Rupee Finance & Management (P.) Ltd. v. Assistant Commissioner of Income-tax, 7(2), Mumbai

ORDER

J. Sudhakar Reddy, Accountant Member. - ITA No. 2300/Mum./2007 is an appeal filed by the assessee and whereas ITA No. 3264/Mum./2006 and ITA No. 2881/Mum./2007 are filed by the revenue. All the appeals pertain to different assessees. As they are inter-connected, applications for consolidation have been moved and by the order of the Hon'ble Vice President, they are consolidated and posted for hearing. As the issues arising from all the three appeals are inter-connected for the sake of convenience they are heard together and disposed of by this common order.

ITA 2300/Mum./2007

2. We first take up ITA No. 2300/Mum./2007. There is only one issue that arises in this appeal, i.e. whether unaccounted investment has been made by the assessee. Shares were purchased by the assessee at a price below the market price. The question is whether the difference between the purchase price and market price can be added as unexplained investment under section 69 of the Income-tax Act or whether it can be treated as a benefit under section 28(iv) of the Act.

Facts in brief :

3. The assessee-company M/s. Rupee Finance & Management Pvt. Ltd. is part of the Essel group consisting of various companies mainly Essel Propack Ltd., Zee Telefilms Ltd. and Pan India Paryatan Ltd. and various other finance and investment companies. The promoter group consists of four brothers. During the year it was submitted that the four brothers have arrived at a Memorandum of Understanding and family settlement with an object to rationalise and re-organise the share of all group companies in the ratio of 40:20:20:20, among the family members of Shri Subhash Chandra, Mr. Laxminarain Goel, Shri Jawaharlal Goel and Ashok Kumar Goel. It is submitted that the shareholdings in Essel Propack Ltd. and Zee Telefilms Ltd., is scattered among number of entities, individuals, etc. and with an object to consolidate the same in one company and to hold the shares in the abovesaid ratio it was agreed to by way of a Memorandum of Understanding, that certain shares of Essel Propack Ltd. belonging to various family members be transferred to the assessee company at cost. The Memorandum of Understanding is dated 17-10-2002. The Assessing Officer observed that the Memorandum of Understanding dated 17-10-2002 is on a stamp paper of Rs. 100 and that it is not registered nor was arrived at by an order of a court. He further observed that it is not as per any Arbitration Award and that it is clearly reversible. Hence in the opinion of the Assessing Officer, the Memorandum of Understanding has no evidentiary value, as it is a self serving document. He quoted section 63 of the Income-tax Act, which gives certain situations where transfer shall be deemed to be revocable for the purpose of sections 60, 61, 62 and 63 of the Act and was of the opinion that the same applies to the facts of this case.

3.1 The Assessing Officer further observed that the persons, who sold the shares of the assessee company at below the market price had also applied for the share allotment from the assessee company and that these shares have been allotted to them in the subsequent year. Thus he concluded that by this methodology the persons who sold their shares to the assessee company at below the market price have reassumed power over the assets and management of the companies in which they earlier had control. Thereafter he relied on the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CIT [1985] 154 ITR 148 and held that the propositions of that case law are applicable to the facts of the case and that the modus operandi adopted by the assessee is clearly an exercise of tax avoidance.

3.2 The Assessing Officer held that the Memorandum of Understanding relied upon by the assessee lacks credence and they fail to satisfactorily explain the discrepancy between the market value and the purchase price. He further observed that these shares so purchased, have been pledged by the assessee with Infrastructure Leasing & Finance Services Limited (hereinafter called 'IL&FS') and loans have been taken by valuing the shares at market value. The loan so raised were advanced by the assessee company to group concerns in which the directors are interested and no interest has been charged from these sister concerns on these loans. Thus he concluded that section 69 of the Act is applicable and made an addition of the difference between the market value and purchase price of the shares. Aggrieved, the assessee carried the matter in appeal.

