S. 28(iv) of Income Tax cannot be invoked without Business Income from Investment Shares: ITAT rules in Favor of Hero Motocorp [Read Order]

Concerning the case of Hero Motocorp, the Income Tax of Appellate Tribunal ( ITAT ) observed the discounted shares were incorrectly taxed under Section 28(iv) of Income Tax Act, 1961 instead of being treated as Long-Term Capital Gains ( LTCG ).

The tribunal ruled that the concerned Section cannot be invoked if there is no business income from the sale of shares held as investment.

Hero Motocorp Ltd, the appellant-assessee, publicly listed joint venture (JV) between the Hero Group and Honda, Japan. Each party held a 26% equity stake as per the JV Agreement dated 26.12.1983. The JV was set up to manufacture, assemble, import, sell, and service motorcycles in India with Honda’s technical assistance and it had imposed certain restrictions on the parties. A Memorandum of Understanding (1999 MOU) allowed Honda to set up its subsidiary in India, Honda Motorcycle and Scooter India Pvt. Ltd. (HMSI)

A share transfer agreement was signed among Honda Motor Co. Ltd., Hero Investment Pvt. Ltd. (HIPL) and Bhadur Chand Investment Private Ltd. On 22.03.2011, Hero Investment Pvt. Ltd. acquired Honda’s 26% stake in Hero Honda Motors Ltd. at Rs. 739 per share for Rs. 3,841.83 crores. Tax was paid as per Section 195 of the Income Tax Act.

The appellant filed its return on 28.09.2011, declaring an income of Rs. 4,36,35,186. The return was selected for scrutiny, and a notice was issued on 07.09.2012. Before the assessment was completed, the appellant merged with Hero Honda Motors Ltd.,(HHML) now Hero Moto Corp Ltd.,(HMCL) on 01.01.2013.

The assessment under Section 143(3) was completed on 29.01.2014, with an income of Rs. 6,11,79,857, adjusted for profit on sale of investments and interest income as business income, and disallowance under Section 14A. The income was later rectified to Rs. 6,02,96,513 on 08.04.2015. The assessment order was subsequently appealed and overturned in favor of the appellant on 30.10.2018 by the Commissioner of Income Tax Tribunal (Appeals) [CIT(A)]-Ludhiana.

On 23/24.03.2018, a survey was conducted at HMCL's Delhi premises, leading to the collection of documents and statements related to the purchase of HHML shares by HIPL from Honda. This was followed by reassessment proceedings initiated on 31.03.2018.

The reassessment, completed on 29.12.2018, increased the income to Rs. 36,50,88,16,576, adding Rs. 36,44,85,20,063 under Section 28(iv) of Income Tax law for the alleged benefit from the discounted share purchase. The CIT(A) upheld this assessment on 28.03.2023, dissatisfied with the decision the appellant filed an appeal before the tribunal.

The Tribunal considered whether the reassessment order dated 29.12.2018 was invalid due to insufficient evidence of income escaping assessment and the appellant's full disclosure of relevant facts, potentially exceeding the scope of Section 147. Additionally, it examined whether the discount received on shares (purchased at Rs. 739 instead of Rs. 1441) constitutes a taxable benefit under Section 28(iv).

The ITAT stated that there was no failure on the part of the assessee to provide full and accurate material facts during the assessment. The AO cannot reopen the assessment based solely on previously reviewed information. The mention of new details from the Pr. CIT does not meet the legal requirement for reopening, which must be based on fresh, tangible evidence. The Supreme Court in Kelvinator of India  ruled that reopening an assessment without new evidence is an abuse of power.

Further stated that the AO incorrectly applied section 28(iv) of the Act in this case. Honda acquired the shares as a strategic investment to strengthen their joint venture with Hero, not for trading. The shares were held as long-term investments for over 25 years and not sold.  It noted that according to Circular No. 6/2016, such shares should be taxed as long-term capital gains if treated as investments in the books. Thus, any benefit from these shares falls under capital gains, not business income.

The CIT(A) had previously ruled that income from the sale of shares was capital gains, not business income. However, the AO later tried to change this by issuing a notice and arguing it was business income, applying section 28(iv). This was incorrect, as the CIT(A) had already determined the shares were investments and the income was capital gains.

The two-member bench of G.S. Pannu (Vice President) and Anubhav Sharma (Judicial Member) ruled that Section 28(iv) cannot be invoked if there is no business income from the sale of shares held as investment.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates