Sri. HEMENDRA SHETH, MUMBAI v. ACIT -12(3), MUMBAI

ITA 38/MUM/2007 | 1998-1999
Pronouncement Date: 27-08-2010 | Result: Partly Allowed

Appeal Details

RSA Number 3819914 RSA 2007
Assessee PAN AAPPS5958L
Bench Mumbai
Appeal Number ITA 38/MUM/2007
Duration Of Justice 3 year(s) 7 month(s) 23 day(s)
Appellant Sri. HEMENDRA SHETH, MUMBAI
Respondent ACIT -12(3), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 27-08-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted H
Tribunal Order Date 27-08-2010
Date Of Final Hearing 20-07-2010
Next Hearing Date 20-07-2010
Assessment Year 1998-1999
Appeal Filed On 03-01-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H MUMBAI BEFORE SHRI D.K.AGARWAL JUDICIAL MEMBER & SHRI T.R.SOOD ACCOUNTANT MEMBER I.T.A.NO. 38/MUM/2007 - A.Y 1998-99 MR. HEMENDRA SHETH 110 SIR VITHALDAS CHAMBERS 16 MUMBAI SAMACHAR MARG MUMBAI 400 023. PAN NO.AAPPS 5958 L VS. ASST. COMMISSIONER OF I.T. 12(3) MUMBAI. AND I.T.A.NO. 1486/MUM/2007 - A.Y 1998-99 ASST. COMMISSIONER OF I.T. 12(3) MUMBAI VS. MR. HEMENDRA SHETH MUMBAI (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.R.VORA. REVENUE BY : SHRI R.S.SRIVASTAVA. O R D E R PER T.R.SOOD AM: IN THESE CROSS APPEALS FILED BY THE ASSESSEE AS WE LL AS THE REVENUE THERE ARE SOME COMMON ISSUES THEREFORE S AME WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON O RDER. 2. I.T.A.NO.38/M/07 [ASSESSEES APPEAL] : IN THIS APPEAL ASSESSEE HAS RAISED THREE GROUNDS OUT OF WHICH GROU ND NO.2 WAS NOT PRESSED AND THEREFORE SAME IS DISMISSED. THE OTHE R GROUNDS ARE AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED COMMISSIONER OF INCOME TAX [APPEALS] ERRED IN FACTS AND IN LAW IN PARTLY CONFIRMING THE ADDITION MADE FOR INCOME ALLE GED TO HAVE BEEN EARNED BY THE APPELLANT U/S.2[24][IV] TO THE E XTENT OF RS.1 10 25 000/- ON THE GROUND THAT IN RESPECT OF 6 3000 SHARES ALLOTTED TO THE APPELLANT BY M/S HRS INSIGHT FINANC IAL 2 INTERMEDIARIES PVT. LTD. AT PART HE HAD RECEIVED TH E BENEFIT TO THE EXTENT WITHIN THE MEANING OF THAT SECTION. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LEARNED COMMISSIONER OF INCOME TAX [APPEALS] ERRED IN FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE OF RS.26 05 119/- MADE OUT OF INTEREST PAID ON BORROWED FUNDS ON THE ALLEGED GROUND THAT T HE BORROWED FUNDS WERE UTILIZED BY APPELLANT FOR MAKING INTERES T FREE ADVANCES AND FOR INVESTMENT IN SHARES. 3. FIRST WE SHALL TAKE GROUND NO.3. AFTER HEARING B OTH THE PARTIES WE FIND THAT THE AO DISALLOWED SOME INTEREST BECAUS E ACCORDING TO HIM SOME OF THE FUNDS WERE USED FOR ADVANCING INTE REST FREE LOANS; THEREFORE PROPORTIONATE INTEREST WAS DISALLOWED AND THE DISALLOWANCE HAS BEEN CONFIRMED BY THE CIT[A]. 4. THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT I NTEREST FREE FUNDS WERE AVAILABLE TO THE ASSESSEE AND ONLY PROPO RTIONATE INTEREST WHICH WAS NOT RELATABLE TO AVAILABILITY OF INTEREST FREE FUNDS COULD HAVE BEEN DISALLOWED PARTICULARLY IN VIEW OF THE LATEST DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE U TILITIES & POWER LTD. 221 CTR 435. AS PER THE FORMULA GIVEN BY THE H ON'BLE HIGH COURT CALCULATION HAS BEEN MADE AT PAGE 145 OF THE PAPER BOOK AND IT WAS SUBMITTED THAT ONLY INTEREST AMOUNTING TO RS.1 71 6 71/- COULD HAVE BEEN DISALLOWED. 5. ON THE OTHER HAND LD. DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY. WE FIND THAT THIS ISSUE HAS BEEN ADJUDICATED IN DETAIL BY THE HO N'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD . [SUPRA]. THEREFORE WE SET ASIDE THE ORDER OF THE LD. CIT[A] AND REMIT THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION TO READJUDICATE THIS ISSUE IN THE LIGHT 3 OF THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD. [SUPRA]. 