TMI Blog2020 (12) TMI 1065X X X X Extracts X X X X X X X X Extracts X X X X ..... e. A mere perusal of reasons recorded demonstrates that there is no independent application of mind by the AO on following crucial issues, that is - Is there a Benefit which is taxable? - What should be the Value? and Under which provision of Act is the income allegedly escaping is taxable? Lack of independent application of mind by the Ld AO is also apparent from the fact that in the reasons recorded u/s 148(2), he holds that benefit is taxable in hands of the A u/s 17(2)(a)(i) r.w.s. 2(24)(iv) of the Act. Clearly there is no section 17(2)(a)(i) in statute. Even if it is presumed that CIT (A) of M/s SGS and the current Ld Assessing Officer intended to mention section 17(2)(i), then too it is applicable to Rent Free Accommodations and hence not relevant and applicable. This error is noted by Ld CIT (A) in the impugned order. In fact, Ld AO while passing the final order realized this and has therefore upheld taxability u/s 17(2)(iii) and not either u/s 17(2)(a)(i) or 17(2)(i) or section 56. In our considered opinion existence of a Benefit is a Jurisdictional Fact which at the outset must be demonstrated by the Ld. AO by determinative rules while assuming jurisdiction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of ₹ 1,44,24,000/- as income under the head Salaries . 2.1 That on facts and in law, the CIT (A) erred in upholding that a benefit has been obtained by the appellant as a director of M/s SGS Tekniks Pvt. Ltd. by acquiring shares of M/s Eltek SGS Pvt. Ltd. at face value of ₹ 10/- per share from it, which is taxable as a perquisite / income in terms of section 17(2)(iii) read with section 2(24)(iv) of the Act. 3. That without prejudice, on facts and in law the CIT (A) erred in adopting the value of benefit at ₹ 240/- per share. 4. That on facts and in law the AO erred in levying interest u/s 234B of the Act. 5. That on facts and in law the orders passed by both the AO and the CIT (A) are void ab-initio and bad in law. 2. Briefly stated the relevant facts are that appellant had filed a return of income on 29th July, 2005. The said return was processed vide intimation dated 10th January, 2006 issued u/s 143(1) of the Act and no notice u/s 143(2) was issued. Thereafter, notice u/s 148 dated 21st July, 2009 was issued by the Ld. AO proposing to reopen the case by assuming jurisdiction u/s 147 of the Act. During the year under consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d discussed application of yield method / profit capitalization method to determine the fair market value, but made wrong calculation. The appellant had in earlier submissions accepted the application of that method subject to the some computation error by AO. The AR had himself worked out the quantum of capital gain which was proposed to be offered to tax (see Annexure A). Since the basic method of computation of fair market value was not correct, the enhancement notice was issued proposing to replace the correct and more logical value to the value adopted by the AR. However, I do agree and find jurisdiction in the argument that there is no provision in the IT Act to replace the actual value of transaction with fair market value in the case of transfer of shares. Section 50C talks of only immovable properties. If the main argument of the appellant is considered in the light of legal provisions, no capital gain on transfer of the shares can be brought to tax by substitution some other value than the value at which the shares are actually transferred. In view of this there is no need to go to the alternate submission of the appellant where capital gain worked out by considering S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tek SGS Pvt. Ltd. The shares of the company Eltek SGS Pvt. Ltd. were acquired at face value of ₹ 10 in various earlier years and included some bonus shares also. Out of that 240400 shares of Eltek were transferred during the year at face value of ₹ 10/- to four directors. The Assessing Officer in the case of SGS Tekniks Pvt. Ltd. held that transfer of shares to directors at book value was a colorable device to avoid tax and hence made addition of ₹ 10578288/- as short term capital gain. In the appeal proceedings addition was deleted considering appellants arguments that there was no provision in the Income Tax Act to substitute sale consideration with fair market value of a capital asset other than immovable property referred to in section 50C. However it was observed by the Ld. CIT(A) that the real value of shares of Eltek was much higher than the face value, considering the profit earning capacity, dividend track record and net worth of that company. Even the breakup value (book value) of shares was much higher than face value. The appellant company passed on huge benefit to the directors by transferring the shares of Eltek to its directors at face value. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or in M/s SGS Tekniks Pvt. Ltd. as per section 2(24)(iv) of the I.T. Act, 1961. the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which but for such payment, would have been payable by the director or other person aforesaid In this case, the company, M/s Eltek SGS Pvt. Ltd. bestowed a benefit of ₹ 240/- per share (i.e., value of share at ₹ 250 Face value of ₹ 10/-) to the assessee and this can be treated as perquisite received by the assessee as per the provisions of section 17(2)(iii) of the I.T. Act, 1961. Therefore, the total benefit received by the assessee can be worked as ₹ 1,44,24,000/- (i.e., 60100 shares X ₹ 240/-) and this income is added to the total income of the assessee in terms of section 17(2)(iii) read with section 2(24)(iv) of the I.T. Act, 1961). 