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2007 (2) TMI 240 - AT - Income TaxIncome From Undisclosed Sources - sham transaction - transfer of shares by an artificially juristic person - MoU in question can be considered as family arrangement or not - Purchases goods or assets at a price lower than the market price(i.e. Share) treated as unexplained investment u/s 69 or benefit or perquisite u/s 28(iv) - HELD THAT - There is no dispute of the fact that the price paid for the shares by the assessee company were the cost incurred by the purchaser. It is also not disputed that all these investments were recorded in the books of account. Under s. 69 only such value of the investments may be deemed to be the income of the assessee for the financial year, if they are not recorded in the books of account. Thus s. 69 is not applicable in this case. The first appellate authority possibly realising this difficulty has chosen to invoke s. 28(iv) and not to give a decisive finding as to whether s. 69 is applicable or not. We have to mention here that it is not the case of the Revenue that the assessee company has paid certain amount in excess of what is recorded in the books of account for the purchase of the shares. There is not even an allegation much less any evidence that the apparent consideration is not the real consideration. The only grouse of the Revenue authorities have is that the assessee company has purchased the shares at a price which much lesser than the market price. This, as already stated is not a disputed fact. Thus on these facts we hold that no addition is sustainable under s. 69. Applicability Of u/s 28 - HELD THAT - The purchase of shares at a particular price which is below the market price as an investment is not income by any stretch of imagination. It cannot also be deemed as income u/s 28 (iv) as it is neither benefit nor perquisite that has arisen to the assessee from the business or in the exercise of a profession. The Hon'ble Gujarat High Court in the case of CIT vs. Bhavnagar Bone Fertiliser Co. Ltd. 1986 (7) TMI 37 - GUJARAT HIGH COURT has upheld the Tribunal's finding that there must be a nexus between the business of the assessee and the benefit which the assessee has derived for the purpose of attracting provisions of s. 28(iv). Thus on the factual matrix, mere purchase of shares, as an investment, with the lock-in-period of holding, for a consideration which is less than the market value, cannot be brought to tax, as a benefit or perquisite u/s. 28(iv) of the Act. The assessee has not in this case, secured any benefit or perquisite in consideration of a business transaction undertaken with the sellers of the shares. Thus this issue is decided in favour of the Revenue and against the assessee. Whether the arrangement in question is a family arrangement or whether transfer of shares by an artificially juristic person can be brought into the ambit of family arrangement, etc. - The transaction cannot be looked into from the angle of the MoU or family arrangement. Mr. Shivram in the course his arguments stated that the companies' assets are different from the family assets. If so, we do not understand how sale by a company to its assets to another company can be part of a family arrangement. A company is a distinct juristic entity. Its assets cannot be mixed up with the assets of a shareholder. If the shareholder has sold his shares to another person in terms of a family arrangement, then only it can be claimed that s. 2(47) does not apply. The assessee in this case, wants the Tribunal to lift the corporate veil and assume that the assets of the companies controlled by the asses sees are that of the family members themselves. Company's assets cannot be dealt with in such a manner and the company law does not permit the same. For this sole reason we are of the considered opinion that the contention of the assessee that the sale of the shares by certain companies to the assessee company are not transfers, is not in accordance with law. This contention has to be necessarily rejected. As we have rejected this contention we need not go into the aspect whether the family arrangement is a colourable device or not. In any event, in view of our finding on the applicability of s. 69, s. 28(iv) detailed findings on this aspect would not alter the results of this appeal. In the result, the appeal of the assessee is allowed. Capital Gain - Transfer of the capital asset - HELD THAT - The first appellate authority at his order has rightly observed that, what in fact never accrued or was never received cannot be computed as capital gain. He relied on the decision of Calcutta High Court in the case of CIT vs. Smt. Nandini Nopany 1997 (12) TMI 102 - CALCUTTA HIGH COURT . He rightly held that it is manifest that the consideration for the transfer of capital asset is what the transferor receives, in lieu of assets he parts with, i.e., money or monies worth and that the expression 'full consideration' cannot be construed as having reference to the market value of the assets transferred but refers to the price bargained for by the parties and it cannot refer to the adequacy of the consideration. He also rightly observed that the legislature has used the words 'full value of the consideration' and not 'FMV of the assets transferred'. He recorded that the AO has not brought on record any material to show that the assessee has received more than what has been disclosed in the books and under these circumstances the difference cannot be brought to tax under the head 'Capital gains'. We fully agree with these findings and the appeals filed by the Revenue fail. In the result, the appeal filed by the assessee is allowed and the appeals filed by the Revenue are dismissed.
Issues Involved:
1. Whether unaccounted investment has been made by the assessee. 2. Applicability of Section 69 of the IT Act. 3. Applicability of Section 28(iv) of the IT Act. 4. Validity and implications of the family arrangement (MoU). 5. Taxability of the difference between market value and purchase price of shares. Detailed Analysis: Issue 1: Unaccounted Investment by the Assessee The core issue in ITA No. 2300/Mum/2007 is whether the difference between the purchase price and market price of shares purchased by the assessee can be added as unexplained investment under Section 69 of the IT Act or treated as a benefit under Section 28(iv) of the Act. The assessee, part of the Essel group, acquired shares at a price below the market price as per a family arrangement (MoU) to consolidate shares within the family. The AO dismissed the MoU as self-serving and lacking evidentiary value, concluding that the difference in share price constituted an unexplained investment and an exercise in tax avoidance. Issue 2: Applicability of Section 69 Section 69 pertains to investments not recorded in the books of account. The tribunal found that the investments were indeed recorded in the books and there was no evidence of any additional payment beyond the recorded purchase price. Since the investments were documented and the purchase price was verified, Section 69 was deemed inapplicable. Issue 3: Applicability of Section 28(iv) Section 28(iv) concerns the value of any benefit or perquisite arising from business or the exercise of a profession. The tribunal noted that the shares were acquired as an investment and not as stock-in-trade, with a lock-in period of three years. There was no event during the year that resulted in income accruing to the assessee. The tribunal concluded that purchasing shares at a price below market value does not constitute a benefit or perquisite under Section 28(iv), as there was no direct nexus between the business of the assessee and the benefit derived. Issue 4: Validity and Implications of the Family Arrangement (MoU) The MoU was intended to rationalize and reorganize the shareholdings among family members. The tribunal recognized the MoU as a valid family arrangement, dismissing the AO's claim that it was a sham transaction. The tribunal emphasized that a family arrangement does not necessarily require an existing dispute and can be made to avoid potential future disputes. The tribunal also noted that the transactions were genuine and approved by the respective boards of directors. Issue 5: Taxability of the Difference Between Market Value and Purchase Price of Shares The tribunal held that the difference between the market value and the purchase price of shares could not be taxed under Section 28(iv) or Section 69. The tribunal emphasized that the purchase of shares at a price below the market value as an investment does not constitute income. The tribunal also noted that the AO failed to demonstrate any evidence of additional consideration beyond the recorded purchase price. Conclusion: The tribunal allowed the appeal of the assessee, ruling that the difference between the market value and the purchase price of shares could not be taxed under Section 28(iv) or Section 69. The tribunal upheld the validity of the family arrangement (MoU) and dismissed the AO's claim that it was a sham transaction. The tribunal also dismissed the appeals filed by the Revenue in ITA Nos. 3264/Mum/2006 and 2881/Mum/2007, concluding that the difference in share price could not be taxed as capital gains in the hands of the transferor companies.
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