7. GROUND NO.3 RAISED BY THE ASSESSEE PERTAINS TO THE ISSUE REGARDING ADDITION ON ACCOUNT OF BENEFIT RECEIVED B Y THE ASSESSEE U/S.2(24)(IV). AN ADDITION WAS MADE BY THE AO FOR A SUM OF RS.4 46 25 000/- OUT OF WHICH THE LD. CIT[A] HAS GI VEN RELIEF TO THE ASSESSEE TO THE EXTENT OF RS.3.36 CRORES ON THE BAS IS THAT PART OF THE SHARES WHICH WERE ALLOTTED TO THE ASSESSEE WERE UND ER LOCK IN PERIOD AND THEREFORE BENEFIT COULD NOT BE EXTENDED. AGAI NST THIS DECISION REVENUE HAS ALSO APPEALED AND THE GROUND RAISED BY THE REVENUE IS AS UNDER- ON THE FACTS OF THE CASE AND IN LAW THE LD. CIT[A] HAS ERRED IN ALLOWING THE RELIEF OF RS.3 36 00 000/- TO THE ASSESSEE BY H OLDING THAT NO BENEFIT IS ACCRUED TO THE ASSESSEE DURING THIS YEAR IN RESPECT OF 192000 SHARES HELD BY THE ASSESSEE BECAUSE ASSESSEE CANNOT TRANSFER THESE SHARES WITHIN THREE YEARS FROM THE D ATE OF ALLOTMENT AS PER CLAUSE 52 OF THE SEBI. 8. BRIEF FACTS OF THE CASE AGAINST WHICH THE ASSESS EE AS WELL AS REVENUE HAS RAISED THE DISPUTE ARE THAT THE ASSESS EE WAS A MEMBER OF BOMBAY STOCK EXCHANGE AND WITH THE OBJECT OF CONVER TING THE PROPRIETARY CONCERN INTO A CORPORATE ENTITY A COMP ANY UNDER THE NAME OF M/S. HRS INSIGHT FINANCIAL INTERMEDIARIES PVT. L TD. [HRS] WAS INCORPORATED ON 31-1-1997. THE AUTHORISED CAPITAL W AS RS.5 CRORES. THE ASSESSEE RECEIVED 1 34 999 SHARES OF FACE VALUE OF RS.100/- EACH AT PAR ON 12-2-1997 ON ALLOTMENT AGAINST MONEY. OUT OF THESE SHARES ASSESSEE SOLD 1 34 998 SHARES AT PAR ON 27-10-1997 @ 250 PER SHARE AGAINST MONEY. OUT OF THIS ALSO 31 519 SHARES WERE SOLD ON 31-3-98 @ OF RS.300/- PER SHARE. THE DIFFERENCE BETWEEN THE P RICE AT WHICH THE 4 SHARES WERE SOLD AND THE SHARES RECEIVED BY THE ASS ESSEE FROM THE COMPANY U/S.80IB 2 55 09 SHARES [130000+156528-3151 9] WHICH WERE ALLOTTED AT PAR WAS TREATED AS BENEFIT RECEIV ED OF RS.175/- PER SHARE U/S.2[24][IV] AND SUBJECTED TO TAX IN THIS YE AR. THE MATTER HAD TRAVELLED UPTO THE TRIBUNAL EARLIER AND THE SAME WA S SET ASIDE TO THE FILE OF THE AO FOR FRESH EXAMINATION OF THE ISSUE. 9. IN THE PRESENT ASSESSMENT PROCEEDINGS ALSO AO RA ISED THE QUERY THAT AS TO WHY THE SAME SHOULD NOT BE TREATED AS IN COME U/S.2[24][IV]. IT WAS MAINLY CONTENDED THAT NO INCOME HAS ARISEN A T THE POINT OF TIME OF THE PURCHASE OF SHARES AND INCOME IF ANY WOULD ARISE ONLY WHEN SUCH SHARES ARE SOLD. IT WAS FURTHER EXPLAINED THAT THE ACTUAL VALUE OF THE SHARES WAS NOT MORE THAN THE FACE VALUE. THE VA LUE OF THE SHARES WOULD DEPEND ON THE INTRINSIC VALUE OF SHARES WHICH IN TURN DEPENDS ON GENERAL PERFORMANCE OF THE COMPANY HEALTH OF THE I NDIAN ECONOMY AND PERCEPTION REGARDING FUTURE ETC. THE ASSESSEE S UBMITTED THAT INTRINSIC VALUE OF THE SHARES WAS ONLY RS.99.51 PER SHARE AND THEREFORE NO BENEFIT U/S.2[24][IV] COULD BE SAID T O HAVE BEEN ACCRUED TO THE ASSESSEE. HOWEVER AO DID NOT AGREE WITH THE SE SUBMISSIONS AND OBSERVED THAT THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. S.VARADARAJAN [224 ITR 9] AND HELD THAT IF AN ASSET WAS PURCHASED AT A PRICE LESS THAN THE FAIR MARKET VALUE BY A BROKER O R A PERSON WHO HAS SUBSTANTIAL INTEREST IN THE COMPANY THEN THE SAME WOULD FORM BENEFIT IN TERMS OF SEC.2[24][IV]. SINCE THE ASSESSEE HAS S OLD SHARES AT RS.250/- ON 15-3-1997 AND ON 21-3-1997 AND AT RS.30 0/- ON 31-3- 1998 THEN DEFINITELY THE VALUE OF THE SHARES WAS M ORE. THE ARGUMENT 5 THAT SHARES WERE SOLD ONLY TO RELATIVES JUST TO BOO ST THE NET WORTH OF THE ASSESSEE AND THE COMPANY BECAUSE THERE WERE HUG E LOSSES TO THE ASSESSEE AND TO ACT AS A BROKER MINIMUM CAPITAL WAS REQUIRED AO NOTED THAT THE MINIMUM CAPITAL REQUIRED FOR RUNNING THE BUSINESS OF A STOCK BROKER WAS DEFINITELY RS.10 LAKHS BUT THAT C APITAL COULD BE IN ANY OF THE FORM SPECIFIED. IN THIS BACKGROUND A SUM OF RS.4 46 24 825/- WAS ASSESSED AS INCOME U/S.2[24][IV]. 