Addition for share application money cannot be made for mere non-service of summon to directors of investment company

ACIT Vs M/s. Swiftsol (I) Pvt. Ltd. (ITAT Nagpur)

Conclusion: Addition under section 68 of share application money received by assessee on the reason that summons issued under section 131 to the directors of the investment company for verification returned unserved was unjustified as assessee had substantiated share capital received by it by furnishing relevant details and no onus was cast on the assessee during relevant assessment year  to produce the persons or the books from investment companies.

 Held: Assessee-company had received share application money with share premium from several corporate entities.  AO made addition under section 68 of share application money received by assessee as unexplained credit on the ground that summons issued under section 131 to the directors of the investment company for verification returned unserved. It was held assessee had duly submitted all the necessary details in respect of the share application received which included name, address, company incorporation details, share application details, balance sheets, PAN, bank statements, acknowledgement of income-tax return filed and confirmation from the parties. AO had not found any fault in these submissions, except that he wanted to verify details by asking the assessee to produce the promoter/director of those companies. Assessee had duly discharged its onus and no onus was cast on the assessee to produce the persons or the books from investment companies. The requirements of enquiry and obtaining explanation from the person making the investment had brought into the statute books by amendment to section 68 which was prospective in nature from 01.04.2013. Admittedly, in the present assessment year 2010-11, addition under section 68 was not justified.

FULL TEXT OF THE ITAT JUDGEMENT

These are appeals by the Revenue against the respective orders of the ld. Commissioner of Income Tax (Appeals) for different assessee companies. Since the issues are common and connected and the appeals were heard together these are being consolidated and disposed of together by this order.

2. One common issue raised in ITA No. 32/Nag/2017 and ITA No. 34/Nag/2017 is that the ld. Commissioner of Income Tax (Appeals) erred in deleting the addition of share application money without appreciating that the assessee failed to establish the identity, creditworthiness and genuineness of the transaction.

3. Since the facts are identical, we are referring to facts and figures of ITA No. 32/Nag/2016.

4. In this case, the Assessing Officer noted that on perusal of the balance sheet, it is found that the assessee has received share application money of Rs.1,24,75,000/-. Hence, the Assessing Officer noted that in the assessment proceedings, the assessee was asked to explain about the share premium receipt considering the fact that the assessee company has not done any significant business. The assessee company gave details showing name of the companies who had given the share application money, their address, their PAN number, share application receipt number, number of shares allotted to them and amount appropriated towards share capital and amount appropriated towards share premium. Thereafter, the Assessing Officer referred to some enquires. He mentioned that the assessee has reiterated that the assessee has filed requisite details such as PAN number, income tax acknowledgement, balance sheet of the companies and the assessee claims that it has discharged the onus. The Assessing Officer noted that the summons u/s. 131 to the directors of the investment company for verification were issued but the letter returned unserved. The Assessing Officer observed that the assessee has obtained confirmation from these companies and it appeared that the assessee is deliberately not producing the directors of the company. Thereafter the Assessing Officer referred to the Hon’ble Delhi High Court decision in the case of CIT vs. Globus Securities & Finance Pvt. Ltd. [2014] 41 taxmann.com 465 (Delhi) and concluded that in view of the assessee’s failure to produce the director/principal officer of the investing company, the share application money was added back as unexplained cash credit. The Assessing Officer concluded as under:

In view of considering all the facts described above and in order to establish Identity, Creditworthiness and genuineness of transaction done with the investor companies as well as to verify the details submitted by the assessee, it is necessary to examine the director / principal officer of all seven investor companies. The observation of Hon’ble Delhi High Court in the case of Globus Securities & Finance (P.) Ltd. (Supra) is touchstone test of the analogy to prove the creditworthiness/ genuineness of transactions. The assessee has not discharged the same and the onus is still with the assessee to prove his bonafide. Hence assessee was asked to produce person competent to explain these important share transactions. Assessee was not able to discharge the onus casted on him under the law. In view of the above, the share application money for Rs. 1,24,75,0007-received by assessee is added back to the income of the^assessee treating the same as cash credit appearing in the books of the assessee

5. Upon assessee’s appeal in this regard, the ld. Commissioner of Income Tax (Appeals) noted that the assessee company had submitted that the assessee company did not have any control over the directors of the investment company. He noted that the assessee had submitted the necessary documents in respect of each corporate entity as under:

a) Request for issue of shares.

b) Bank statement

c) PAN card

d) Certificate of incorporation

e) General Board Resoulution for purchase of shares and securities.

f) Acknowledgement of Return of Income Tax Act, 1961

g) Balance sheet & Profit and loss account.

