Income: Accrual and time – Sections 2(24) (vd) and 28(v) – A. Y. 1995-96 – Acquisition of shares at concessional rate – Prohibition on sale of shares for lock-in period of three years – No benefit in the form of differential price accruing to assessee – No income accrues:

The assessee was allotted nine lakh shares and 8,13,900 shares in the financial year 1994-95 at a concessional rate of Rs. 90 per share. In the A. Y. 1995-96 the Assessing Officer took the view that the market value of the shares was Rs. 455 per share and that the difference of Rs. 365 was to be treated as “benefit” as defined u/s. 2(24) (vd) r.w.s. 28(iv). Accordingly, he levied tax thereon. The Tribunal held that as long as the bar to sell the shares operated, the question of any benefit in the form of differential price, accruing to the assessee did not arise. The Tribunal accordingly deleted the addition.

On appeal by the Revenue, the Telangana and Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:

“i) There exists a distinction between “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.

ii) There was a clear bar for a period of three years prohibiting the sale of shares. 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 could not be said that the sale of the share would take place or that it would yield the differential price.

iii) 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.

iv) The Income-tax Officer had not demonstrated that the income in the form of “benefit” had arisen to the assessee at all. The sole basis for levying tax on the amount was on the assumption that in case the shares were sold, they would have yielded the differential price and that, in turn, could be treated as income. Even if the exercise contemplated by the Income Tax Officer was taken as permissible in law, at the most, it amounted to “accrual” and not “arising” of income.

v) The Tribunal had explained the subtle distinction between the two, in a perfect manner and arrived at the correct conclusion.”