10. ON APPEAL BEFORE THE CIT[A] THE SUBMISSION MAD E BEFORE THE AO WERE REITERATED. IT WAS FURTHER POINTED OUT THAT UNTIL THE TRANSFER OF BSE MEMBERSHIP CARD TO HRS AFTER FULFILLMENT OF NEC ESSARY BSE AND SEBI REQUIREMENTS ON 31-12-1997 THE ASSESSEE WAS A MEMBER OF THE BSE IN HIS INDIVIDUAL CAPACITY AND WAS OBLIGED TO M EET VARIOUS MINIMUM CAPITAL REQUIREMENTS. SINCE THE ASSESSEE HA D SUFFERED HUGE LOSSES IT BECAME NECESSARY TO BRING THE NET WORTH O F THE ASSESSEE TO A POSITIVE FIGURE FOR WHICH THE SHARES WERE SHOWN TO HAVE BEEN SOLD TO THE RELATIVES AT A MUCH HIGHER VALUE THAN INTRINSIC VALUE PER SHARE. THE ASSESSEE WAS ALSO REQUIRED TO MEET IN ADDITION TO T HE MINIMUM CAPITAL OF RS.10 LAKHS CAPITAL ADEQUACY NORMS PRESCRIBED B Y THE BSE WITH REFERENCE TO INTRA-DAY TRADING GROSS EXPOSURE BOL T TWSS ETC. FOR WHICH VARIOUS GUARANTEES WERE REQUIRED FROM THE BAN KERS. IT WAS FURTHER POINTED OUT THAT TILL 31-12-1997 HRS COULD NOT DO ANY SHARE BROKERAGE BUSINESS AND THE COMPANY WAS ONLY IN THE PROCESS OF SETTING UP OF BUSINESS AND THEREFORE SHARES COULD NOT HAV E APPRECIATED AND THAT TOO BY 275%. IT WAS ALSO ARGUED THAT THERE WER E TWO METHODS FOR VALUATION OF THE EQUITY SHARES I.E. [I] BREAK-UP VALUE METHOD AND/OR 6 [II] EARNING CAPITALIZATION METHOD. DETAILS OF VALU ATION OF BOTH THE METHODS WERE FILED BEFORE THE AO. IT WAS POINTED OU T THAT BOOK VALUE OF THE SHARE WAS RS.99.45 AS ON 3`1-10-1997 RS.99. 43 ON 31-12-1997 AND RS.99.51 ON 31-3-1998 AND AFTER STANDARD ADJUST MENT THE VALUE OF THE SHARES WAS ONLY RS.84.52 AS ON 31-3-1998 UNDER THE NET ASSET VALUE. UNDER THE SECOND METHOD I.E. EARNING CAPITA LIZATION METHOD THE VALUE OF THE SHARES OF RS.100/- WAS ONLY RS.96. 77 AND AFTER 15% DISCOUNT ON ACCOUNT OF NON TRANSFERABILITY SUCH VAL UE CAME TO ONLY RS.82.25. THUS THESE VALUATIONS ARE MUCH LOWER THA N THE VALUE OF RS.275/- ADOPTED BY THE AO. 11. IT WAS FURTHER POINTED OUT THAT UNDER THE SEBI RULES WHEN AN INDIVIDUAL MEMBERSHIP WAS CONVERTED INTO THE CORPOR ATE ENTITY THEN SUCH INDIVIDUAL WAS REQUIRED TO CONTINUE TO HOLD MI NIMUM 40% OF THE SAID SHARES FOR AT LEAST A PERIOD OF THREE YEARS AN D THUS OUT OF 4 80 000 SHARES 1 92 000 SHARES COULD NOT HAVE BEE N SOLD OR TRANSFERRED FOR A PERIOD OF THREE YEARS AND ACCORDI NGLY SUCH SHARES COULD NOT HAVE BEEN VALUED AT A HIGHER VALUATION. I T WAS POINTED OUT THAT OUT OF TOTAL SHARES OF 4 21 517 ALLOTTED TO TH E ASSESSEE ASSESSEE HAD ALREADY SOLD 1 66 517 SHARES LEAVING A BALANCE OF 2 55 000 SHARES OUT OF WHICH 1 92 000 SHARES COULD NOT BE SOLD FOR A PERIOD OF THREE YEARS. IT WAS ALSO POINTED OUT THAT HRS HAS NOT DON E ANY BUSINESS PRIOR TO THE SALE OF SHARES WHICH FACT WAS TOTALLY IGNORED BY THE AO. 12. AFTER CONSIDERATION OF THE RIVAL SUBMISSIONS T HE CIT[A] PARTLY AGREED WITH THE SUBMISSIONS OF THE ASSESSEE AND DEC IDED THE ISSUE VIDE PARAS 1.15 AND 1.16 AS UNDER: 7 `1.15 THE UNDERSIGNED HAS CONSIDERED THE RIVAL CON TENTIONS. EVEN IF THE MAIN GROUND IS REJECTED YET THE SEBI CIRCULAR MENTIONED ABOVE CANNOT BE IGNORED. IT IS CLEAR THAT IN RESPECT OF 4 0% OF THE SHARES ALLOTTED BY THE COMPANY NO BENEFIT CAN ACCRUE TO T HE APPELLANT DURING THIS YEAR AS THE APPELLANT COULD NOT TRANSFER THESE SHARES FOR A LOCK-IN- PERIOD OF 3 YEARS FROM THE DATE OF ALLOTMENT. IN VI EW OF THIS THEREFORE IT IS HELD BY THE UNDERSIGNED THAT NO BENEFIT ACCRUED TO THE APPELLANT IN RESPECT OF 1 92 000 SHARES. THE ONLY BENEFIT ACCRUE D WAS IN RESPECT OF THE BALANCE 63 000 SHARES. THEREFORE THE ADDITION I S SUSTAINED TO THE EXTENT OF RS.1 10 25 000/-. THE APPELLANT THUS GETS A RELIEF OF RS.3 36 00 000/- [I.E. 1 92 000 X 175/-]. 