2013 (3) TMI 392 - AT - Income Tax

Appeal dismissed: Capital reserve from amalgamation not taxable as business income.

Income-tax Officer, Ward 7(3), Kolkata Versus Shreyans Investments (P.) Ltd.

Income-tax Officer, Ward 7(3), Kolkata Versus Shreyans Investments (P.) Ltd. - TMI Issues Involved:1. Whether the issue of shares by the amalgamated company to the shareholders of the amalgamating company constitutes a transfer under Section 2(47)(i) of the Income Tax Act, 1961.2. Application of Section 47(vii) of the Income Tax Act, 1961, in the context of the amalgamation.3. Whether the Assessing Officer was provided an opportunity to address the provisions of Section 47(vii) during the assessment.4. Determination if the amalgamation is an adventure in the nature of trade.5. Whether the capital reserve created due to amalgamation is taxable as business income under Section 28(iv) of the Income Tax Act, 1961.Issue-Wise Detailed Analysis:1. Transfer under Section 2(47)(i):The Assessing Officer contended that the issuance of shares by the amalgamated company to the shareholders of the amalgamating company in lieu of the transfer of the undertaking constitutes a transfer within the meaning of Section 2(47)(i) of the Income Tax Act, 1961. The CIT(A) disagreed, stating that such transactions are considered transfers but are exempt from capital gains tax under Section 47(vi) and Section 47(vii).2. Application of Section 47(vii):The Assessing Officer argued that the CIT(A) erred in applying Section 47(vii) since it was not relied upon by the assessee during the assessment proceedings. The CIT(A) held that the amalgamation falls under the purview of Section 47(vi) and Section 47(vii), which exempts certain transfers from capital gains tax.3. Opportunity to Address Section 47(vii):The Assessing Officer claimed that he was not given an opportunity to address the provisions of Section 47(vii) during the assessment. The CIT(A) did not specifically address this procedural issue but focused on the substantive application of the law.4. Amalgamation as an Adventure in the Nature of Trade:The Assessing Officer concluded that the amalgamation was an adventure in the nature of trade, aimed at increasing the assessee's business capabilities and profits. The CIT(A) rejected this view, stating that the amalgamation was a capital account transaction, not a business transaction.5. Taxability of Capital Reserve under Section 28(iv):The Assessing Officer added Rs. 2,06,87,692 to the assessee's income under Section 28(iv), arguing that the capital reserve created due to amalgamation was a business benefit. The CIT(A) and the Tribunal disagreed, holding that the capital reserve was a capital receipt, not a revenue receipt, and thus not taxable under Section 28(iv). The Tribunal emphasized that capital receipts are inherently outside the scope of income taxable under Section 28(iv) unless specifically included by the Income Tax Act.Conclusion:The appeal by the Assessing Officer was dismissed. The Tribunal upheld the CIT(A)'s decision that the capital reserve created due to the amalgamation was a capital receipt and not taxable as business income under Section 28(iv). The Tribunal also confirmed that the amalgamation was not an adventure in the nature of trade and that the provisions of Section 47(vi) and Section 47(vii) applied, exempting the transaction from capital gains tax.