4. The first appellate authority considered the various submissions made by the assessee and observed that the assessee is engaged in the business of investment in shares and securities and that it is an investment company. He held that it is very clear that there is a huge gap between the purchase price paid by the assessee company for the shares of Essel Propack Ltd. and the market price and this fact is not controverted by the assessee. He observed that the assessee purchased the shares at below the market price and then pledged the same with IL&FS and a loan has been taken by valuing the shares at market price and then amounts have been advanced to group concerns in which directors are interested without charging interest and thus the assessee has derived a benefit out of this transaction. Thus the first appellate authority has come to a conclusion that the benefit derived by the assessee is clearly chargeable to income-tax under the head "Profits and gains of business or profession" for the value of such benefits under section 28(iv). As per the first appellate authority the benefit derived by the assessee is taxable under section 28(iv) of the Act. He relied on the decision in the case of Commissioner Of Income-Tax, Gujarat-I v. Alchemic Pvt. Ltd. [1981] 130 ITR 168 (Mad.) and held that the benefit received in kind was taxable as business income. On the plea of the assessee that it was merely a realignment of interest in pursuance of a family arrangement, among family members and thus it would not be a transfer, the first appellate authority held that a compromise or family alignment is based on the assumption, that there is an antecedent title, of some sort in the parties and the agreement acknowledges and defines what the title is, each party relinquishing all claims of property, other than that falling to his share and recognising the right of the others, as they had previously ascertained, to the proportions allotted to them, respectively. He further went on to hold that the claim of the assessee can be accepted only when the family settlement is arrived at, so as to decide family disputes and rival claims by fair and equitable division or allotment of properties, between the various members of the family. He observed that in the case of the assessee, there is no co-relation between the number of shares transferred by the family members and the number of shares allotted to them in the assessee-company. He further observed that there is no evidence on record to show that there is a dispute amongst the family members and that having shares in a public limited company cannot lead to dispute as regards the holding of shares. On the premises that there is no evidence to show that there any dispute or the possibility of a dispute. The learned CIT(A) held that the claim of family settlement is not bona fide. He relied on the decision of the Hon'ble Gauhati High Court in the case of Commissioner Of Income-Tax v. Mrs. Bibijan Begum. [1996] 221 ITR 836 , wherein a purported family settlement a mother in a muslim family gave up her right in land received as dowry in favour of her children, who had no pre-existing right in such property nor was there any present or likely dispute. Thus he upheld the finding of the Assessing Officer that the modus operandi adopted by the assessee is an exercise in tax avoidance and thus the addition made by the Assessing Officer is to be sustained.

4.1 In the opinion of the first appellate authority the settlement in question is simply for the shares of the public limited company, i.e., Essel Propack Ltd. The first appellate authority has not adjudicated on the plea of the assessee that sections 69 and 69A and 60 to 63 are not applicable to the facts of the case. A reading of the appellate order suggests that the first appellate authority had difficulty in rejecting the contentions of the assessee on the applicability of these sections but he did not want to specifically say so and in this regard but has upheld the addition by invoking section 28(iv) of the Act. Aggrieved, the assessee is in appeal.

5. The learned counsel for the assessee, Shri K. Shivram based his arguments on four propositions. Firstly the family arrangement is recognised by law and is genuine and not a transfer; secondly the purchase of the shares at cost was a genuine decision and thus the ratio of the judgment in the case of McDowell & Co. Ltd. (supra) is not applicable to the facts of his case; thirdly section 69 is not at all applicable to the facts of the assessee's case and that provisions of section 28(iv) is not applicable to the facts of the assessee's case.

5.1 Shri Shivram, elaborating the propositions submitted that, an oral understanding was arrived at between the four brothers during the financial year 2002-03 and this was brought into writing in the form of a Memorandum of Understanding and the family arrangement was to rationalise the shareholdings in all group companies in the ratio of 40:20:20:20. Thus he submitted that as the shareholding in Essel Propack Ltd. was scattered between a number of entities, individuals, etc. there were to be consolidated in one company and the shareholdings of those two companies was also to be held in agreed ratio. As per the Memorandum of Understanding of the shares have to be transferred at the cost at which the seller has purchased and not at the market rate and it was also a condition that such shares cannot be sold by the assessee for a period of 3 years which is a lock-in-period. The assessee had acquired shares of Essel Propack Ltd. from various members of Goel family at the cost at which the Goel family acquired the share in pursuance of this family arrangement. He took this bench to the recitals of the Memorandum of Understanding which are at page 34 of the paper book to explain the object of the family arrangement. He submitted that as per the Memorandum of Understanding, after transferring their shareholdings at cost to the assessee-company, all the members of the family had applied for the shares of the assessee company in the ratio decided as per the Memorandum of Understanding and the shares allotted. The holding pattern of the assessee-company after such allotment was stated as follows :

Thus he submitted that the transfers in question were not to outsiders but just within the family as per family arrangement, at the cost at which they were acquired. He pointed out that all these transactions were approved by the respective board of directors selling companies. He vehemently contended that the contention of the Assessing Officer that there was understatement of purchase cost, by the assessee is absolutely wrong, misplaced and without any proof and that the assessee has not paid any money or sale consideration over and above the price mentioned in the books. He also pointed out that the Assessing Officer issued notice under section 133(6) to all the parties from whom shares were purchased and verified the details and did not find any discrepancy in the purchase price or any other incriminating evidence. On the observations of the Assessing Officer, he submitted that - (a) it is not necessary that there should be an existing dispute for arriving at a family arrangement nor it is necessary to have to contemplation of a dispute. He submitted that a family arrange-ment can be made to avoid potential future disputes not only between the family members, but also near relatives or the persons who have some sort of interest or antecedent title. Family arrangement as per Shri Shivram can be made to have harmony in the family members and for this submission he relied on the judgment of the Hon'ble Madras High Court in the case of CGT v. D. Nagrirathinam [2004] 266 ITR 342 . He further submitted that family arrangements may be even oral and no registration is required if it was an oral arrangement brought into writing at a later date. Thus, though the family arrangement is not registered he submits that it has evidentiary value and is binding on the persons who were parties to it and also operates as an estoppel to preclude any of the parties, who have taken advantage from this arrangement, from revoking or challenging the same. He relied on the decision of the Hon'ble Supreme Court in the case of Kale v. Deputy Director of Consolidation [1976] 3 SCC 119 (pages 131-154 Paras 10, 138 & 139). He further submits that like a partition, family arrangement is not a transfer and on the contrary is a transaction between members and for the benefit of the family, so as to preserve the family property. He submits that such an arrangement is based on the assumption that there was an antecedent title with the parties and the agreement acknowledges and defines what the title is. Thus it was for this reason the family arrangement, as per the learned counsel does not amount to conveyance of property for a person who has title or a person who has no title. For this proposition he relied on the following case laws :

