedings, the Ld. CIT(A) also dismissed the appeal of the assessee after taking into consideration the appellant’s submissions by observing and holding as under: 5.2 I have circumspected the spectrum of facts & circumstances of the case and have carefully considered the findings of the Assessing Officer and rival submission of the Appellant and perused the evidences on record. I find that 9980 shares were allotted to one Mr. Rajiv Saxena who was Director of the Company and had resigned from the Board of Directors of the Appellant Company on 31.10.2009/ He was having in his possession all these Equity Shares of a parent Company namely; M/s. CCI Projects Pvt. Ltd. Co.. When Mr. Rajiv Saxena being a Director of the Company has given his shares to the Appellant Company after his resignation but there is no visible/invisible reason that such handing over of shares worth of Rs.49.02 crores is a real Gift. It is very evident that such handing over of Equity Shares of a parent Company cannot be regarded as Gift. No genuine person can give such huge worth of shares to such Company where from he is retiring or going out. Therefore, there is no valid reason for giving any Gift to such Company. Secondly, when such Equity Shares has been given to the Appellant Company without cost, such Gifts become income in the hands of the Appellant Company because it is an income of Revenue nature. Further, it can be seen from a letter dated 25.02.2010, claimed to be issued by Mr. Rajiv Saxena that such shares were sold to the Appellant without cost. Such evidence submitted by the Appellant is demonstrated as under:
5.3. As can be seen from the above evidence that in reality there was no Gift to the Appellant Company, but 9980 shares were sold out/handed over to the Appellant Company free of sale price hence, entire worth of Equity Shares is an income
6 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. taxable in the hands of the Appellant. The word "income" is not limited by the words "profits" and "gains" and anything which can properly be described as income is taxable under this Act, unless expressly exempted. Maharaj Kumar Gopal Saran Narain Singh vs. CIT, (1935) 3 ITR 237, 242 (PC); Raja Bahadur Kamakshya Narain Singh vs. CIT, (1943) 11 ITR 513, 522 (PC); Kedar Narain Singh vs. CIT (1938) 6 ITR 157, 161(AIl).
Thus, in the light of above factual references and judicial propositions, it is held that there is no genuine Gift of Equity Shares and the worth of share taken by the Appellant is evidently a taxable income hence, addition so made of Rs.49,02,00,000/- is sustained.”
The Ld. A.R. submitted before the Bench that assessee company i.e. Cable Corporation of India Ltd. is a company in which public are substantially interested. The ld counsel submitted that during the year, the assessee received a gift of 9908 equity shares of M/s. CCI Projects Pvt. Ltd. from Mr. Rajiv Saxena which were treated as capital receipt by the assessee by making necessary entries in the books of accounts. The Ld. A.R. submitted that the assessee made the necessary disclosure of said gift of shares in the audited statement of accounts and also in the return of income filed by the assessee and also stated that the said gift being a capital receipt is not covered by the provisions of section 56 of the Act. The Ld. A.R. contended that the authorities below have grossly erred in taxing the said amount under section 56 of the Act. The Ld. A.R. submitted that the findings of Ld. CIT(A) are factually incorrect in so far as the donor of share Mr. Rajiv Saxena is concerned as he in fact was appointed as director w.e.f. 31.10.2009 by taking us to the page No.11 of the audited annual accounts wherein it was stated that Mr. Rajiv Saxena was appointed w.e.f. 31.10.2009 whereas in the appellate order the Ld. CIT(A) in para 5.2 page No.13 has stated that Mr. Rajiv Saxena who was director of the assessee company has resigned on 31.10.2009. The Ld. A.R. submitted
7 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. that provisions of section 56(2)(vii)(a) of the Act are not applicable to the assessee as it is a public limited company. The Ld. A.R. drew our attention to the amendment which was effected in section 56(2) by inserting clause No.(vii)(a) by Finance Act, 2010 w.e.f. 01.06.2010 is applicable only to private limited companies and is applicable from A.Y. 2010-11 whereas the assessee is a public limited company in which public are substantially interested. The present gift was made on 25.02.2010 which is prior to the date of insertion of clause (vii)(a) to section 56(2) of the Act and therefore is not applicable to the assessee at all. The Ld. A.R. further submitted that even if for imaginary sake the gift would have been made after the date of insertion of this clause, the provisions of section 56(2)(vii)(a) of the Act would not have been applicable to the assessee company as it is a company in which public are substantially interested whereas section 56(2)(vii)(a) has specifically excluded a company in which public are substantially interested from its ambit and therefore this section has no application to the assessee at all. The Ld. A.R. in defence of his arguments relied heavily on the decision of co-ordinate bench of the Tribunal in the case of Nerka Chemical Pvt. Ltd. vs. DCIT in ITA No.4423/M/2014 A.Y. 2009-10 & ors. order dated 31.08.2018. The Ld. A.R. submitted that the identical issue has been decided in the said case by the coordinate bench and the case of the assessee is squarely covered by the said decision. The Ld. A.R. also relied on a couple of decisions namely; 1. D.P. World Pvt. Ltd. 26 taxman.com 163 (Mumbai –Trib.) 2. KDK Enterprises 57 Taxmann.com 284 (Mum-Trib.).
