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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Shri Vijay Pal Rao, Vice-Shri Manjunatha, G.
(िनधा�रण वष�/Assessment Year: 2008-09) Dy.CIT Vs. Shri Prakash Nimmagadda Circle 1(1) Hyderabad Hyderabad PAN:ACBPN4246R (Appellant) (Respondent) िनधा��रती �ारा/Assessee by: Shri K.C. Devdas, CA राज� व �ारा/Revenue by:: Dr. Meghnath Chowhan, CIT(DR) सुनवाई की तारीख/Date of hearing: 06/11/2024 घोषणा की तारीख/Pronouncement: 16/12/2024 आदेश/ORDER
Per Vijay Pal Rao, Vice President
This appeal filed by the Revenue is directed against the order, dated 20/03/2017 of the learned CIT (A)-9, Hyderabad, relating to A.Y.2008-09.
The Revenue has raised the following grounds:
“(i). The learned CIT(A) erred in directing the Assessing Officer to delete the addition of Rs 338,73,00,000/-made u/s 28(iv) of the Income Tax Act.
(ii) The learned CITA) ought to have appreciated that the assessee is a Promoter Director in M/s Alpha Avenues P ltd and 33,53,000 shares of the said company were allotted to the assessee at face value of Rs 10/- whereas at the same time the shares were allotted at a premium of Rs 350/- to other investors and therefore the assessee received benefit or perquisite out of allotment of said shares. (iii) The learned CIT(A) ought to have further appreciated that such benefit is on account of the conduct/management of the business of a closely held company by the assessee as a key promoter/ director and hence, the benefit, being non-monetary benefit, arising out of the business nexus is taxable in the hands of the assessee u/s 28(iv) of the IT Act. (iv)The learned CIT(A) ought to have appreciated that the assessee is a Promoter Director in M/s Alpha Villas P Ltd and 30,75,000 shares of the said company were allotted to the assessee at face value of Rs 10/- whereas at the same time the shares were allotted at a premium of Rs 350/- to other investors and therefore the assessee received benefit or perquisite out of allotment of said shares. (v) The learned CIT(A) ought to have further appreciated that such benefit is on account of the conduct/management of the business of a closely held company by the assessee as a key promoter/director and hence the benefit. being non- monetary benefit, arising out of the business nexus is taxable in the hands of the assessee u/s 28(iv) of the IT Act. (vi) The learned CIT(A) ought to have appreciated that the assessee is a Promoter Director in Gilchrist Investments P ltd and 32,50,000 shares of the said company were allotted to the assessee at face value of Rs 10/- whereas at the same time the shares were allotted at a premium of Rs 350/- to other investors and therefore the assessee received benefit or perquisite out of allotment of said shares. (vii) The learned CIT(A) ought to have further appreciated that such benefit is on account of the conduct/management of the business of a closely held company by the assessee as a promoter/ director and hence the benefit, being non- monetary benefit, arising out of the business nexus is taxable in the hands of the assessee u/s 28(iv) of the IT Act.
(vii) The Appellant craves leave to add, delete, substitute and amend any ground of appeal before and or at the time of hearing of the appeal. For these and other grounds that may be canvassed at the time of hearing of the appeal, it is prayed that addition made by the assessing officer u/s 28(iv) of the IT Act be restored.”
The Revenue has raised the following additional grounds: “1 The Learned CIT(A) having appreciated the fact that the assessee is a promoter director in (i). M/s. Alpha Avenues Pvt. Ltd., wherein 33,53,000 shares of the company were allotted to the assessee at the face value of Rs. 10/- per share, (ii) M/s. Alpha Villas Pvt. Ltd., wherein 30,75,000 shares of the company were allotted to the assessee at the face value of Rs.10/- per share and (iii) M/s. Gilchrist Investments Pvt. Ltd., wherein 32,50,000/- shares of the Company were allotted to the assessee at the face value of Rs.10/- per share, whereas at the same time the shares were allotted at a premium of Rs.350/- per share to M/s. Cornerstone Property Investment Pvt. Ltd. The Ld. CIT(A) having held that the shares so allotted to the assessee at face value is taxable U/s 17(2)(c)(ii) and 56(2)(vii) and (via) of the I.T Act, 1961 in Para 9.5 of the order, the Ld.CIT(A) erred both on facts and in law in not adjudicating on the same. Therefore, the order of the Ld.CIT(A) may be reversed by the Hon'ble ITAT or set aside back to the file of the Ld.CIT(A). 2. The appeal craves leave to add, delete, substitute and amend any of the grounds of appeal before hearing of appeal. Any other ground that may be urged at the time of hearing.”
The brief facts of the case leading to the controversy are that, the assessee is a Director of M/s. Alpha Avenues Pvt.
Page 3 of 43 Ltd, M/s. Alpha Villas Pvt. Ltd and M/s. Gilchrist Investments Pvt. Ltd. During the previous year relevant to A.Y under consideration, the assessee derives income from house rent, capital gain and other sources being interest from Bank. The assessee filed his return of income on 8/8/2008 declaring total income of Rs.28,78,260/-. The return of income was initially processed u/s 143(1) of the I.T. Act, 1961. Later on, the Assessing Officer reopened the assessment by issuing notice u/s 148 of the Act on 06/07/2012 for assessing the income on account of allotment of shares to the assessee by the above 3 companies of Rs.10/- each at par as against the allotment of shares of these companies to M/s. Cornerstone Properties and Investments (P) Ltd at a premium of Rs.350/- per share. The Assessing Officer while framing the assessment u/s 143(3) r.w.s. 147 of the Act made addition of Rs.338,73,00,000/- representing the premium charged by these companies from M/s. Cornerstone Properties and Investments (P) Ltd, but benefit was given to the assessee for not charging any premium and assessed u/s 28(iv) of the I.T. Act, 1961.
The assessee challenged the action of the Assessing Officer before the learned CIT (A) and raised objection including the validity of the reopening of the assessment. The learned CIT (A) decided the issue in favour of the assessee on merits by holding that the issuance of shares to the assessee by these companies at par, in comparison to the issuance of shares at Page 4 of 43 premium to 3rd party M/s. Cornerstone Properties and Investments (P) Ltd, does not fall in the ambit of section 28(iv) of the I.T. Act, 1961 as this is not an income from his business activity or exercise of profession.
Aggrieved by the order of the learned CIT (A), the Revenue filed the present appeal.
Before the Tribunal, the learned DR has submitted that the decision of the CIT(A) is incorrect both on facts, and in law. According to the learned DR, in this case, the following undisputed facts are evident:
(i) The three companies are investment companies. They have invested certain sums in lands and shares of other companies. The objective was to realize good profits from the said investments.
(ii) Apart from the three companies mentioned in the above discussion, the assessee is a director in G2 Corporate Services Ltd, Vanpic Projects Pvt Ltd, Vanpic Ports Pvt Ltd and other companies. As per the own admission of Shri N. Prakash recorded in the Statement before Addl CIT, Range -1 u/s 131 on 25/11/2010, in proceedings u/s 144A in the case of M/s Alpha Avenues Pvt Ltd and M/s Alpha Villas Pvt Ltd, the assessee was looking after family investments. As the Statement is material for Page 5 of 43 decision in the case of the assessee, it is humbly submitted that the same may be admitted as evidence under Rule 29 of the ITAT Rules. Relevant portion of the statement of Shri N. Prakash is reproduced below:
"3. What were the factors material for making investments in the shares of M/s Raghuram Cements Ltd and M/s Jagati Publications Pvt Ltd at a premium to the face value?
