Preface
`Gifts` received are specifically dealt with by the provisions embedded in section 56(2)(vii)/(x) inserted with effect from 01st October, 2009 & 01st April, 2017 falling under Part F of Chapter IV of the Income Tax Act, 1961. In the course of professional pursuits, any benefit or perquisite whether convertible in monetary terms or not but arising in the course of exercise of such profession is amenable to be taxed under the provisions of section 28(iv) of the Income Tax Act and not under section 56(2)(vii)/(x). The issue pertaining to taxability of source becomes peculiar when the impugned transaction itself is capable of being moved through two different computation routes i.e. taxability in the course of exercise of such business or profession or taxability under the head `Income from other sources. The discussion becomes enigmatic when the department contends that the benefit forms part of business income and thus liable to the taken into account for the purposes of computing income under that respective head whereas the assessee contends diametrically the opposite of it. A moot question arose before the Hon’ble Mumbai Bench of the Income Tax Appellate Tribunal in the case of a prominent film personality `Shahrukh Khan ‘as to the taxability of immovable property i.e. `Signature Villa’ received by him from Nakheel PJSC (Public Joint Stock Company), a Dubai based company. Hon’ble Tribunal in Assistant Commissioner of Income Tax vs. Shahrukh Khan (2017) 189 TTJ (Mumbai) 547 principally dealt with the provisions pertaining to section 28(iv) of the Income Tax Act, 1961 in context with the property received out of natural love and affection.
Principal Issues before the Hon’ble Bench
1.Whether immovable property received by a resident assessee from an artificial/fictional entity located outside India can be taxed in the case of such assessee under the provisions of section 28(iv) of the Income Tax Act, 1961.
2.Whether Companies/artificial entities which operate under fictional and artificial seal of law are competent to make gift even in absence of any natural love and affection on their part.
3.Whether taxability of source can be traced back keeping in view the personal traits/attributes of assessee which are not connected with exercise of any professional pursuits/occurrences.
4.Whether additions can be made merely on the basis of suspicion, conjectures or surmises without even considering the transaction in its proper perspective.
Facts/Issue Involved
The issue arising out of the provisions contained in section 28(iv) of the Income Tax Act, 1961 inserted by the Finance Act, 1964 with effect from 01st April, 1964 invariably reads as under:-
`28(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession’
1.Before Assessing Officer
1.1.The assessee namely Shahrukh Khan was a resident individual and a prominent film personality having worldwide fan following was assessed under section 143(3) of the Income Tax Act, 1961 for the assessment year 2008-09. The assessment was framed by the learned assessing officer under section 143(3) vide his order dated 27th December, 2010 at Rs.144.17 crores against the returned income of Rs.126.31 crores filed by the assessee on 30th September, 2008. The return was subsequently revised by the assessee to same figures as on 22nd April, 2009. The nature of discord fell principally in nature of taxability of `Signature Villa’ received as gift by the assessee from Nakheel PHSC (Public Joint Stock Company), a Dubai based company vide gift deed dated 16th September, 2007 which in the opinion of assessing officer was to be assessed as professional receipts under section 28(iv) of the Act. The assessee however contended that no professional service was ever rendered to Nakheel PJSC and attributed the receipt of `Signature Villa’ to a unilateral gratuitous act of gift by Nakheel PJSC on account of his personal relations as a friend with His Excellency Sultan Ahmed Bin Sulayem who was executive director/chairman of the Nakheel PJSC company. The said transfer of property falling in nature of unilateral gratuitous act could not said to have arisen out of the exercise of any business/professional pursuits as so understood in context of the provisions of section 28(iv) of the Income Tax Act, 1961. This apart, there was absolutely no contractual obligation on the part of any party to the unilateral act of transfer which never arose out of the exercise of any professional pursuit, therefore the provisions of section 28(iv) are not applicable in the governing circumstances of the case.