6. The ld. Commissioner of Income Tax (Appeals) also obtained remand report from the Assessing Officer. The ld. Commissioner of Income Tax (Appeals) thereafter noted that in a similar case, the same issue was considered and the decision was allowed in favour of the assessee. He concluded as under:

4.5. I find that in case of Sterlight Fincom Pvt. Ltd the appellant has provided the AO with adequate details establishing identity, creditworthiness and genuineness of transaction of documents pertaining to transfer of share, bank statements, PAN Card details, acknowledgment of return of income etc. has been provided by the appellant to the AO before finalizing of assessment order. The AO neither during the course of original assessment proceedings nor during the course of appellate proceedings has rebutted the assertion made by the appellant in any manner. I also find that the reliance placed by the AO on the decision of Hon’ble Delhi High Court in the case of CIT Vs. Globus Securities and Finance Ltd. is totally misplaced. In the above mentioned case it was two persons who were controlling three companies and who had given their share application money and had admitted to this fact before the Director of Income Tax Act, 1961 tax (Investigation). Thus in case of M/s.Globus Services and Finance Ltd., the concern was engaged in providing accommodation entries through various company controlled by them. However in the case of the appellant, the AO has not been able to provide any evidence as the investigating companies were engaged in providing accommodation entries to various other concern and that the money that has been invested in the appellant company belongs to the appellant himself. The appellant in his submission has also given justification for charging share premium of Rs.90/- per share based on the fact that share application money was to be invested in the shares of other companies. The appellant has also relied on various judicial pronouncements. Accordingly, considering the facts of the case, the judicial pronouncements relied upon by the appellant in the submissions made and the ratio of judgment based on similar facts in case of Gondwana Engineering Pvt.Ltd decided by CIT(A)-2, Nagpur, I am of the opinion that the addition made by the AO is not proper. Considering the totality of facts, I am of considered opinion that the appellant has furnished clear evidence to establish the identity and creditworthiness of creditors and genuineness of transactions. Based on the facts of the case, the addition made by the AO to the tune of Rs.1,24,75,000/- is hereby deleted.

7. Against the above order, the assessee is in appeal before us.

8. We have heard both the ld. Counsel of the assessee and perused the records. Upon careful consideration we note that assessee company in this case has received share application money with share premium from several corporate entities. The assessee has submitted the documentary evidences in connection with the share application money received. These included various details like name, address, company incorporation details, share application details, balance sheets, PAN, bank statements, acknowledgement of income tax return filed and confirmation from the parties. The assessing officer wanted to verify the details submitted by examining the Director/Principal Officer of the investing companies. The Assessing Officer has drawn adverse inference because he noted that assessee has neither produced the concerned parties nor their directors, though he accepted that confirmation from them were duly produced. The ld. Commissioner of Income Tax (Appeals) has given a finding that the assessee has given all the necessary details required to discharge its onus. He has observed that the Assessing Officer neither during the course of original assessment proceedings nor during the course of appellate proceedings has rebutted the submissions of the assessee in any manner. He observed that the Assessing Officer has not been able to provide any evidence that the investing companies were engaged in providing accommodation entries or that the money that has been invested in the assessee company belongs to the assessee itself. Thereafter, referring to the several case laws, the ld. Commissioner of Income Tax (Appeals) deleted the addition.

9. Upon careful consideration, we find that we may gainfully refer to the provisions of section 68 of the Act in this regard under which the addition has been made. The same reads as under:

Cash credits.

68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year :

Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.

In this regard it is to be noted that the first proviso was introduced by the Finance Act, 2012, with effect from the assessment year 2013-14.

10. The Hon’ble jurisdictional High Court had occasion to consider the addition of similar share applications u/s. 68 in several case laws.