Ans: My elder brother, Shri N. Prasad is founder of M/s Matrix Laboratories Ltd and has a keen eye on investments. According to him, there are panchratnas in terms of growth potential. They are Entertainment & Media sector, Health Care, Infrastructure, Power and Core sector. According to this policy, we have made investments in concerns like MAA TV, Care Hospital, Asian Institute of Gastroenterology, Indu Projects, Annapoorna Studios, Vanpic, Relysis and some other companies of these sectors through our group companies. Both the above concerns also were picked up because they belong to the above sectors.
4 Please explain the specific factors for making investment in both the above companies though there could be a variety of choice in the form of several other companies of similar type? Also how did you know that there was investment opportunity in these two companies because they are not listed companies?
Page 6 of 43 Ans: As the investments are made with the active guidance and directions of my elder brother, Shri N. Prasad, I have to check with him on this issue. Also, we have a team of five persons (including me) who are looking into investment opportunities and provide assistance to Shri Prasad. Regarding the specific factors and the knowledge of investment opportunity, I will check with my brother and my team and furnish a reply on this point in 2 to 3 days because I do not readily remember the specific points".
(iii) From the above, it is clear that the assessee is actively engaged in the activity of floating investment companies and making prudent investments in such companies and also making large scale purchases in shares of profitable companies and realize good profits out of those investments.
(iv) It is also a fact that the assessee furnished a personal guarantee to M/s Cornerstone Property Investments Pvt Ltd of an annual return of 12% on the amounts invested by the said company in shares of the three companies at a huge premium.
(v) It is also a claim of the assessee that the investment into shares of M/s Bharathi -Cements Ltd yielded high return. It is also an admitted fact that the three companies did not distribute any profits or (vi) dividend or any other benefit to M/s Cornerstone Property Investment Pvt Ltd even after the shares of Page 7 of 43 M/s Bharati Cements Ltd were sold. The relevant portion of the statement of the assessee (cited above) is reproduced below: "9. What was the expectation of Shri Kumar or M/s Cornerstone Property Investments Pvt Ltd about the returns on the investment. Whether any return was given by your companies to them till date?
Ans: I do not have much idea about his expectation in terms of percentage of return. Till date, we have not distributed any profits or dividends or amount any other form to M/s Cornerstone Property Investments Pvt Ltd.
10. Are you planning to pay any dividend or distribute profit now because in this year you sold shares of M/s Bharati Cements at profit?
Ans: We are looking for further investment opportunity using the funds".
When the issue of perquisite taxable in the hands of the assessee was pointed out to him in the statement referred above, he stated that as it is a legal issue, he will consult his tax consultants and also verify the facts and come back. Subsequently, Mr C. Maruti Nagendram, AR of M/s Alpha Avenues Pvt Ltd submitted a letter before the Addl CIT, Range-1, Hyderabad
Page 8 of 43 (vii) It is also a fact evident from the annual accounts of M/s Alpha Villas Pvt Ltd unsecured loan in the name of the assessee is shown at 3,46,99,712/- as on 31/03/2018. In the case of M/s Alpha Avenues Pvt Ltd also the amount of unsecured loan in the name of the assessee is shown at Rs.3,31,99,712/- as on 31/03/2018. This clearly shows that the assessee providing huge sums as interest free advances to the companies whose shares are allotted to him so that they would make investments using the said funds and realize huge gains. The annual accounts of both the above said companies for FY 2007-08 are attached with these submissions as additional evidence. As they are material for the decision in the case, the same may kindly be admitted as additional evidence under Rule 29 of the ITAT Rules.
(ix) It is also a fact on record that the jurisdictional Bench of Hon'ble ITAT in its decision dated 14/02/2018, confirmed the deletion of the addition made u/s 68 in the hand in the cases of M/s Alpha Villas Pvt Ltd and M/s Alpha Avenues Pvt Ltd for AY: 2008-09 in 1413 & 1424/Hyd/2014. The Hon'ble ITAT held that the amount of Rs 350/- as share premium which is capital in nature and cannot be taxed in the hands of the said companies u/s 68.
8. All the three companies which allotted shares to the assessee are not start-up companies and they are into operation for about 3 years and on own admission earned huge sums on Page 9 of 43 account of transfer of land on 18/04/2007. Therefore, the net worth of the three companies is high which merits the share premium of 350/. It is humbly submitted that between the date on which shares were allotted to the assessee (01/03/2018) and the date on which shares were allotted to M/s Cornerstone Property Investments Pvt Ltd (03/03/2018), there was not material change in the valuation of the shares of the said three companies. In case of a company with running operations, the allotment of shares on almost on the same date to different persons at different rates definitely leads to benefit in the hands of the person who acquired the shares at the lower value.
9. The Hon'ble Supreme Court examined the issue of perquisite u/s 28(iv) in the case of Mahindra & Mahindra Ltd (255 Taxmann 305) and held that:
"On a plain reading of section 28(iv), prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of section 28(iv), the benefit which is received has to be in some other form rather than in the shape of money".
Thus, the learned DR has contended that it is clear that the assessee has availed the benefit from these companies in the form of other than money and therefore, the same is taxable u/s 28(iv) of the I.T. Act, 1961. The assessee got non-monetary benefit in the form of shares of 3 companies at a value lower than
Page 10 of 43 the prevailing market value/fair market value and therefore, the difference in the amount paid by the assessee per share and the value of the share at which it was allotted to 3rd party is a benefit measurable in terms of money. The reliance by the learned CIT (A) on the judgment of the Hon'ble Supreme Court in the case of Infosys Technologies Ltd is misplaced. The benefit has arisen and accrued to the assessee on 1/3/2008 when the shares having the value of Rs.360/- was allotted to the assessee @ Rs.10/- each. The assessee is promoter and having controlling stake in various companies and therefore, the assessee is in the profession on managing these companies and benefit accrued to the assessee on account of allotment of shares of these companies is a business/ professional income derived from these activities of management of companies and liable to be assessed u/s 28(iv) of the I.T. Act, 1961. The learned DR has relied upon the judgment of the Hon'ble Rajasthan High Court in the case of CIT vs. R.L. Kasliwal (207 ITR 208) as well as decision of the Mumbai Bench of the Tribunal in the case of Priyanka Chopra vs. Dy. CIT (169 ITD 1). The learned DR has submitted that there is a nexus between the business activity of the assessee and allotment of shares at a face value which resulted a non-monetary benefit to the assessee in comparison to the fair market value of the shares at which allotted to 3rd person and the said benefit is an income of the assessee u/s 28(iv) of the I.T. Act, 1961.