1.16 THEREFORE THIS GROUND IS PARTLY ALLOWED AS THE ADDITION OF RS.3 36 00 000/- IS DELETED BUT THE ADDITION OF RS. 1 10 25 000/- IS CONFIRMED. 13. BEFORE US THE LD. CHARTERED ACCOUNTANT OF THE A SSESSEE SHRI R.R.VORA SUBMITTED THAT THIS IS A CASE OF A PRIVATE LIMITED COMPANY AND THEREFORE SHARES ARE NOT FREELY MARKETABLE. T HE SAME COULD BE ALLOTTED AND/OR SOLD ONLY TO PROMOTERS/DIRECTORS AN D RELATIVES AND FRIENDS OF SUCH PROMOTERS AND DIRECTORS. THEREFORE IT IS NOT NECESSARY THAT SHARES WOULD FETCH THE SAME VALUE WHICH HAS BE EN OBTAINED BY SELLING THE SHARES TO RELATIVES. IN FACT SHARES WE RE SOLD AT A HIGHLY EXAGGERATED PRICE WITH AN IDEA TO INFLATE THE BALAN CE-SHEET I.E. THE NET WORTH WITH THE CLEAR OBJECTIVE TO OBTAIN GOOD BANKI NG FACILITIES SO AS TO CARRY ON THE BUSINESS OF THE COMPANY. IN FACT THE COMPANY DID NOT START ITS OPERATION TILL DECEMBER 2007 AND THEREFO RE THE SHARES OF THE COMPANY COULD NOT HAVE POSSIBLY MORE VALUE THAN THE BOOK VALUE. 14. HE FURTHER ARGUED THAT AT BEST THE SHARES COULD HAVE BEEN VALUED AT EITHER BOOK VALUE METHOD OR INCOME CAPITA LIZATION METHOD AND THE VALUE WORKED ON THESE METHODS CAME TO RS.83 AND AS PER BOOK VALUE THE SAME WAS AT RS.99.51. DETAILED WORKI NG IN THIS REGARD WAS FILED BEFORE THE AO COPY OF WHICH HAS BEEN PLA CED AT PAGES 74 TO 79 OF THE PAPER BOOK. HE ARGUED THAT IN ANY CASE TH E BENEFIT OR 8 PERQUISIT IF ANY COULD BE SAID TO HAVE BEEN DERIV ED ONLY AT THE POINT WHEN SUCH SHARES ARE SOLD AND NOT AT A POINT OF ALL OTMENT OF SHARES BY THE COMPANY TO THE ASSESSEE. IN THIS REGARD HE REFE RRED TO THE DECISION IN THE CASE OF CIT VS. RUPEE FINANCE & MANAGEMENTS PVT. LTD. [119 TTJ 632]. HE POINTED OUT THAT IN THAT CASE IT WAS H ELD THAT WHEN AN INVESTMENT WAS MADE THEN NO PERQUISITE OR BENEFIT W OULD SAID TO HAVE ARISEN U/S.28[IV]. THIS DECISION HAS BEEN CONFIRMED BY THE HON'BLE BOMBAY HIGH COURT IN I.T.A.NO.1208 OF 2008 COPY OF WHICH HAS BEEN PLACED AT PAGES 147 TO 149 OF THE PAPER BOOK. HE PO INTED OUT THAT SIMILAR VIEW WAS TAKEN IN THE FOLLOWING DECISIONS- A) KNB INVESTMENT (P) LTD. VS. ACIT [79 ITD 238] [H YD] B) DCIT VS. CHAND MERCHANT (P) LTD. [99 TTJ 712] [ MUM] IT WAS ARGUED THAT EVERY RECEIPT HAS TO BE TAXED IF IT IS IN THE NATURE OF INCOME UNDER A PARTICULAR HEAD AND THE SAME CANNOT BE CHARGED UNDER THE RESIDUARY HEAD OF INCOME FROM OTHER SOURCES A ND THIS PRINCIPLE WAS CONFIRMED BY THE HON'BLE SUPREME COURT IN THE C ASE OF CIT VS. D.P.SANDU BROTHERS CHEMBUR (P) LTD. 273 ITR 1. IN A NY CASE ONLY THE REAL INCOME CAN BE ASSESSED NOW AND NO REAL INCOME CAN BE SAID TO HAVE BEEN ACCRUED UNLESS AND UNTIL THE SHARES ALLOT TED BY HRS TO THE ASSESSEE ARE SOLD IN THE MARKET. HE ALSO SUBMITTED THAT AS PER SEBI REGULATIONS LOCK-IN PERIOD WAS ALSO THERE AND THE S O CALLED BENEFIT ALLEGED BY THE AO COULD NOT HAVE BEEN POSSIBLY EXTE NDED TO THE SHARES WHICH WERE SUBJECT TO THE LOCK-IN PERIOD AND COULD NOT BE SOLD FOR A PERIOD OF THREE YEARS. HE ALSO SUBMITTED THAT AS FA R AS 1 30 000 SHARES WHICH WERE ALLOTTED ON 31-12-1997 AGAINST THE STOCK EXCHANGE CARD 9 THE SO CALLED BENEFIT COULD NOT HAVE BEEN ASSESSED TO TAX BECAUSE THE SAME COULD NOT BE REGARDED AS TRANSFER IN VIEW OF T HE SPECIFIC PROVISIONS OF SEC.47[II]. 