8 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. The Ld. A.R. also relied on the decision of Hon’ble Supreme Court in the case of Parimisetti Seetharamamma Vs. CIT (1965) 57 ITR 532 (SC) wherein the Hon’ble Apex Court has held that every receipt is not an income. The Ld. A.R. finally prayed before the Bench that in view of the ratio laid down by the co- ordinate bench of the Tribunal under identical facts and also in view of the provisions of section 56(2)(vii)(a) of the Act which has been inserted w.e.f. 01.06.2010 by the Finance Act, 2010 specifically providing that company in which public are substantially interested are not covered under the said clause. Therefore, the order of Ld. CIT(A) deserved to be reversed and AO be directed to delete the addition made on account of gift of shares of Rs.49.02 crores.
The Ld. D.R., on the other hand, relied heavily on the order of AO and Ld. CIT(A). The Ld. D.R. submitted that if the contentions of the Ld. A.R. are accepted that any gift by any person is exempt from tax then it would cause huge tax evasion as none of the parties will pay any tax on the revenue derived and this would be an escape route for such type of dubious and suspicious transactions made by way of gift of shares worth crores of rupees. The Ld. D.R. submitted that shares of M/s. CCI Projects Pvt. Ltd. which were held by the director Mr. Rajiv Saxena were gifted to the assessee company without any valid reasons. The said M/s. CCI Projects Pvt. Ltd. is a parent company of the assessee. Thus this is a clear cut devise of tax evasion. The Ld. D.R. submitted that it is very strange that shares worth Rs.49.02 crores were gifted by Mr. Rajiv Saxena to the company without quid pro quo. The Ld. D.R. argued that
9 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. when an asset is gifted it becomes a surplus/income in the hands of the recipient and has to be taxed as revenue in nature. The Ld. D.R. also referred to the letter of Mr. Rajiv Saxena wherein it was stated that share was sold to the assessee without cost. The Ld. D.R. tried to justify the order of Ld. CIT(A) by submitting that the shares worth Rs.49.02 crores were sold free of cost and thus there was no gift to the assessee as stated in the letter dated 25.02.2010 of Mr. Rajiv Saxena. The Ld. D.R. argued that any receipt/profit or gain has to be taken as income taxable under the Act unless especially exempted. Finally, the Ld. D.R. relied heavily on the order of authorities below and submitted that the order of Ld. CIT(A) may be affirmed.
We have heard the rival submissions of both the parties and perused the material on record including the impugned order and decisions cited by the ld AR. The undisputed facts are that the assessee has gifted 9908 equity shares of M/s. CCI Projects Pvt. Ltd. to the assessee which was shown by the assessee in the schedule VI “Investments” by showing the value at Rs.100/- and the corresponding credit entries were made in the capital reserve by showing the same as gift received. The AO valued the same at Rs.49.02 crores and added the same to the income of the assessee under section 56 of the Act on the ground that the assessee became richer by this amount with the said gift. According to the AO the said transaction was a colourable devise designed and adopted by the assessee and Mr. Rajiv Saxena to circumvent the tax liability on such transfer of shares. The AO also referred to the letter of Mr. Rajiv Saxena dated 25.02.2010 wherein it is stated that 9908 equity shares
10 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. were gifted to Cable Corporation of India. According to the AO, the said receipt of gifts is taxable under section 56 of the Act which is of vide import and covers every income not specifically covered under other heads of income. The AO stated that the provisions of section 56(2) of the Act are inclusive and not restrictive and includes every type of income which is not covered under any of the specific heads of income. The Ld. CIT(A) affirmed the order of AO on the ground that 9908 equity shares of M/s. CCI Projects Pvt. Ltd. were sold/handed to the assessee company free of cost and thus held that AO has rightly treated the entire worth of the equity shares as income taxable in the hands of the assessee. It is also undisputed that the assessee is a company in which public are substantially interested and therefore provisions of section 56(2)(vii)(a) of the Act are not applicable to the assessee company which were inserted by the Finance Act, 2010 w.e.f. 01.06.2010. In other words even if the assessee company has received any gift of equity shares of a company, even then the same can not be brought to tax under the provisions of said section as these are not applicable to public company in which public are substantially interested. For the purpose of better understanding of the said section, the same is reproduced as under: “Section 56(2) : In 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 :— [(vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009,— (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;”
11 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. 9. We also observe that the identical issue has been decided by the co-ordinate bench of the Tribunal in the case of Nerka Chemical Pvt. Ltd. vs. DCIT in ITA No.4423/M/2014 A.Y. 2009- 10 & ors. vide order dated 31.08.2018. The operative part whereof is reproduced as under: “27. We have considered the rival submissions of the parties and have gone through the various documents sought to be relied as additional evidence and the decisions relied by the ld. representatives. We have also deliberated on the judicial pronouncement cited the ld. Special Counsel for the revenue and the ld Senior Counsel for the assessee during the course of hearing before us. For appreciation of Rule 29 we may refer the provision thereof, which is as under:
“29. Production of additional evidence before the Tribunal.- The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any documents to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or, if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them, or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced.”