11. On the other hand, the learned AR of the assessee has submitted that, it is a well settled proposition of law that, for any receipt to be taxed under the I.T. Act, 1961, it must have a character of income, as generally understood or defined in the Act and falling under the charging section. A receipt which is a capital receipt and not a revenue receipt, cannot be charged to tax. A receipt to be charged must squarely fall within the four walls of the charging section either directly or by a deeming provision enacted by the legislature. Except the specific deeming provisions for treating a receipt as income, there cannot be a fiction or Court can fill the gap in legislation. There is no room for any intendment under the fiscal statue except to look mainly at what is clearly said. Nothing has to be read in, nor to be implied, but one can only look fairly at the language used in the statue. Therefore, tax has to be levied, if the subject fall within the 4 corners of the provisions otherwise no tax can be imposed by inference, analogy or trying to probe the intention of the legislature of considering the substance of the matter. The learned AR of the assessee has referred to the judgment of the Hon'ble Supreme Court in the case of Commissioner of Income-Tax, Patiala & ... vs M/S. Shahzada Nand & Sons & Ors reported in 60 ITR 962 as well as in the case of A.V. Fernandez vs. State of Kerala (Civil Appeal No.232 of 1955, reported in (1957) 8 Sales Tax cases 561. The learned AR has further contended that section 28 set out income which are chargeable to tax under the head business and profession. Clause (iv) of section 28 refers to the value of any benefit or perquisite,
Page 12 of 43 whether convertible into money or not arising from the business or exercise of a profession. A plain reading of this provision shows that the 3 conditions precedents for such taxability i.e. there should be a benefit or perquisites; (ii) that such benefits or perquisites should arise from the business or exercise of the profession carried on by him and (iii) that it should be in revenue field but not in capital field. Therefore, the benefit must be arisen when business carried on or exercise of profession by the assessee during the relevant previous year to bring into the ambit of section 28(iv) of the I.T. Act, 1961.
The learned AR further contended that section 28 of the I.T. Act, 1961 contemplates only the benefit arising in the previous year and therefore, the concept of accruing the benefit is missing in the provision of section 28(iv) of the Act. The assessee was allotted shares of 3 companies at a lesser value than the shares allotted to 3rd party but the same would not lead to the conclusion that it is in the nature of benefit or perquisites arising to the assessee at the time of allotment falling under the provisions of section 28(iv) because no benefit at all is made by the assessee from the purchase of any of the assets. At the most, the benefit, if any, would arise only on the sale of those shares. The comparative price advantage theory to tax alleged benefit u/s 28(iv) of the Act is ill founded. Thus,, the alleged benefit for allotment of shares at lesser price than the 3rd party cannot be Page 13 of 43 treated as income of the assessee u/s 28(iv) of the Act in the absence of any business nexus.
The learned AR further submitted that the Coordinate Bench of this Tribunal in the case of KNB Investments Pvt Ltd, and the Bombay Bench of the Tribunal in the case of Rupee Finance and Management Ltd have held that there is no perquisite u/s 28(iv) when shares were allotted at concessional rates and the benefit if any is notional and is taxable on sale of shares as capital gains. Tribunal's decisions were upheld by the high courts. The perquisite should arise from business and not merely accrue. Unless shares are liquidated, no income would arise, though it may have accrued (AP High Court in case of KNB Investments). For a particular item to be charged as perquisite, the provider should have a corresponding liability or should incur expenditure. In this case since it is allotment, the conditions would not be met and hence, shares cannot be perquisite as held by the Hon'ble Supreme Court in case of Excel Industries.
Any perquisite to be taxed, there shall be valuation rules to define the Fair Market Value, Cost etc. If no rules are prescribed, the computation fails and hence taxation of perquisite is not possible as held by the Hon'ble Supreme Court in case of Infosys Ltd. In Bharat V Patel Case the Hon'ble Supreme Court reiterated its view and rejected the Revenue's plea to tax the transaction u/s 28(iv).
He further submitted that u/s 17, special clauses are provided to tax shares allotted as perquisites, which are in addition to general clause, and such special clause is absent u/s 28 even as on today, in spite of multiple Supreme Court rulings emphasizing on such computation rules. Hence shares are not taxable as perquisites u/s 28 as held by the Hon'ble Supreme Court in case of VM Salgaocar Pvt Ltd (2000) 243 ITR 383 11. The difference in Full value consideration and Cost is taxable as capital gains on sale of shares. The purported perquisite value would then be taxed as part of capital gain. When two views are possible for taxing the income, the one favourable to the Assessee has to be adopted. There are no provisions u/s 49 to define cost of acquisition in case of shares treated as perquisite u/s 28(iv), whereas such provision exists u/s 49(2AA) for shares treated as perquisite u/s 17. In the absence of computation mechanism, value of benefit on shares, if any cannot be treated as perquisite u/s 28(iv). There are no uniform rules for valuing shares and FMV is defined differently for specific sections. FMV is not defined for a business asset. It is defined for a capital asset u/s 2(22 B) of the IT Act. The FMV computation of shares for purposes of Section 56 is defined at Sec 56(vib) or Section 56(2)(x) as the case may be. If shares are to be valued for Sec 28(iv) there are no valuation rules prescribed. In case of unjustified premium, the same is taxable under 56(2)(vib) of the IT Act that too from AY 2013-14 . Even such unjustified premium is now not subject to Page 15 of 43 tax from AY 2025-26. Section 28(iv) was amended w.e.f 01.04.2023 to include perquisite "in cash or in kind or partly in cash and partly in kind". The allotment of shares may fall under the 'partly in cash and partly in kind' and since the transaction happened in AY 2008-09 the same is not covered u/s 28(iv) as transactions in kind only were covered at that point in time. Allotment of shares at concessional rates would fall under the category of 'capital transactions' and hence cannot be taxed u/s 28(iv) as held by the Kolkata Bench of this Tribunal in case of Shreyans Investments Pvt Ltd. Section 28(iv)covers fringe benefits that are availed in addition to consideration earned in carrying out a profession or while doing business. A benefit that is passed on by one party to another in addition to cost or sale price, is covered in this proviso as reported in the case of Softner Traders & Consultants Pvt Ltd of the Bombay Bench of the Tribunal.
The learned AR of the assessee further relied upon the following judgments:
i) CIT vs. Excel Industries Ltd (358 ITR 2956)(S.C) ii) CIT vs. B.C Srinivasa Setty (128 ITR 294) iii) Income Tax Officer vs. Undavalli Constructions (191 ITD 749) iv) CIT vs. Infosys Technologies Ltd (Civil Appeal No.3725 of 2007)
Page 16 of 43 v) Add. CIT vs Bharat V. Patel (civil appeal No.24888 of 2015) (S.C) vi) ITO vs. Shreyans Investments Pvt. Ltd, 31 Taxmann.com 71 (Kol).
Relying upon the above cited judgments/decision, the learned AR of the assessee has submitted that prior to the amendment in the provisions of section 56(1)(x) w.e.f. 1/4/2017, receiving any property other than immovable property without consideration or a consideration which is less than the aggregate fair market value of the property is not taxable as per the provisions of the Act. Thus, the learned AR has contended that only after the amendment to section 56 and insertion of clause (x) w.e.f. 1/4/2017, the income on account of acquiring a property for a consideration less than the fair market value of the property may be taxed as income from other sources and hence, the question of attracting the provisions of section 28(iv) of the I.T. Act, 1961 does not arise.