1.2.The learned assessing authority was of the view that since the assessee derived considerable part of his income from advertisements/stage shows and was acting as a brand ambassador of various companies because of his iconic image & globally recognized fame, the impugned transaction fell in the sphere of section 28(iv) of the Act. The assessing officer in his exercise of framing assessment gathered corroborative materials from the web-portal of the transferor company Nakheel PJSC and noticed that the said company was using the assessee’s brand image for endorsing its Palm Project since 2004 on its official website and electronic media. In furherance, assessee made several visits to the site office of the donor company in the years 2004 & 2005 and had also participated in the annual day celebration of the donor company in the year 2007. It was further opined by the assessing officer that transferor company was keen to use the assessee’s brand image as a medium of publicizing its Palm Project since 2004 and the assessee had never objected to such act on the part of the donor company and thus was nothing but mere a smokescreen to evade lawful payment of taxes in India. The assessing officer was in furtherance of his examination of the impugned transaction opined that ownership of the `Signature Villa’ vested with the artificial entity Nakheel PJSC which was a separate and distinct legal entity separate from its directors and therefore such artificial entities are incapable of possessing the sentiments which an individual can possess. Therefore the entire exercise was hatched to avoid discharge lawful payment of taxes attributed to such property in Dubai.
1.3.The assessee officer encapsulated the entire issue in Para No.6 of the assessment order wherein which he categorized the impugned transaction as a benefit flowing in the course of assessee’s professional pursuits thus amenable to the rigours of section 28(iv). Since, the donor in the instant case was a juristic entity which by itself is incapable of possessing any natural senses such as love and affection, the transaction cannot fall within the doors of being categorized as gift immune from tax under the law. Moreover frequent visit of assessee to the site office of the company and his participation in the annual day celebration also established that the transaction has resulted out of the exercise of assessee’s profession. The officer further held that there is no doubt that the alleged gift has been made for the purpose in pursuance to the profession of assessee, thus the very attribute of profession cannot be negated while putting to tax the property received. The assessing officer in furtherance of his intent, took into account the monetary value of property `Signature Villa’ projected by the assessee in his wealth tax return filed for the subsequent assessment year 2009-10 pegged at Rs.17,84,95,000/-. The said value was nothing but an estimated value which in turn was not backed by any valuation report. However, the assessing officer further observed that keeping in view the estimated value of property which is scaled down on account of worldwide economic recession and economic meltdown of UAE markets, conservative value of Rs.17,84,95,000/- as deposed by the assessee in his wealth tax return for the year 2009-10 adopted the monetary value of professional receipt for the year under consideration for taxation purposes under section 28(iv).
1.4.The assessee vide another submission dated 22nd December, 2010 confronted the stand of the learned assessing officer and in support filed another letter from Nakheel PJSC dated 17th October, 2010 wherein the donor confirmed that it did not avail any professional services from the assessee and the assessee’s performance at the annual day function was only a gesture of personal friendship of the assessee with H.E.Sultan Alhmed Bin Sulayam (sultan). Unmoved by the assessee’s submission, the assessing officer proceeded to make adjustments to the returned income declared by the assessment thereby leading to an assessed income of Rs.144.17 crores.
2.Before Commissioner (Appeals)
2.1.In furtherance of his contest, the assessee travelled to the first level of appeal with the Commissioner (Appeals) controverting the findings of the learned assessing officer. The assessee submitted that as per the contents of material gathered by the assessing officer from the website of Nakheel PJSC to contend that assessee’s presence was amongst one of the many news items which were surfaced online and which was also not prominently visible to the users at large and hence could not lead to a conclusion that the assessee undertook any kind of professional advertisement for the donor company. Furthermore the very finding as to the presence of the assessee at the annual day meet, it was contended that the same was at the request of the Sultan and that too out of personal friendship sans any advertisement and/or endorsement undertaken for the company in question. Attention was also drawn to the letter issued by Nakheel PJSC dated 17th October, 2010 to lend support that no performance was ever undertaken by the assessee at the annual day celebration in 2007 and it was just with an intent to finalize the location etc. the assessee visited the sales office/centre of the donor and that too in the year 2004 & 2005. Thus, the transaction could not be construed as falling in nature of gift and could not be added to the income of the assessee.
