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2025 (1) TMI 239 - AT - Income TaxRevision u/s 263 - Taxability of the investments in the hands of the trust u/s 56(2)(x) - assessment of trust - relatives inclusions in the beneficiaries - whether transactions involved in this case are out of the purview of section 56(2)(x) as the trust has been established exclusively for the family members covered in the definition of relative? HELD THAT - Assessee has made only submissions with respect to the non-taxability of interest in partnership firm, the assessee has no where mentioned any thing about the receipt of preference shares and equity shares of M/s Silver Needle hospitality. The AO has also not conducted any query nor raise any further question as regard to the applicability of the provisions of section 56(2)(vii) explanation (d) vis- -vis preference shares and equity shares.AO has also failed to see the applicability of the provisions of section 45(4) of the Income Tax Act as they stood at the relevant times. It was the abundant duty of the AO to examine the valuation of shares of partnership firms, adopted by the settlor for crediting the capital account of assessee in those firms and the taxability of the same in the hands of the firms and vice versa, which the AO has not done in this case. Therefore, it is a complete case of lack of enquiry. It is settled position of law that tax planning is permissible if it is done within the four corners of law but tax evasion is not permissible. Whether amount received is not taxable in terms of section 56(x) as the same has been received for the benefit of relative? - We don t find any infirmity in the view of the PCIT in as much as it is evident from the clauses of the trust deed that the benefits of the trust were not restricted to relatives only. The benefit of the amount received was not restricted to the family members and hence the view of the AO is not plausible view therefore the PCIT is correct in law in holding the order as prejudicial to the interest of revenue. What was received is not covered by the definition of term property as given in explanation(d) of section 56(2)(vii)? - whether interest in partnership firm is covered in the meaning of expression property ? - There are so many differences between expression share and securities therefore one cannot say that they are synonyms. The additional differences highlight the complexities and nuances of shares and securities, and demonstrate the importance of understanding the specific characteristics of each. Expression shares and securities as used in explanation(d) of section 56(2)(vii) denotes two different type of properties these properties are distinct and hence the term and used between them carries a meaning of or . There are so many judicial pronouncements wherein it has been held that and can be read as or when the interpretation requires so. In the present case the context in which the term shares and securities has been used it is abundantly clear that and should be read as or . Further literal interpretation in the present case is also giving an absurd meaning therefor we are of the firm opinion that the expression and used here should be read as or Case laws where it has been held that terms 'or' and 'and' can be interchangeably interpreted to fulfil the legislative intent. We are of the view that term and is to be read as or . And if that be so then whether interest in partnership firm falls in the category of shares as used in explanation (d) of section 56(2)(vii). What is interest in partnership firm has been decided by so many judicial pronouncements wherein this expression has been interpreted of expression. We have already noted somewhere else that term shares as used in explanation-2 of section 56(2)(vii) is not restricted to the shares of companies only, rather it is wide enough to mean a part or portion of something. For instance, sharing refers to dividing or giving out portions of something among several people.. Merely because some expression is missing we cannot restrict the meaning of a word. It is settled position of law that that words should not be overly restricted; their meaning can be shaped by the context in which they are used. Legal texts, contracts, or laws often define words, but if a specific definition is not provided, courts or authorities may interpret the word according to its common usage or the broader context. Therefore we have to take the common meaning of word share . As interest in partnership firm falls in the category of shares and the same is covered by the provisions of explanation (d) of section 56(2)(vii). Therefore, we reject the contentions of assessee that interest in partnership firm is out of the purview of section 56(2)(X). Whether amount was not received without consideration? - No merit in this contention in view of the fact that it is not merely a case of receipt of an amount, rather a case where on the same date the assessee has been given rights in the partnership firms and the erstwhile partner has been retired. In fact, assessee has been made owner of the partnership firms without paying any penny. In fact, it is a finding of fact that no actual money has been transferred to the account of the assessee rather shares of M/s Silver Niddle has been transferred and capital account of the assessee has been credited in the partnership firms by reconstituting the partnership firms. Amount received by the trust is received under fiduciary capacity and hence not taxable and trust via trustee does not have any right to enjoy the receipt as owner - We don t find any merit in these arguments, there are provisions under the Income Tax Act which are meant exclusively for the purpose of taxation of Private Discretionary trusts. For instance, section 165 specify the tax rates applicable to a trust section 164A provides charge of tax in case of oral trust etc. Provisions of section 56(2)(X) are not applicable to genuine transactions - In the facts of the present case, two important facts which are missing in other cases are that the assessee in this case has received the amounts without consideration for the benefits of non-relatives, secondly the assessee has been made partner in those firms where the settlor was having substantial interest. In order to circumvent the provisions of section 45, which deals with the chargeability of capital gains under various circumstances, the assessee has adopted a route of transferring the assets of Partnership firm thorough layers of companies and juristic entities. Therefore, we are not convenience with the arguments of the assessee. Validity of Revision u/s 263 - The position of facts and law as discussed above would prove beyond doubt that the present case the order of the AO is erroneous in so far as prejudicial to the interest of revenue. AO has passed the order without making enquiries which should have been made by him. It is equally true that in final stage of assessment, the assessee has not disclosed the transferee of shares of private limited company along with interest in partnership firm in categorical terms. Here we would like to make a reference to the decision of Every stone 1994 (7) TMI 36 - RAJASTHAN HIGH COURT wherein it has been held that non application of mind by the AO to the legal issues would justify action of section 263. Assessee appeal dismissed.
1. ISSUES PRESENTED and CONSIDERED The core legal questions considered in this judgment are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Erroneous and Prejudicial Order under Section 263
Issue 2: Taxability under Section 56(2)(x)
Issue 3: Definition of "Property" under Section 56(2)(x)
Issue 4: Receipt Without Consideration
3. SIGNIFICANT HOLDINGS
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