We have considered the rival submissions as well as the relevant material available on record. The undisputed facts leading to the controversy are that the assessee is a Director in M/s. Alpha Avenues Pvt. Ltd, M/s. Alpha Villas Pvt. Ltd and M/s. Gilchrist Investments Pvt. Ltd. During the previous year relevant to the A.Y under consideration, these 3 companies have allotted the shares to the assessee as well as to M/s. Cornerstone
Page 17 of 43 Properties and Investments (P) Ltd, the details of the shares allotted are as under: Date of allotments Name of company Name of allottee No. of shares Price per share allotted 1/3/2008 Alpha Avenues N Prakash 33,53,000 10 Pvt Ltd 3/3/2008 -do- Cornerstone 4,16,666 360 Property Investment Pvt Ltd 1/3/2008 Alpha Villas N Prakash 30,75,000 10 Pvt Ltd 3/3/2008 -do- Cornerstone Property 4,16,666 360 Investment Pvt Ltd 1/3/2008 Gilchrist Inv N Prakash 32,50,000 10 Pvt. Ltd 3/3/2008 -do- Cornerstone Property 5,55,555 360 Investment Pvt Ltd
There is no dispute that, all these transactions were duly recorded in the books of account of the companies, as well as the books of the assessee. The Assessing Officer, while framing the assessment, has given the reasons for making additions on account of allotment of shares by these companies to the assessee at par, as against allotment of the shares to the 3rd party i.e. Cornerstone Property Investment Pvt Ltd @ Rs.360/- per share including premium of Rs.350/- per share as under: “During the course of assessment proceedings of M/s. Alpha Avenues Pvt Lid for the A.Y.2008-09 it was noticed that the assessee got allotted 33,53,000 shares of the said M/s. Alpha Avenue Pvt Lid., at face value of Rs. 10/-. Similarly, he got allotted 30,75,000 shares at face value Rs. 10/- in M/s. Alpha Villas (P) Ltd.. whereas at the same time the shares were allotted at a premium of Rs.350 /- to other investors. Also, he got allotted 32,50,000 shares in M/s.
Gilchrist Investments Private Ltd., tor Rs. 10/- and the same shares were allotted at a premium of Rs.350/- per share to other investors. It was also noticed that the said M/s. Alpha Avenues Pvt Ltd., issued 4,16,666 shares at a premium of Rs.350/- per share to M/s. Cornerstone Properties Investments Pvt Ltd. The Addl. CIT has conducted proceedings u/s. 144A in the case of M/s. Alpha Avenues Pvt Ltd during which assessee has justified the premium charged to M/s. Cornerstone Properties Investments Pvt Ltd. The assessee is a promoter director and also the family member which runs the business of M/s. Alpha Avenues Pvt Ltd., which is a closely held company. It can be said that M/s. Alpha Avenues Pvt Ltd is run by both the brothers Sri Nimmagadda Prakash and Sri Nimmagadda Prasad. Therefore, it is their sweat and hard work that brought business to the company which in turn resulted in issue of shares at a premium to other investors. Since the benefit of derived share premium by the company is on account of the conduct/management of the business by Sri N. Prakash i.e., assessee such a benefit is taxable in the hands of the assessee u/s.28(iv) of the Act. It is also pertinent to note that net worth of the assessee M/s. Cornerstone Properties Investments Pvt Ltd does not merit purchase of shares at premium. Therefore. the difference of premium amount paid by the M/s. Alpha Avenues Pvt Ltd. M/s. Alpha Villas Pvt Ltd., and also M/s. Gilchrist Investments Private Lid., in acquiring shares in the respective companies in which the assessee is a man promoter director is treated as income of the assessee u/s.28(iv) arising out of the business nexus and taxed accordingly.”
20. Thus, the Assessing Officer was of the view that, acquiring the shares of these 3 companies by the assessee at par has accrued a benefit of Rs.350/- per share to the assessee being the premium charged by these companies from 3rd party i.e. Cornerstone Properties and Investments (P) Ltd. The Assessing Officer has observed that the assessee is the main promoter and director of these companies and therefore, the difference of Page 19 of 43 premium amount is treated as income of the assessee u/s 28(iv) of the I.T. Act, 1961 being arisen out of the business nexus. However, as it is evident from the facts and records of the case that, the assessee has declared the income from house rent, capital gain and other sources and there is no income under the head “business or profession”. The transactions of the acquisition of shares by the assessee of these 3 companies are in the nature of investments and therefore, there is no involvement in business activity on the part of the assessee while acquiring the shares of these 3 companies. In any case, when the assessee has not carried out any business activity or exercise any profession of rendering any professional service to any of these companies, then the question of deriving benefit in the nature of business income or perquisites from the transaction of allotment of shares these companies to the assessee does not arise. Section 28 of the I.T. Act, 1961 contemplates the income which are chargeable to tax under the head profit & gains of business and profession. Clause (iv) of section 28 refers to the benefit or perquisites arising from business or exercise of profession. Therefore, the benefit from business or exercise of profession is an essential condition for bringing the said benefit in the ambit of section 28 of the I.T. Act, 1961. The investment in the shares of a company does not fall in the definition of income chargeable to tax under any head of the income provided under the I.T. Act, 1961 prior to the amendment to section 56(2) by Finance Act, 2017 w.e.f.1/4/2017 whereby clause (x) has been inserted. For the sake of ready
Page 20 of 43 reference, we quote clause (x) of sub-section 2 of section 56 as under: “56(2) I particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “income from other sources’ namely:- (i) dividends; x x x x x x x x x (ix) ..xx xxxxxx (x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,— (a)any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum; (b)any immovable property,— (A)without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property; (B)for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:— (i)the amount of fifty thousand rupees; and(ii)the amount equal to [ten] per cent of the consideration: Provided that where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purposes of this sub-clause : Provided further that the provisions of the first proviso shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account or through such other electronic mode as may be Page 21 of 43 prescribed, on or before the date of agreement for transfer of such immovable property: Provided also that where the stamp duty value of immovable property is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of this sub-clause as they apply for valuation of capital asset under those sections: (c)any property, other than immovable property,— (A)without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (B)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 sum of money or any property received— (I)from any relative; or (II)on the occasion of the marriage of the individual; or (III)under a will or by way of inheritance; or (IV)in contemplation of death of the payer or donor, as the case may be; or (V)from any local authority as defined in the Explanation to clause (20) of section 10; or (VI)from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or (VII)from or by any trust or institution registered under [section 12A or section 12AA or section 12AB]; or Page 22 of 43
(VIII)by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub- clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or (IX)by way of transaction not regarded as transfer under clause (i) or clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii)[or clause (viiac) or clause (viiad) or clause (viiae) or clause (viiaf)] of section 47; or (X)from an individual by a trust created or established solely for the benefit of relative of the individual; *(XI)from such class of persons and subject to such conditions, as may be prescribed;”
21. Thus, the only provision to tax the receipt of a property other than immovable property without any consideration or for a consideration less than the aggregate fair market value of the property is provided under sub-clause(c) of clause (x) of sub- section 2 of section 56 of the I.T. Act, 1961. Prior to insertion of this clause (x), there was no charging section to tax the receipt of property without consideration or for a consideration less than the aggregate fair market value of the property. Therefore, in the absence of any charging provision to tax the receipt of a property, without consideration or for a consideration less than the fair market value of the property at relevant point of time, the said transaction of acquisition of shares by the assessee at par in comparison to the shares allotted to 3rd person at a premium of Rs.350 per share cannot be taxed in the hands of the assessee. Even otherwise, the transaction of acquisition of shares or Page 23 of 43 investment in shares of the companies for which there was no allegation about any unexplained investment or genuineness of the transaction falls in the capital field and not in the revenue field.
