2019 (3) TMI 1856 - AT - Income Tax

Reopening of assessment - legality and validity of the notice u/s 148 - addition on the ground that Section 28(iv) of the Act cannot be invoked in this case - Allotment of Sweat Equity shares to the assessee - CIT(A) upheld the legality and validity of the reopening but deleted the addition on the ground that there is no relationship of employer-employee before the company and the assessee, which allotted the Sweat Equity shares to the assessee; that the equity allotted was not specified security and from such an angle it does not answer the description of perquisites u/s 17(2) of the Act; that the valuation of the equity at artificially jacked up prices without any economic basis would not help to sustain the addition - HELD THAT - As rightly contended by the assessee, even before the issuance of the notice u/s 148, it was clear that the assessee did not receive any benefit whatsoever under the sweat Equity share Agreement. We find force in the submissions made on behalf of the assessee that the reversal of the share premium account pursuant to the orders of the Hon ble High Court would relate back to the date of allotment. We are unable to consider the analogy drawn by the Ld. AO and the Ld. DR to say that subsequent/future event cannot affect the taxability in the year of its accrual, because in this matter certain factors which are stipulating constraints on the availment of benefit under the agreement. Firstly, there is a condition of 10 years association, which has failed; that secondly, the Hon ble High Court directed the cancellation of the allotment and to reverse the entries which shall relate back to the date of agreement itself; that thirdly, there is no economic basis for the valuation of the shares to assess the income of the assessee. For these reasons, we are of the considered opinion that the learned CIT(A) rightly reached a conclusion that this is a case of hypothetical income of the nature of perquisite and more so, the very basis of the valuation is not scientific without any financial back up data to justify the valuation. We are in agreement with the submission on behalf of the assessee that the decision in the case of CIT vs Infosys Technology Ltd. 2008 (1) TMI 17 - SUPREME COURT wherein the issue involved was that whether allotment of Sweat Equity Shares to an employee is a perquisite or not and it was held that where the lock in period was involved, the perquisite would be treated only in the year in which the lock in period ends. Since in this case the agreement came to an end, shares were surrendered and the entries were reversed long prior to the lock in period, no case of taxing the allotment as perquisite in the hands of the assessee in the AY 2007-08. In view of the conflict of opinion expressed by the Hon ble Gujarat and Madras High Court, the view favourable to the assessee had to be accepted and while respectfully following the decision of the Hon ble Apex court in the case of Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME COURT we find that the composite order cannot be sustained. We are of the considered opinion that either on facts or on law, there is no need to interfere with the findings of the learned CIT(A) in deleting the addition made by the learned AO on the premise that the allotment of shares to the assessee are to be taxed as perquisites or profession income.

Summary

Issues Involved:
1. Legality and validity of the notice under Section 148 of the Income-tax Act, 1961.
2. Taxability of the sweat equity shares under Section 28(iv) of the Income-tax Act, 1961.
3. Legality of the composite order disposing of objections along with the assessment order.

Detailed Analysis:

1. Legality and Validity of the Notice under Section 148:

The assessee challenged the legality and validity of the notice issued under Section 148 of the Income-tax Act, 1961. The learned Commissioner of Income-tax (Appeals) [CIT(A)] upheld the legality and validity of the reopening but deleted the addition made by the Assessing Officer (AO). The CIT(A) noted that the assessee had filed objections to the notice, which were disposed of in the assessment order itself. The Revenue argued that the delay in filing objections by the assessee (2 years after the notice) did not invalidate the reassessment order.

2. Taxability of the Sweat Equity Shares under Section 28(iv):

The assessee received one lac equity shares from M/s Rockland Hospital Ltd. as sweat equity with a lock-in period of 10 years. However, the Delhi High Court later directed the reversal of these shares, and the assessee surrendered them. The AO added ?2 crore under Section 28(iv) of the Act, considering it as professional income. The CIT(A) deleted this addition, stating that there was no employer-employee relationship, the shares were not specified securities, and the valuation was artificial without economic basis. The CIT(A) concluded that no real income accrued to the assessee as the shares were surrendered before the lock-in period ended.

The Revenue contended that the benefit derived from the allotment of sweat shares should be taxable, irrespective of the subsequent surrender. The assessee argued that no real income was derived as the shares were surrendered, and the agreement was rendered null and void by the High Court's order. The Tribunal agreed with the CIT(A) that the income was hypothetical and not taxable as perquisites.

3. Legality of the Composite Order:

The assessee argued that the composite order disposing of objections along with the assessment order was bad in law. The Tribunal noted conflicting judicial opinions on this matter. The Gujarat High Court in General Motors India P. Ltd. vs DCIT held that a composite order is not sustainable, while other cases cited by the Revenue suggested otherwise. The Tribunal, following the principle of favoring the assessee in case of conflicting opinions, found the composite order unsustainable.

Conclusion:

The Tribunal upheld the CIT(A)'s findings, agreeing that the addition made by the AO was not sustainable either on facts or law. The appeal of the Revenue was dismissed, and the Cross Objection filed by the assessee was dismissed as infructuous. The Tribunal emphasized that the hypothetical nature of the income and the lack of real benefit to the assessee rendered the addition under Section 28(iv) invalid. The composite order disposing of objections along with the assessment was also found to be legally unsustainable.