S.K. Sattar S.K. Mohd. Choudhari v. Gundappa Amabadas Bukate [1996] 6 SCC 373 (Referred in 97 ITD 291 (Chennai)(301)

CIT v. A.L. Ramanathan [2000] 245 ITR 494 (Mad.)

He further relied on the decision of the Tribunal in Kay ARR Enterprises v. Jt. CIT [2005] 97 ITD 291 (Chennai) and submitted that this decision was confirmed by the Hon'ble High Court vide order dated 6-7-2007 and the proposition therein supports his contention. He further submits that the Mumbai Bench of the Tribunal in the case of Pankaj Mansukhlal Doshi v. ITO [IT Appeal No. 8892 (Bom.) of 1990 for the assessment year 1987-88] "D" Bench order dated 29-5-1998 has considered a similar arrangement and held that it was a genuine family arrangement. He further submits that the first appellate authority had wrongly relied on the judgment of the Hon'ble Gauhati High Court in the case of Bibi Jan Begum (supra) as in that case the children had no right to land as per the customary law among muslims and thus the transfer was not recognised by the Court.

5.2 On facts he submits that the Assessing Officer accepted the consider-ation in the hands of the transferors and thus he cannot make any addition in the hands of the transferees. He further submits that the purchase of shares was made at a price which was incurred by the seller, in pursuance of the MOU and thus the decision was genuine and the ratio of the judgment of McDowell & Co. Ltd.'s case (supra) would not apply. He relied on the decision of the Hon'ble Supreme Court in the case of UOI v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) and the judgment of the Hon'ble Gauhati High Court in the case of Commissioner Of Income Tax… v. George Williamson (Assam) Ltd.…. [2004] 265 ITR 626 . He vehemently contended that if the transaction is otherwise valid in law and results in reduction of tax to an assessee, the same cannot be brushed aside on the ground that the underlying motive of entering into the transaction by the assessee was to reduce its tax liability. He relied on some more case laws in support of his proposition that the Assessing Officer as well as the first appellate authority was wrong in applying the propositions laid down in McDowell & Co. Ltd.'s case (supra) to the facts of the case.

5.3 On the application of section 69 the learned counsel submits that the CIT(A) has agreed that section 69 cannot be invoked on the facts and circumstances of the case and that the Revenue has not come in appeal disputing such findings of the CIT(A). On Section 69 he submits that the section is applicable only when such investments are not recorded in the books of account, the assessee offers no explanation about the nature and source of investment or in case where such explanation is not satisfactory. He submits that the investments have been recorded in the books and the assessee has given full explanation and produced all evidences and thus section 69 is not attracted. The Assessing Officer as per the learned counsel for the assessee has not given any evidence or instance of any investment made out of the books of account.

5.4 On the application of sections 60, 61, 62 and 63, the learned counsel submits that the Assessing Officer has confused himself as these sections relate to clubbing of income as head note to Chapter V itself reads that "Income from other persons, included in assessee's total income". Without prejudice, he submits that sections 60 to 66 can be applied to the transferor and not the transferee. He contends that a company is an artificial person and separate legal entity and an individual holder, has power to appoint director and that the transferors were already having control and continued to have control over the companies but not over the assets of the company or its income. Thus, the MOU, as per Shri Shivram has provided for re-organisations of shares but without changing the control. He further submits that sections 60 to 63 relates to income, i.e. revenue in nature and not capital receipts. Thus he contends that these sections were wrongly invoked by the Assessing Officer.

5.5 On the applicability of section 28(iv) the learned counsel submits that this section is not at all applicable to the facts of the assessee's case as the shares were held as investment and not as stock-in-trade and further there is a three year lock-in-period for these shares. He submits that the provisions of section 28(iv) are applicable only if there is direct nexus between the transaction and the benefit. He referred to the Memorandum explaining the provisions, a copy of which is at page 162 of the assessee's paper book and the circular explaining the provisions which is at page 163 of the paper book and submitted that there is no nexus between the business of the assessee and the benefit in question. He further argued that the benefit as arrived at by the Assessing Officer is notional and it cannot be quantified as on the date of transfer because the assessee has not resold the shares. He submits that in the absence of transfer of shares during the impugned financial year, the question of accrual or receipt of benefit does not arise. He submitted that the CIT(A) has wrongly relied upon the judgment of the Hon'ble Allahabad High Court in the case of Chandra Katha Industries v. CIT [1982] 138 ITR 168 as in that case the assessee had received excise duty refund which was credited to P&L account and the court had held that only non mandatory benefits or perquisites is covered under section 28(iv) and the Revenue was denied the benefit of raising an additional ground as regards the applicability of section 41(4).