In case of CIT vs. Excel Industries Ltd (Supra), the Hon'ble Supreme Court has considered the issue of hypothetical income brought to tax by applying the provisions of section 28(iv) in Para 17 to 27 as under:
“17. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) it was held as follows:— "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book- keeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account."
18. The above passage was cited with approval in Morvi Industries Ltd. v. CIT (Central), [1971] 82 ITR 835 (SC) in which this Court also considered the dictionary meaning of the word "accrue" and held that income can be said to accrue when it becomes due. It was then observed that: "....... the date of payment ....... does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately."
19. This Court further held, and in our opinion more importantly, that income accrues when there "arises a corresponding liability of the other party from whom the income becomes due to pay that amount."
It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee.
In so far as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is therefore not the income of the assessee. 22. In Godhra Electricity Co. Ltd. v. CIT, [1997] 225 ITR 746/91 Taxman 351 (SC) this Court reiterated the view taken in Shoorji Vallabhdas & Co. (supra)and Morvi Industries Ltd. (supra). 23. Godhra Electricity is rather instructive. In that case, it was noted that the High Court held that the assessee would be obliged to pay tax when the profit became actually due and that income could not be said to have accrued when it is based on a mere claim not backed by any legal or contractual right to receive the amount at a subsequent date. The High Court however held on the facts of the case that the assessee had a legal right to recover the consumption charge in dispute at the enhanced rate from the consumers. 24. This Court did not accept the view taken by the High Court on facts. Reference was made in this context to CITv. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC) wherein it was held, after referring to Morvi Industries that real accrual of income and not a hypothetical accrual of income ought to be taken into consideration. For a similar conclusion, reference was made to Poona Electric Supply Co. Ltd. v. CIT, [1965] 57 ITR 521
Page 25 of 43 (SC) wherein it was held that income tax is a tax on real income.
Finally, a reference was made to State Bank of Travancore v. CIT[1986] 158 ITR 102/24 Taxman 337 (SC) wherein the majority view was that accrual of income must be real, taking into account the actuality of the situation; whether the accrual had taken place or not must, in appropriate cases, be judged on the principles of real income theory. The majority opinion went on to say: 'What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made "no income".' 26. This Court then considered the facts of the case and came to the conclusion (in Godhra Electricity) that no real income had accrued to the assessee in respect of the enhanced charges for a variety of reasons. One of the reasons so considered was a letter addressed by the Under Secretary to the Government of Gujarat, to the assessee whereby the assessee was "advised" to maintain status quo in respect of enhanced charges for at least six months. This Court took the view that though the letter had no legal binding effect but "one has to look at things from a practical point of view." (See R.B. Jodha Mal Kuthiala v. CIT[1971] 82 ITR 570 (SC)). This Court took the view that the probability or improbability of realisation has to be considered in a realistic manner and it was held that there was no real accrual of income to the assessee in respect of the disputed enhanced charges for supply of electricity. The decision of the High Court was, accordingly, set aside.
27. Applying the three tests laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued
Page 26 of 43 to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic.”
The Hon'ble Supreme Court has observed that to bring an income in the ambit of section 28(iv), the income accrued to the assessee should be a real income and not hypothetical. Consequently, there should be a corresponding liability of the other party, to pass on the benefit to the assessee and, thirdly, there should be a probability that, realization of benefit by the assessee from a realistic and practical point of view. Therefore, until and unless the benefit is realized by the assessee, the alleged income cannot attract the provisions of section 28(iv) of the I.T. Act, 1961. Even otherwise, in the absence of any provisions to charge a particular transaction or a receipt or a benefit, the transaction cannot be brought to tax as held by the Hon'ble Supreme Court in the case of CIT vs. B.C. Srinivasa Setty (Supra) in para 8 of the order:
“8. Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings section 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other section of the head "Capital gains". Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those
Page 27 of 43 provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income-tax Act, whereunder each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section, there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrity of the statutory scheme provided for each head.
Since the transaction, in question, in the case of the assessee is acquisition of shares which is in the nature of investment, therefore, the benefit, if any, accrued to the assessee does not fall under the head “profits & gains of business or profession”. The Hon'ble Supreme Court in the case of Commissioner vs. Mahindra & Mahindra (Supra) held in para 13 as under: “13. On a plain reading of Section 28 (iv) of the IT Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision
Page 28 of 43 of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act.
25. Thus, it is observed that the capital receipts are inherently outside the scope of income which can be taxed u/s 28(iv) of the Act apart from lack of pre-conditions for taxing such benefit that there should be benefit or perquisites and such benefit or perquisites arise from the business or exercise of profession which means the benefit arisen or perquisites must be in the nature of business receipts or revenue receipts.
Considering all these binding precedents of the Hon'ble Supreme Court, the Kolkata Benches of the Tribunal in the case of Income Tax Officer Vs. Shreyans Investments Pvt. Ltd (Supra) has analyzed the provisions of section 28 in Para 7 to 9 as under:
“7. Section 28 sets out the incomes which are chargeable to income-tax under the head 'Profits and gains of business and profession', and clause (iv) thereto refers to "the value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of a profession". It is thus clear that besides the profits and gains from business and profession carried on by the assessee at any time during the previous year, any other benefit or perquisite, whether
Page 29 of 43 convertible into money or not, is also chargeable to tax under this head of income. A plain reading of this provision shows two conditions precedents for such taxability i.e. (i) that there should be benefits or perquisites; and that (ii) that such benefits or perquisites should arise from the business or exercise of the profession. The expression 'arising from the business' essentially implies that the benefit or perquisite must be in the nature of a business receipt or revenue receipt. No matter how wide be the scope of Section 28(iv), the difference between a capital receipt and revenue receipt cannot be overlooked. In the case of Mahindra & Mahindra Ltd. v. CIT [2003] 261 ITR 501/128 Taxman 394, Hon'ble Bombay High Court has, in the context of this significant distinction between revenue and capital receipts, held that waiver of principal amount in respect of imports of plant and machinery could, by no stretch of logic, be treated as 'business income', and, therefore, as an income taxable under section 28(iv). One must bear in mind the fact that section 28 only refers to the "income" which can be charged to income tax under the head "profits and gains from business or profession", and, therefore, when a particular advantage, perquisite or receipt is not in the nature of income, there cannot be any occasion to bring the same to tax under section 28(iv). Hon'ble Supreme Court, in the case of Padmaraje R Kadambande v. CIT [1992] 195 ITR 877/62 Taxman 456 observed that, "…we hold that the amounts received by the assessee during the financial year in question have to be regarded as capital receipts, and, therefore, are not income within meaning of section 2(24) of the Income Tax Act." (Emphasis by underlining supplied by us). This clearly shows, as is the settled law, that a capital receipt, in principle, is outside the scope of income chargeable to tax. Of course, there are specific provisions under the Income Tax Act which provide that certain capital receipts can also be considered as income, such as under section 2 (24)(vi) which covers "any capital gains chargeable under section 45", but right now we are confined to normal connotations of the expression 'income'. Howsoever liberal or narrow be the interpretation of expression 'income', it cannot alter character of a receipt, i.e. convert a capital receipt into revenue receipt or vice versa. The crucial distinction between capital and revenue cannot be blurred or nullified by even the most liberal interpretation of expression 'income'. It is also important to bear in mind that, as held by Hon'ble Supreme Court in the case of Dr K George Thomas v. CIT [1985] 156 ITR 412/23 Taxman 46, "the burden is on the revenue to establish that the receipt is of a revenue nature" though "once a receipt is found to be of revenue
Page 30 of 43 character, whether it comes under exemption or not, it is for the revenue to establish". It is thus clear that capital receipts are inherently outside the scope of an income which can be taxed under section 28(iv), and Hon'ble Bombay High Court, in the case of Mahindra & Mahindra Ltd. (supra) also holds so. As to what constitutes capital receipt, we find guidance from Hon'ble Madras High Court's judgment in the case of CIT v. Seshasayee Bros. (P.) Ltd. [1996] 222 ITR 818/89 Taxman 13 wherein Their Lordships, after elaborately surveying the legal precedents on this issue, concluded that, "Thus, a combined reading of the abovesaid judicial pronouncements would go to show that when a receipt is referable to fixed capital, it is not taxable, and it is taxable as a revenue receipt when it is referable to circulating capital or stock in trade". To sum up, unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv). The reference to benefits which can be brought to tax under section 28(iv) for benefits 'arising from the business' also indicates that such benefit must be a business receipt, or revenue receipt, in nature.
