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2008 DIGILAW 5 (KAR)

Commissioner of Income Tax v. Kirtivan D. Kotian

2008-01-03

DEEPAK VERMA, K.L.MANJUNATH

body2008
JUDGMENT K.L. Manjunath, J.— This appeal is by the Revenue challenging the order passed by the Income Tax Appellate Tribunal, Bangalore Bench, in I.T.A. No. 384/Bang/2001. 2. The assessee who is an employee of M/s. Manikya Plastichem Pvt. Ltd. as an individual filed return of income on July 1, 1996, for the assessment year 1996-97 declaring total income of Rs. 4,68,520. The return was processed under Section 143(1)(a) of the Income Tax Act. During the course of assessment, it was noticed by the Revenue that M/s. Manikya Plastichem Pvt. Ltd. had issued 50,000 equity shares at a face value of Rs. 10 each to the assessee herein and in the same year the said company had issued 4,00,000 equity shares at Rs. 25 per share to TDICI. The Assessing Officer having found the difference in the market value of the shares allotted to the assessee, treated the difference amount of Rs. 15 per share as an escaped income. 3. The Assessing Officer issued a notice under Section 148 of the Act on August 2, 1999, for which the assessee sent a detailed reply stating that as his family members being the promoters of M/s. Manikya Plastichem Pvt. Ltd. pursuant to an agreement entered into between the aforesaid company with M/s. Technology Development and Information Company of India Ltd., had allotted 50,000 equity shares of Rs. 10 each, therefore he contended he has not acquired any benefit or amenity as required under Section 17(2)(iii) of the Act and requested the Assessing Officer to pass an appropriate order. The Assessing Officer rejected the contention of the assessee on the ground that in the same year pursuant to the agreement referred to by the assessee M/s. Manikya Plastichem Pvt. Ltd., has sold 4 lakh equity shares at the rate of Rs. 25 per share and the difference of Rs. 15 per share has to be treated as a benefit derived by the assessee by virtue of his employment in M/s. Manikya Plastichem Pvt. Ltd., Accordingly, the order of assessment was passed. 4. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) which appeal came to be dismissed. 15 per share has to be treated as a benefit derived by the assessee by virtue of his employment in M/s. Manikya Plastichem Pvt. Ltd., Accordingly, the order of assessment was passed. 4. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) which appeal came to be dismissed. Aggrieved by the concurrent findings of the authorities below, second appeal was filed by the assessee before the Income Tax Appellate Tribunal, Bangalore Bench, contending that the authorities did not consider the effect of the agreement entered into between M/s. Manikya Plastichem Pvt. Ltd. and TDICI and further contended that though he was not willing to take shares at the rate of Rs. 10 each pursuant to the agreement as he belongs to the family of the promoter of M/s. Manikya Plastichem Pvt. Ltd. shares were allotted to him as an associate of a promoter. 5. The Tribunal having heard the parties, found that the shares were allotted to the assessee as a promoter of the company and having held that the shares were allotted to him pursuant to the agreement dated November 9, 1995, allowed the appeal of the assessee and set aside the order passed by the Commissioner of Income Tax (Appeals) as well as the Assessing Officer. 6. Being aggrieved by the orders passed by the Tribunal, the present appeal is filed by the Revenue raising the following substantial questions of law : 1. Whether the Tribunal was correct in holding that the reopening of assessments made by the Assessing Officer was without jurisdiction; as it was on account of mere change of opinion when admittedly during the course of assessment of M/s. Manikya Plastichem Pvt. Ltd. it was detected that equity shares worth Rs. 25 had been sold in favour of the assessee at Rs. 10 and the difference had escaped assessment which was liable to be taxed in accordance with the amended Section 147 of the Act? 2. Whether the Tribunal was correct in holding that the transfer of shares by M/s. Manikya Plastichem Pvt. Ltd., the employer in favour of the assessee at a lower rate than that of the market value would not amount to perquisite as the assessee did not acquire any vested right as enunciated by the apex court in Commissioner of Income Tax, Kerala and Coimbatore Vs. L.W. Russel, AIR 1965 SC 49 3. Whether the Assessing Officer was correct in bringing to tax the difference in acquiring shares at Rs. 10 when compared to the market value at Rs. 25 as a perquisite in accordance with Section 17(2)(iii)(c) of the Act read with Board Circular No. 710, dated July 24, 1995 See Swan Mills Ltd. Vs. Commissioner of Income Tax, (1995) 215 ITR 1 Bom 7. We have hard the Counsel for both the parties. 8. At the outset, Counsel for both the parties submit that if this court considers question No. 1 in favour of the Revenue, questions Nos. 2 and 3 need not be considered by this court as those questions would only be academic in nature. In the circumstances, we have to consider question No. 1 formulated by the Revenue. 9. Having heard the Counsel for both the parties, we notice that it is not in dispute that the respondent-assessee is an employee of M/s. Manikya Plastichem Pvt. Ltd. According to him, he is also a director of the company. A copy of the agreement entered into between TDICI and M/s. Manikya Plastichem Pvt. Ltd. dated November 9, 1995, is also produced before us. Learned Counsel for the assessee relying upon special condition (2) of the agreement contends that the assessee has been allotted shares at the rate of Rs. 10 since he happens to be an associate of a promoter of the company. Therefore, he contends that the question of law framed by the Revenue has to be answered against it in view of the findings of the Tribunal. 10. Mr. Seshachala, Counsel for the Revenue, contends that the assessee herein is only an employee-cum-director and not a promoter. He being not a promoter of the company, he cannot rely upon the agreement to get the benefit and to avoid tax. According to him, agreement dated November 9, 1995, cannot be considered in view of the specific provision under Section 17(2)(iii) of the Act and the circular issued by the Department in regard to the allotment of shares by a company to its employees. 11. According to him, agreement dated November 9, 1995, cannot be considered in view of the specific provision under Section 17(2)(iii) of the Act and the circular issued by the Department in regard to the allotment of shares by a company to its employees. 11. Though the Tribunal has given a finding that shares have been allotted to the assessee by virtue of the agreement dated November 9, 1995, in favour of the assessee as a promoter of the company, on facts he cannot be considered as a promoter of M/s. Manikya Plastichem Pvt. Ltd. Though the Counsel for the assessee has relied upon the word "promoters and associates", we are afraid to accept the argument advanced by the Counsel for the assessee since the word "associates" can include any person not only an employee of the company or director of the company, but it includes any person as an associate. The assessee being an employee of the company, having got allotted 50,000 shares at the rate of Rs. 10 each, we are of the opinion that he has been benefited out of such allotment when the same shares are sold at the rate of Rs. 25 per share. We are of the opinion that the Tribunal without considering the facts of the case and without appreciating the words "promoters and associates" at par as envisaged in special condition (2) has allowed the appeal of the assessee wrongly. Therefore, we are of the opinion that the Tribunal was not justified in allowing the appeal of the assessee as the assessee has been benefited as contemplated under Section 17(2)(iii) of the Act. In the circumstances, we have to answer question No. 1 in favour of the Revenue. Therefore, we are not required to consider questions Nos. 2 and 3 as per the statement made by the Counsel for the Revenue. 12. In the result, we allow this appeal and set aside the order passed by the Tribunal and confirm the order passed by the Assessing Officer as well as the Commissioner of Income Tax (Appeals).