15. ON THE OTHER HAND THE LD. DR RAISED VARIOUS S UBMISSIONS AND HAS ALSO FILED WRITTEN SUBMISSIONS DATED 22-07-2010 . THE MAIN ARGUMENTS OF THE LD. DR CAN BE SUMMARIZED AS UNDER: 15.1 THAT THE LD. CIT[A] HAS CLEARLY HELD THAT EXPR ESSION EMPLOYED U/S.2[24][IV] WAS BENEFIT AND NOT PROFIT AND THEREF ORE THE PROVISIONS WOULD BE ATTRACTED IF THE SHARES WERE ALLOTTED TO T HE ASSESSEE AT A CONCESSIONAL RATE. IN VIEW OF THIS FINDING LD. CIT [A] WAS NOT CORRECT IN GIVING A CONTRARY FINDING THAT THIS BENEFIT WOULD N OT ACCRUE IN RESPECT OF 1 92 000 SHARES IN VIEW OF THE LOCK-IN PERIOD OF THREE YEARS AND THE SAID SEBI REGULATION HAS NO BEARING UPON THE INCOME TAX ACT. IT WAS POINTED OUT THAT THE COMPANY WAS INCORPORATED ON 31 -1-1997 AND SOME SHARES WERE ALLOTTED TO THE ASSESSEE AND SEBI REGULATION REGARDING LOCK-IN PERIOD WOULD OPERATE ONLY FROM TH E DATE OF REGISTRATION OF THE COMPANY WITH SEBI I.E. 31-12-19 97 AND THEREFORE THE REGULATION WOULD NOT APPLY TO ANY SHARES ALLOTT ED BEFORE THAT DATE. SINCE THE SHARES WERE ALLOTTED BEFORE THOSE DATES A ND SHARES WERE ALSO SOLD BEFORE THOSE DATES THE BENEFIT WOULD ACCRUED TO THE ASSESSEE ON 28-10-1997 ITSELF. 16. THAT THE FAIR MARKET VALUE OF THE SHARES CAN BE DETERMINED ON THE BASIS OF CCI GUIDELINES ISSUED BY THE ERSTWHILE CONTROLLER OF CAPITAL ISSUES DEPARTMENT OF ECONOMIC AFFAIRS MINISTRY OF FINANCE GOVERNMENT OF INDIA. HE REFERRED TO THE DECISION OF THE HON'BLE 10 SUPREME COURT IN THE CASE OF IN THE CASE OF HINDUST AN LEVER EMPLOYEES UNION VS. HINDUSTAN LEVER LIMITED 1995 ( 83 COM CASE 30). NO CERTIFICATE FROM A QUALIFIED VALUER I.E. THE CHA RTERED ACCOUNTANT HAS BEEN OBTAINED FOR THE FAIR MARKET VALUE OF THE SHAR ES AS PER WORKING SUBMITTED BY THE ASSESSEE. IT WAS SUBMITTED THAT TH E ASSET VALUE METHOD OR YIELD METHOD MAY LEAD TO A DIFFERENT VALU ATION AND THAT IS WHY THE HON'BLE SUPREME COURT HELD THAT MARKET PRIC E WAS THE MOST FAIR METHOD. SINCE THE BUSINESS OF THE ASSESSEE HAS NOT COMMENCED THEREFORE THE YIELD METHOD WAS NOT APPROPRIATE. SI MILARLY SINCE THE COMPANY WAS A NEW COMPANY THEREFORE EVEN THE BOOK VALUE METHOD WAS NOT ADEQUATE AND MARKET VALUE WAS THE ONLY CRIT ERIA SINCE THE SHARES HAVE BEEN SOLD IN THE OPEN MARKET @ RS.250/- AND RS.300/- AND THAT PRICE CAN FAIRLY BE CONSIDERED AS THE MARK ET PRICE. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. WE AGREE WITH THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSE SSEE. FIRSTLY IT HAS TO BE NOTED THAT ASSESSEE IS A PRIVATE LIMITED COMP ANY AND THE SHARES ARE NOT LISTED IN ANY STOCK EXCHANGE. IN THE CASE O F PRIVATE LIMITED COMPANIES SHARES ARE NOT EVEN FREELY TRADEABLE AND THE SAME CAN BE SOLD ONLY TO RELATIVES AND FRIENDS AND THAT TOO WIT H THE PRIOR APPROVAL OF THE BOARD OF DIRECTORS. IN THE CASE BEFORE US DETA ILS OF THE SHARES WHICH WERE ALLOTTED TO THE ASSESSEE ON VARIOUS DATE S ARE AS UNDER (1) A.Y 1997-98 DATE NO. OF SHARES PRICE PER SHARE CONSIDERATION 01-02-1997 1 RS.100 CASH 12-02-1997 1 32 280 RS.100 TOWARDS SECURITY DEPOSIT OF BUSINESS PREMISES 12-02-1997 2 618 RS.100 CHEQUE PAYMENT 11 TOTAL 1 34 999 (1) A.Y 1998-99 DATE NO. OF SHARES PRICE PER SHARE CONSIDERATION 28-10-1997 156 518 RS.100 AGAINST ASSETS OF THE BUSINESS 31-12-1997 130 000 RS.100 AGAINST STOCK EXCHANGE CARD TOTAL 286 518 FROM ABOVE IT IS CLEAR THAT ALL THE SHARES HAVE BEE N ALLOTTED BEFORE 31- 12-1997 AND ADMITTEDLY BY THAT POINT OF TIME HRS HA D NOT STARTED ITS BUSINESS AND POSSIBLY ITS SHARES WILL NOT HAVE MORE VALUE THAN THE BOOK VALUE. WE FURTHER FIND THAT THE ASSESSEE HAD FURNIS HED DETAILED CALCULATION OF VALUATION OF SHARES ON ASSET VALUE M ETHOD YIELD CAPITALIZATION METHOD AS WELL AS BOOK VALUE METHOD BUT THE SAME HAS NOT BEEN GONE INTO BY THE LOWER AUTHORITIES AND NO DEFECTS