To find out whether or not the benefit, even if that be so, is on capital account or revenue account, it is necessary to understand the nature of transaction which has resulted in, what the Assessing Officer, perceives as 'benefit to the assessee'. This was a case of amalgamation in the nature of merger, and an amalgamation in the nature of merger, in corporate parlance, is the process of blending of two or more companies into one of these blending companies, the shareholders of each blending company becoming substantially the shareholder of the company which holds the blended undertaking. The expression 'amalgamating company' is used for the 'blending company' which loses its existence into the other company and the expression 'amalgamated company' is used for blended undertaking, which holds existence of those two or more companies. In essence thus, the whole exercise of amalgamation in the nature of merger is an exercise in that of pooling of resources, as also pooling of assets, into the company in which two or more companies are blended. It is a process of corporate reconstruction and it is only with the approval of Hon'ble jurisdictional High Court that this exercise is carried out. In the present case also, as stated in paragraph 4 of Part I of Schedule A (i.e. scheme of amalgamation) to Hon'ble Calcutta High Court's order dated
Page 31 of 43 9th April 2008, "for the purpose of better, efficient and economical management, control and running of the business and to withstand the recessionary trend in the economy of the business undertaking concerned and for administrative convenience and to obtain advantage of economies of large scale, the present scheme is proposed to amalgamate the transferor company (i.e. VVPL) with the transferee company (i.e. the assessee)". As a result of amalgamation, the assessee, being the transferee company, will increase its assets and liabilities, and, even if there be any benefit in the process, such a benefit can only be in the capital field because it is relatable to the non trading assets and capital. What it affects is the capital structure of the assessee company and the manner in which business is consolidated. As the Assessing Officer himself observes, "……this exercise of amalgamation is also aimed at bolstering the capability of the assessee to conduct business more dynamically and earn more profit. So, the enhancement of its capital reserve, as a result of this amalgamation can only be construed as a benefit accrued to the assessee…", but then it is not even the case of the Assessing Officer that the benefit is in the revenue field, and unless the Assessing Officer is to discharge the onus of demonstrating that the benefit is in the revenue field, there cannot be any occasion to invoke Section 28(iv). Applying the test laid down by Hon'ble Madras High Court, in the case of Seshasayee Brothers (supra), also, we find that the benefit is referable to the capital, and is thus not of an income nature. Even if, as the Assessing Officer observes, "it can be surmised that the assessee is benefited in a myriad ways by way of amalgamation", it does not lead to the conclusion that the benefit is in revenue field which alone can be treated as income and thus be considered for taxability under section 28(iv) of the Act. The onus is on the Assessing Officer to demonstrate that the receipt is of the revenue nature.
We have noted that the Assessing Officer's observations to the effect that 'business' under section 28 has a very broad meaning and may be used in different connotations" and that it includes adventure in the nature of trade, as also his reliance on Hon'ble Supreme Court's judgment in the case of Rajputana Textiles (Agencies) Ltd. v. CIT [1961] 42 ITR 743 (SC), wherein it was held that where from the very beginning, purchase of shares is made with the intention of selling them, at a profit, it is an adventure in the nature of trade. However, we are unable to see any merits in these arguments either. Whatever be the scope of expression 'business', an advantage has to be of income nature first, and when it is not of income
Page 32 of 43 nature, it cannot be brought to tax under the head profits and gains from business or profession. As regards the transactions in the nature of 'adventure in the nature of trade' in a situation in which shares are purchased with an intention of selling the same, right now we are dealing with a case of amalgamation by way of merger and not by way of purchase of shares, and, therefore, there cannot be any question of selling of the shares, nor does this judicial precedent deal with the issue before us in any other manner. There is no material whatsoever before us to indicate that the benefit, even if accruing to the assessee, was in revenue field, in the course of assessee's business dealings or of trading nature. In view of these discussions, we are of the considered view that the benefit, if any, derived by the assessee on account of amalgamation by way of merger was not in revenue field, and not of an income nature. Accordingly, there was no occasion to invoke Section 28(iv) of the Act. Learned CIT(A) was quite justified in his observations that "the amalgamation is not an adventure in the nature of trade" and that "this transaction is clearly a capital account transaction". Learned CIT(A) was quite justified in deleting the impugned addition, we uphold his conclusions, and we decline to interfere in the matter.”
Thus, the Tribunal has elaborately considered the applicability of provisions of section 28 in respect of the transactions/benefit/perquisites not falling in the nature of revenue receipts as well as not arising from the business or profession. Following the said decision of the Kolkata Bench of the Tribunal, the Visakhapatnam Bench of the Tribunal in the case of Income Tax Officer vs. Undavalli Constructions (Supra) has again considered this issue in Para6 to 6.4 as under:
“6. We have heard both the parties and perused the material placed on record. The AO made the addition in this case, invoking the provisions of section 28(iv) of the Act. Section 28(iv) envisages to tax the benefit or the perquisite arising from the business or exercise of profession. The benefit must accrue or arise in the course of carrying on such business. For the Page 33 of 43 sake of clarity, we extract relevant part of 28(iv) of the Act which reads as under : "Profits and gains of business or profession.