6. Before Ld. CIT (A) the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itiation of action under section 147(a) or 147(b) of the pre-amended section are highlighted above. The only condition for action is that the assessing officer should have reasons to believe that income has escaped assessment, which belief can be reached in any manner and is not qualified by a pre-condition of faith and true disclosure of material fact by an assessee as contemplated in the pre-amended section 147(a) and the assessing officer can under the amended provisions legitimately reopen the assessment in respect of an income which has escaped assessment. Viewed in the angle power to reopen assessment is much wider under the amended provision and can be exercised even after the assessee has disclosed fully and truly all the material facts. Reasons which may weigh with the assessing officer may be the result of his own investigation and may come from any source that he considers reliable. In conclusion it is stated that the notice u/s was issued after due consideration. A copy of the notice was given to the appellant. The appellant filed his objections which were duly considered by the AO. The action to reopen the case is valid. This ground of appeal of the applicant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted by that the Ld. AO has erred in assuming jurisdiction to reassess by invoking provision of section 147 inasmuch as there is no application of mind by the Ld. AO while recording of reasons, rendering assumption of jurisdiction as bad in law. He submitted that the observations of Ld. CIT(A) while disposing off the appeal of M/s SGS were not binding upon the Assessing Officer of the appellant and therefore he was duty bound to apply an independent mind and conduct necessary investigations before issuing notice u/s 148. In support of his submissions, Ld. Counsel relied upon following decisions:- Raj kumar (C) HUF reported in 2016-TIOL-727-ITATBang Signature Hotels (P) Ltd. reported in 338 ITR 51 (Del) SFIL Stock Broking reported in 325 ITR 285 (Del) RMG Polyvinyl reported in 396 ITR 5 (Del) 6. Ld. Counsel further submitted that while recording the reasons it was imperative upon the Ld. AO to independently examine whether there existed any benefit which is taxable as income in nature of perquisites. He submitted that existence of benefit in the instant case was a jurisdiction fact which must exist prior to recording of the reasons for reopening u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t u/s 234B of the Act. In this regard it was submitted that income in dispute is tax deductible and therefore, as per decision of Hon ble Delhi High Court in GE Packaged Power reported in 373 ITR 65 (Del) interest u/s 234B cannot be levied. 10. On the other hand, Ld. Sr. DR vehemently opposed the above argument of the Ld. Counsel and submitted that the Ld. AO has correctly assumed jurisdiction to re-assess u/s 147 of the Act. He submitted that the order passed by Ld. CIT (A) in the case of M/s SGS was an information material enough justifying formation go belief and recording of reasons. Ld. Sr. DR further supported the taxability of income on merits by relying upon orders passed by the lower authorities. 11. We have carefully considered the rival submissions, perused the relevant finding given in the impugned orders and the material referred to before us. Evidently, the present proceedings u/s 147 got triggered pursuant to order passed by Ld CIT(Appeals)-XI in case of M/s SGS. Ld. CIT (A) in that case has recorded following material facts which have not been disputed before us:- i. Face value of shares of M/s Eltek transferred to appellant by M/s SGS is @ ₹ 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson who has a substantial interest in the company; (c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income under the head Salaries (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds fifty thousand rupees: Explanation.-For the removal of doubts, it is hereby declared that the use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this subclause; 13. From a bare perusal of section 17(2)(iii), it can be inferred that the Value of benefit is directly linked with cost incurred by the employer in either providing that benefit free of cost or at concessional rate . Cost u/s 17(2)(iii) is that of the employer in providing the benefit. Income u/s section 2(24)(iv) is taxable only if it f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any interest on the overdrawn amount in the two years under consideration. Where the company borrows funds on interest for the specific purpose of providing loans to its directors but does not charge interest from them, or where the financial condition of the company is such that utilisation of the funds of the company by its directors in the form of loan without payment of interest to the company will be detrimental to the interest of the company, in such cases, grant of interest-free loan to the directors may be regarded as a benefit provided by the company to its directors. 14. It will be relevant to note that the above decision of Hon ble Calcutta High Court has been approved by the Hon ble Apex Court in case of VM Salgaoear Bros reported in 243 ITR 393 (SC). To the similar effect is the decision of Pune ITAT in case of Bhavarlal Hiralal reported in (2017) 82 taxmann.com 233 (Pune) . In the present case, admittedly M/s SGS acquired shares of M/s Eltek @ ₹ 10 per share in year 1997. During the year under consideration some of these shares were further sold to the appellant as part of internal business reorganization at the same price. Considering this fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stock market and earn profit out of that. If a person acquires a large block of shares with the object of the acquisition of the controlling interest of the company whose shares are to be purchased, the inference is inevitable that the intention was not to acquire them as part of the person s stock-in-trade. Subsequent disposal of some of the shares so acquired does not make the transaction an adventure in the nature of trade. This was the view of the Hon ble Supreme Court in the case of Ramnarain Sons (P.) Ltd.