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2025 (5) TMI 810 - AT - Income TaxAddition as benefit/perquisite u/s 28(iv) - fair market value of the shares received as loan during the year under consideration - HELD THAT - The commercial consideration in a transaction is thus implicit to invoke s. 28(iv) of the Act. A party to transaction (lender) ending up getting not even a right to recovery of value of shares lent from the borrower can by no stretch of imagination be regarded as transaction guided by commercial wisdom and in the assessee of any commercial traits the operation of s. 28(iv) automatically gets excluded. Element of quid pro quo is the bedrock of any business or commerce. The CIT(A) has apparently proceeded on un-dimensional assumptions and extremely peripheral considerations. The retention of additions taking shelter of sec 28(iv) of the Act thus militates against the very scheme of s. 28(iv) itself. There can be plethora of reasons for failure to execute a formal loan agreement reduced in writing. The need for written agreement should be best left to the judgment of the parties. Besides oral contracts are also recognized in law and more so for the purposes of income tax proceedings neither the existence of any written agreement itself is determinative of character of transaction per se nor absence thereof prevents the AO to assess the circumstantial and surrounding circumstances to arrive at a lawful conclusion. Neither there is any material to suggest waiver from recovery of share value from the end of the lender nor can it be inferred in the light of human probabilities. Hence no benefit can be said to have accrued to the assessee for the purposes of sec 28(iv) of the Act as sought to unrealistically concluded by the CIT(A). The action of the CIT(A) does not thus stand to reason and is apparently based on figment of imagination. Although the additions have been directed to be made by the CIT(A) under s. 28(iv) of the Act the CIT(A) has also made some references to sec 41(1) in its delineation. Sec 41(1) is attracted if any benefit arises from remission or cessation of trading liability. Sec 41(1) however in our opinion does not come into play at threshold. The liability towards repayment of such loan transactions continue to exist during the year and there is total absence of any remission or cessation of any liability towards lender per se. The pre-requisites of sec 41(1) are thus glaringly not met. We thus find strong traction in the plea raised on behalf of the assessee. The action of the CIT(A) is devoid of any rationale as rightly pleaded on behalf of the assessee. Additions u/s 28(iv) for the purposes of determination of tax liability u/s 115JB - In the facts of the present case firstly the books of accounts have not been rejected nor any adverse remark qua the accounting entry or maintenance of books of accounts has been made by the AO. The issue is squarely covered in favour of the assessee by the judgement rendered in the case of Apollo Tyres Ltd. 2002 (5) TMI 5 - SUPREME COURT secondly and without prejudice the additions directed to be made by the CIT(A) under s. 28(iv) of the Act has been deleted and reversed for the purposes of determination of taxable income under normal provisions of the Act in the preceding paragraphs. Thus as a sequel to such view expressed the adjustments made to the book losses declared by the assessee is not permissible. Hence on both counts the adjustments made to the book profit for the purposes of determination of MAT liability with reference to s. 115JB of the Act is unsustainable in law. Appeal of the assessee is allowed.
The core legal questions considered in this appeal relate primarily to the tax treatment of shares received by the assessee from a third party, Galaxy Infrastructure Developers Pvt. Ltd. ("GIDPL"), and the consequent additions made by the tax authorities under various provisions of the Income Tax Act, 1961 ("the Act"). The issues can be summarized as follows:
1. Whether the receipt of 40,00,000 shares of Dewan Housing Finance Corporation Limited ("DHFL") by the assessee from GIDPL constitutes a loan transaction or a business benefit/perquisite taxable under section 28(iv) of the Act. 2. Whether the addition made by the Assessing Officer (AO) under section 68 of the Act, treating the receipt of shares as unexplained cash credit, was justified. 3. Whether the fair market value (FMV) of shares on the date of receipt can be considered as the quantum of benefit under section 28(iv), or whether the benefit should be computed as the difference between the loan value and the actual value realized on sale/liquidation of shares, especially considering the loss suffered by the assessee. 4. Whether the additions made under section 28(iv) of the Act should be considered for recomputing the book profits under section 115JB for Minimum Alternate Tax (MAT) purposes, given the self-contained nature of adjustments prescribed under section 115JB. Detailed analysis of these issues is as follows: Issue 1: Nature of Receipt of Shares - Loan or Business Benefit Relevant Legal Framework and Precedents: Section 28(iv) of the Act taxes "any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession." Section 68 deals with unexplained cash credits. The Supreme Court's decision in Kedarnath Jute Manufacturing Company underscores that taxability of receipt or benefit depends on the nature of the transaction rather than the accounting treatment. Court's Interpretation and Reasoning: The AO initially treated the receipt of shares as unexplained cash credit under section 68, doubting the identity, genuineness, and creditworthiness of GIDPL. However, the Commissioner of Income Tax (Appeals) [CIT(A)] accepted the genuineness of the transaction and creditworthiness of GIDPL, deleting the addition under section 68. Nonetheless, the CIT(A) concluded that the transaction was not a loan but a commercial/business arrangement. The CIT(A) reasoned that:
The CIT(A) further observed that the assessee had connived with promoters of DHFL to artificially inflate share prices, an illegal activity, reinforcing the commercial nature of the transactions. Key Evidence and Findings: The CIT(A) relied on the absence of formal loan documentation, the manner in which shares were handled in the books (stock-in-trade), the statements of the assessee's director, and the conduct of the parties post-transaction (non-return of shares, sale of pledged shares). The AO's initial doubts on creditworthiness were addressed by production of GIDPL's balance sheets and net worth details. However, the CIT(A) emphasized the substance over form, concluding no loan existed. Application of Law to Facts: The CIT(A) applied section 28(iv) to tax the value of shares received as a business benefit, quantifying it at the FMV on the date of receipt. The AO was directed to make an addition of Rs. 234.10 crores as business income under section 28(iv). Treatment of Competing Arguments: The assessee argued that the shares were received on loan, supported by Delivery Instruction Slips (DIS) indicating loan, minutes of meetings, email communications demanding return of shares, statements recorded under sections 133A and 131, and the lender's confirmation of loan nature. The assessee contended that no benefit accrued as the shares were returnable and losses suffered negated any remission of liability. The revenue contended the absence of formal loan agreements, the profit-sharing arrangement, the pledge and sale of shares as margin, and the non-return of shares indicated a business benefit rather than loan. The CIT(A) accepted this view. Conclusions: The Tribunal rejected the CIT(A)'s characterization of the transaction as business benefit under section 28(iv), emphasizing the documentary evidence and conduct indicating a loan transaction. It held that mere inability to repay due to losses does not amount to remission of liability or confer any benefit taxable under section 28(iv). The Tribunal noted that the CIT(A)'s conclusion was based on assumptions and lacked tangible basis. The transaction was held to be a loan, and no benefit arose to the assessee for taxation under section 28(iv). Issue 2: Validity of Addition under Section 68 The AO made an addition under section 68 treating the receipt of shares as unexplained cash credit due to doubts on identity, genuineness, and creditworthiness of GIDPL. The CIT(A) deleted this addition after the assessee produced evidence including GIDPL's financials, establishing creditworthiness and genuineness. The Tribunal upheld the CIT(A)'s deletion of the addition under section 68, finding the evidence sufficient to discharge the onus on the assessee. Thus, the addition under section 68 was unsustainable. Issue 3: Computation of Benefit and FMV of Shares The CIT(A) computed the "benefit" as the FMV of shares on the date of receipt, amounting to Rs. 234.10 crores, and directed this to be added to the income under section 28(iv). The assessee contended that if any benefit were to be considered, it should be the difference between the loan amount and actual realization on forced sale/liquidation of shares, which resulted in a loss, negating any benefit. The Tribunal agreed with the assessee that no benefit arose, as the transaction was a loan and the assessee suffered a loss on sale of pledged shares. The FMV on the date of receipt was not a "benefit" but merely the value of loaned shares. The forced sale and resultant loss negated any notion of benefit or remission of liability. Issue 4: Adjustment of Book Profits under Section 115JB The CIT(A) directed the AO to recompute book profits under section 115JB (MAT provisions) by adding back the amount of Rs. 234.10 crores to the book loss declared by the assessee. The assessee challenged this on the ground that section 115JB is self-contained, and adjustments can only be made as per the specific sub-clauses of Explanation 1 to section 115JB. The Tribunal relied on the Supreme Court's decision in Apollo Tyres Ltd. v. CIT, holding that the book profits under section 115JB cannot be disturbed unless prescribed by the statute. Since the books of account were not rejected and no adverse remark was made by the AO, and since the additions under section 28(iv) were deleted, the adjustment to book profits was unsustainable. Significant Holdings and Core Principles: "The taxability of a receipt or benefit is to be decided on the nature of transaction and not on the basis of the treatment in the books of accounts." "There is nothing on record to arrive at a conclusion that the lender has waived its right in any manner to recover shares or equivalent value thereof from the recipient assessee." "The remission of liability cannot be assumed merely on the basis of losses incurred or financial incapacity of the assessee to repay the loan." "Adjustments to book profits under section 115JB can only be made if specifically provided under the Explanation to that section and cannot be made arbitrarily." "The mere absence of a written loan agreement does not ipso facto convert a loan transaction into a business benefit; oral contracts and surrounding circumstances must be considered." Final Determinations:
Accordingly, the appeal was allowed on all grounds raised by the assessee.
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