2021 (1) TMI 739 - AT - Income Tax

Reopening of assessment u/s 148 - As argued notice has been issued purely on the borrowed satisfaction of DIT (Investigation) and no belief has been recorded in the reasons for reopening the case - bringing to tax the value of Sweat Equity issued by Rockland Hospital Ltd. to the assessee and which assessee was stated to have received without any consideration - HELD THAT - We find force in the submissions of Ld AR that when the taxation of the value of sweat equity shares which is alleged to have escaped the assessment has itself been set to nought by the order of H ble High Court in the company petition, then its taxability does not remain on the date of issuance of initiation of reassessment proceedings. By the same Sweat Equity agreement apart from assessee, Shri Umesh Upadhaya was also allotted Sweat Equity shares and in his case also the reopening was initiated on identical facts. When the matter in the case of Umesh Upadhaya was carried before CIT(A), CIT(A) had noted the aspect of reversal of share account, that was used to derive valuation and he has noted that as per the order of Hon ble High Court, it was clear that no effective transaction can be said to the taken place and the reversal of share premium account were automatically related back to date of allotment. In such a situation, he noted that it was the case of hypothetical income and since the income did not result at all, there cannot be a tax and notional hypothetical income was not amenable to tax as perquisite . He accordingly decided the issue in favour of the assessee. Against the aforesaid order of CIT(A) in the case of Shri Umesh Upadhaya the matter was carried by the Revenue before the Tribunal. Considering the factual situation as noted by the CIT(A) in the case of Umesh Upadhaya, the Coordinate Bench of Tribunal has upheld the order of CIT(A) and dismissed the appeal of Revenue. We find that the facts of the case in the case of Umesh Upadhyaya (supra) and assessee are identical and in such a situation the decision in the case of Umesh Upadhaya would be squarely applicable to the present assessee s case also. Considering the totality of these facts we find force in the argument of the assessee that the AO was not justified in invoking the reassessment proceedings. - Decided in favour of assessee.

Summary

Issues:
1. Validity of reopening assessment under section 148 of the Income Tax Act, 1961.
2. Taxability of Sweat Equity shares issued without consideration.
3. Determination of the value of Sweat Equity shares.
4. Treatment of conditional issue of shares as a perquisite.
5. Applicability of High Court order on the taxability of Sweat Equity shares.

Validity of Reopening Assessment:
The case involved a challenge to the reassessment proceedings initiated under section 148 of the Income Tax Act. The assessee contended that the notice was issued solely based on a report from the Directorate of Income Tax (Investigation) without independent application of mind by the Assessing Officer (AO). The assessee argued that the AO did not record a belief of income escapement but relied on the report. Additionally, the assessee highlighted a High Court order directing reversal of entries related to Sweat Equity shares issued by Rockland Hospital, leading to the surrender of all shares by the assessee. The Tribunal found merit in the argument, emphasizing that when the taxability of the shares was nullified by the High Court order, the reassessment proceedings lacked justification. The Tribunal set aside the reassessment, ruling in favor of the assessee.

Taxability of Sweat Equity Shares:
The Assessing Officer (AO) initiated reassessment to tax the value of Sweat Equity shares issued by Rockland Hospital to the assessee without any consideration. The AO valued the shares at ?200 per share, totaling ?10,00,000, treating it as income under section 28(iv) of the Act. The assessee challenged this addition on the grounds that the High Court had directed the reversal of entries related to the shares, rendering the taxability void. The Tribunal, considering the identical case of another individual, upheld the argument that no effective transaction took place due to the High Court order, leading to the conclusion that no taxable income existed. The Tribunal ruled in favor of the assessee, emphasizing that the notional income from the shares was not subject to tax as a perquisite.

Determination of the Value of Sweat Equity Shares:
The dispute revolved around the valuation of Sweat Equity shares issued by Rockland Hospital to the assessee. The AO valued the shares at ?200 each, totaling ?10,00,000, for tax treatment under section 28(iv) of the Act. The assessee contested this valuation, citing the High Court's order directing the reversal of entries related to the shares, leading to the surrender of all shares. The Tribunal, considering the factual similarity with another case, concluded that the shares' taxability was nullified by the High Court order, thereby rejecting the AO's valuation. The Tribunal ruled in favor of the assessee, setting aside the reassessment proceedings.

Treatment of Conditional Issue of Shares as a Perquisite:
The case raised the issue of whether the conditional issue of Sweat Equity shares should be considered a perquisite for tax purposes. The assessee argued that the shares were wrongly issued by Rockland Hospital, as per the High Court order directing the reversal of entries related to the shares. The Tribunal, in line with the decision regarding a similar case, held that no effective transaction occurred due to the High Court order, leading to the conclusion that the notional income from the shares was not taxable as a perquisite. The Tribunal ruled in favor of the assessee, emphasizing the lack of taxability in such circumstances.

Applicability of High Court Order on Taxability of Sweat Equity Shares:
The case involved the impact of a High Court order directing the reversal of entries related to Sweat Equity shares issued by Rockland Hospital to the assessee. The assessee surrendered all shares following the High Court order. The Tribunal, considering a similar case where the taxability of shares was nullified by the High Court order, ruled in favor of the assessee. The Tribunal emphasized that the High Court's decision rendered the taxability of the shares void, leading to the rejection of the reassessment proceedings initiated by the AO. The Tribunal set aside the reassessment, ruling in favor of the assessee.

The Tribunal allowed the appeal of the assessee, setting aside the reassessment proceedings and concluding that the taxability of the Sweat Equity shares was void due to the High Court order. As a result, the other grounds raised by the assessee on merits were deemed academic and did not require adjudication.