HAVE BEEN POINTED OUT IN THE SAME. THOUGH THE LD. DR SUBMITTE D THAT FAIR MARKET VALUE IS THE MARKET PRICE AND WE HAVE NO QUARREL WI TH THAT BUT IN THE CASE OF A PRIVATE LIMITED COMPANY NO MARKET PRICE I S EASILY AVAILABLE BECAUSE SHARES OF PRIVATE LIMITED COMPANIES ARE NOT LISTED IN ANY STOCK EXCHANGE AND ARE NOT FREELY TRADEABLE. SIMPLY BECAU SE ASSESSEE HAS SOLD SOME SHARES ON TWO DIFFERENT DATES I.E. ON 15- 3-1997/21-3-1997 @ RS.250 AND ON 31-3-1998 @ RS.300 THAT PRICE CANN OT BE TAKEN AS THE MARKET PRICE. THIS IS BECAUSE THE REASON FOR SA LE OF SHARES HAS BEEN EXPLAINED THAT THE ASSESSEE WANTED TO JACK UP ITS NET WORTH AND SHARES WERE SOLD AT HIGHER PRICE TO THE RELATIVES. THIS MEANS THAT IT IS NOT NECESSARY THAT OUTSIDERS WOULD ALSO BUY SHARES OF HRS AT THE SAME 12 PRICE. IN ANY CASE IN THE CASE OF RUPEE FINANCE & M ANAGEMENT PVT. LTD. VS. ACIT [SUPRA] IT WAS HELD THAT NO BENEFIT WOULD ARISE U/S.28[IV] AT THE TIME OF INVESTMENT. IN FACT HEAD NOTE READS AS UNDER: THE UNDISPUTED FACTS IN THIS CASE ARE THAT THE ASS ESSEE COMPANY HAS PURCHASED CERTAIN SHARES AT A PRICE WHICH IS BELOW THE MARKET VALUE. THERE IS NO DISPUTE OF THE FACT THAT THE PRICE PAID FOR THE SHARES BY THE ASSESSEE COMPANY WERE THE COST INCURRED BY THE PURC HASER. IT IS ALSO NOT DISPUTED THAT ALL THESE INVESTMENTS WERE RECORD ED IN THE BOOKS OF ACCOUNT. UNDER S. 69 ONLY SUCH VALUE OF THE INVESTM ENTS MAY BE DEEMED TO BE THE INCOME OF THE ASSESSEE FOR THE FIN ANCIAL YEAR IF THEY ARE NOT RECORDED IN THE BOOKS OF ACCOUNT. THUS S. 6 9 IS NOT APPLICABLE IN THIS CASE. THE FIRST APPELLATE AUTHORITY POSSIBL Y REALISING THIS DIFFICULTY HAS CHOSEN TO INVOKE S. 28(IV) AND NOT T O GIVE A DECISIVE FINDING AS TO WHETHER S. 69 IS APPLICABLE OR NOT. I T IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE COMPANY HAS PAID CERTAIN AMOUNT IN EXCESS OF WHAT IS RECORDED IN THE BOOKS OF ACCOUNT FOR THE PURCHASE OF THE SHARES. THERE IS NOT EVEN AN ALLEGATION MUCH LE SS ANY EVIDENCE THAT THE APPARENT CONSIDERATION IS NOT THE REAL CON SIDERATION. THE ONLY GROUSE THE REVENUE AUTHORITIES HAVE IS THAT THE ASS ESSEE COMPANY HAS PURCHASED THE SHARES AT A PRICE WHICH IS MUCH L ESSER THAN THE MARKET PRICE. THIS AS ALREADY STATED IS NOT A DISP UTED FACT THUS ON THESE FACTS NO ADDITION IS SUSTAINABLE UNDER S. 69. THIS DECISION OF THE TRIBUNAL HAS BEEN CONFIRMED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S RUPEE FINANCE & MANAGEMENT PVT. LTD. IN I.T.A.NO.1208 OF 2008 AND P ARA-3 OF THE ORDER READS AS UNDER: 3. WE HAVE PERUSED THE TRIBUNALS JUDGMENT. THE TR IBUNAL HAS CONSIDERED THE ENTIRE ISSUE AT LENGTH IN ITS ORDER DATED 5.2.2008 AND HAS GIVEN FINDING THAT MERE PURCHASE OF SHARES AS AN INVESTMENT WITH THE LOCK IN PERIOD OF HOLDING FOR A CONSIDERA TION WHICH IS LESS THAN THE MARKET VALUE CANNOT BE BROUGHT TO TAX AS A BE NEFIT OR PERQUISITE UNDER SECTION 28[IV] OF THE ACT. THE TRIBUNAL HAS A LSO GIVEN THE FINDING THAT THE ASSESSEE HAS NOT SECURED ANY BENEFIT OR PE RQUISITE IN CONSIDERATION OF A BUSINESS TRANSACTION UNDERTAKEN WITH THE SELLERS OF THE SHARES. IN VIEW OF THE ABOVE FINDING OF FACT T HERE IS NO SUBSTANTIAL QUESTION OF LAW INVOLVED IN THE PRESENT APPEAL. 