(supra). Where sale of those shares was not contemplated, there is no justification in comparing the market price of existing Dr. Reddy s Laboratories shares with the preferential issue price of shares. One of the strongest arguments of the Revenue is that the appellant companies have derived the benefit through the preferential issue of shares of Dr. Reddy s Laboratories Ltd., as the issue was not made available to the public at large. The main objective of preferential issue was to maintain the group control, even after the Euro-issue. That is why the shares were allotted to the promoters and their core associates. If shares were also offered to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has made a twofold characterisation, viz. income accruing or arising. But while dealing with benefit in the nature of income in the context of section 28, law has conspicuously omitted the concept of accruing and has prescribed only arising . Benefit arising implies benefit arising in the previous year. In other words, the law has made the nature of benefit under section 28(iv) very clear and precise. That is, the benefit must be income in character; and it should be arising in the relevant previous year. In the present case, the income is prospective on the condition of the future sale of shares. That income which is prospective in nature cannot be construed as benefit arising to the appellant-companies in the relevant previous year. 43. The basis of the argument that the appellant-companies have derived benefit in the preferential allotment of shares in the sense that the companies have not paid ₹ 455 per share, but paid only ₹ 90 per share, and thus the appellant-companies had a comparative price advantage, is again not well-founded. The Hon ble High Court of Gujarat had an occasion to examine an issue on the similar line in Spunpipe Constru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot arising of income . Here again, the Tribunal has explained the subtle distinction between the two, in a perfect manner and arrived at the correct conclusion. 17. Further, where legislature intended that for taxation of perquisite , especially in cases of issuance/allotment/transfer of share by an employer to his employee the value of perquisite is determined by taking into consideration the FMV then it has specifically provided for that. One may refer to provisions of section 17(2)(iiia) which was inserted by Finance Act, 1999, w.e.f 01-04-2000 and thereafter was omitted by Finance Act, 2000 w.e.f 01-04- 2001 and provisions of section 17(2)(vi) by Finance Act (No.2) 2009 inserted w.e.f. 01-04-2010. These are reproduced below: Section 17(2)(iiia) Section 17(2)(vi) Section 17(2)( iiia ) the value of any specified security allotted or transferred, directly or indirectly, by any person free of cost or at concessional rate, to an individual who is or has been in employment of that person : Provided that in a case where allotment or transfer of specified securities is made in pursuance of an option exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price; 18. In the present case, we are concerned with law applicable for AY 2005-06 when provisions of section 17(2)(iiia) or 17(2)(vi) are not applicable. In this regard reference can be made to the judgment of Hon ble Apex Court in case of M/s Infosys Technologies reported in 297 ITR 167 (SC). In this case issue involved was taxation of ESOP s as Perquisites. Since provisions of section 17(2)(iiia) were inserted later revenue invoked provisions of section 17(2)(iii). Hon ble Apex Court rejected the argument raised by revenue seeking valuation of perquisite comparing benefit derived with FMV. Apex Court also held that provision of section 17(2)(iiia) are not retrospective and concluded as under: 16. Be that as it may, proceeding on the basis that there was 'benefit', the question is whether every benefit received by the person is taxable as income? In our view, it is not so. Unless the benefit is made taxable, it cannot be regarded as income. During the relevant assessment years, there was no provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC) has held as under: 68. A jurisdictional fact is a fact which must exist before a Court, Tribunal or an Authority assumes jurisdiction over a particular matter. A jurisdictional fact is one on existence or non-existence of which depends jurisdiction of a court, a Tribunal or an authority. It is the fact upon which an administrative agency s power to act depends. If the jurisdictional fact does not exist, the court, authority or officer cannot act. If a Court or authority wrongly assumes the existence of such fact, the order can be questioned by a writ of certiorari. The underlying principle is that by erroneously assuming existence of such jurisdictional fact, no authority can confer upon itself jurisdiction which it otherwise does not possess. . . 78. From the above decisions, it is clear that existence of jurisdictional fact is sine qua non for the exercise of power. If the jurisdictional fact exists, the authority can proceed with the case and take an appropriate decision in accordance with law. Once the authority has jurisdiction in the matter on existence of jurisdictional fact , it can decide the fact in issue or adjudicatory fact . A wrong decis ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