The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession,— (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;" 6.1 The Ld.CIT(A) has discussed the issue of taxing the sum u/s 28(iv) in detail and held that the extra land received by the assessee on partition does not fall under the benefits received or accrued to the assessee during the course of carrying on the business in para No. 10 and 11 which reads as under : '10. I have perused the submissions of appellant, the information brought on record and the contention of the A.O. Considering the facts of the case in entirety, it appears that the A.O was erroneous in applying the section 28(iv) of the IT Act while making the addition on account of 'value of benefit arising from the receipt of land' by the appellant firm during the period of partition of the land under consideration. Section 28(iv) of the IT Act.1961 (1) "The plain reading of sec.28(iv) makes it clear that section 28 refers to the profits and gains& business or profession." It sets out the income which are chargeable to income-tax under the head profits and gains of business or profession and clause (iv) thereto states that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. This provision shows conditions precedent for such taxability i.e. (1) that there should be benefits or perquisites; and that (ii) such benefits or perquisites should arise from the business or exercise of the profession. The expression 'arising from the business' essentially implies that the benefit or perquisite must be in the nature of a business receipt or revenue receipt. One must bear in mind the fact that section 28 only refers to the 'income' which can be charged to income tax under the head 'profits and gains from business or profession', and, therefore, when a particular advantage, perquisite or receipt is Page 34 of 43 not in the nature of income, there cannot be any occasion to bring the same to tax under section 28(iv) (2) One more condition for applicability of section 28(iv) of the Act is that the benefit or perquisite must arise from business or exercise of profession. The phrase 'arise from business' in the context of section 28(iv) contemplates not some connection with the business undertaking of the assessee but it envisages that the benefit or perquisite must arise out from actual conduct of the business of the assessee. In other words, before sub-section (iv) of sec. 28 is invoked it is necessary to show and prove the proximate cause or nexus between the alleged benefit or perquisite and the business actually carried on by the assessee. The nexus or the proximate cause must be real, immediate and not illusionary or imaginary. The benefit or perquisite contemplated by sec. 28(iv) must necessarily have a live connection with the business carried on by the assessee and the benefit must accrue or arise in the course of carrying on of such business. The benefit or perquisite should be in the nature of trade receipt. (3) The future gain or benefit when actually denied by the assessee, the same certainly will be assessed as business income and only because a transaction now undertaken will bring more commercial gain or benefit to the assessee in future does not entitle to treat the present transaction itself as benefit or perquisite arising from business and bring the value of the said transaction to tax by deeming he same. The future benefits when actually realized, received or accrued to the assessee, depending upon the system of accounting adopted, will certainly be includible in the assessable income of the assessee at that point of time.
Coming to the issue whether on the partition of land as a co-owner, arise any benefit or perquisite to the appellant-firm u/s 28(iv) of the Act as opined by the A.0, has to be ensured into. It is known from the foregoing that the assessee is not doing any business activity with the other firm - M/s Sai Infra, made a simple investment as a co-owner in land and got partitioned on 22-11-2013 and the partition was done on unequal shares only to ensure that none of the co-owners is subjected to any loss. Since the assessee-firm is carrying out business in real estate, keeping in view the future development, agreed/accepted to acquire, even though, there are slums abetting the land on west, south and east sides.
During the transaction, no cash or benefit or perquisite was received neither by the assessee nor by the other firm, it was only a partition. After holding more than 34 months, part of land was converted as stock-in-trade and sold along with built up space in the form of residential apartments. Balance part of the land was sold as investment and the appellant has offered taxes in the subsequent years, under the head capital gains and hence there is no loss of revenue.' 6.2 During the course of appeal proceedings, the Ld.AR taking our attention to balance sheet, demonstrated that the subject property purchased along with the co-owner remained as capital asset and divided in partition between the co-owners. Both the co-owners have not carried on any business jointly. The said land was converted into stock-in-trade by the assessee after the partition and this fact was established by the assessee as per the sanction order for conversion of land which was obtained on 16-12-2013 from the Commissioner, Municipal Corporation, Eluru. In this regard it is pertinent mention the decision of Hon'ble Gujarat High Court in the case of Bharat Kumar R.Panchal (supra), in para No. 4 which reads as under : "4. Without reference to any case law on the subject, in our considered opinion, on the plain language of cl.(iv) of s.28, the amount received by the assessee as a partner in the erstwhile partnership, on separation of some of the partners, cannot be described as a benefit or perquisite having arisen from the business or the exercise of a profession. The amount has been received by the assessee when four of his partners separated from the erstwhile partnership and shares of erstwhile partners in that firm were divided along with the assets". Though the decision was rendered in connection with the partnership firm the same is equally applies to this case, since the capital asset was divided on partition of co-ownership. The coordinate bench of ITAT, Kolakata in ITO v. Shreyans Investments (P.) Ltd. [2013] 31 taxmann.com 11/141 ITO 672 has considered the issue of taxing the capital receipt u/s 28(iv) and given ruling that unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv) of the act. For the sake of clarity, we extract relevant part of the order of the coordinate bench supra as under:
"7. Section 28 sets out the incomes which are chargeable to income-tax under the head 'Profits and gains of business and profession', and clause (iv) thereto refers to "the value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of a profession". It is thus clear that besides the profits and gains from business and profession carried on by the assessee at any time during the previous year, any other benefit or perquisite, whether convertible into money or not, is also chargeable to tax under this head of income. A plain reading of this provision shows two conditions precedents for such taxability i.e. (i) that there should be benefits or perquisites; and that (ii) that such benefits or perquisites should arise from the business or exercise of the profession. The expression 'arising from the business' essentially implies that the benefit or perquisite must be in the nature of a business receipt or revenue receipt. No matter how wide be the scope of section 28(iv), the difference between a capital receipt and revenue receipt cannot be overlooked. In the case of Mahindra & Mahindra Ltd. v. CIT [2003] 261 ITR 501/128 Taxman 394, Hon'ble Bombay High Court has, in the context of this significant distinction between revenue and capital receipts, held that waiver of principal amount in respect of imports of plant and machinery could, by no stretch of logic, be treated as 'business income', and, therefore, as an income taxable under section 28(iv). One must bear in mind the fact that section 28 only refers to the "income" which can be charged to income tax under the head "profits and gains from business or profession", and, therefore, when a particular advantage, perquisite or receipt is not in the nature of income, there cannot be any occasion to bring the same to tax under section 28(iv). Hon'ble Supreme Court, in the case of Padmaraje R Kadambande v. CIT [1992] 195 ITR 877/62 Taxman 456 observed that, "…we hold that the amounts received by the assessee during the financial year in question have to be regarded as capital receipts, and, therefore, are not income within meaning of section 2(24) of the Income-tax Act." (Emphasis by underlining supplied by us). This clearly shows, as is the settled law, that a capital receipt, in principle, is outside the scope of income chargeable to tax. Of course, there are specific provisions under the Income-tax Act which provide that certain capital receipts can also be considered as income, such as under section 2 (24)(vi) which covers "any capital gains chargeable under section 45", but right now we are confined to normal connotations of the expression 'income'. Howsoever liberal or narrow be the interpretation of Page 37 of 43 expression 'income', it cannot alter character of a receipt, i.e. convert a capital receipt into revenue receipt or vice versa. The crucial distinction between capital and revenue cannot be blurred or nullified by even the most liberal interpretation of expression 'income'. It is also important to bear in mind that, as held by Hon'ble Supreme Court in the case of Dr K George Thomas v. CIT [1985] 156 ITR 412/23 Taxman 46, "the burden is on the revenue to establish that the receipt is of a revenue nature" though "once a receipt is found to be of revenue character, whether it comes under exemption or not, it is for the revenue to establish". It is thus clear that capital receipts are inherently outside the scope of an income which can be taxed under section 28(iv), and Hon'ble Bombay High Court, in the case of Mahindra & Mahindra Ltd. (supra) also holds so. As to what constitutes capital receipt, we find guidance from Hon'ble Madras High Court's judgment in the case of CIT v. Seshasayee Bros. (P.) Ltd. [1996] 222 ITR 818/89 Taxman 13 wherein Their Lordships, after elaborately surveying the legal precedents on this issue, concluded that, "Thus, a combined reading of the above said judicial pronouncements would go to show that when a receipt is referable to fixed capital, it is not taxable, and it is taxable as a revenue receipt when it is referable to circulating capital or stock in trade". To sum up, unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv). The reference to benefits which can be brought to tax under section 28(iv) for benefits 'arising from the business' also indicates that such benefit must be a business receipt, or revenue receipt, in nature." 6.3 In the instant case there is no dispute that the land in question was purchased as capital asset and remained as capital asset till the partition. No business activity was carried on by the co-owners and the assessee has received the land on partition. The share of land received on partition cannot be treated as income arising from the business. As discussed earlier the asset was shown in the balance sheet as capital asset but not stock in trade. Thus, the contention of the assessee that the excess land received in partition was not taxable u/s 28(iv) is also supported by the decisions referred supra. 6.4 Subsequent to taking the land on partition, the assessee has sold the property after the development and declared the Page 38 of 43 average sale value of Rs. 24488/- per sq.yard which is more than the value adopted by the AO in the assessment. The reason for postponement of taxation was explained by the assessee as disadvantageous location for marketing. The Ld.CIT(A) followed the decision of Hon'ble Supreme Court in the case of Excel Industries Ltd. (supra) and viewed that there was no loss of revenue. Therefore, we agree with the finding of the Ld.CIT(A) that the excess area of land received was not taxable u/s 28(iv) of the Act and there is no loss of revenue. Hence, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. Appeal of the revenue is dismissed.”