A careful reading of first limb of Rule 29 makes it clear that the Tribunal shall not admit additional evidence and thus, neither party can lead additional evidence. However, it provides that additional evidence may be admitted if the Tribunal requires any document to be produced to enable it to pass an order or for any other substantial cause. The second limb of Rule 29 provides that only the assessee can furnish additional evidence provided it is established that his case has been decided without giving sufficient opportunity by the authorities below and that too, when the Tribunal is satisfied on this and after recording of the reasons to be recorded in writing. Therefore, in our view, the aforesaid rule, the Revenue is not allowed to furnish any fresh evidence in an appeal filed by the assessee unless it is so required by the Tribunal. Thus, the admission of the additional evidence is the discretion of the Tribunal. No doubt the Tribunal is required to exercise its discretion with sound reasoning, guided by various judicial pronouncements.
The Jurisdictional High Court in CIT Vs Kamal C Mehboobbani (214 ITR 15) (Bom) held as under:
“7. --------------, we are of the opinion that rule 29 does not confer any right on the parties as such to produce any additional evidence either oral or documentary before the Tribunal. On the other hand, such a right has specifically been taken away by prohibiting the production of the additional evidence by the parties. The power has been vested only in the Tribunal to
12 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. require production of any document or evidence if it is of the opinion that it is necessary to do so to enable it to pass order or for any other substantial cause. For doing this also, the Tribunal has to record reasons. In the present case, the Tribunal has not issued any such direction. On the other hand, it has stated that it is not satisfied that any such direction should be issued. In that view of the matter, we do not find any infirmity in the order of the Tribunal (sic-refusing) to entertain the additional evidence sought to be produced by the Revenue at the time of hearing of the appeal.”
The Hon’ble Rajasthan High Court in CIT Vs Rao Raja Hanut Singh (252 ITR 528) (Raj) held as under:
“Production of additional evidence at the appellate stage is not matter of right to the litigating party but within the discretion of the Court which is to be exercised judiciously…… Secondly, even if it be a question of law, if answer is evident or is settled by the decisions of the Supreme Court, such question need not be referred to the Court for its opinion. There is no dispute about the fact that litigant cannot claim as a matter of right to lead additional evidence before appellate authority and the power of the Tribunal in the matter of taking additional evidence on record is circumscribed by the rule. Exercise of such power to permit a party to produce additional evidence before the Tribunal is absolutely within the discretion of the Tribunal and cannot be claimed as a matter of right. There is statutory mandate that parties are not entitled to produce additional evidence, oral or documentary, before the Tribunal. The discretion of the Tribunal to take the additional evidence required to be produced by the parties on record is circumscribed by the condition that if the Tribunal requires said evidence to be produced before it to enable it to pass orders or for any substantial cause.”
