Itta/14/2001 Of The Commissioner Of Income Tax v. K.a.r.investments (P) Ltd

* THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM + I.T.T.A.Nos.80 of 2000and 14 of 2001 %Date: 18.06.2014 The Commissioner of Income Tax, Hyderabad. and …appellant. $K.N.B.Investments (P) Limited, Hyderabad. …Respondent ! Counsel for appellant: Sri J.V.Prasad, Standing Counsel ^ Counsel for Respondent : Sri S.Ravi < GIST: > HEAD NOTE: ? Cases referred THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND I.T.T.A.Nos.80 of 2000and 14 of 2001 COMMON JUDGMENT:(Per the Hon’ble Sri Justice L.NarasimhaReddy) These two appeals under Section 260A of the Income TaxAct, 1961 (for short ‘the Act’) arise out of a common order, dated29.05.2000 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. The respondents were allotted 9,00,000 shares and 8,13,900 shares, respectively of M/s. Dr.Reddy’s LaboratoriesLimited in the financial year 1994-95 at a concessional rate ofRs.90/-, per share. The acquisition of shares was reflected in thereturns filed for the assessment year 1995-96. The Income TaxOfficer (ITO) took the view that the market value of the shares wasabout Rs.455/-, per share and that the differential amount beingRs.365/- deserves to be treated as ‘benefit’, as defined underSection 2(24)(vd) read with Section 28(iv) of the Act. The ITOpassed separate orders, dated 27.03.1998, levying tax on thedifferential amount, apart from dealing with other questions. The respondents filed appeals before the AppellateCommissioner. The appeals were dismissed through order, dated19.03.1999. Thereupon, the respondents carried the matters inappeal, being I.T.A.Nos.189 and 190 of 1999, before the Tribunal. Through the orders under appeals, the Tribunal accepted thecontention of the respondents and allowed the appeals. The appeals were admitted on noting the existence of substantialquestions of law. Sri J.V.Prasad, learned Standing Counsel for the Corporation,submits that the approach adopted by the Tribunal is contrary to thesettled principles of law and specific provisions of the Act. Hecontends that the ITO and the Appellate Commissioner havefurnished cogent reasons in support of their conclusions and theTribunal was not justified in reversing the concurrent findings. Learned counsel submits that a mere perusal of the relevantprovisions of law, particularly Section 28(iv) of the Act, woulddisclose that once a value or benefit was derived by an assessee, itis immaterial whether it can be converted into money or not, and thatthe reason assigned by the Tribunal in this behalf is untenable. Hefurther submits that the facts, such as that prohibition was imposedon sale of shares, for three years or the fluctuations in the sharemarket, are totally irrelevant, in the context of arriving at a conclusionas to whether any benefit had accrued to the assessee. Sri S.Ravi, learned Senior Counsel for the respondents, onthe other hand, submits that the ITO and the Appellate Authorityhave virtually expanded the scope of the relevant provisions of lawand have brought the non-existent income under the purview oftaxation. He contends that it is only when the shares that wereallotted to the respondents were capable of yielding incomeinstantly, irrespective of the preparedness of the respondents to selltheir shares, that the benefit can be said to have accrued. He furthersubmits that the Tribunal has analysed the matter with reference torelevant provisions of law and has arrived at correct conclusions. Learned Senior Counsel further submits that even if one ignores thevolatility or fluctuating nature of the prices of shares, the benefit inthe form of difference between the market price and the price at which the share was allotted can be said to have accrued, if only theshare was capable of being sold. Expanding this, he submits that aclear and unequivocal prohibition against transfer of shares for ablock period of three years was imposed by the allotting companyand as long as that operated, the question of accrual of any benefit,in the form of differential price, does not arise. The appellant framed two questions in the memorandum ofgrounds by naming them as questions of law and they were adoptedby this Court, while admitting the case. Though we find it difficult totreat those questions as reflecting substantial questions of law, wedesist from delving into that aspect at this stage. Section 28 of the Act brings the profits and gains of businessor profession under the purview of income tax. The profits and gainsof different kinds numbering about a dozen are enlisted underdifferent clauses. The ITO invoked Section 28(iv) of the Act againstthe respondents. It reads: “The value of any benefit or perquisite, whetherconvertible into money or not, arising from business or theexercise of a profession.” The expression “value of any benefit” is made part of thedefinition of income under Section 2(24)(vd) of the Act. It reads: “The value of any benefit or perquisite taxable underclause (iv) of Section 28.” In a way, it is a circular phenomenon, in that the definitionrefers to the charging section and the charging section relies uponthe definition, under the Act. The only way to extricate this appearsto 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 addingthe words, “whether convertible into money or not, arising frombusiness or the exercise of a profession.” The benefit, which is sought to be taxed, in the instant case, isthe difference between the market price, on the one hand, and theallotted price of a share, on the other. It has already been mentionedthat according to the ITO, the market price was Rs.455/- per share,whereas it was allotted to the respondents at Rs.90/- per share, onpreferential allotment. Even if all the subsidiary contentionsadvanced by the respondents in this behalf are rejected, the factremains that there is a clear bar for a block period of three yearsprohibiting the sale of shares. It is axiomatic that the benefit can besaid 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 holdingsuch a share, if the bar operates, it is difficult to imagine that the saleof the shares would take place or that it would yield the differentialprice. Though we said this with some amount of precession, theTribunal elaborated the same in detail and took the view that as longas the bar operated, the question of any benefit in the form ofdifferential price, accruing to the respondents, does not arise. Weare in agreement with the conclusion arrived at by the Tribunal. The second aspect is as to whether the benefit has, in fact,accrued at all to the respondent. There exists a distinction betweenthe “accrual of income”, on the one hand, and “arising of income”, onthe other. While accrual is almost notional in nature, the other isfactual. It is too well known that in its complex nature, the Act coversnot only the ‘income’ that, in fact, has arisen, but also the one thathas accrued. When the Parliament has consciously chosen to restrict the The second aspect is as to whether the benefit has, in fact,accrued at all to the respondent. There exists a distinction betweenthe “accrual of income”, on the one hand, and “arising of income”, onthe other. While accrual is almost notional in nature, the other isfactual. It is too well known that in its complex nature, the Act coversnot only the ‘income’ that, in fact, has arisen, but also the one thathas accrued. When the Parliament has consciously chosen to restrict the taxation of benefit only when it has arisen, it is not permissible to taxthe benefits by treating them as ‘accruals’. A close scrutiny of theconcept of “arising of income” discloses that, it, in fact, must flow intothe assets of the assessee, during previous year, and thereby, itbecame taxable in the financial year. The ITO was not even able toshow, much less demonstrate, that the income in the form of “benefit”has arisen to the respondents at all. The sole basis for levyingincome tax on the amount was on the assumption that in case theshares are sold, they would have yielded the differential price andthat, in turn, can be treated as ‘income’. Even if the exercisecontemplated by the ITO is taken as permissible in law, at the most,it amounts to ‘accrual’ and not ‘arising’ of income. Here again, theTribunal has explained the subtle distinction between the two, in aperfect manner and arrived at the correct conclusion. We do not find any substantial question of law in the appealsand they are accordingly dismissed. There shall be no order as tocosts. The miscellaneous petition filed in this appeal shall alsostand disposed of. ____________________ L.NARASIMHA REDDY, J. _____________________ CHALLA KODANDA RAM, J. Date:18.06.2014 GJ