Reassessment for Perquisites Invalid: Difference in Share Value Not Taxable When Acquired in Exchange for Non-Profit Interest

By | June 23, 2025
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Reassessment for Perquisites Invalid: Difference in Share Value Not Taxable When Acquired in Exchange for Non-Profit Interest and Subsequent Capital Gains Taxed

Issue:

Whether the difference between the intrinsic value of shares and the amount paid by the assessee for acquiring those shares can be taxed as “perquisites” under Section 2(24)(iv) of the Income-tax Act, 1961, particularly when the shares were acquired in exchange for an interest in a not-for-profit organization and subsequent capital gains from the sale of those shares have already been surrendered to tax by the assessee.

Facts:

For the assessment year 2001-02, the assessee acquired 10% shares of a company for ₹20 lakhs. The Assessing Officer (AO) later noticed that the book value of the outstanding equity shares of the company was ₹110 crores. Consequently, the AO reassessed the value of the 10% shares acquired by the assessee at ₹11 crores (representing 10% of ₹110 crores). The AO then made an addition of the difference between this intrinsic value of the shares (₹11 crores) and the amount paid by the assessee for acquiring them (₹20 lakhs) as a perquisite under Section 2(24)(iv) (which includes the value of any benefit or perquisite, whether convertible into money or not, obtained from a company by a director or by a person who has a substantial interest in the company).

However, it was noted that the assessee had received these shares in exchange for his interest in a “not-for-profit organisation.” Importantly, in a subsequent assessment year, the assessee had sold these shares, and the Long-Term Capital Gains (LTCG) arising from that sale were duly surrendered to tax. The revenue had also accepted the cost of acquisition of shares at ₹10 per share (implying acceptance of the original ₹20 lakhs acquisition cost, given 10% of ₹20 lakhs at ₹10 per share would be 200,000 shares).

Decision:

Yes, the court held that, on facts, the provisions of Section 2(24)(iv) were inapplicable, and therefore, the difference between the intrinsic value of the shares and the amount paid by the assessee for acquiring them could not be taxed as perquisites. The decision was in favor of the assessee.

Key Takeaways:

  • Nature of “Perquisite” under Section 2(24)(iv): This section taxes “benefits or perquisites” obtained from a company by directors or persons with substantial interest. It implies that such benefits are usually in the nature of income derived from their position or interest in the company, often linked to remuneration or undue advantage.
  • Exchange for Interest in Non-Profit Organization: The crucial fact that the shares were received in exchange for an “interest in a not-for-profit organisation” changes the character of the transaction. It indicates a transfer of an asset (interest in the non-profit) for consideration (shares), rather than a gratuitous benefit or perquisite from the company.
  • Subsequent Taxation as Capital Gains: The most significant aspect is that the assessee had already sold these shares in a subsequent year and paid capital gains tax on them, with the revenue accepting the original cost of acquisition. Taxing the difference at the time of acquisition as a “perquisite” would amount to double taxation of the same economic value—once as a perquisite and again as a capital gain.
  • No “Profit” at Time of Acquisition: If the shares were acquired in a genuine exchange, the “profit” (or the increase in value) would ideally be realized and taxed at the time of their sale as capital gains, not at the time of acquisition, unless it’s a clear case of compensation in kind or an employee stock option benefit designed to be a perquisite.
  • Consistency of Revenue’s Stand: The revenue’s acceptance of the cost of acquisition for capital gains calculation in a later year implicitly contradicts the idea that the same acquisition involved a taxable perquisite at the time of acquisition.
  • Favor of Assessee: The outcome is highly beneficial to the assessee, preventing the taxation of the deemed difference in share value as a perquisite.
HIGH COURT OF DELHI
Commissioner of Income-tax
v.
Naresh K Trehan
Vibhu Bakhru and Tejas Karia, JJ.
IT Appeal No.1262 of 2011
MAY  20, 2025
Sanjay Kumar, SSC, Ms. Monica Benjamin and Ms. Easha, JSCs for the Appellant. Deepak Chopra, Rohan Khare, Dr. Shashwat Bajpai and Priyam Bhatnagar, Advs. for the Respondent.
ORDER
Vibhu Bakhru, J.- This is an application seeking condonation of delay of 1563 days in filing the present appeal.
CM APPL. 21759/2011
2. We find no credible reasons for condoning the delay.
3. However, we note that the present appeal has been pending before this Court since 2011. In the given circumstances, we consider it relevant to briefly examine the controversy as raised by the Revenue.
ITA 1262/2011
4. The Revenue has filed the above captioned appeal under Section 260A of the Income Tax Act, 1961 [the Act] impugning an order dated 25.01.2007 passed by the learned Income Tax Appellate Tribunal [ITAT] in ITA No. 4679/Del/2005/Dr. Naresh K. Trehan v. Deputy Commissioner of Income-tax [2007] 14 SOT 101 (Delhi), in respect of Assessment Year [AY] 2001-02. The respondent [Assessee] had filed his return of income for the previous year relevant to the AY 2001-2002, which was processed under Section 143(1) of the Act. Thereafter, the return was selected for scrutiny, and the assessment proceedings culminated into an assessment order dated 28.02.2003. In terms of the said assessment order, the Assessee’s return of income was accepted.
5. Thereafter, a notice dated 19.07.2004 was issued under Section 148 of the Act for the reason that the Assessee had acquired ten per cent shares of M/s Escorts Heart Institute & Research Centre Limited [EHIRCL] for a consideration of Rs.20,00,000/-. The Assessing Officer [AO] noticed that the book value of the outstanding equity shares of EHIRCL was Rs.110,14,12,937/-. On the aforesaid basis, the Assessee’s shareholding was valued at Rs.11,01,41,293/-, representing ten per cent of the said value. According to the AO, the intrinsic value of the shares reflected the Assessee’s income that had escaped assessment. It is stated that additions were made in the assessment order of M/s Escorts Limited, which held eighty per cent of the outstanding equity share capital of EHIRCL.
6. The reassessment proceedings culminated in an order passed under Section 148/143(3) of the Act, whereby the Assessee’s income was assessed at Rs.16,61,19,930/-. This included an addition of Rs.10,80,00,000/- on account of the value of the ten per cent shares of EHIRCL. The AO calculated the intrinsic value of the said shares at the rate of Rs.550/- per share, whereas the Assessee had reflected the value of shares at Rs.10/- per share.
7. The Assessee appealed the said decision before the Commissioner of Income Tax (Appeals)-XXVIII, New Delhi [CIT(A)]. However, the learned CIT(A) not only upheld the addition made by the AO but also enhanced the same by Rs.3,90,00,000/- on the basis that the book value of the shares in question was Rs.745/- and not Rs.550/- per share. This led the Assessee to file an appeal before the learned ITAT, which was partly allowed by the impugned order.
8. The learned ITAT rejected the Assessee’s challenge to the reopening of the assessment; however, accepted the challenge on merits of the addition. It was the Assessee’s case that he had received the shares in exchange of his interest in Escort Heart Institute and Research Centre (a not for profit organisation) and therefore, there could be no profit at the time of acquisition of the shares. Consequently, the value of the shares could not be added as a perquisite.
9. The learned ITAT held that the provisions of Section 2(24)(iv) of the Act were inapplicable, and therefore, the difference between the intrinsic value of the shares and the amount paid by the Assessee for acquiring the shares could not be taxed as perquisites.
10. The Revenue has appealed the said decision before this Court.
11. The Assessee has, during the course of the proceedings, filed an additional affidavit confirming that the shares in question were sold during the Financial Year 2007-08 and that the income from gains was duly surrendered to tax. The Assessee also produced a statement of computation of income for AY 2008-09, which indicates that the Assessee had surrendered the long term capital gains from the sale of the said shares to tax. The Assessee’s return for AY 2008-09 was selected for scrutiny. The said proceedings culminated in the assessment order dated 30.12.2010 passed under Section 143(3) of the Act. The Assessee’s computation of long term capital gains was accepted by the Assessing Officer [AO] and the gains from the shares were brought to tax. Thus, we find that the Revenue, having accepted the cost of acquisition of shares at Rs.10/- and having taxed the gains arising therefrom, cannot now take a stand that the cost of the shares in the hands of the Assessee was required to be computed based on their intrinsic value. This clearly militates against accepting that the cost of acquisition of the shares as ?10/- in the subsequent assessment years.
12. In view of the above, we do not consider that any substantial question of law arises for consideration of this court.
13. The appeal is accordingly dismissed.