Andhra Pradesh H.C : Where shares were allotted at concessional rate, no income would accrue or arise until expiry of lock in period

High Court Of Andhra Pradesh

CIT Vs. K.N.B. Investments (P.) Ltd.

Section : 5

Assessment Year : 1995-96

L. Narasimha Reddy And Challa Kodanda Ram, JJ.

I.T.T.A. Nos. 80 Of 2000 And 14 Of 2001

June 18, 2014


L. Narasimha Reddy, J. – These two appeals under section 260A of the Income-tax Act, 1961 (for short “the Act”), arise out of a common order dated May 29, 2000, passed by the Income-tax Appellate Tribunal, Hyderabad Bench “A”, in I.T.A. Nos. 189/H/1999 and 190/H/1999. The respondents in both the appeals are investment companies.

2. The respondents were allotted 9,00,000 shares and 8,13,900 shares, respectively, of M/s. Dr. Reddy’s Laboratories Ltd. in the financial year 1994-95 at a concessional rate of Rs. 90 per share. The acquisition of shares was reflected in the returns filed for the assessment year 1995-96. The Income-tax Officer (ITO) took the view that the market value of the shares was about Rs. 455, per share and that the differential amount being Rs. 365 deserves to be treated as “benefit”, as defined under section 2(24)(vd) read with section 28(iv) of the Act. The Income-tax Officer passed separate orders dated March 27, 1998, levying tax on the differential amount, apart from dealing with other questions.

3. The respondents filed appeals before the Appellate Commissioner. The appeals were dismissed through order, dated March 19, 1999. Thereupon, the respondents carried the matters in appeal, being I.T.A. Nos. 189 and 190 of 1999, before the Tribunal. Through the orders under appeals, the Tribunal accepted the contention of the respondents and allowed the appeals. The appeals were admitted on noting the existence of substantial questions of law.

4. Sri J. V. Prasad, learned standing counsel for the Income-tax Department, submits that the approach adopted by the Tribunal is contrary to the settled principles of law and specific provisions of the Act. He contends that the Income-tax Officer and the Appellate Commissioner have furnished cogent reasons in support of their conclusions and the Tribunal was not justified in reversing the concurrent findings. Learned counsel submits that a mere perusal of the relevant provisions of law, particularly section 28(iv) of the Act, would disclose that once a value or benefit was derived by an assessee, it is immaterial whether it can be converted into money or not, and that the reason assigned by the Tribunal in this behalf is untenable. He further submits that the facts, such as that prohibition was imposed on sale of shares, for three years or the fluctuations in the share market, are totally irrelevant, in the context of arriving at a conclusion as to whether any benefit had accrued to the assessee.

5. Sri S. Ravi, learned senior counsel for the respondents, on the other hand, submits that the Income-tax Officer and the appellate authority have virtually expanded the scope of the relevant provisions of law and have brought the non-existent income under the purview of taxation. He contends that it is only when the shares that were allotted to the respondents were capable of yielding income instantly, irrespective of the preparedness of the respondents to sell their shares, that the benefit can be said to have accrued. He further submits that the Tribunal has analysed the matter with reference to the relevant provisions of law and has arrived at the correct conclusions. Learned senior counsel further submits that even if one ignores the volatility or fluctuating nature of the prices of shares, the benefit in the form of difference between the market price and the price at which the share was allotted can be said to have accrued, if only the share was capable of being sold. Expanding this, he submits that a clear and unequivocal prohibition against transfer of shares for a block period of three years was imposed by the allotting company and as long as that operated, the question of accrual of any benefit, in the form of differential price, does not arise.

6. The appellant framed two questions in the memorandum of grounds by naming them as questions of law and they were adopted by this court, while admitting the case. Though we find it difficult to treat those questions as reflecting substantial questions of law, we desist from delving into that aspect at this stage.

7. Section 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 Income-tax 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 Income-tax 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, in fact, accrued at all to 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 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 the 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 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.

14. The miscellaneous petition filed in this appeal shall also stand disposed of.

[Citation : 367 ITR 616]

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