18. SIMILARLY IN THE CASE OF KNB INVESTMENT (P) LTD . VS. ACIT [SUPRA] AGAIN THE ISSUE OF BENEFIT OF PERQUISITE U /S.28[IV] CAME UP FOR CONSIDERATION WHEREIN THE DIFFERENCE BETWEEN THE IS SUE PRICE AND MARKET PRICE WAS SOUGHT TO BE ASSESSED AND IT WAS H ELD AS UNDER: 13 THE ISSUE PRICE OF RS. 90 PER SHARE IS COMPARABLE TO THE BREAK-UP VALUE OF SHARES. IN SUCH CIRCUMSTANCES WHEN THE MA RKET PRICE IS NOT CONSIDERED WHERE THE NET WORTH VALUE ALONE IS CONS IDERED THE ULTIMATE REWARD FOR THE APPELLANT-COMPANIES IS AN E VENTUAL CAPITAL GAIN SUPPLEMENTED BY A DIVIDEND YIELD. THE REWARD OF CAPITAL GAINS ARISES ONLY WHEN THE APPELLANT- COMPANIES ULTIMATEL Y SELL THE SHARES FOR A HIGHER PRICE THAN PAID FOR THE ACQUISITION. T HE SUPPLEMENTARY REWARD OF DIVIDEND YIELD AS SUCH DOES NOT BESTOW AN Y BENEFIT UPON THE APPELLANT- COMPANIES. THIS IS BECAUSE THE DIVIDEND IS DECLARED ON THE BASIS OF THE FACE VALUE OF SHARES WHICH IS THE SAME FOR ALL THE SHAREHOLDERS IRRESPECTIVE OF THE PRICE PAID BY THE M FOR THE ACQUISITION OF SHARES. THIS IS THE POSITION WHEN THE ISSUE PRIC E OF SHARES IS COMPARED WITH THAT OF NET WORTH PRICE/VALUE. THERE IS NO BENEFIT WHERE THE COMPARISON IS BETWEEN THE ISSUE PRICE AND THE NET WORTH VALUE. THE CASE OF BENEFIT IS ATTEMPTED ON A CO MPARISON OF THE ISSUE PRICE AND MARKET PRICE. THE CONTEMPLATED BENE FIT IS A PRICE SAVER IN A CONTEXT WHEN THE ISSUE PRICE IS COMPARED TO THE THEN PREVAILING MARKET RATE. OR THE CONTEMPLATED BENEFIT IS RELATIVE IN NATURE; RELATIVE TO THE PREVAILING MARKET PRICE. EV EN IN CIRCUMSTANCES WHERE THE ISSUE PRICE IS COMPARED TO THE MARKET PRI CE THERE NEED NOT BE SUCH A RELATIVE BENEFIT IN ALL CASES. THERE WAS MARKET PRICE FLUCTUATION IN THE CASE OF SHARES. THE SHARE VALUE WAS RS. 62.50 PER SHARE IN THE MARKET IN THE THIRD QUARTER OF 1992. I F THE PRESENT ISSUE PRICE OF RS. 90 PER SHARE IS COMPARED TO THE THEN P REVAILING MARKET PRICE OF RS. 62.50 PER SHARE IT IS OBVIOUS THAT TH ERE COULD BE NO BENEFIT OR ADVANTAGE. THEREFORE THE ADVANTAGE OR B ENEFIT ON THE BASIS OF A COMPARATIVE PRICE SAVER IS SUBJECT TO THE MARK ET PRICE PREVAILING ON A PARTICULAR DAY. IT IS CLEAR THAT THE PROMOTERS GROUP WAS HOLDING A PERCENTAGE OF MORE THAN 25 PER CENT IN THE EQUITY O F R. LTD. AND THEY COULD RETAIN OR MAINTAIN THE SAME LEVEL OF HOLDING ONLY BECAUSE OF THE PREFERENTIAL ISSUE OF SHARES. IF THERE WAS NO SUCH PREFERENTIAL ALLOTMENT THE GROUP S HOLDING WOULD HAVE COME DO WN TO LESS THAN 25 PER CENT TO BE PRECISE AT 22.77 PER CENT. AS RIGHT LY ARGUED BY THE COUNSEL FOR THE APPELLANTS THE MINIMUM HOLDING OF AT LEAST 25 PER CENT ALWAYS HELPED THE PROMOTERS GROUP TO BLOCK THE PA SSING OF ANY SPECIAL RESOLUTION PROPOSED BY ANY HOSTILE GROUP AT ANY POINT OF TIME AS PASSING OF SPECIAL RESOLUTION NEEDED A MINIMUM O F 75 PER CENT OF VOTING POWER. IT MEANS THE PROMOTERS COULD RETAIN THEIR CONTROL OVER THE MANAGEMENT OF THE COMPANY EVEN AFTER THE EURO-I SSUE. A CLEAR NEXUS IS ESTABLISHED BETWEEN THE OBJECT OF RETAININ G CONTROLLING INTEREST AND THE PREFERENTIAL ISSUE OF SHARES. WHEN THE SHARES WERE ACQUIRED BY THE APPELLANT-COMPANIES WITH THE SPECIF IC OBJECTIVE OF RETAINING THE CONTROLLING INTEREST IN R. LTD. THER E CANNOT BE A PRESUMPTION THAT THOSE SHARES WERE ACQUIRED FOR RES ALE IN THE STOCK MARKET AND EARN PROFIT OUT OF THAT. IF A PERSON ACQ UIRES A LARGE BLOCK OF SHARES WITH THE OBJECT OF THE ACQUISITION OF THE CO NTROLLING INTEREST OF THE COMPANY WHOSE SHARES ARE TO BE PURCHASED THE I NFERENCE IS INEVITABLE THAT THE INTENTION WAS NOT TO ACQUIRE TH EM AS PART OF THE PERSON S STOCK-IN-TRADE. SUBSEQUENT DISPOSAL OF S OME OF THE SHARES SO ACQUIRED DOES NOT MAKE THE TRANSACTION AN ADVENT URE IN THE NATURE OF TRADE. ONE OF THE MAIN OBJECTS OF PREFERENTIAL I SSUE OF SHARES WAS TO RETAIN THE GROUP CONTROL IN R. LTD. THEREFORE R. L TD. COULD NOT HAVE OFFERED THE SHARES TO PUBLIC AT LARGE. THAT WOULD D EFEAT THE PURPOSE ITSELF. THE SHARES CANNOT BE QUOTED IN THE MARKET B ECAUSE OF THE COMPULSORY LOCK-IN-PERIOD OF THREE YEARS. THEREFORE THOSE SHARES WERE NOT QUOTED IN THE MARKET. IN