The case law relied by ld DR for the revenue are not directly on the admission of additional evidence and are differentiable on the factual matrix of the present case. The case law in New Delhi Television Ltd. Vs ACIT (83 taxmann.com 282) relied by ld Special Counsel, has been reversed by Hon’ble Delhi High Court. Further in case of CIT Vs Khairunnissa Ebrahim (201 ITR 903) (Ker), this decision dealt with admission of additional ground before the appellate authority and not additional evidence. The said decision upheld the admission of additional ground by the Tribunal without any discretion and in a duty bound manner. The case law in CIT vs Jansampark Advertising (375 ITR 373) (Del) the facts of this case are not applicable to the facts of the present case. The question before the High Court was whether the Tribunal was correct in allowing the appeal of the assessee in respect of addition made on account of unexplained credit under section 68 of the Act. The observations of the Court were enumerated in Para 42. The observations of the Court are reproduced as under:
“42. The AO here may have failed to discharge his obligation to conduct a proper inquiry to take the matter to logical conclusion. But CIT (Appeals), having noticed want of proper inquiry, could not have closed the chapter
13 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. simply by allowing the appeal and deleting the additions made. It was also the obligation of the first appellate authority, as indeed of ITAT, to have ensured that effective inquiry was carried out, particularly in the face of the allegations of the Revenue that the account statements reveal a uniform pattern of cash deposits of equal amounts in the respective accounts preceding the transactions in question. This necessitated a detailed scrutiny of the material submitted by the assessee in response to the notice under Section 148 issued by the AO, as also the material submitted at the stage of appeals, if deemed proper by way of making or causing to be made a “further inquiry” in exercise of the power under Section 250(4). This approach not having been adopted, the impugned order of ITAT, and consequently that of CIT (Appeals), cannot be approved or upheld.”
In the aforesaid case as the addition was made on account of unexplained credits under section 68 of the Act. The material furnished by the assessee during the course of reassessment proceedings was not properly scrutinized by the AO. Further, the CIT (A) and Tribunal decided the case without examining the information submitted before them by the assessee. In this context, it was held by the High Court that the CIT (A) and Tribunal ought to have made further enquiry into the transaction entered into by the assessee if deemed necessary. Accordingly, the High Court remanded the matter back to the CIT(A) to examine the material submitted by the assessee and decide the matter in light of the said material. Accordingly, it was not a case of admission of any additional evidence but it was restored back directing an enquiry to be made on the material that was already before the lower authorities. The decision in Maruti Udyog Vs ITAT (supra) deals with admission of additional ground and not additional evidence. The two are governed by different independent principles and accordingly, the aforesaid decision has no applicability in the present case.
In Union of India Vs Ibrahim Uddin (supra), the Hon’ble Supreme Court has observed in para 49 of the judgement that the true test, in deciding application is, whether the appellate court is able to pronounce judgement on the materials before it without taking into consideration the additional evidence sought to be adduced. Further in para 50 it was held that the power so conferred (for admission of additional evidence) upon the Court by the code ought to be very sparingly exercised, and one requirement at least of any new evidence to be adduced should be that it should have a direct and important bearing on a main issue in the case.
We have further noted that the documents filed by way of additional evidence are related with loan transaction entered between the assessee and DHPL with Credit Suisse and investment of funds by Timberlane in DHPL. The subscription of shares by Timberlane in DHPL is irrelevant for the issue under consideration before Tribunal. In case any inquiry was required to be made in that aspect, then it ought to be made in the assessment of DHPL and not in case of assessee’s assessment. Further, we observe that the loan taken by DHPL and assessee, and the capital infusion by Timberlane in DHPL are in no way related to the gift transactions. The said loan transactions were completed before the gifts of shares were transferred / gifted. We are in agreement with the submission of ld. Sr. Counsel for assessee that
14 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. by allowing the prayer of revenue to lead additional evidence and unable a further enquiry would tantamount to provide the revenue an opportunity of re-opening of the case which is not permissible under the garb of prayer for seeking admission of additional evidence, when the revenue has not filed any appeal, cross objection or exercise power conferred under section 147, 154 or 263 on various authorities under the Act.
In view of the discussion of various case law relied by the parties, we are of the view that the additional evidence is necessarily not required by the Tribunal to arrive at a conclusion in respect of the issue before Tribunal. Considering the nature of the documents and the prayer made in the application under Rule 29, we do not find any substances in the application of the revenue to allow them to file the additional evidence as the said additional evidence has no relevance with the fact in issue before the Tribunal. Moreover, there is no dispute about the transfer of share by way of Gift and about the identity of the donor and volumes of the shares. The assessee besides the other issues has raised issues only on the taxability of the shares under various provisions of Act. Therefore, the application filed by the revenue under Rule 29 is dismissed
Now we shall proceed to discuss Ground No.2 relates to validity of taxability of gifted shares to Assessee Company, under various sections of Income-tax Act. We have considered the rival submissions of the ld Counsels of the parties. We have also deliberated on various judicial pronouncement referred by the lower authorities in their orders as well as various decisions cited and relied by the parties during the course of hearing in context of factual matrix of the case.
The Assessing Officer while passing the assessment order treated the transfer of share as taxable receipt holding that assessee is a beneficiary in the ordinary course of its business and the receipt of share is taxable under section 28(iv). The Assessing Officer alternatively treated the market value of shares received by assessee without consideration as income from other sources under section 56(1). The ld. CIT(A) besides confirming the addition under section 28(iv) and 56(1), held that transaction of transfer of share to assessee is covered within the purview of section 2(22)(a), holding it that distribution of share by DHPL of accumulated substantial capital asset to the assessee, who is one of its shareholder along with family member of Shroff family.