5.6 Shri Shivram vehemently contended that in the present case the assessee has not received any benefit at all in terms of section 28(iv) and further the quantification of the benefit based on price difference is erroneous and that the benefit, if any, would accrue only on the date of sale. He once again relied on the family arrangement and submitted that the purchase of shares were made with specific purpose and there was neither any contemplation of immediate sale of the shares or plans to procure shares from the market at the market price. He referred to the fluctuation of the market value of the shares. He further relied on the decision of the Hon'ble Hyderabad Bench of the Tribunal in the case of KNB Investments (P.) Ltd. v. Asstt. CIT [2001] 79 ITD 238 for the proposition that section 28(iv) does not apply. Similarly he relied on the case law Dy. CIT v. Chand Merchant (P.) Ltd. [2006] 99 TTJ (Mum.) 712 to buttress his point that section 28(iv) is not applicable in cases where shares are purchased or received by an assessee at a cost which is below the market value or free of cost on account of exchange of units.

5.7 He further submitted that the word "benefit" or "perquisite" have been used in the said section 28(iv) have to be read together and would draw colour from each other. He argued that the term "perquisite" denotes meting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person and from the very beginning the person providing such facilities or concessions knows that whatever is being done is irretrievable to him and has been granted as a privilege or right of that person. For this proposition he relied on the decision of the Mumbai Bench of the Tribunal in the case of Helios Food Improvers (P.) Ltd. v. Dy. CIT [2007] 14 SOT 546 wherein the Hon'ble Tribunal has followed the ratio of the judgment of the jurisdictional High Court in the case of Mahindra & Mahindra Ltd. v. CIT [2003] 261 ITR 501 (Bom.).

5.8 The learned counsel further referred to the introduction of section 50C by the Finance Act, 2002 with effect from 1-4-2003 and submitted that even this section though introduced after the impugned assessment year, is applicable only to the transferor. He relied on the decision of the Hon'ble Supreme Court in the case of Commissioner Of Income Tax, Gujarat v. A. Raman & C. [1968] 67 ITR 11 for the proposition that income which could have but has not been earned is not taxable as income accrued. He further goes to state that section 56(iv) which was introduced with effect from 1-9-2004 to bring to tax, in the hand of the recipients, the gift as income subject to certain exceptions is also not applicable to the assessee for the impugned assessment year. He pointed out that the Gift-tax Act was also not made applicable for 1-10-1998 and hence it could not be invoked.

5.9 Thus he concluded his argument of submitting that there is no provision in the Income-tax Act, to tax the difference between the actual amount paid for the purchase of shares and the market value and that the liability if at all could be fastened only on the seller and thus, he submitted that the addition made by the Assessing Officer as confirmed by the CIT(A) is contrary to the provisions of the Income-tax Act and hence is liable to be deleted.

6. The learned departmental representative, Shri S.D. Srivastava vehemently controverted the arguments of the learned counsel for the assessee and submitted that the CIT(A) has basically stressed on two points on page 7 at para 3 of his order. The first is that the assessee is engaged in the business of investments in shares and securities and thus the purchase of shares at a value less than the market value is a benefit flowing out of the business of the assessee and thus attracting section 28(iv). The second point, as per the learned departmental representative is that the entire arrangement is a colourable device for the detailed reasons mentioned both by the Assessing Officer as well as the CIT(A). He pointed out that the very fact that the assessee company after purchasing the shares at a price which is much lower than the market value, had pledged these shares at market value, and obtained loans for being funnelled as interest free advances to group concerns, demonstrates that this is a device to evade tax. He vehemently contended that there is nothing in praesenti calling for a family arrangement. He submits that the assessee company is a juristic entity and cannot be considered as part of any family so as to get affected by a family arrangement. As per Shri Srivastava, most of the parties involved in those adjustments are artificially juristic persons and their transactions should be looked into from that very point of view and cannot be equated with division or realignment of ancestral property held by family members who have common bondage or members who have some sort of a right or entitlement to certain assets. Thus he submits that the entire transactions should be viewed independent of the so-called family arrangement and transfer of shares from one company to another at a certain price, should be viewed as an independent transaction, and not coloured by the so-called family settlement.