2.2.However, the contentions raised by the assessee before the Commissioner (Appeals) fail to find favour on the impugned issue. The Commissioner (Appeals) upheld the action of the assessing officer in making adjustment to the returned income declared by the assessee and also simultaneously approved reliance placed by the assessing officer on the pronouncement of the Hon’ble Delhi High Court in Rajeev Tandon vs. Assistant Commissioner of Income Tax (2008) 215 CTR (Del) 272 : (2007) 297 ITR 219 (Del). In the said case, it was observed that since the donors were not related to the assessee and had no occasion to make such a gift, high court concluded that it was appellant’s own unexplained money that was routed through the donors simply to increase the capital of the company. Accordingly, the ratio of Rajeev Tandon’s case was squarely applicable to the facts of the case under reference. The Commissioner (Appeals) was in agreement with the findings rendered in the assessment order by the learned assessing officer and held that the officer has correctly treated gift as not genuine and brought its value to tax under the Income Tax Act. The Commissioner (Appeals) while upholding the adjustment made to the returned income by the assessing officer however agreed with the valuation of the property arrived at by the valuer Hamptons International vide its valuation report dated 11th August, 2011 and directed the learned AO to adopt the value of the `Signature Villa’ as Rs.14,69,92,845/-. Aggrieved, the assessee further challenged the action of the worthy Commissioner (Appeals) before the Hon’ble Income Tax Appellate Tribunal disputing the quantum additions whereas, the revenue disputed the relief extended to the assessee qua valuation by taking inference from the report of the valuer Hamptons International.
3.Before the Hon’ble Income Tax Appellate Tribunal
3.1.Before the Hon’ble Income Tax Appellate Tribunal, the assessee again vehemently contested the findings and stand of the revenue and disputed the conclusion drawn by the authorities below. The assessee reiterated his submissions made before the authorities below before the tribunal wherein attention was drawn to the primary facts necessary for adjudication of the matter under reference. The assessee contended that that fee charged by the assessee ranged from about Rs.6.5 crores to Rs.8 crores in the impugned assessment year for brand endorsement for various products as per agreements placed in the paper book which fall in nature of elaborate arrangements and are subjected to heavy rehearsals, shoots etc. Whenever the assessee undertakes any kind of endorsement in the course of his professional activity, the same is splashed all over various electronic and print media to obtain the maximum public coverage. Merely by resorting to the photographs of assesse placed in news item in the obscure portion of the website of Nakheel PJSC was not justified to tax the villa gifted in the hands of assessee by making adjustments to the income returned. The assessee further denied having carried any act falling in nature of professional endorsement or advertisement with the intent to gather customers for the donor. Furthermore, the villa was accepted after obtaining due clearances from the Reserve Bank of India in the year 2007 after due consultation/permission of Ministry of Finance & Ministry of Home Affairs. It was only in the event that permission was received from the government agency, the gift deed was executed by the donor in his favour. Since the ownership of the property was vested with the Nakheel PJSC which was in fact under the exclusive control of Sultan, the gift deed was executed by Nakheel who in the meanwhile was converted into Public Joint Stock Company. The deed was executed as merely a mark of personal friendship between the Sultan and the assessee and at no point of time existed any professional or contractual relations between the donor and the done, therefore the impugned villa could not be added to the income of assessee under section 28(iv). The Hon’ble tribunal opined per contents of para No.7.2 – 7.7 in the facts of the case as under:-
7.2 We find that the whole genesis of the gift is Sultan’s letter dated 16/12/2004 which has been reproduced in assessment order at Page No.14. The same is executed on the letterhead of Nakheel by HE Sultan Ahmed Bin Sulayem and the gift is accepted by the assessee. A perusal of the same shows that the Villa has been given ‘as a token of our appreciation……’. It further states that ‘…..we will discuss the location of the villa and further details of the gift in due consideration with you.’ Pursuant to the same, the assessee, through Chartered Accountant R.M.Ajgaonkar, sought permission of RBI vide letter dated 20/12/2004 as placed on Page No. 12 of the paper book. Thereafter, after a series of correspondence between assessee/assessee’s representatives and RBI, the permission has finally been given to the assessee vide RBI letter dated 20/04/2007 which is placed on Page No. 23 of the paper book. Thereafter, deed of gift has been executed in assessee’s favor on 16/09/2007 which is reproduced on Page Nos. 2 to 4 of the assessment order. Clause (e) of the said gift deed states that ‘the donor is desirous of transferring by way of gift to donee who is celebrity from India and also a celebrity in Dubai U.A.E., in order to honor the donee and without any monetary consideration the said property being…………’. Similarly, as per clause (f), ‘the donor is desirous of transferring the said property to the donee by way of gift.’ The assessee has accepted the said gift and the deed also bears a reference to RBI permission dated 20/04/2007. We find that all these events are interlinked and in tandem with each other. These events are, prima facie, part and parcel of the same transaction solely aimed at fulfilling Sultan’s wish to gift a Villa in assessee’s favour.