The Income Tax Act does not define the term 'Gift'. Gift is defined under section 122 of the Transfer of Property Act - 1882, which reads as under:
'122. "Gift" defined - "Gift" is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee.'
Further section 5 of the Transfer of Property Act defines the term "Transfer of Property" as under:
15 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. '5. "Transfer of Property" defined - In the following sections "transfer of property" means an act by which a living person conveys property, in present or in future, to one or more other living person or to himself and one or more other living persons; and "to transfer property" is to perform such act.'
In this section "living person" includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals ."
Section 122 of the Transfer of Property Act provides for making of a gift and permits transfer of moveable or immovable property but without any consideration. The shares or interest in a company is a moveable asset as per the Companies Act. Further as per section 5 of the Transfer of Property Act, a company is a living person, competent to transfer a property and therefore the Transfer of Property Act permits a company to be a transferor (donor).
In DP World (P) Ltd vs. DCIT (140 ITD 694) (Mum) the coordinate bench of Tribunal while considering the taxability of the Gift held that when, the assessee received three residential flats by way of gift of shares of the concerned housing society from its sister concern and in absence of any specific provision taxing a gift as a deemed business income, provisions of section 28(iv) cannot be applied. Not every receipt is taxable under head ‘Income from other Sources’ but only those which can be shown as ‘income’ can be brought to tax under this head, if it does not fall directly under other heads of income specified in section 14. Thus, the transaction was held to be nothing but a gift and thus a non taxable capital receipt.
Further, the Coordinate bench of Tribunal in DCIT Vs KDA Enterprises (supra) held section 2(24) defines 'income'. The definition of 'income' provided in section 2(24) although an inclusive definition, but it specifically provides the income which are intended to be taxed under the provisions of the Act. Even the income in the nature of capital gains as per section 45, and gifts received as per section 56(2)(v), (vi), (vii) etc. are included in the definition of income. Thus under the Act only the receipts which are in the nature of 'income' are subjected to tax. Any other receipts which are not in the nature of 'income' are not liable to tax under the provisions of the Act. Section 5 provides for scope of total income chargeable to tax in India on the basis of receipt, accrual and deemed to be received and accrued in India. In view of above, the charging section of the Act specifically provides for taxation of 'income' of an assessee. For a receipt to be taxable under the provisions of the Act it must necessarily be in the nature of an income or its taxability should have been specifically provided by the statute. Under the Act, what is subjected to tax is only the 'income' of the assessee and not each and every receipt of the assessee, where the other receipts not in the nature of income are intended to tax, the legislature has specifically made provisions for taxability of such receipts in the statute itself like section 45, section 56(v), 56(vi), 56(vii) etc. It was also held that as per the provisions of law prevailing during the year under consideration, the gift received by one corporate body from another corporate bodies do not come under the
16 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. ambit of income as contemplated under section 2(24) or any other provisions of the Act. While referring and following the decision in DP World (P) Ltd (supra) it was further held that companies are competent to make and receive gifts and natural love and affection are not necessary requirement. It was held that the only requirement for company is to make gifts as per respective Memorandum and Article of association, which authorize the company for the same. Applying the proposition of law laid down in the above decision to the facts of the instant case, it is found that the assessee and the donor companies are authorized in this regard for receiving and making gifts respectively by their Memorandum and Articles of association.
The Hon’ble jurisctional High Court in assessee’s own case (Nerka Chemicals Vs Union of India 371 ITR 280) while hearing the writ petition against the refusal of stay of recovery held that the assessee has more than just a strong prima facie case in this regard. The title given to a document is not determinative of its true character. The purport of the document must be ascertained on a consideration of the contents thereof. The respondents do not deny that no consideration in the terms of money or money(s) worth was paid by the assessee to the transferors. The High Court further referred the decision of Mumbai Tribunal in DP world Ltd Vs DCIT and held that the receipt of gift has been held as not taxable under section 28(iv) as well as 56(1)/56(2) of the Act.
Now, first, we shall examine the taxability of the gift of shares by making addition under section 2(22) (a). The section 2(22)(a) in the statute book is as under: Section 2(22) “dividend” includes
(a) Any distribution by a company of accumulated profit, whether capitalized or not if such contribution entails the relief by company to its shareholder of all or any part of asset of the company
In our view, in order to fall within clause (a) of section 2(22), two conditions must be satisfied; (i) it must be a distribution of accumulated profits, whether capitalized or not; and (ii) it must be such as entails the release of all or any of assets of the company. The two conditions are manifestly cumulative and it is only if both conditions are satisfied, a distribution can be said to be dividend within the meaning of the section. We have noted that the assessee is not a shareholder of DHPL and therefore, the taxing of receipt of gift from DHPL is not sustainable. Even while making submission ld. counsel for assessee invited our attention to the investment schedule of assessee-company as on 31.03.2008 which shows that assessee is not a shareholder of DHPL (Page No. 134 of PB). In the related party disclosure as well, which is forming part of audited account of assessee for the year ended on 31.03.2010 shows that DHPL is the holding company of assessee (Page No. 132 of PB). Therefore, invoking the provision of section 2(22) (a) in respect of gift of share by DHPL to NCPL without consideration is unsustainable.
So far as the taxability of gifted shares under section 28(iv) of the Act is concerned, we are of the view that the provision of section 28(iv) can be invoked to
17 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. bring to tax the amount or benefit, if the three conditions are fulfilled; viz (i) the assessee has to receive a benefit or a perquisite; (ii) the benefit or perquisite must be in a form other than cash; (iii) such receipt must arise from the carrying on of the business. Admittedly in the present case the assessee has received the shares in gift and, therefore, conditions (i) and (ii) above is fulfilled but the third condition is not satisfied. We have already noted that the business of the Appellant is trading in chemicals.
In Circular No.20D dated 7th July 1964 CBDT clarified that;
“Assessment of the value of any benefit or perquisite arising from business or exercise of a profession, as income from business or profession.
A new clause (iv) has been inserted in section 28, with effect from 1-4- 1964, by section 7 of the Finance Act, 1964, under which the value of any benefit or perquisite (whether convertible in money or not) arising from business or the exercise of a profession will be chargeable to tax under the head "Profits and gains of business or profession.
The effect of the above-mentioned amendment is that in respect of an assessment for the assessment year 1964-65 and subsequent years, the value of any benefit or amenity, in cash or kind, arising to an assessee from his business or the exercise of his profession, e.g., the value of rent-free residential accommodation secured by an assessee from a company in consideration of the professional services as a lawyer rendered by him to that company , will be assessable in the hands of the assessee as his income under the head “Profit and gains of business or profession”.
Further the coordinate bench in Rupee Finance Management (P) Ltd Vs ACIT (supra) held that when as a part of memorandum of understanding between group companies, certain shares of a group company were transferred to assessee at cost, and the purchase was by way of investment only and it was not a case of revenue that there was any business connection or business done between seller and purchaser or that any privilege or benefit or concession had been passed by seller to assessee. Therefore, mere purchase of shares as an investment with lock-in period of holding, for a consideration which is less than market value, cannot be brought to tax as a benefit or perquisite under section 28(iv).
In DCIT Vs Manish M Chheda (29SOT 138 Mum) it was held
“17.----- one of the condition necessary for applicability of s. 28(iv) is the benefit or perquisite sought to be taxed must be arising in the course of business carried on. In the case of Smt. Chetanaben B. Sheth (Minor) (supra), Hon’ble Gujarat High Court has held that amount received by an assessee partner of a firm towards valuation of goodwill and assets of a firm at the time of retirement from the firm does not attract provisions of s. 28(iv) of the Act, since, the same cannot be said to be a perquisite arising from the business and that even otherwise it would not partake the
18 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. character of income. Besides the above, we are of the view that the increase in capital of partner as a result of revaluation of assets of the firm has no nexus with the business of the firm and, therefore, cannot be brought within the ambit of s. 28(iv) of the Act. We, therefore, hold that provisions of s. 28(iv) cannot be applied to bring the sum in question to tax in the hands of the partners of the firm.”
With the aforesaid discussion, we are of the view that the revenue has failed to demonstrate that the receipt of share by way of gift is in the nature of income and benefit or perquisite arising in the course of assessee’s business and that the receipt of gift of share is taxable under section 28(iv). The assessee is not having have any business transactions of any nature whatsoever with the donors from whom the shares of UPL and UEL were received. In absence of such transactions the provisions of section 28(iv) is not applicable and the finding of ld. CIT(A) in seeking to bring to tax the value of the shares so received in terms of section 28(iv) is also not sustainable.
Sections 2(18)(b) and 56(2)(viia) of the Act (as on statue book during the relevant period) read as under :—
'2. Definitions. - In this Act, unless the context otherwise requires,—
(18) "company in which the public are substantially interested"—a company is said to be a company in which the public are substantially interested—
(a)** ** ** (b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely :—
(A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder ;
(B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by—
(i) the Government, or
(ii) a corporation established by a Central, State or Provincial Act, or
(iii) any company to which this clause applies or any subsidiary company of such company [if the whole of the share capital of such subsidiary company
19 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. has been held by the parent company or by its nominees throughout the previous year.