11. We may gainfully refer to the Hon’ble jurisdictional High Court expositions in this case as under:

1) CIT vs. Gagandeep Infrastructure (P.) Ltd. [2017] 394 ITR 680 had held as under:

(e)  We find that the proviso to section 68 of the Act has been introduced by the Finance Act 2012 with effect from 1st April, 2013. Thus it would be effective only from the Assessment Year 2013-14 onwards and not for the subject Assessment Year. In fact, before the Tribunal, it was not even the case of the Revenue that Section 68 of the Act as in force during the subject years has to be read/understood as though the proviso added subsequently effective only from 1st April, 2013 was its normal meaning. The Parliament did not introduce to proviso to Section 68 of the Act with retrospective effect nor does the proviso so introduced states that it was introduced “for removal of doubts” or that it is “declaratory”. Therefore it is not open to give it retrospective effect, by proceeding on the basis that the addition of the proviso to Section 68 of the Act is immaterial and does not change the interpretation ofSection 68 of the Act both before and after the adding of the proviso. In any view of the matter the three essential tests while confirming the pre-proviso Section 68 of the Act laid down by the Courts namely the genuineness of the transaction, identity and the capacity of the investor have all been examined by the impugned order of the Tribunal and on facts it was found satisfied. Further it was a submission on behalf of the Revenue that such large amount of share premium gives rise to suspicion on the genuineness (identity) of the shareholders i.e. they are bogus. The Apex Court in Lovely Exports (P.) Ltd.(supra) in the context to the pre-amended Section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income Tax Officer to proceed by reopening the assessment of such shareholders and assessing them to tax in accordance with law. It does not entitle the Revenue to add the same to the assessee’s income as unexplained cash credit.

f) In the above circumstances and particularly in view of the concurrent finding of fact arrived at by the CIT(A) and the Tribunal, the proposed question of law does not give rise to any substantial question of law. Thus not entertained.

2) CIT vs. Orchid Industries (P.) Ltd. [2017] 397 ITR 136 (Bom) had held as under: “5] ‘ The Assessing Officer added Rs.95 lakhs as income under Section 68 of the Income Tax Act only on the ground that the parties to whom the share certificates were issued and who had paid the share money had not appeared before the Assessing Officer and the summons could not be served on the addresses given as they were not traced and in respect of some of the parties who had appeared, it was observed that just before issuance of cheques, the amount was deposited in their account.

6] The Tribunal has considered that the Assessee has produced on record the documents to establish the genuineness of the party such as PAN of all the creditors along with the confirmation, their bank statements showing payment of share application money. It was also observed by the Tribunal that the Assessee has also produced the entire record regarding issuance of shares i.e. allotment of shares to these parties, their share application forms, allotment letters and share certificates, so also the books of account. The balance sheet and profit and loss account of these persons discloses that these persons had sufficient funds in their accounts for investing in the shares of the Assessee. In view of these voluminous documentary evidence, only because those persons had not appeared before the Assessing Officer would not negate the case of the Assessee. The judgment in case of Gagandeep Infrastructure (P.) Ltd. (supra) would be applicable in the facts and circumstances of the present case”

12. In IT Appeal No. 26/2017 and others in the case of Pr. CIT, Nagpur vs. M/s. Apeak Info Tech, Nagpur and others the Hon’ble Bombay High Court Nagpur Bench vide order dated 08.06.2017 has inter alia observed as under:

8(c) In any case, we may point out that the amendment to Section 68 of the Act by the addition of proviso thereto took place with effect from 1^st April, 2013. Therefore, it is not applicable for the subject Assessment year 2012-13. So for as the pre-amended Section 68 of the Act is concerned, the same cannot be invoked in this case, as evidence was led by the Respondents- Asessee before the Assessing Officer with regard to identity, capacity of the investor as well as the genuineness of the investment. Therefore, admittedly, the Assessing Officer did not invoke Section 68 of the Act to bring the share premium to tax. Similarly, the CIT(A) an consideration of facts, found that Section 68 of the Act cannot be invoked. In view of the above, it is likely that the Revenue may have taken an informed decision not urge the issue of Section 68 of the Act before the Tribunal.

9(b) It is further pertinent to note that the definition of income as provided under Section 2(24) of the Act at the relevant time did not define as income any consideration received for issue of share in excess of its fair market value. This came into the statute only with effect from 1^st April, 2013 and thus, would have, no application to the share premium received by the Respondent – Assessee in the previous year relevant to the assessment year 2012 – 2013. Similarly, the amendment to Section 68 of the Act by addition of proviso was made subsequent to previous year relevant to the subject Assessment year 2012-13 and cannot be invoked. It may be pointed out that this Court in Commissioner of Income Tax vs. M/s. Gangadeep Infrastructure (P) ltd (Income Tax Appeal No.1613 of 2014 decided in 20 March 2017) has while refusing to entertain a question with regard to Section 68 of the Act has held that the proviso to Section 68 of the Act introduced with effect from 1 April 2013 will not have retrospective effect and would be effective only from Assessment year 2013-14.

13. From the above expositions, it is clear that the assessee’s case clearly falls under the realm of the above case laws. The proviso to section 68 has clearly and unambiguously been held to be prospective and not retrospective. Admittedly the same is not applicable in the assessment year which is being considered here, i.e., assessment year 2010 – 11. Hence, adverse inference taken by the assessing officer that assessee could not produce the share applicants and their directors, is not sustainable.

14. We find that the assessee in this case has duly submitted all the necessary details in respect of the share application received which included name, address, company incorporation details, share application details, balance sheets, PAN, bank statements, acknowledgement of income tax return filed and confirmation from the parties. The Assessing Officer has not found any fault in these submissions except that he wanted to verify the details by asking the assessee to produce the promoter/director of these companies. As clearly emanating from the aforesaid case laws, the assessee has duly discharged its onus and no onus was cast on the assessee in the impugned assessment year to produce the persons or the books from the investment companies. The requirements of enquiry and obtaining explanation from the person making the investment in these circumstances have been brought into the statute books by amendment to section 68 of the Act. These have been clearly held in the above case laws to be prospective as they were effective only from 01.04.2013. Admittedly, the present assessment year being assessment year 2010-11, the Assessing Officer was not justified to take up the issue of obtaining explanation from the Directors/promoters of the investing companies.

15. Thus, we find that deletion of addition by the ld. Commissioner of Income Tax (Appeals) in this case is in confirmity with the expositions of the Hon’ble Jurisdiction High Courts as above. Accordingly, we do not find any infirmity in the order of the ld. Commissioner of Income Tax (Appeals) and hence we uphold the same.

16. One common issue raised in all the appeals reads as under:

Grounds of appeal

1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition without appreciating that the assessee has purchased the shares from PPSL at discounted rate being a group concern company.

2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in not appreciating the facts that the share¹‘ transaction is artificially designed to pass on the benefit of share transaction from entity to entity.

Since the facts are identical, we are referring to facts and figures of ITA No. 407/Nag/2016.

