9911796707
TMI Blog2008 (2) TMI 816X X X X Extracts X X X X X X X X Extracts X X X X ..... er it can be treated as a benefit under section 28(iv) of the Act. Facts in brief : The assessee-company M/s. Rupee Finance and Management P. Ltd. is a part of the Essel group consisting of various companies mainly Essel Propack Ltd., Zee Telefilms Ltd. and Pan India Paryatan Ltd. and various other finance and investment companies. The promoter group consists of four brothers. During the year it was submitted that the four brothers have arrived at a memorandum of understanding and family settlement with an object to rationalise and reorganise the shares of all group companies in the ratio of 40 : 20 : 20 : 20, among the family members of Shri Subhash Chandra, Mr. Laxminarain Goel, Shri Jawaharlal Goel and Ashok Kumar Goel. It is submitted that the shareholdings in Essel Propack Ltd. and Zee Telefilms Ltd., is scattered among number of entities, individuals, etc. and with an object to consolidate the same in one company and to hold the shares in the abovesaid ratio, it was agreed to by way of a memorandum of understanding, that certain shares of Essel Propack Ltd. belonging to various family members be transferred to the assessee-company at cost. The memorandum of understanding is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity considered various submissions made by the assessee and observed that the assessee is engaged in the business of investment in shares and securities and that it is an investment company. He held that it is very clear that there is a huge gap between the purchase price paid by the assessee-company for the shares of Essel Propack Ltd. and the market price and this fact is not controverted by the assessee. He observed that the assessee purchased the shares at below the market price and then pledged the same with IL FS and a loan has been taken by valuing the shares at market price and then amounts have been advanced to group concerns in which directors are interested without charging interest and thus the assessee has derived a benefit out of this transaction. Thus the first appellate authority has come to a conclusion that the benefit derived by the assessee is clearly chargeable to income-tax under the head " Profits and gains of business or profession" for the value of such benefits under section 28(iv). As per the first appellate authority the benefit derived by the assessee is taxable under section 28(iv) of the Act. He relied on the decision in the case of CIT v. Alchemic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the plea of the assessee that sections 69 and 69A and 60 to 63 are not applicable to the facts of the case. A reading of the appellate order suggests that the first appellate authority had difficulty in rejecting the contentions of the assessee on the applicability of these sections but he did not want to specifically say so and in this regard but has upheld the addition by invoking section 28(iv) of the Act. Aggrieved, the assessee is in appeal. Learned counsel for the assessee, Shri K. Shivram based his arguments on four propositions. Firstly the family arrangement is recognised by law and is genuine and not a transfer ; secondly the purchase of the shares at cost was a genuine decision and thus the ratio of the judgment in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 is not applicable to the facts of his case ; thirdly section 69 is not at all applicable to the facts of the assessee` s case and that the provisions of section 28(iv) is not applicable to the facts of the assessee` s case. Shri Shivram, elaborating the propositions submitted that, an oral understanding was arrived at between the four brothers during the financial year 2002-03 and this was brought int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t necessary that there should be an existing dispute for arriving at a family arrangement nor it is necessary to have contemplation of a dispute. He submitted that a family arrangement can be made to avoid potential future disputes not only between the family members, but also near relatives or the persons who have some sort of interest or antecedent title. A family arrangement as per Shri Shivram can be made to have harmony in the family members and for this submission he relied on the judgment of the hon` ble Madras High Court in the case of CGT v. D. Nagrirathinam [2004] 266 ITR 342. He further submitted that the family arrangements may be even oral and no registration is required if it was an oral arrangement brought into writing at a later date. Thus, though the family arrangement is not registered he submits that it has evidentiary value and is binding on the persons who were parties to it and also operates as an estoppel to preclude any of the parties, who have taken advantage from this arrangement, from revoking or challenging the same. He relied on the decision of the hon` ble Supreme Court in the case of Kale v. Deputy Director of Consolidation [1976] 3 SCC 119 (pages 131 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the hon` ble Gauhati High Court in the case of CIT v. George Williamson (Assam) Ltd. [2004] 265 ITR 626. He vehemently contended that if the transaction is otherwise valid in law and results in reduction of tax to an assessee, the same cannot be brushed aside on the ground that the underlying motive of entering into the transaction by the assessee was to reduce its tax liability. He relied on some more case laws in support of his proposition that the Assessing Officer as well as the first appellate authority was wrong in applying the propositions laid down in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 to the facts of the case. On the application of section 69, learned counsel submits that the Commissioner of Income-tax (Appeals) has agreed that section 69 cannot be invoked on the facts and circumstances of the case and that the Revenue has not come in appeal disputing such findings of the Commissioner of Income-tax (Appeals). On