Explanation.—In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words "not less than fifty per cent", the words "not less than forty per cent" had been substituted;
‘Section’- 56. Income from other sources - (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In 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 :—
** ** **
"(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested,—
(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:
Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47.
Explanation.—For the purposes of this clause, "fair market value" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);'
Now we deem it appropriate to refer the legislative history of section 56 and the amendments made to the said provisions from time to time in order to widen
20 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. its ambit and cover transfer of specific assets by certain persons without consideration or for inadequate consideration.
sub section 2 clause (v) was inserted w.e.f. 1 April 2005 to tax the receipt of any sum of money exceeding Rs.25,000 without consideration by any individual or HUF subject to certain exclusions.
sub section 2 clause (vi) was inserted w.e.f. 1 April 2007 to tax the receipt of any sum of money exceeding Rs.50,000 without consideration by any individual or HUF subject to certain exclusions.
sub section 2 clause (vii) was inserted w.e.f. 1 October 2009 to tax the receipt of money or any property whose value exceeds Rs. 50,000 without consideration or for inadequate consideration by any individual or HUF subject to certain exclusions.
sub section 2 clause (viia) was inserted w.e.f. 1 June 2010 to tax the receipt of shares of a closely held company whose value exceeds Rs 50,000 without consideration or for inadequate consideration by any firm or company subject to certain exclusions.
sub section 2 clause (viib) was inserted w.e.f. 1 April 2013 to tax the excess of consideration over the fair value where the receipt of consideration for issue of shares by a private company exceeds the face value of shares issued subject to certain exclusions.
sub section 2 clause (x) was inserted w.e.f. 1 April 2017 to tax the receipt of money or any property whose value exceeds Rs. 50,000 without consideration or for inadequate consideration by any person subject to certain exclusions.
As we have seen that corresponding amendments were made to the definition of income in section 2(24) to cover the aforesaid receipts as income i.e. insertion of clauses (xiii), (xiv), (xv), (xvi), (xvii) and (xviia) in section 2(24) of the Act. In view of the above, history, the intention of the legislature has been to cover a particular transaction in the tax net; the law has been suitably amended. The fact that the gift of shares of a company in which the public is substantially interested between two companies was not covered under the provisions of section 56 until the introduction of subsection (2)(x), the said transaction ought not to be taxed under section 56 of the Act. We may also note that in Explanatory Notes to the provisions of Finance Act 2010 issued by CBDT in its Circular No. 1/2011 dated 06.04.2011, explained the applicability and the intention of the legislation of introducing section 56(2) (viia) as under ;
“13.2. These are anti – abuse provisions which are applicable only if an individual or an HUF is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or an HUF, without consideration or at a price lower than the fair market value was not
21 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. attracted by the anti-abuse provision. In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, section 56 was amended to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested).” (emphasis supplied)
Thus it is clear that the section 56(2)(viia) has been introduced as an antiabuse provision for preventing the practice of transferring unlisted shares at prices much below their fair market value or without any consideration. It is pertinent to mention that after amendment to section 56(2)(viia), only the transfer of shares of unlisted company without consideration or for inadequate consideration is deemed to be income chargeable to tax. It is not in dispute that the assessee has received gift of shares of UPL and UEL being listed company, which cannot be treated as income chargeable to tax. In the present case the shares were gifted even prior to the proposal made in the Finance Act 2010 w.e.f. 01.06.2010. We are in agreement with the submission of ld. Sr. Counsel for the assessee that the Gift –tax Act,1958 has been repealed and there is no tax on the Gift either on the donor or on the donee in any form under Income tax Act or any other Act. The contention of the ld. Sr Counsel so far as it relates to repealing the Gift –tax Act was not disputed by the Revenue. Further it is the contention of the ld. Sr Counsel for the assessee that the taxability of gift remained outside the tax net for a long time until section 56(2) was brought on statue book for bringing to tax gift received by individual and by Hindu Undivided Family (HUF) under certain circumstances from 1st April 2005.