28. Therefore, it is a settled proposition of law that, if the alleged benefit is not arisen from business or profession of the assessee or from exercise of the profession of the assessee, then the same cannot be brought to tax under the provisions of section 28(iv) of the I.T. Act, 1961. Further, if the alleged benefit is also in respect of transaction which falls in the capital field being investment in shares, then in the absence of any real income, the same cannot be brought to tax by invoking the provisions of section 28(iv) of the Act. It is pertinent to note that the income arising from sale of these shares would be taxed under the head Capital Gain then the transaction of acquisition of shares can’t be held in revenue field. The learned CIT (A) has decided the issue in para 9.1 to 9.7 of the impugned order as under:
“9.1 Ground No. 2 to 8 relate to taxing differences in the prices of share allotment as perquisites u/s. 28(iv) in the hands of the appellant. The views of the Assessing Officer, submissions of the appellant, were duly considered. 9.2 It is noticed that the appellant, on his own, did not carry on any business during the previous year. On perusal of the return of income it is seen that there was no business
Page 39 of 43 between the appellant and the three companies. As seen from the assessment record, the return of income of the appellant for the AY 2008-09 Consists of the following heads of income: (i)) Salary Income (ii) Income from house property (iii) Long Term Capital Gains (iv) Short Term Capital Gains (v) Income from other sources Hence, the provisions of Section 28(iv) cannot be invoked in the appellant's case. This view is supported by the decision of Gujarat High Court in the case of Bhavanagar Bone and Fertiliser Company Ltd (166 ITR 316) and followed by ITAT, Bombay in Rupees Finance and Management Pvt Ltd (120 ITR 539) and later approved by Bombay High Court. 9.3 A benefit/perquisite is either a liability or obligation in the hands of the provider, as held by the Supreme Court in the case of Excel Industries Ltd. (358 JTR 295). It was held that "income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee." It is, therefore, not correct for the Assessing Officer to treat allotment of shares gives scope for accrual of a benefit. 9.4 Any benefit/perquisite, mentioned in section 28(iv) should arise from business. The benefit should not merely accrue, but arise. In the case of K.N.B. Investments Pvt. Ltd. (367 ITR 616), the Andhra Pradesh High Court, dealing with similar situation, held that allotment of shares on favourable terms would, at the most, be accrual of income and not arising of income. Since income has not flown into the assets of the appellant, the benefit is not arisen and, therefore, not taxable. Thus, what the Hon'ble Court sought to emphasize was that there must be a nexus between arising of a benefit in a transaction of which the assessee should be a direct beneficiary. The AO in the assessment order has not demonstrated as to how the assesee was a beneficiary of such benefits. 9.5 It is a settled principle that for computing the value of any benefit to be taxes, there shall be enabling mechanism in provisions or rules, in the absence of which the value cannot
Page 40 of 43 be ascertained and taxed. Such a mechanism does exist in Section 17(2)(c)(iii) w.e.f. 1-4-2001 for shares allotted under ESOP / sweat equity. Similarly, section 56(2)(vii) and (viia) provides to taxing the difference in consideration and the fair market value. Corresponding and related provisions are inserted in section 49, which defines cost. In the absence of such provisions, the value of the benefit in the form of shares allotted at face value, cannot be ascertained and taxed. In this regard the decision of the Supreme Court in the case of CIT Vs. Infosys Technologies Ltd (297 ITR 167) has been duly considered. 9.6 It is a vital aspect in tax jurisprudence that in a taxing Act one has to look at what is clearly said. There is no room any intendment. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. It is a constitutional mandate that no tax can be levied without the authority of law. If these cardinal principles are taken into consideration, it will appear that liability under section 28(v) has been attached on the appellant by implication without the authority of law. It would be pertinent to refer to the Hon'ble Apex Court judgements which are reproduced in brief below: (a) In this case the observations of Rowlatt, J in the case of Cape Brandy Syndicate Vs Indian Revenue Commissioner are relevant. "In a taxing statute one has to look at what is clearly said. There is no element of intendment. There is presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly on the language used." The Supreme Court in the case of CIT Vs. Ajax Products Ltd., (55 ITR 741) refers to this judgment. After examination of the matrix of issues it is noted that so long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the legislature cannot then be appealed to whittle down the statutory language which is otherwise clear. (b) In the case of CIT vs TV Sundaram Iyengar. (1975), 101- ITR-764 (SC), the Apex Court observed that "if the language of the statue is clear and unambiguous, and if two interpretation are reasonably possible, it would be wrong to discard the plain meaning of the words used in order to meet a possible injustice."
(c) Further, in the case of Keshavji Ravji & Co., vs CIT, 49 Taxman-87 as long as there is no ambiguity in (c) (SC), the Apex Court observed that "the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the legislature cannot be appealed to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words used, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do manifest the intention of the legislature." 9.7 Keeping in view the facts, issues and circumstances as brought out supra, Assessing Officer is directed to delete the addition made u/s 28(iv) and Ground Nos.2 to 8 in appeal are allowed.”
As we have discussed the taxability of alleged benefit in the light of series of binding precedents, we do not find any error or illegality in the impugned order of the learned CIT (A) on this issue. Accordingly, the same is upheld.
In the result, appeal filed by the Revenue is dismissed.