THE CIRCUMSTANCES THOSE SHARES THAT 14 COULD NOT BE QUOTED IN THE MARKET CANNOT BE A SUBJ ECT-MATTER OF COMPARISON WITH THE EXISTING SHARES ALREADY QUOTED AND TRADED IN THE STOCK MARKET. THERE IS NO BASIS OR JUSTIFICATION IN MAKING A COMPARISON BETWEEN UNEQUALS. SUCH A COMPARISON IS HYPOTHETICAL . THE APPELLANT- COMPANIES HAD NO PLAN TO PROCURE SHARES FROM THE ST OCK MARKET. THEREFORE THE MARKET PRICE DID NOT APPLY. IT WAS A PREFERENTIAL ALLOTMENT LAWFULLY MADE. IT WAS MADE FOR SOME STRAT EGICAL PURPOSE OF OWNERSHIP AND CONTROL. THE NEW SHARES WERE LOCKED U P FOR A PERIOD OF THREE YEARS. IT WAS NOT POSSIBLE TO SELL THE SHARES DURING THE RELEVANT PREVIOUS YEAR. THE PREMISES RELIED ON BY THE REVENU E PRESUPPOSE THE ARISING OF BENEFIT IN THE NATURE OF INCOME ON THE P RINCIPLE OF CONTEMPLATED SALE. THE SHARES COULD BE SOLD ONLY AF TER THREE YEARS. THE SHARE VALUE IS HIGHLY SUSCEPTIBLE TO MARKET FLU CTUATIONS. THE SHARES OF R. LTD. HAVE FLUCTUATED FROM RS. 62.50 TO RS. 560 PER SHARE DURING THE 23 MONTH PERIOD ENDING MAY 1994. IN THE CIRCUMSTANCES ONE CANNOT SAFELY PREDICT WHAT WOULD BE THE MARKET PRICE OF SHARES AFTER THE EXPIRY OF THREE YEARS. THE MARKET VALUE D EPENDS ON A LOT OF FACTORS INCLUDING GENERAL ECONOMIC CONDITIONS MARK ET BUOYANCY THE STATUS OF PARTICULAR INDUSTRY AND THE FINANCIAL IMA GE OF THE PARTICULAR COMPANY ETC. THE APPELLANT- COMPANIES WOULD GAIN B ENEFIT ON THE SALE OF SHARES ONLY IF AT THAT TIME THE SHARES COMM ANDED A MARKET PRICE HIGHER THAN THE ACQUISITION COST. TO BE SIMPL E THAT PART OF THE MATTER IS UNCERTAIN. THE PROSPECTIVE BENEFIT THAT M IGHT ARISE ON THE SALE OF SHARES IN THE FUTURE IS UNCERTAIN. WHILE DE FINING THE SCOPE OF TOTAL INCOME IN S. 5 THE LAW HAS MADE A TWO-FOLD C HARACTERISATION VIZ. INCOME ACCRUING OR ARISING. BUT WHILE DEALING WITH BENEFIT IN THE NATURE OF INCOME IN THE CONTEXT OF S. 28 LAW HAS CONSPICU OUSLY OMITTED THE CONCEPT OF 'ACCRUING' AND HAS PRESCRIBED ONLY 'ARIS ING'. 'BENEFIT ARISING' IMPLIES BENEFIT ARISING IN THE PREVIOUS YE AR. IN OTHER WORDS THE LAW HAS MADE THE NATURE OF BENEFIT UNDER S. 28(IV) VERY CLEAR AND PRECISE. THAT IS THE BENEFIT MUST BE INCOME IN CHA RACTER; AND IT SHOULD BE ARISING IN THE RELEVANT PREVIOUS YEAR. IN THE PR ESENT CASE THE INCOME IS PROSPECTIVE ON THE CONDITION OF THE FUTUR E SALE OF SHARES. THAT INCOME WHICH IS PROSPECTIVE IN NATURE CANNOT B E CONSTRUED AS 'BENEFIT ARISING' TO THE APPELLANT-COMPANIES IN THE RELEVANT PREVIOUS YEAR. IT IS VERY DIFFICULT TO HOLD THAT THE SAVINGS IN THE ACQUISITION COST OF SHARES ON A COMPARATIVE PRICE ADVANTAGE IS IN THE N ATURE OF BENEFIT CONTEMPLATED IN S. 28(IV).RAMNARAIN SONS (P) LTD. VS. CIT (1961) 41 ITR 534 (SC) AND CIT VS. SUNPIPE & CONSTRUCTION CO. LTD. (1965) 55 ITR 68 (GUJ) RELIED ON; KIKABHAI PREMCHAND VS. CIT (1953) 24 ITR 506 (SC) AND MASON (INSPECTOR OF TAXES) VS. INNES ( 1968) 70 ITR 491 (CA) APPLIED. 19. IN VIEW OF THE ABOVE ANALYSIS AND DECISIONS WE ARE OF THE VIEW THAT NO BENEFIT OR PERQUISITE COULD BE SAID TO HAVE BEEN ACCRUED TO THE ASSESSEE MERELY BECAUSE SHARES HAVE BEEN ALLOTTED T O THE ASSESSEE AT FACE VALUE AND SOME OF THEM HAS BEEN SOLD AT A HIGH ER PRICE. IN THESE CIRCUMSTANCES WE SET ASIDE THE ORDER OF THE LD. CI T[A] IN THIS RESPECT. 15 20. THUS WE ALLOW THIS GROUND OF APPEAL RAISED BY THE ASSESSEE AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 21. IN THE RESULT ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSES AND REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 27 TH DAY OF AUGUST 2010. SD/- SD/- (D.K.AGARWAL) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 27 TH AUGUST 2010. P/-*