17. In this case, the assessee’s are corporate entities. During the course of assessment proceedings on perusal of balance sheet of the assessee the assessing officer found that the assessee had made investment in the shares of Purti Power Sugar Limited (hereinafter called as ‘PPSL’) at a discounted rate during the year under consideration. The assessing officer further noted that PPSL had issued shares to few other entities and individuals at higher rate during the same period. The assessing officer was of the opinion that assessee had enjoyed benefit within the meaning of provision of section 28 (iv) of the Income Tax Act which should be added as income of the assessee. In response, the assessee submitted that assessee had made investment in the equity shares of PPSL by acquiring the shares at the rate of Rs.4 per share. The face value of the share was Rs. 10 each. That these shares were purchased from few third-party companies in the market, which were not related with the assessee. That these are also not related with PPSL. That the investment was duly accounted for in the books of the assessee and displayed in the audited balance sheet of the assessee under investment. It was submitted that the said amount does not come under the ambit of section 28(iv). It was further submitted that the perusal of audited balance sheet of PPSL would show that it was continuously incurring losses and had heavy accumulated losses in the balance sheets of all the earlier years and it continued to do so in the later years also. It was stated that in view of the negative sentiments in the market and considering heavy accumulated losses, it can be said that the price of Rs.4 per share was the most appropriate share price. It was further submitted that the deciding factor should be the book value of shares and not anything else. It was submitted that the value of PPSL shares has declined further in the coming years due to heavy losses and so the question of taxing something as a benefit that never ever existed at all is not justified. It was further submitted that assessee had acquired the shares from third-party company which did not belong to group. There was no business relation with the party from whom the shares were acquired. That the assessee was not in the business of purchase and sale of shares and securities. That the shares of PPSL were purchased with the clear intention of holding it as investment and not for the purpose of trading in those shares. Since the shares were not purchased from PPSL or group companies, it cannot be said that any so-called benefit has arisen out of business taxable u/s. 28(iv) of the IT Act. It was further submitted that even if it is presumed that assessee has benefited by the so-called concession in share price, section 28(iv) does not permit to tax such benefit that accrues to the assessee. It was submitted that the benefit must arise from the business or exercise of profession. It was further submitted that the assessee continues to hold these shares as investment only. However the assessing officer was not convinced. He held that the assessee’s contention that the receipt on account of share transactions should be treated as capital in nature, is not acceptable. He held that the said transactions do not qualify for the claim of capital gain/loss as per the provision in view of the fact that these transactions are off market transaction and not share market transaction. He further observed that the assessee’s contention of having no business relations with the parties is not acceptable. He referred to the enquiry made and observed that many group companies have given corporate guarantees to PPSL for term loan. He held that there was business relation between the assessee and PPSL. Hence, the assessing officer concluded that the assessee had enjoyed the benefit within the meaning of section 28(iv) of the IT Act and, hence, the amount involved was added to the total income of the assessee under the provisions of section 28(iv) of the IT act.

18. Against the above order, the assessee appealed before the ld. Commissioner of Income Tax (Appeals) challenging both the validity of reopening as well as merits of addition.

19. The ld. Commissioner of Income Tax (Appeals) did not adjudicate the ground raised against the validity of reopening. However, he adjudicated the merits of the case. While considering the merits of the case, the ld. Commissioner of Income Tax (Appeals) noted that the only contention of the assessing officer is that shares have been purchased at a price which is below the market price. In this regard, the ld. Commissioner of Income Tax (Appeals) referred to several ITAT decisions and opined that these amounts cannot be added under section 28(iv) of the Act.

20. We may gainfully refer to the order of the ld. Commissioner of Income Tax (Appeals) in this regard which reads as under:

5.4. I have also gone through the assessment order passed by the A.O., rounds of appeal, the submissions made by the appellant, remand report submitted by the A.O. and the reply to the remand report submitted by the A.O. vide letter dated 7.3.2016. The fact remains that the appellant has made investment in shares of M/s.Purti Power Sugar Ltd, The AO has not made any addition on account of any unexplained money that might have been invested by the appellant in purchasing the shares of M/s.PPSL. The only contentions of the A.O is that the shares have been purchased at a price which is below the market price. In this regard I have perused the submission of the appellant and various other judicial pronouncements on this subject. I am inclined to agree with the appellant that the addition made by the AO is not in accordance with the established accounting principles and the laws laid down by various judicial authorities. Ld. ITAT, Mumbai in the case of Softnet Traders & Consultants Vs. Department of Incometax decided vide ITA NO.3070 & 3071/Del/2008 (E-Bench) has considered the similar question with similar ground of appeal.

“On the facts and in the circumstances of the case the Ld.CIT(A) erred in law and on facts in deleting the addition of Rs.17,39,43,000/-made by the Assessing Officer to the total income of the assessee within the meaning of section 28(l)(iv) of the I.T.Act”

The bench has decided the issue in the following manner:

“This brings us to whether the difference in question can be considered as income under s. 28(iv)? The section read as follows:

“28. The following income shall be chargeable to income-tax under the head ‘Profits and gains of business or profession’,-

(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.”

Circular explaining the provisions of new s. 28(iv) at cl. 82 states as follows: “Assessment of the value of any benefit or perquisite arising from business or exercise of a profession, as income from business or profession.

83. A new cl (iv) has been inserted in s. 28, w.e.f. 1st April, 1964, by s. 7 of the Finance Act, 1964, under which the value of any benefit or perquisite (whether convertible in money or not) arising from business or the exercise of a profession will be chargeable to tax under the head ‘Profits and gains of business or profession’. A corresponding amendment has been made to s. 2 (24), including the value of such benefit or perquisite in the definition of the term ‘income’ vide new sub-cl (va) inserted in s. 2(24) bys. 4(c)(i) of the Finance Act, 1964.