In our considered view, by virtue of the introduction of the section 56(2)(viia) the transfer of shares of unlisted company either for inadequate consideration or without consideration is deemed to be income chargeable to tax as income from other sources which was otherwise not taxable under the Act. It is important to note here that after the amendment to section 56(2)(viia) of the Act, only the transfer of shares of an unlisted company without consideration or for inadequate consideration is deemed to be income chargeable to tax and not the transfer of shares of listed company. In the present case the assessee has received gift of shares of UPL and UEL being listed Companies, and therefore, the same cannot be treated as income chargeable to tax. In the present case the shares were gifted even prior to the aforesaid proposal made vide the Finance Bill, 2010 applicable w.e.f 01.06.2010, therefore, no addition can be made in the assessment year 2010- 11, relevant to F.Y.2009-10 under consideration.
At the cost of repetition, we observe that there is no question of taxing a receipt in the form of shares of a listed company received by way of a gift under the Act since the said receipt does not tantamount to income as the term is defined. Further, there was also no provision under the Act at the relevant time for taxing the transfer of shares of a listed Company received without any consideration in the hands of the recipient and, accordingly, the question of taxing the gift of shares of UPL and UEL as income in the hands of the Company does not arise.
22 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. 54. Even after the amendment to section 56(2)(Viia) of the Act, only the transfer of shares of an unlisted company without consideration or for inadequate consideration is deemed to be income chargeable to tax. In the instant case, NCPL has received gift of shares of UPL and DEL being listed Companies, and therefore, the same cannot be treated as income chargeable to tax. In the instant case the shares were gifted even prior to the aforesaid proposal made vide the Finance Bill, 2010
Since we have held that no addition for taxability of gifted share in a listed share can be made either under section 2(22)(a), 28(iv) or 56(1), consequently no addition is warranted while computing the book profit under section 115JB of the Act.
The case laws relied by ld. Special Counsel for revenue is not applicable on the facts of the present case. Reliance was placed on the decision in ACIT Vs Bilakia Holding (supra), the said case deals with the family arrangement wherein three brothers of a family held equal interest and shareholding in the assessee company. The various members of the Bilakhia family entered into a deed of family arrangement with a view to consolidate and equalize values of the assets held by each of the parties. The question before the Tribunal was whether the transfer of shares of Nestle Ltd. and Hindustan Lever Ltd. held by members of the family to the assessee company as per the family arrangement claimed to have been transferred without any monetary consideration can be held to be a gift or not? The Tribunal referred to the definition of ‘gift’ as defined in the Transfer of Property Act, 1882; that "Gift is a transfer of certain existing moving or immovable property made voluntarily and without consideration by one person, called the donor, to another, called the donee and accepted or on behalf of the donee." As the issue was equalization of wealth which was made in pursuance of a family arrangement, it was held that the transfer could not be called voluntary and without consideration and therefore not a valid gift. The facts of the said decision are not applicable to the present case. Further, in the said case the receipt of gift was credited to the Profit and Loss account and not to Capital Reserve. However, the gift of share in the present case is shown as Capital receipt. Further, Hon’ble Bombay High Court in B.A. Mohata (supra) dealt with a family dispute and an arrangement to resolve such dispute. The transfer of property was done pursuant to a family arrangement. This decision does not lay down the proposition that a Company cannot make a gift. They only state that a company cannot be part of a family arrangement. Accordingly, the facts of the aforesaid case are not applicable to the facts of the present case. Hence, Ground No.2 of the appeal is allowed.”
It has been clearly held by the co-ordinate bench of the Tribunal that provisions of section 56(2) are not attracted nor the provisions of section 28(iv) were applicable to a gift of shares received by the assessee. Moreover, the amendment in section 56(2) has been brought about by inserting clause (vii)(a) to this
23 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. section by Finance Act, 2010 which is effective from 01.06.2010 and is not applicable to the year under consideration. Even if, we presume that the provisions of section 56(2)(vii)(a) of the Act are applicable to the gifts received by a company or firm even then the said provisions are not applicable to the assessee as it is a company in the public are substantially interested and this class of companies haves been specifically excluded from the application of clause 56(2)(vii)(a)of the Act. Since the assessee is a company in which public are substantially interested, therefore the said provisions are not applicable to the assessee. Moreover, the case of the assessee is squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of Nerka Chemical Pvt. Ltd. vs. DCIT(Supra) as has been reproduced above. We, therefore, respectfully following the said decision hold that the gift received by the company from Mr. Rajiv Saxena of 9980 equity shares of CCI Pvt. Ltd. is not taxable in the hands of the assessee and accordingly, we set aside the order of Ld. CIT(A) and direct the AO to delete the disallowance.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 31.05.2019.
Sd/- Sd/- (Amarjeet Singh) (Rajesh Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 31.05.2019. * Kishore, Sr. P.S.
Copy to: The Appellant The Respondent
24 ITA No.6558/M/2017 M/s. Cable Corporation of India Ltd. The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench
//True Copy//
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.