section 69 he submits that the section is applicable only when such investments are not recorded in the books of account, the assessee offers no explanation about the nature and source of investment or in case where such explanation is not sat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise. He submitted that the Commissioner of Income-tax (Appeals) has wrongly relied upon the judgment of the hon` ble Allahabad High Court in the case of Chandra Katha Industries v. CIT [1982] 138 ITR 168 as in that case the assessee had received excise duty refund which was credited to profit and loss account and the court had held that only non-mandatory benefits or perquisites is covered under section 28(iv) and the Revenue was denied the benefit of raising an additional ground as regards the applicability of section 41(4). Shri Shivram vehemently contended that in the present case the assessee has not received any benefit at all in terms of section 28(iv) and further the quantification of the benefit based on price difference is erroneous and that the benefit, if any, would accrue only on the date of sale. He once again relied on the family arrangement and submitted that the purchase of shares were made with specific purpose and there was neither any contemplation of immediate sale of the shares or plans to procure shares from the market at the market price. He referred to the fluctuation of the market value of the shares. He further relied on the decision of the hon'ble Hyd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase of shares and the market value and that the liability if at all could be fastened only on the seller and thus, he submitted that the addition made by the Assessing Officer as confirmed by the Commissioner of Income-tax (Appeals) is contrary to the provisions of the Income-tax Act and hence is liable to be deleted. The learned Departmental representative, Shri S. D. Srivastava vehemently controverted the arguments of learned counsel for the assessee and submitted that the Commissioner of Income-tax (Appeals) has basically stressed on two points on page 7 at paragraph 3 of his order. The first is that the assessee is engaged in the business of investments in shares and securities and thus the purchase of shares at a value less than the market value is a benefit flowing out of the business of the assessee and thus attracting section 28(iv). The second point, as per the learned Departmental representative is that the entire arrangement is a colourable device for the detailed reasons mentioned both by the Assessing Officer as well as the Commissioner of Income-tax (Appeals). He pointed out that the very fact that the assessee-company after purchasing the shares at a price whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly settlement and in the absence of any existing dispute between the assessee and his minor son and other children with regard to the property, it was a transfer without consideration and hence a gift to the minor son. Under these circumstances, the court held that the interest accruing on gifted amount to minor son is to be added to the income of the assessee under section 64(1)(v). The learned Departmental representative further relied on the decision of the Ahmedabad Bench of the Tribunal in the case of Kusumben Kantilal Shah v. ITO [1996] 56 ITD 476. In this case a private limited company had two groups of shareholders managing its affairs as directors also. The first group consisted of three persons including the assessee, while the second group consisted of four members. By virtue of an agreement, the company agreed to allow the purchaser to develop its property and also for that purpose of sale to the purchaser of its available and unutilised floor space index of the entire property. In order to resolve the differences between two groups, the matter was referred to arbitration. In pursuance of the arbitration award the assessee received certain amounts as price of her shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding litigation or for saving its honour. (iii) Being an agreement, there is consideration for the same, the consideration being the expectation that such an agreement or settlement will result in establishing or ensuring amity and goodwill amongst the relations." Reliance was also placed on the judgment of the Calcutta Bench of the Tribunal in the case of Edward Keventer P. Ltd. v. Deputy CIT [2004] 89 ITD 347 for the proposition that the authorities have the required power to go behind transactions so as to find out the truth of the matter. In this decision the Tribunal has surveyed and summarised the legal position visa-vis the powers of the income-tax authorities in relation to sham transactions. Shri Srivastava vehemently contended that a plain reading of the memorandum of understanding does not suggest that there was a family arrangement or settlement. As per him it simply points out to corporotisation of the assessee` s activities and there was no partition by metes and bounds. Only the shares in a particular set of corporate concerns were realigned under the guise of family arrangement. He stressed on the point that there was neither a dispute nor there was a necessity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the facts and circumstances of the case and on a perusal of the papers on record and the orders of authorities below as well as the case laws cited by both the parties, we hold as under : The first issue is whether the memorandum of understanding in question can be considered as family arrangement or not. The second issue is whether the family arrangement is a make believe and sham transaction. The third issue is whether the difference between the market value of the shares and the purchase price can be brought to tax in the hands of the assessee-company under section 69. The fourth issue is as to whether the difference in question referred to above, can be brought to tax in the hands of the assessee-company under section 28(iv). We take up third and fourth issues first. Section 69 reads as follows : " 69. Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eable to tax under the head ` Profits and gains of business or profession` . A corresponding amendment has been made to section 2(24), including the value of such benefit or perquisite in the definition of the term ` income` vide new sub-clause (va) inserted in section 2(24) by section 4(c)(i) of the Finance Act, 1964. 83. The effect of the abovementioned amendment is that in respect of an assessment for the assessment year 1964-65 and subsequent years, the value of any benefit or amenity, in cash or kind, arising to an assessee from his business or the exercise of his profession, e.g. the value of rent-free residential accommodation secured by an assessee from a company in consideration of the professional services as a lawyer rendered by him to that company, will be assessable in the hands of the assessee as his income under the head ` Profits and gains of business or profession` ." (emphasis supplied) The condition for invoking section 28(iv) is that the chargeable income of the assessee should arise from the business or in the exercise of a profession. There must be a nexus between the business of the assessee and the benefit the assessee derived. The assessee in this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing or it must have characteristics of income before it becomes chargeable at a later stage if the original transaction is completed as designed. The Bench further observed that the words " benefit" or " perquisite" have been used in the said section and have to be read together and would draw colour from each other. Normally the term " perquisites" denotes meting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person or from the very beginning the person providing such facility or concession knows that whatever is being done is irretrievable to him, as it has been granted to a person as a privilege or right of that person. Thus it was concluded that the word " benefit" has to be interpreted in the same manner, that is, at the time of execution of the business transaction one party should give to the other party an irretrievable benefit or advantage, as an obligation or facility or a concession. In our opinion, only if the seller had incurred an expense or a liability or had provided a facility to the purchaser, then the value in cash of such expenses or benefit or perquisite shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and against the Revenue. Coming to the reference to sections 60 to 63, the same are not at all applicable as they fall under Chapter V which deals with income from other persons, included in the assessee` s total income. Thus, the amount in question, in our considered opinion, has been wrongly brought to tax by the Revenue authorities, in the hands of assessee. As we have given our findings on the applicability of section 69 as well as section 28(iv), we need not have to go into the issue as to 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. This much need to be said that the allegation of the Revenue that this is a sham transaction or a make believe transaction is not borne out by record. By now it is well settled that the taxing authorities are not entitled in determining whether a receipt is liable to be taxed, by ignoring the legal character of the transaction, which is the source of the receipt and to proceed on what they regard as " the substance of the matter" . The taxing authority is entitled and is duty bound to determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, section 28(iv) detailed findings on this aspect would not alter the result of this appeal. In the result, the appeal of the assessee is allowed. Coming to I. T. A. Nos. 3264/Mum./2006 and 2881/Mum./2007, these are appeals by the Revenue directed against separate but identical orders of the Commissioner of Income-tax (Appeals) dated December 7, 2006 and March 17, 2006 respectively. These two companies had sold their shares held by them in Essel Propack Ltd. to Rupee Finance and Management P. Ltd. at the cost for which they had purchased the shares which was much lesser than the market price. The Assessing Officer brought to tax the difference. On appeal the first appellate authority applied the decision of the hon` ble Supreme Court in the case of K. P. Varghese v. ITO [1981] 131 ITR 597 and the judgment in the case of CIT v. Shivakami Co. P. Ltd. [1986] 159 ITR 71 (SC) and other case laws and has come to a conclusion that the transfer of shares have been made by the company and not by family members and the company certainly is a distinct entity and cannot be a part of the family arrangement. He also held that the assets said to have been transferred in pursuance of a family ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of full value of consideration received or accruing as a result of a transfer of the capital asset. The hon` ble Supreme Court in the case of K. P. Varghese v. ITO [1981] 131 ITR 597 held that sub-section (2) of section 52 can be invoked only when the full value of the consideration received in respect of the transfer is shown at a lesser figure than that which is actually received by the assessee. It further laid down that the burden of proving such understatement of consideration is on the Revenue and that the sub-section has no application in the case of a bona fide transaction, where the true consideration received by the assessee has been declared or disclosed by him. Section 50C, has come into the statute only with effect from April 1, 2003 by the Finance Act, 2002 and is not applicable to the impugned assessment years. Hence, for the period prior to the insertion of section 50C no addition can be made by invoking the ratio of this section. The first appellate authority at page 21 of 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 the Calcutta High Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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