83. The effect of the above-mentioned amendment is that in respect of an assessment for the asstyr. 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’.”

The condition of invoking s. 28(iv) is that the chargeable income of the assessee should arise from the business or in the exercise of profession. There must be a nexus between the business of the assessee and the benefit the assessee derived. The assessee in this case purchased certain shares at a certain price and was required to hold these shares for a period of three years. It is not in dispute that this was an investment made by the assessee company hence irrespective of the fact as to whether these investments were made in pursuance of the MoU or not, we are of the consideration opinion that such investments cannot be said to be a benefit arisen out of the business of the assessee. Moreover the assessee is the purchaser of the shares and there is no event that has taken place during the current accounting year which can be said to have resulted in any income being accrued or arisen to the assessee company during the year. If at all the assessee transfers the shares, then the benefit of profit in question can be brought to tax in those particular years. In all the case laws relied upon by the Revenue have been discussed by us while narrating their arguments and in these cases the tax has been levied on the transferor and not the transferee. The effect of this section has been explained by the CBDT in the above cited circular and from this it is clear that, when an assessee purchases goods or assets at a price lower than the market price, under whatever circumstances, the same cannot be brought to tax under s. 28(iv). The section covers fringe benefits that are availed in addition to consideration earned in carrying out a profession or while doing business. A benefit that is passed on by one party to another, in addition to cost or sale price, is covered in this proviso. This is clear from the example quoted. In our humble opinion, this section cannot be invoked under the present facts and circumstances.

8.4 Be it as it may the co-ordinate Bench of the Tribunal (F-Bench, Mumbai) in the case of Helios Food Improvers (P) Ltd. (supra) held that s. 28 is a charging section and takes into account the receipts of specified categories of all incomes as well as the receipts which could be generally construed as income in the ordinary sense. But the fact remains that all the receipts mentioned in s. 28 are inherently of income nature except in case of receipt under a given amount of insurance policy. It also states that s. 28(iv) refers to any benefit or perquisite and this means that such benefit or perquisite should be in the nature of income from the very beginning 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 meeting 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 be treated as income. In this case, the seller has not incurred any expenses or liability or has provided a facility. It sold its shares at a reduced price.

8.5 Applying these propositions to the case on hand, 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 under s. 28(iv) as it is neither benefit nor perquisite that has arisen to the assesses from the business or in the exercise of a profession. The Hon ‘ble Gujarat High Court in the case ofCIT vs. Bhavnagar Bone & Fertiliser Co. Ltd. (1987) 59 CTR (Guj) 116: (1987) 166ITR 316 (Guj) 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). At p. 320 it has observed as follows:

“After referring to various decisions, the Tribunal observed, these decisions make it abundantly clear that the benefit received or receivable by a person must be one which has intimate connection with business and even if such benefit is derived by way of bounty, nevertheless it would be taxable, if accrues to it or if received by it in the course of business or employment of office.”

In this case the Revenue has not demonstrated what is the business connection or the business done between the seller and the purchaser of the shares. No case has been made out that privilege or benefit or concession has been passed on by the seller to the buyer as part and parcel of a business transaction. A benefit has been assessed by the CIT(A). Mere purchase of shares by way of investment cannot be considered as business of the company though the objects of the company enable it to invest as well as deal in shares. As already stated there is no event which can be said to have resulted in accrual of income to the assessee. Thus on this 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 under 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. “

8. In view of the above discussion and the order of the coordinate Bench of the we do not find any merit in the appeal of the revenue and accordingly uphold the order of the CIT(A).”

5.5. Again I find that ITAT, Mumbai 1 the case of DP World (P) Ltd. Vs. DCIT 140 ITD 694 has stated that in a case where assessee received three residential flats from its sister concern, a UK based company, which the assessee explained as transaction of gift of shares and agreement of capital receipt not chargeable to tax. Considering the facts of the case the Hon’ble Tribunal held that provision of Sec28(iv) could not be applied to the assessee’s case.

