2023 (1) TMI 171 - AT - Income Tax

Addition u/s 28(iv) - Sweat equity shares - shares have been allotted to the appellant without any amount being paid as consideration by the appellant, in lieu of the appellant being an expert having vast experience in a particular field, and supplying professional contribution, dedication and value addition to M/s RHL - shares are subject to a lock-in period of 3 years from the date of allotment of sweat equity - Whether no real income has accrued to the assessee despite the documentary evidence ? - As submitted that the appellant is not a professional and has no professional earning, nor has it received any professional fee and therefore the value of Sweat Equity is not chargeable under 28(iv) ? - HELD THAT - Applying the three tests laid down by various decisions of the apex Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of M/s RHL to pass on the benefits of the high valuation of shares; and the probability or improbability of realization of the benefits by the appellant considered from a realistic and practical point of view (the reversal of entries in the books of M/s RHL having taken place subsequently), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) would be inapplicable to the facts and circumstances of the Essentially, the law evolved by the apex Court requires the Assessing Officer to be pragmatic and not pedantic. Section 28(iv) lays down that any benefit accruing to an assessee in the course of exercise of his profession shall be considered as his income. CIT(A) held that even assuming that a benefit could have said to have accrued, then also it has been held in the case of Helios Food Improvers Pvt. Ltd. 2007 (2) TMI 348 - ITAT MUMBAI that the word benefit has to be interpreted that one party should give to the other an irretrievable benefit or advantage as an obligation or facility or concessions. It was further held that if only the seller had incurred an expense or liability or had provided facility to the purchaser, then the value of cash of such expense or benefit or perquisite shall be treated as income. The same was reiterated in Rupee Finance Management (P) Ltd. 2007 (2) TMI 240 - ITAT BOMBAY-J . In the case of the appellant, the offer of sweat equity shares is conditional, and not irretrievable. Furthermore, it is seen that the entry of share premium liability and corresponding asset Intellectual Property Rights reflected in the books of M/s RHL have also been reversed subsequently. It thus follows that the appellant was never in receipt of any irretrievable benefit by way of share premium otherwise payable. Even this amount has no real basis of valuation. Therefore there is no irretrievable benefit that had accrued to the appellant, so as to bring the amount to tax in the hands of the appellant u/s 28(iv). Holding thus, the ld. CIT(A) deleted the addition in the hands of the assessee. Appeal of the Revenue is dismissed.

Summary

Issues:
- Addition of Rs.2,00,00,000/- u/s 28(iv) of the Income Tax Act
- Accrual of real income to the assessee

Analysis:
1. The Revenue filed an appeal against the order of the ld. CIT(A) deleting the addition of Rs.2,00,00,000/- u/s 28(iv) of the Act. The A.O. noted that M/s RHL issued sweat equity shares to the appellant valued at Rs. 200 per share, with a balance considered as 'share premium'. The A.O. considered this as taxable professional income u/s 28(iv) due to the expert contribution of the appellant. The appellant argued against this, stating no professional earning was received, and the shares were conditional with a lock-in period.

2. The appellant contended that the shares' value was actuarial and the actual book value was lower. Citing precedents, the appellant argued that the reduced share premium in M/s RHL's books indicated no real income. The appellant emphasized not rendering services to M/s RHL and lack of qualification for the same. The assessment was challenged under Sec. 28(iv), emphasizing the need to determine its applicability to the case.

3. The ld. CIT(A) considered the appellant's submissions and held that no real benefit accrued to the appellant. Referring to legal precedents, it was concluded that the 'sweat equity' shares were conditional and not an irretrievable benefit. The reversal of 'share premium' entry in M/s RHL's books further supported the decision that no real benefit was received by the appellant. Consequently, the ld. CIT(A) deleted the Rs.2,00,00,000/- addition in the appellant's hands.

4. The Tribunal upheld the ld. CIT(A)'s decision, finding no reason to interfere. The appeal of the Revenue was dismissed, affirming the deletion of the addition under Sec. 28(iv) of the Income Tax Act.