6.1 To substantiate his argument that this is a colourable device he relied on the reasons given by the Assessing Officer in the assessment order, as well as by the CIT(A) in his order. He relied on the propositions laid down in the case of CIT v. L.N. Dalmiya [1994] 207 ITR 89 (Cal.) . In this case the assessee had purchased shares to acquire the controlling interest in a company. Thereafter those shares were sold at a lower rate to other companies which were owned by the assessee himself. It was held that these transactions were to avoid tax, as the assessee still retained the controlling interest of that company and thus the loss was held as not allowable. The learned departmental representative further relied upon the judgment of the Hon'ble Madras High Court in the case of K. Venugopal v. Commissioner Of Income-Tax [2001] 248 ITR 251 in which case the assessee had executed a deal, wherein he has given an amount to his minor son. The amounts were transferred without consideration. There was no existing dispute between the assessee and his minor son and other children with regard to the property. On these facts, the Hon'ble Court held that the assessee has transferred certain amounts out of his absolute property to his minor son, under the so-called family settlement and in absence of any existing dispute between the assessee and his minor son and other children with regard to the property, it was a transfer without consideration and hence a gift to the minor son. Under these circumstances, the court held that the interest accruing on gifted amount to minor son is to be added to the income of the assessee under section 64(1)(v).

6.2 The learned departmental representative further relied on the decision of the Ahmedabad Bench of the Tribunal in the case of Kusumben Kantilal Shah v. ITO [1996] 56 ITD 476 . In this case a private limited company had two groups of shareholders managing its affairs as directors also. The first group consisted of three persons including the assessee, while the second group consisted of four members. By virtue of an agreement, the company agreed to allow the purchaser to develop its property and also for that purpose of sale to the purchaser of its available and unutilised floor space index of the entire property. In order to resolve the differences between two groups, the matter was referred to Arbitration. In pursuance to the Arbitration Award the assessee received certain amounts as price of her share. The Assessing Officer levied capital gains. The first appellate authority upheld the same. Under these circumstances the bench observed that the existence of a family dispute is a sine qua non for the family settlement and that family arrangement is made by the parties belonging to the same family in a bona fide manner so as to put an end to various disputes among themselves in respect of properties in which their interest is common, but such interest cannot be determined in specie or severally. It is also held that there should be an antecedent title in the properties belonging to the family before a family arrangement could be made among various claimants to the title. The assessee's plea was dismissed on the ground that the same is not covered by the alleged family arrangement, as in this case, the groups of shareholders, though related somehow, belonged to altogether different families and there was nothing in common among them.

6.3 In this judgment there is an observation wherein it is stated that the company being a corporate entity, was in no way concerned with the dispute amongst the shareholders. It was also held that in the absence of a dispute it could not be concluded even if the corporate veil was penetrated and the arrangement was made to secure peace and harmony amongst the members.

6.4 Shri Srivastava further relied on the decision of the 'E' Bench of the Bombay Tribunal in the case of Panalal Silk Mills Pvt. Ltd. v. Commissioner Of Income-Tax. [1993] 44 ITD 458 . Here also the company was managed by two groups of shareholders and they relied upon a family arrangement for arguing that there was no transfer. In such circumstances the bench held as follows :

"9. .....A family arrangement is an agreement among the members of the same family, intended to be generally and reasonably for the benefit of the family, either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour. The essentials of a family arrangements are—

(i) There must be an agreement amongst the various members of the family intended to be generally and reasonably for the benefit of the family.
(ii) The agreement should be with the object either of compromising doubtful or disputed rights, or for preserving the family property, or the peace and security of the family by avoiding litigation or for saving its honour.
(iii) Being an agreement, there is consideration for the same, the consideration being the expectation that such an agreement or settlement will result in establishing or ensuring amity and goodwill amongst the relations."

6.5 Reliance was also placed on the judgment of the Calcutta Bench of the Tribunal in the case of Edward Keventer (P.) Ltd. v. Dy. CIT [2004] 89 ITD 347 for the proposition that the authorities have the required power to go behind transactions so as to find out the truth of the matter. In this decision the Tribunal has surveyed and summarised the legal position vis-a-vis the powers of the Income-tax authorities in relation to sham transactions.

6.6 Shri Srivastava vehemently contended that a plain reading of the Memorandum of Understanding does not suggest that there was a family arrangement or settlement. As per him it simply points out to corporotisation of assessee's activities and there was no partition by meets and bounds. Only the shares in a particular set of corporate concerns were realigned under the guise of family arrangement. He stressed on the point that there was neither a dispute nor there was a necessity for writing a Memorandum of Understanding and that the same was not registered and the transfers have taken place between two independent juristic legal entities and that the shares purchased were pledged at market rate and a loan was taken and this amount has been passed on to sister concern as interest free advances. Thus he submits that once the assessee is not covered by a family arrangement, then the obvious conclusion is that this is a transfer and that it is in pursuance to and in furtherance of carrying on all the business of the assessee company. The main object of the asssessee company, he pointed out, was investment in shares.

7. Shri Shivram joining the issue submitted that the facts of case of L.N. Dalmiya (supra) are different and in that case also the loss was not allowed in the hands of the transferor of the company and this had not affected the transferee. He also submitted that this issue was considered by the Special Bench of the Tribunal in the case of Wallfort Shares & Stock Brokers Ltd. v. ITO [2005] 96 ITD 1 (Mum.) . On the judgment of Hon'ble Madras High Court in the case of K. Venugopal (supra) Shri Shivram submits that in that case also the amount was taxed in the hands of the transferor and not transferee. He further submits that in this case shares were purchased at cost and it was not a case of gifting of money. On the decision in the case of Kusumben Kantilal Shah (supra) he pointed out that gains were held as taxable in the hands of the transferor and not transferee and the Tribunal was concerned with section 2(47) and not with section 28(iv). Similarly in the case of Panalal Silk Mills (P.) Ltd. (supra) Shri Shivram submits that the Tribunal was concerned with the case under the Gift-tax Act and not under the Income-tax Act. Coming to the judgment of Edward Keventer (P.) Ltd.'s case (supra) he submitted that this case can be invoked only when the transactions are not genuine and whereas in his case the entire arrangement was genuine. Even otherwise he submits that the Tribunal was not dealing with the issues under section 28(iv). He reiterated his contention that there is no section under the Income-tax Act which can bring to tax any amount under the facts and circumstances of the case.

8. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record and the orders of authorities below as well as the case laws cited by both the parties, we hold as under :

8.1 The first issue is whether the Memorandum of Understanding in question can be considered as family arrangement or not. The second issue is whether the family arrangement is a make belief and sham transaction. The third issue is whether the difference between the market value of the shares and the purchase price can be brought to tax in the hands of the assessee company under section 69. The fourth issue is as to whether the difference in question referred to above, can be brought to tax in the hands of the assessee company under section 28(iv).

8.2 We take up third and fourth issues first. Section 69 reads as follows :

"69. Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year."

The undisputed facts in this case are that the assessee 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 purchaser. It is also not disputed that all these investments were recorded in the books of account. Under section 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 section 69 is not applicable in this case. The first appellate authority possibly realising this difficulty has chosen to invoke section 28(iv) and not to give a decisive finding as to whether section 69 is applicable or not. We have to mention here that it 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 less any evidence that the apparent consideration is not the real consideration. The only grouse of the revenue authorities have is that the assessee company has purchased the shares at a price which much lesser than the market price. This, as already stated is not a disputed fact. Thus on these facts we hold that no addition is sustainable under section 69.

8.3 This brings us to whether the difference in question can be considered as income under section 28(iv)? The section reads as follows :

"28. The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession',—

(iv)the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession."

Circular explaining the provisions of new section 28(iv) at clause 82 states as follows :

"Assessment of the value of any benefit or perquisite arising from business or exercise of a profession, as income from business or profession.

82. A new clause (iv) has been inserted in section 28, with effect from 1-4-1964, by section 7 of the Finance Act, 1964, under which the value of any benefit or perquisite (whether convertible in money or not) arising from business or the exercise of a profession will be chargeable to tax under the head 'Profits and gains of business or profession'. A corresponding amendment has been made to section 2(24), including the value of such benefit or perquisite in the definition of the term 'income' vide new sub-clause (va) inserted in section 2(24) by section 4(c)(i) of the Finance Act, 1964.

83. The effect of the above-mentioned amendment is that in respect of an assessment for the assessment year 1964-65 and subsequent years, the value of any benefit or amenity, in cash or kind, arising to an assessee from his business or the exercise of his profession, e.g. the value of rent-free residential accommodation secured by an assessee from a company in consideration of the professional services as a lawyer rendered by him to that company, will be assessable in the hands of the assessee as his income under the head 'Profits and gains of business or profession'." [Emphasis supplied]

The condition of invoking section 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. The assessee in this case purchased certain shares at a certain price and was required to hold these shares for a period of three years. It is not in dispute that this was an investment made by the assessee-company hence irrespective of the fact as to whether these investments were made in pursuance of the Memorandum of Understanding or not, we are of the consideration opinion that such investments cannot be said to be a benefit arisen out of the business of the assessee. Moreover the assessee is the purchaser of the shares and there is no event that has taken place during the current accounting year which can be said to have resulted in any income being accrued or arisen to the assessee company during the year. If at all the assessee transfers the shares, then the benefit of profit in question can be brought to tax in those particular years. In all the case laws relied upon by the revenue have been discussed by us while narrating their arguments and in these cases the tax has been levied on the transferor and not the transferee. The effect of this section has been explained by the CBDT in the above cited circular and from this 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 under section 28(iv). The section covers fringe benefits that are availed in addition to consideration earned in carrying out a profession or while doing business. A benefit that is passed on by one party to another, in addition to cost or sale price, is covered in this proviso. This is clear from the example quoted. In our humble opinion, this section cannot be invoked under the present facts and circumstances.

8.4 Be it as it may the co-ordinate Bench of the Tribunal (F-Bench, Mumbai) in the case of Helios Food Improvers (P.) Ltd. v. (supra) held that section 28 is a charging section and takes into account the receipts of specified categories of all incomes as well as the receipts which could be generally construed as income in the ordinary sense. But the fact remains that all the receipts mentioned in section 28 are inherently of income nature except in case of receipt under a given amount of insurance policy. It also states that section 28(iv) refers to any benefit or perquisite and this means that such benefit or perquisite should be in the nature of income from the very beginning or it must have characteristics of income before it becomes chargeable at a later stage if the original transaction is completed as designed. The bench further observed that the words 'benefit' or 'perquisite' have been used in the said section and have to be read together and would draw colour from each other. Normally the term 'perquisites' denotes meting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person or from the very beginning the person providing such facility or concession knows that whatever is being done is irretrievable to him, as it has been granted to a person as a privilege or right of that person. Thus it was concluded that the word 'benefit' has to be interpreted in the same manner, that is, at the time of execution of the business transaction one party should give to the other party an irretrievable benefit or advantage, as an obligation or facility or a concession. In our opinion, 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 this case, the seller has not incurred any expenses or liability or has provided a facility. It sold its shares at a reduced price.

8.5 Applying these propositions to the case on hand, the purchase of shares at a particular price which is below the market price as an investment is not income by any stretch of imagination. It cannot also be deemed as income under section 28(iv) as it is neither benefit or perquisite that has arisen to the assessee from the business or in the exercise of a profession. The Hon'ble Gujarat High Court in the case of CIT v. Bhavnagar Bone & Fertilizer Co. Ltd. [1987] 166 ITR 316 has upheld the Tribunal's finding that there must be a nexus between the business of the assessee and the benefit which the assessee has derived for the purpose of attracting provisions of section 28(iv). At page 320 its has observed as follows :

"After referring to various decisions, the Tribunal observed, 'These decisions make it abundantly clear that the benefit received or receivable by a person must be one which has intimate connection with business and even if such benefit is derived by way of bounty, nevertheless it would be taxable, if accrues to it or if received by it in the course of business or employment of office."

In this case the revenue has not demonstrated what the business connection or the business done between the seller and the purchaser of the shares. No case has been made out that privilege or benefit or concession has been passed on by the seller to the buyer as part and parcel of a business transaction. A benefit has been assessed by the CIT(A). Mere purchase of shares by way of investment cannot be considered as business of the company though the objects of the company enable it to investment as well as deal in shares. As already stated there is no event which can said to have resulted in accrual of income to the assessee. Thus on this factual matrix, mere purchase of shares, as an investment, with the lock-in-period of holding, for a consideration which is less than the market value, cannot be brought to tax, as a benefit or perquisite under section 28(iv) of the Act. The assessee has not in this case, secured any benefit or perquisite in consideration of a business transaction undertaken with the sellers of the shares. Thus this issue is decided in favour of the revenue and against the assessee.

8.6 Coming to the reference to sections 60 to 63, the same are not at all applicable as they fall under Chapter V which deals with income from other persons, included in assessee's total income.

8.7 Thus, the amount in question, in our considered opinion, has been wrongly brought to tax by the revenue authorities, in the hands of assessee.

8.8 As we have given our findings on the applicability of section 69 as well as section 28(iv), we need not have to go into the issue as to whether the arrangement in question is a family arrangement or whether transfer of shares by an artificially juristic person can be brought into the ambit of family arrangement, etc. This much need to be said that the allegation of the revenue that this is a sham transaction or a make belief transaction is not borne out of record. By now it is well settled that the taxing authorities are not entitled in determining whether a receipt is liable to be taxed, by ignoring the legal character of the transaction, which is the source of the receipt and to proceed on what they regard as 'the substance of the matter'. The taxing authority is entitled and is duty bound to determine the true legal relationship resulting from the transaction. If the parties have chosen to conceal income by a device, it is open to the taxing authorities to unravel the device and determine the true charactership of the relationship. But at the same time the legal effect of a transaction cannot be displaced by probing into the substance of the transaction. Coming to the facts of this case, it is not known who are the owners of shares of the companies which have transferred shares in Essel Propack Ltd. to the assessee company. What is the family holdings in each of the companies, prior to sale and after sale is not known. What is the loss or sacrifice of each family member and the gain of the other due to the Memorandum of Understanding is not known. The apparent fact is only that one company sold shares to another company. Both are juristic entities and are not bound by family arrangement. Shares held by a company are its assets, and the shareholders, even if they are family members, do not own the shares of Essel Propack Ltd. The transaction cannot be looked into from the angle of the Memorandum of Understanding or family arrangement. Mr. Shivram in the course his arguments stated that the companies' assets are different from the family assets. If so, we do not understand how sale by a company to its assets to another company can be part of a family arrangement. A company is a distinct juristic entity. Its assets cannot be mixed up with the assets of a shareholder. If the shareholder has sold his shares to another person in terms of a family arrangement, then only it can be claimed that section 2(47) does not apply. The assessee in this case, wants the Tribunal to lift the corporate veil and assume that the assets of the companies controlled by the assessees are that of the family members themselves. Company's assets cannot be dealt with in such a manner and the company law does not permit the same. For this sole reason we are of the considered opinion that the contention of the assessee that the sale of the shares by certain companies to the assessee company are not transfers, is not in accordance with law. This contention has to be necessarily rejected. As we have rejected this contention we need not go into the aspect whether the family arrangement is a colourable device or not. In any even, in view of our finding on the applicability of section 69, section 28(iv) detailed findings on this aspect would not alter the results of this appeal.