5.6. I also find that similar issue has been decided in favour of the appellant by Hyderabad Tribunal in case of M/s.K.N.B.Investments (P) Ltd. The matter has also been decided in favour of the appellant in appeal before High Court of Andhra Pradesh decided vide 367 1TR 616 by making following comment:

7. Sec. 28 of the Act brings the profits and gains of business or profession under the purview of income-tax. The profits and gains of different kinds numbering about a dozen are enlisted under different clauses. The Incometax officer invoked section 28(iv) of the Act against the respondents. It reads:

“The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.”

8. The expression “value of any benefit” is made part of the definition of income under section 2(24) (vd) of the Act. It reads:

“The value of any benefit or perquisite taxable under clause (iv) of section 28”

9. In a way, it is a circular phenomenon, in that the definition refers to the charging section and the charging section relies upon the definition, under the Act. The only way to extricate this appears to be, referring to the further ingredients added under section 28(iv) of the Act After adopting the expression ” value of any benefit or perquisites”, the provision proceeds to qualify the same by adding the words, “whether convertible into money or not, arising from business or the exercise of a profession.”

10. The benefit, which is sought to be taxed, in the instant case, is the difference between the market price, on the one hand, and the allotted price of a share, on the other. It has already been mentioned that, according to the Incometax Officer, the market price was Rs.455 per share, whereas it was allotted to the respondents at Rs.90 per share, on preferential allotment 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. It is axiomatic that 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. Though we said this with some amount of precession, the Tribunal elaborated the same in detail and took 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. We are in agreement with the conclusion arrived at by the Tribunal.

11. The second aspect is as to whether the benefit has, i the respondent. 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 It is too well known that in its complex nature, the Act covers not only the “income” that, in fact, has arisen, but also the one that has accrued.

12. When Parliament has consciously chosen to restrict the taxation of benefit only when it has arisen, it is not permissible to tax the benefits by treating them as “accruals”. A close scrutiny of the concept of “arising of income” discloses that, it, in fact, must flow into the assets of the assessee, during previous year, and thereby, it became taxable in the financial year. The Income Tax Act, 1961 tax Officer was not even able to show, much less demonstrate, that the income in the form of “benefit” has arisen to the respondents at all. The sole basis for levying income-tax on the amount was on the assumption that in case of shares are sold, they would have yielded the differential price and that, in turn, can be treated as “income”. Even if the exercise contemplated by the Income Tax Act, 1961 tax Officer is taken as permissible in law, at the most, it amounts to “accrual” and not “arising” of income. Here again, the Tribunal has explained the subtle distinction between the two, in a perfect manner and arrived at the correct conclusion.

13.We do not find any substantial question of law in the appeals and they are accordingly dismissed. There shall be no order as to costs.”

5.7. Relying on the submissions of the appellant and the judicial pronouncements stated above following facts emerge:

i. The appellant company has made investments in shares of M/s.Purti Power Sugar Ltd.

ii. The investment in these shares have been made allegedly at a price which is lower than the market price.

iii. The transactions of purchase of shares is a transaction of capital nature not having any bearing on profits/loss of the appellant company.

iv. This is not the case of the A.O. that any unaccounted money earned by the appellant has been invested in purchases of shares.

v. No benefit can be stated to have accrued to the appellant within the meaning of Sec.28(iv) of the Income tax Act, 1961.

vi. Any benefit that may arise to the appellant will come only at a point when the alleged shares are transferred. In that case appropriate gains/loss can be subject to tax as per provision of Income tax Act.

21. Against the above order, the Revenue is in appeal before us.

22. The learned counsel of the assessee sought to raise the ground under rule 27 of the ITAT rules by submitting that the ld. Commissioner of Income Tax (Appeals) by not adjudicating the challenge of the assessee to the validity of reopening has erred and it has caused prejudice to the assessee.

23. We have heard both the counsel and perused the records. We find that in this case, the assessee company has made the investment in shares of PPSL. The assessee has submitted before the authorities below that these shares have not been purchased from PPSL directly but have been purchased from third parties. This submission of the assessee has not been rebutted/disputed by the Assessing Officer. The purchase of the share has been done at a price of Rs.4/-, as against the face value of Rs.10/-. The differential amount has been treated by the Assessing Officer as benefit within the meaning of section 28(iv) of the I. T. Act. In this regard, the assessee’s submission is that the PPSL was continuously incurring losses and had heavy accumulated losses in the balance sheets of all the earlier years and it continued to do so in the later years also. Under these circumstances, it was submitted that the negative sentiments in the market and considering heavy accumulated losses, it can be said that the price of Rs.4 per share was the most appropriate share price. This submission of the assessee has not been rebutted by the Assessing Officer. The ld. Counsel of the assessee has also submitted before us a copy of the balance sheet of PPSL as on 31.03.2009. In the said balance sheet, the accumulated losses for the year ending 31.03.2008 and 31.03.2009 were Rs.73,63,29,388.14 and Rs.69,38,40,568.06 respectively. This factual position clearly indicate that the company PPSL had huge accumulated losses and the assessee’s submission that there was negative sentiments and the price of Rs.4/- per share is quite appropriate, is acceptable. The Assessing Officer has not disputed these submissions. He has only gone on the premise that there is a difference between the face value and the value at which has been purchased and hence in the opinion of the Assessing Officer the benefit u/s. 28(iv) accrues. In this regard, we are of the opinion that while question of benefit u/s. 28(iv) of the Act accrues or not, will arise only if there is in fact any benefit. The above facts, that the said company (PPSL) was continuously incurring losses and has huge accumulated losses clearly indicate that the price, at which it was purchased cannot be said to be understated. Hence, there is no question of any kind of gain arising in purchase of these shares at the stated price above.

24. Now we come to the question as to whether even if there is a benefit in this regard, whether the same can be taxed u/s. 28(iv) of the Act or not. Section 28(iv) provides that the following income shall be chargeable to Income Tax Act, 1961 under the head profits and gains:

1. the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.

25. Thus, the condition of invoking of section 28(iv) is that the chargeable income of the assessee should arise from the business or in the exercise of profession. There must be a nexus between the business of the assessee and the benefit the assessee derived. The assessee in this case purchased certain shares at a certain price from parties other than the company whose shares were acquired. We find that such investment cannot be said to be a benefit arising out of the business of the assessee. Moreover, the assessee is the purchaser of the share as investment and there is no incident that has taken place during the current accounting year which can be said to lead to any income accrued or arisen during the year. If at all the assessee transfers the shares then the probable benefit or profit, if any, in question can be brought to tax in those particular years as long term or short term capital as the case may be. In this regard, from a reading of section 28(iv) of the Act and the corresponding amendment in section 2(24) it is clear that even when the assessee purchases goods or assets at a price lower than the market price, under whatever circumstances the same cannot be brought to tax u/s. 28(iv).

26. Another aspect in this regard is that the assessee have not purchased these shares from PPSL, rather it has been purchased from third parties. No cogent material has been brought on record to prove that these third parties are either related to PPSL or the assessee. The assessee has clearly submitted that there is no business relationship as such between these parties. However, the Assessing Officer has disbelieved these submissions by generally referring to an enquiry which had revealed that some group companies have given corporate guarantees to PPSL for term loan. These unsubstantiated claims without specific finding about the name of the entity involved cannot be said to be giving rise to a business relationship among the parties. In this regard, we find that the case laws referred by the ld. Commissioner of Income Tax (Appeals) in his appellate order reproduced hereinabove are germane and support the case of the assessee.

27. In the background of the aforesaid discussion and precedent, it is evident that no income has accrued to the assessee u/s. 28(iv) of the I. T. Act. The assessee has simply purchased some shares of a loss making company at less than the face value from third parties. The assessee has not sold those shares and obtained any benefit of any kind whatsoever. Hence, the addition u/s. 28(iv) is not at all justified. Hence, we do not find any infirmity in the order of the ld. Commissioner of Income Tax (Appeals) and we uphold the same.

28. Since the issue on merits has already been decided in favour of the assessee, the adjudication in the ground relating to validity of reopening urged by the ld. Counsel of the assessee under rule 27 of the ITAT Rules is now only of academic significance. Hence, we are not referring into the same.

29. In the result, all the appeals of the Revenue stands dismissed.