2014 (6) TMI 600 - AT - Income Tax

Nature of receipts of shares Minimum Alternate Tax (MAT) - transfer of shares effected by the members of Bilakhia family to the assessee-company - Whether the transfer of the shares of Nestle India Ltd and Hindustan Lever Ltd held by the members of Bilakhia family as investment by them to the assessee-company as per family arrangement dated 16-02-2001 claimed to have been transferred without any monetary consideration can be held to be gift or not Held that - Following Commissioner of Wealth-Tax, Mysore Versus HH Vijayaba, Dowager Maharani Saheb of Bhavnagar Palace, And Others 1979 (3) TMI 1 - SUPREME Court - any transfer of any moveable or immovable property can be treated as gift only if the same is made voluntarily and without any consideration - family arrangement cannot be regarded as being without consideration so as to render them unenforceable - family arrangement in the present case is enforceable and binding, the assessee cannot take the plea that transfer of shares by the family members to the assessee in pursuance to the family arrangement was without consideration. Transfer of shares of Nestle India Ltd and Hindustan Lever Ltd held as investment by members of Bilakhia family to the assessee-company as per family arrangement dated 16-02-2001 claimed to have been transferred without any monetary consideration cannot be held to be a gift- thus, the order of the CIT(A) is set aside Decided in favour of Revenue. Gifts received from the family members - Assignment of the right to receive back the loans and advances given to third parties by the directors Held that - Assessee-company itself has treated the money as its own money and taken the amount to the capital reserve, therefore, the full amount was treated as income of the assessee by the AO while finalizing the assessment under regular provisions and under special provisions of section 115JB of the Act - gift of Rs. 14 crores by the family members to the assessee-company and Rs. 17,11,839/- received by the company on account of the assignment of the right to receive back loans and advances given to third party by the directors of the assessee-company, to equalize the wealth of three brothers of the family as per the understanding reached by way of family agreement, this total sum of Rs. 14,17,11,839/- cannot be treated as gift in the hands of the asssessee-company for the reasons given by us while holding that transfer of shares by the family members to the asssessee-company was not a gift in the hands of the assessee-company thus, the order of the CIT(A) is set aside Decided in favour of Revenue. Validity of re-opening of the assessment by AO u/s. 147 of the Act Change of opinion - Held that - The AO reached the belief that there was escapement of income on going through the return of income filed by the assessee after he accepted the return u/s 143(1) without scrutiny, and nothing more - This is nothing but a review of the earlier proceedings and an abuse of power by the AO Following Commissioner of Income Tax, Delhi Versus M/s. Kelvinator of India Limited 2010 (1) TMI 11 - SUPREME COURT OF INDIA reasons recorded by the AO do confirm the apprehension about the harm that a less strict interpretation of the words reason to believe vis- -vis an intimation issued u/s 143(1) can cause to the tax regime - There is no whisper in the reasons recorded, of any tangible material which came to the possession of the assessing officer subsequent to the issue of the intimation - It reflects an arbitrary exercise of the power conferred u/s 147. There was escapement of income - no income has escaped assessment while in the last line it is mentioned that there is no escapement of tax which means he also admitted escapement of income - The provisions of the act are clear that reopening of assessment is permissible if there is escapement of income and for doing so it is not necessary that there should also be escapement of tax which in certain circumstances as in the case of assessee there is escapement of income while there is no escapement of tax - both the grounds on which re-opening of assessment was challenged by the assessee are devoid of merit Decided against Assessee. Adjustment to book profit u/s 115JB of the Act Held that - Shares received by the assessee-company were not gifts in the hands of assessee-company, the argument advanced on behalf of the assessee-company that shares received as gift do not constitute investment and hence gain on sale of these shares were not required to be routed through profit and loss account falls flat, the assessee was not justified in crediting the sale proceeds of the shares directly to capital reserve account without routing through profit and loss account - AO has rightly taken the credits for the purpose of adjustment to book profit u/s 115JB of the Act Decided against Assessee.

Issues Involved:
1. Nature of receipts of shares by the assessee-company.
2. Re-opening of assessment under Section 147 of the Income Tax Act.
3. Adjustment to book profit under Section 115JB of the Income Tax Act.

Detailed Analysis:

Issue 1: Nature of Receipts of Shares by the Assessee-Company
- Facts: The assessee-company received shares from family members under a family arrangement and claimed these as gifts. The AO treated these as purchases with consideration, not gifts.
- Revenue's Argument: The transfer of shares under the family arrangement was not voluntary or without consideration, thus not qualifying as a gift. The AO added the amounts of Rs. 45,58,654/- and Rs. 14,17,11,839/- to the total income of the assessee.
- Assessee's Argument: The transfer of shares was a gift as per Section 122 of the Transfer of Property Act, which does not require natural love and affection. The assessee argued that the family arrangement was voluntary and the shares were transferred without monetary consideration.
- Tribunal's Decision: The transfer of shares was not a gift as it was part of a family arrangement aimed at equalizing the holdings among family members, which has monetary connotations. The Tribunal held that the transfer was not voluntary and was for consideration, thereby reversing the CIT(A)'s order and restoring the AO's decision.

Issue 2: Re-opening of Assessment under Section 147 of the Income Tax Act
- Facts: The AO re-opened the assessment on the grounds that the assessee had credited capital gains from the sale of gifted shares directly to the capital reserve, bypassing the profit and loss account, leading to income escaping assessment.
- Assessee's Argument: The assessee contended that the re-opening was based on a change of opinion and that no income had escaped assessment.
- Tribunal's Decision: The Tribunal found that there was no application of mind by the AO during the original assessment regarding the capital gains not being routed through the profit and loss account. The Tribunal upheld the re-opening of the assessment, stating that there was valid reason to believe that income had escaped assessment.

Issue 3: Adjustment to Book Profit under Section 115JB of the Income Tax Act
- Facts: The AO added Rs. 45,58,654/- to the book profit for taxation under Section 115JB, which was confirmed by the CIT(A).
- Assessee's Argument: The assessee argued that the AO had no authority to adjust book profits once the accounts were audited and accepted, and that proceeds from the sale of gifted shares should not be credited to the profit and loss account.
- Tribunal's Decision: Since the shares were not considered gifts, the Tribunal held that the assessee was not justified in crediting the sale proceeds directly to the capital reserve account. The AO was correct in adjusting the book profit under Section 115JB.

Conclusion:
- The Tribunal allowed the revenue's appeal and dismissed the assessee's appeal for the assessment year 2002-03.
- For the other assessment years (2001-02, 2003-04, 2004-05, and 2006-07), the Tribunal followed the decision for the assessment year 2002-03, dismissing the assessee's appeals and allowing the revenue's appeals.

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