7.3 The whole material relied upon by the revenue is news items concerning assessee and few photographs of assessee at Nakheel’s Annual Day in the year 2007 which was placed on the website of the company. This material has been referred by Ld. AO at various places in the assessment order to reach a conclusion that the assessee undertook brand endorsement for the donor in exchange of gift. However, a perusal of the photograph as placed on Page Nos. 8 & 9 of the assessment order reveals that the assessee figures in Event Gallery 7 & 9. However, the same in no way suggest stage performance by the assessee, in any manner rather the assessee is shown with a mike in Event Gallery 7 which, in fact, corroborates the arguments of the Ld. AR that the assessee merely addressed the employees of the company at the said gathering.
7.4 The Ld. AO has placed reliance on another photograph depicting the event of assessee’s visit at Donor’s Sales Office in the year 2004 with a news-item which gave brief account of assessee’s visit to the Nakheel Sales Centre. However, it is important to note the positioning of the news-item on the website of the company as enumerated by the Ld. AR and which is reproduced on Page No 4 of Ld. CIT(A)’s appellate order. A perusal of the same reveals that the website of the donor company contained number of Tabs one of which was ‘news’ which contained calendar wise ‘news items’. The information of assessee’s visit to the sales center was one amongst the many news items and the list also contained information about visit of several famous personalities worldwide over several years to Nakheel and its various projects. Therefore, after perusal of the same, it is difficult to accept the fact that the said news item tantamount to any kind of advertisement or brand endorsement for the donor in exchange of gift.
7.5 The above conclusions are further supported by the fact that the gift was offered to the assessee in the year 2004, whereas, the Annual Day took place in the year 2007 and therefore the assessee was under no obligation to attend the same and undertake any sort of brand endorsements for donor company. This is further fortified by the letter of Nakheel dated 17/12/2010 where Nakheel has stated that:
“This is to further state that we have invited Mr. Shah Rukh Khan as one of the guest of honors at the occasion of Nakheel Day held on [2nd September, 2007] in Dubai. Nakheel Day is a non-commercial internal staff event of the company. He graced the occasion as a gesture of goodwill and friendship with HE Sultan Ahmed bin Sulayem where his presence at this function was gratis.”
The said letter gives strength to contention that presence of the assessee at the Annual Day was mere goodwill gesture and the event was internal staff event of the company.
7.6 So far as the capacity of the corporate entity to make a gift and execution of gift deed is concerned, we find that the argument that the corporate has separate legal entity as distinct from its members/directors, may be true in Indian Context but may not be true as per customs prevailing in Dubai. The Ld. AR has contended that Sultan had the ultimate control over the affairs of the donor company and the company was under exclusive domain of the Sultan which has nowhere been controverted by the revenue. Even in Indian context, Mumbai Tribunal in the case of Dy. CIT v. KDA Enterprises (P.) Ltd. [2015] 57 taxmann.com 284/68 SOT 349 has held that the companies are competent to make gift and there is no requirement of any natural love or affection for making or receiving gifts by companies. Upon perusal of chain of events leading to execution of gift as enumerated in Para 7.2, we have already reached an inevitable conclusion that all events /actions were interlinked and part and parcel of the same gift transaction and therefore, gift deed was executed by the Nakheel at the behest of Sultan only in view of the fact that ownership was vested with the company.
7.7 Finally, it is well settled law that no addition could be made merely on the basis of mere suspicion, conjectures or surmises. The assessee has therefore, in our opinion, discharged the onus of proving the gift transaction being unilateral gratuitous act of the donor company and the onus was on revenue to establish the contrary, which, in our opinion, has remained undischarged.