9. In the result, the appeal of the assessee is allowed.

10. Coming to ITA Nos. 3264/Mum./2006 and 2881/Mum./2007, these are appeals by revenue directed against separate but identical orders of the CIT(A) dated 7-12-2006 and 17-3-2006 respectively. These two companies had sold their shares held by them in Essel Propack Ltd. to Rupee Finance & Management Pvt. Ltd. at the cost for which they had purchased the shares which was much lesser than the market price. The Assessing Officer brought to tax the difference On appeal the first appellate authority applied the decision of the Hon'ble Supreme Court in the case of K.P. Verghese [1981] 131 ITR 597 and the judgment in the case of CIT v. Shivakami Co. (P.) Ltd. [1986] 159 ITR 71 and other case laws and has come to a conclusion that the transfer of shares have been made by the company and not by family members and the company certainly is a distinct entity and cannot be a part of the family arrangement. He also held that the assets said to have been transferred in pursuance to a family members' arrangement, are not family assets with the common interest of the family members therein and thus cannot come within the ambit of a family arrangement. He held that the shares of Essel Propack Ltd. share held by the assessee company are not family property of Goel group. Thus he upheld the order of the Assessing Officer to the extent it is held that these shares cannot be said to have been transferred under a family arrangement so as to bring them out of the ambit of section 2(47) of the Act.

11. He further referred to the computation of capital gain under section 48 of the Act and after extracting the observations of the Apex Court in the case of K.P. Varghese ( supra) struck down the addition on the ground that the Assessing Officer has not demonstrated that the assessee has received more than what consideration has been shown by the assessee in the records. At para 7.6 of the CIT(A)'s order in the case of Briggs Trading Co. (P.) Ltd. the erstwhile section 52(2) was considered and the introduction of section 50C by the Finance Act, 2002 with effect from 1-4-2003 was also considered. Thereafter he observed that the benefit received by the transferee company in receiving the shares at less than the market value could not be taxable under section 28(iv) in the hands of the transferee company through this issue was not before him. The addition on account of capital gains has been deleted. Aggrieved, the revenue is in appeal.

12. We have heard Shri S.D. Srivastava, the learned departmental representative and Shri Hemendra N. Shah the learned counsel for the assessee.

13. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record and the orders of the authorities below as well as the case laws cited we are of the considered opinion that the order of the first appellate authority has to be upheld in both these cases for the following reasons :

13.1 As already held in the order of Rupee Finance & Management Pvt. Ltd. there is no allegation much less, any evidence to show that these assessees before us have received monies in excess of amounts of sale consideration recorded and disclosed in the transaction for the sale of shares. The first appellate authority has rightly noted that under section 48 the starting point for computation of capital gains is the amount of full value of consideration received or accruing as a result of a transfer of the capital asset. The Hon'ble Supreme Court in the case of K.P. Varghese (supra) held that sub-section (2) of section 52 can be invoked only when the full value of the consideration is received in respect of a transfer is shown at a lesser figure than that which is actually received by the assessee. It further laid down that the burden of proving such understatement of consideration is on the revenue and that the sub-section has no application in the case of a bona fide transaction, where the true consideration received by the assessee has been declared or disclosed by him. Section 50C, has come into the statute only with effect from 1-4-2003 by Finance Act, 2002 and is not applicable to the impugned assessment years. Hence, for the period prior to the insertion of section 50C no addition can be made by invoking the ratio of this section. The first appellate authority at page 21 of his order has rightly observed that, what in fact never accrued or was never received cannot be computed as capital gain. He relied on the decision of Calcutta High Court in the case of CIT v. Smt. Nandini Nopani [1998] 230 ITR 679 . He rightly held that it is manifest that the consideration for the transfer of capital asset is what the transferor receives, in lieu of assets he parts with, i.e., money or monies worth and that the expression 'full consideration' cannot be construed as having reference to the market value of the assets transferred but refers to the price bargained for by the parties and it cannot refer to the adequacy of the consideration. He also rightly observed that the Legislature has used the words 'full value of the consideration' and not 'fair market value of the assets transferred'. He recorded that the Assessing Officer has not brought on record any material to show that the assessee has received more than what has been disclosed in the books and under these circumstances the difference cannot be brought to tax under the head 'Capital gains'. We fully agree with these findings and the appeals filed by the revenue fail.

14. In the result, the appeal filed by the assessee in ITA No. 2300/Mum./ 2007 is allowed and the appeals filed by the revenue in ITA No. 3264/ Mum./2006 and ITA No. 2881/Mum./2007 are dismissed.