September 2008
(a) S. 69 — Investments not recorded in books of account are covered. 695 (b) S. 28(iv) — Condition that chargeable income should arise from business — Purchase of investment, at lower value not covered
By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
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Part A — Reported Decisions
47 (2008) 22 SOT 174 (Mum.)
Rupee Finance & Management (P.) Ltd. v.
ACIT
ITA Nos. 3264 (Mum.) of 2006 and
2300 & 2881 (Mum.) of 2007
A.Ys. 2002-03 and 2003-04. Dated 05.02.2007
(a) S. 69 of the Income-tax Act, 1961 — U/s.69, only
such investments are covered, which are not recorded in books of account.
(b) S. 28(iv) of the Income-tax Act, 1961 — The
condition for invoking S. 28(iv) is that the chargeable income should arise
from the business/profession — Purchase, by way of an investment, at a lower
value is not covered.
Pursuant to an MOU between the assessee-company and the group
of promoters, shares of two group companies were transferred to the assessee at
cost. The Assessing Officer, applying S. 69, made an addition on account of the
difference between the market value and purchase price of the shares. The CIT(A)
held that the benefits derived by the assessee were clearly chargeable to tax
u/s.28(iv) and, accordingly, upheld the addition.
The Tribunal held that addition u/s.69 was not sustainable
and there was no income u/s.28(iv). The Tribunal noted as under :
1. S. 69 :
(a) It was not disputed that the investments purchased were
recorded in the books of account.
(b) U/s.69, only such value of the investments may be
deemed to be the income of the assessee for the financial year, if they are
not recorded in the books of account. Thus, S. 69 was not applicable to the
instant case.
(c) The first Appellate Authority possibly realising this
difficulty had chosen to invoke S. 28(iv) and not to give a decisive finding
as to whether S. 69 was applicable or not.
(d) There was no allegation or evidence from the Revenue
that the apparent consideration was not the real consideration. The only
grouse of the Revenue authorities was that the assessee-company had purchased
the shares at a price which was much lesser that the market price.
(e) On these facts, therefore, no addition would be
sustained u/s.69.
2. S. 28(iv) :
(a) The condition for invoking S. 28(iv) is that the
chargeable income of the assessee should arise from the business or in the
exercise of profession. There must be a nexus between the business of the
assessee and the benefit the assessee derived.
(b) In the instant case the assessee purchased certain
shares at a certain price and was required to hold these shares for a period
of three years. It was not in dispute that this was an investment made by the
assessee. Hence, irrespective of the fact as to whether these investments were
made in pursuance of the MOU or not, such investments could not be said to be
a benefit arising out of the business of the assessee.
(c) The effect of this Section has been explained by the
CBDT, from which it is clear that when an assessee purchases goods or assets
at a price lower than the market price, under whatever circumstances, the same
cannot be brought to tax u/s.28(iv).
(d) Only if the seller had incurred an expense or a
liability or had provided a facility to the purchaser, then the value in cash
of such expenses or benefit or perquisite shall be treated as income. In the
instant case, the seller had not incurred any expenses or liability, nor had
provided a facility. It sold its shares at a reduced price.
(e) Therefore, the purchase of shares at a particular price
which was below the market price as an investment was not income by any
stretch of imagination. It could not also be deemed as income u/s.28(iv), as
it was neither benefit or perquisite that had arisen to the assessee from the
business or in the exercise of a profession.
