2014 (10) TMI 253 - HC - Income Tax

Benefit / perquisit u/s 2(24)(vd) r.w. section 28(iv) Difference in value of shares alloted at concessional rate profits and gains of business or profession - According to the ITO, the market price was ₹ 455 per share, whereas it was allotted at ₹ 90 per share, on preferential allotment - Held that - Even if all the subsidiary contentions advanced by the respondents in this behalf are rejected, the fact remains that there is a clear bar for a block period of three years prohibiting the sale of shares.- the benefit can be said to have arisen to an individual, if only, any person in his place, would have got the differential price, by selling the shares - Irrespective of the willingness or otherwise of the person holding such a share, if the bar operates, it is difficult to imagine that the sale of the shares would take place or that it would yield the differential price the Tribunal was rightly was of the view that as long as the bar operated, the question of any benefit in the form of differential price, accruing to the respondents, does not arise Decided against revenue. Whether the benefit has accrued at all to the respondent Held that - There exists a distinction between the accrual of income , on the one hand, and arising of income , on the other - while accrual is almost notional in nature, the other is factual - in its complex nature, the Act covers not only the income that, in fact, has arisen, but also the one that has accrued - The sole basis for levying income-tax on the amount was on the assumption that in case the shares are sold, they would have yielded the differential price and that, in turn, can be treated as income - the Tribunal has explained the subtle distinction between the two, in a perfect manner and arrived at the correct conclusion no substantial question of law arises for consideration Decided against revenue.

Summary

Issues:
- Interpretation of section 28(iv) of the Income-tax Act, 1961 regarding the taxation of benefits.
- Determining whether a benefit accrued to the respondents from the difference in share prices.
- Distinguishing between the accrual and arising of income for tax purposes.

Interpretation of Section 28(iv):
The case involved appeals under section 260A of the Income-tax Act, arising from a common order passed by the Income-tax Appellate Tribunal. The respondents, investment companies, were allotted shares of a company at a concessional rate. The Income-tax Officer levied tax on the differential amount between the market value and the allotted price, considering it a "benefit" under section 2(24)(vd) read with section 28(iv) of the Act. The Tribunal accepted the respondents' contention, leading to the present appeal.

Taxation of Benefits - Accrual to Respondents:
The main contention revolved around whether a benefit accrued to the respondents due to the difference in share prices. The Income-tax Officer argued that the Tribunal erred in reversing the findings, emphasizing that any benefit derived by an assessee, regardless of convertibility into money, should be taxable. Conversely, the respondents argued that the benefit could only be considered to have accrued if the shares were capable of yielding income instantly. They highlighted a clear prohibition on share transfer for three years, negating any immediate benefit.

Accrual vs. Arising of Income:
A crucial distinction was made between the accrual and arising of income for tax purposes. The Tribunal correctly pointed out that while accrual is notional, arising is factual. The Income-tax Officer failed to demonstrate that the benefit had actually arisen to the respondents. Taxation of benefits should only occur when they have arisen, not merely accrued. The Tribunal's analysis of this distinction was deemed correct, leading to the dismissal of the appeals for lack of substantial questions of law.

In conclusion, the High Court dismissed the appeals, emphasizing the importance of distinguishing between the accrual and arising of income for taxation purposes. The Tribunal's interpretation of section 28(iv) regarding the taxation of benefits and the consideration of whether a benefit accrued to the respondents were pivotal in reaching the final decision.