3.2..The Hon’ble tribunal opined that in the governing circumstances of the case, the revenue’s case was strengthened on the foundation of few photographs of assessee at Nakheel’s annual day celebration in the year 2007 which was placed on the website of the company. However, these photographs by itself do not suggest that the assessee had in fact rendered any service falling in nature of professional service so as to warrant receipt of villa as gift taxable under the provisions of section 28(iv). The mere presence of the assessee at the annual day meet did not satisfy the credentials of any professional performance as it was in nature of internal non-commercial affair of the company. The assesse graced the occasion as a goodwill gesture on account of his friendship with His Excellency Sultan Ahmed Bin Sulayem where his presence was without any consideration. The tribunal relied upon pronouncement of its own seat in a case titled Deputy Commissioner of Income Tax vs. KDA Enterprises (P) Limited (2015) 120 DTR (Mumbai)(Trib) 163 : (2015) 171 TTJ (Mumbai) 1 : (2015) 57 taxmann.com 284 (Mumbai) wherein it was observed that companies were fully competent to make gifts and there is no requirement of any natural love or affection for making or receiving gifts by the artificial entities. The impugned transaction between the assessee Shahrukh Khan & H.E.Sultan fell in nature of gift which was further attributable to personal relations between the two and the assessing officer having failed to discharge the onus in respect of taxability of the `Signature Villa’. It was further settled that no addition can merely be made on the basis of surmises, conjectures or suspicion. The assessee in the given circumstances discharged the onus of proving the gift being unilateral gratuitous act of the donor company I.e. Nakheel PJSC and absence of any professional attribute in the so called exercise. The revenue also placed reliance upon the provisions pertaining to taxability of gift in kind by taking recourse to the provision of section 56(2)(vii)(b) but since the impugned matter pertained to the assessment year 2008-09 and the amendment pertaining to gift of immovable property was brought on the statute w.e.f.01st October, 2009 (i.e. Finance Act, 2010), the same could not be applied to the case of assessee under reference.
Principles emerging out of the order of the Hon’ble Bench
1.Section 28(iv) of the Income Tax Act, 1961 dealing with the aspect of any benefit or perquisite received (whether convertible in money or not) cannot be subjected to the rigours of taxation in absence of any professional/skilled/businesslike attribute impugned to the transaction concerned.
2.Section 28(iv) will per se be attracted when the benefit or perquisite impugned arises on account of the assesse having exercised his professional skill, understanding, prowess, dexterity and/or contractual obligation in the course of such transaction so as to warrant adjustment under the statute.
3.In order that the subject falls within the provisions embedded in section 28(iv), it is all the more obligatory and imperative on the part of revenue authorities to discharge their onus of proof so as legitimately throw the transaction to tax.
4.Revenue authorities must be on the caution in their attempt to tax the subject under section 28(iv) as merely by placing reliance upon selective advertisements/endorsements, the professional attributes in the course of exercise of business or profession are not satisfied.
5.Every gratuitous act or performance does not suitably lead to the conclusion that event principally falls in nature of business or profession so as to warrant disallowance/adjustment to income under section 28(iv).
6.The additions/adjustments to income as a general rule cannot be made merely on the basis of suspicion, conjectures or surmises. The belief of the revenue authority must be free from any supposition/assumption and the evidence tendered in the course of assessment must be tested on the anvil of relevancy, sufficiency, permissibility and entitlement.
7.That without prejudice to the provisions of section 56(2)(vii)/(x), receipts falling in nature of business or profession can solely be attributed for taxation under section 28(iv) and not else.
8.Finally as settled by the Hon’ble Supreme Court of India in Commissioner of Income Tax, Guahati & Ors vs. M/s Sati Oil Udyog Ltd & Anr (2015) 230 Taxman 521 / 56 taxmann.com 285 (SC) / (2015) 276 CTR (SC) 14, the burden of proving that the assessee has so attempted to evade tax is on the revenue which may be discharged by the revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has, in fact, attempted to evade tax lawfully payable by it.
Tailpiece
In light of the discussion made above, it can be well concluded that transactions attributable to professional/skilled/business traits can very well fall in the realm of the taxing provision under section 28(iv) and not otherwise. The authorities must be introspect the transaction in its entirety in order to find out the rationale behind the concerned receipt of impugned amount (whether in cash or in kind) so as to attract the provisions of section 28(iv) of the Income Tax Act, 1961.
Contact No: 90413-04900 / 98142-18476 | Email: adv.sameerbhatia@gmail.com
Author Bio
Wonderfully explained sir.
Though section 28(iv) is a two line section but it is litigated on a vast scale.