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.

The Tribunal dismissed the appeal by the Assessing Officer, upholding the decision that the capital reserve resulting from the amalgamation was a capital ... Invoking the provisions of sec 28 - Issue of shares by amalgamated company to the its shareholders in lieu of transfer of undertaking of the amalgamating company - whether are all transfers within the meaning of section 2(47)(i) - whether CIT(A) erred in considering the provisions of Section 47(vii) when it has not been relied upon by the assessee during the course of assessment proceedings under section 143(3) - Held that:- Section 28 sets out two conditions precedents for such taxability i.e. (i) that there should be benefits or perquisites and that (ii) that such benefits or perquisites should arise from the business or exercise of the profession. In the case of Mahindra & Mahindra Limited v. CIT (2003 (1) TMI 71 - BOMBAY HIGH COURT) in a significant distinction between revenue and capital receipts, held that waiver of principal amount in respect of imports of plant and machinery could, by no stretch of logic, be treated as 'business income', and, therefore, as an income taxable under section 28(iv). One must bear in mind the fact that when a particular advantage, perquisite or receipt is not in the nature of income, there cannot be any occasion to bring the same to tax under section 28(iv). In the case of Padmaraje R Kadambande v. CIT (1992 (4) TMI 215 - SUPREME COURT) observed the amounts received by the assessee during the financial year in question have to be regarded as capital receipts, and, therefore, are not income within meaning of section 2(24) of the Income Tax Act. This clearly shows, as is the settled law, that a capital receipt, in principle, is outside the scope of income chargeable to tax. Howsoever liberal or narrow be the interpretation of expression 'income', it cannot alter character of a receipt, i.e. convert a capital receipt into revenue receipt or vice versa. The crucial distinction between capital and revenue cannot be blurred or nullified by even the most liberal interpretation of expression 'income'. Also see Dr K George Thomas v. CIT (1985 (9) TMI 2 - SUPREME COURT) wherein held that the burden is on the revenue to establish that the receipt is of a revenue nature' though 'once a receipt is found to be of revenue character, whether it comes under exemption or not, it is for the revenue to establish'. To sum up, unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv). The reference to benefits which can be brought to tax under section 28(iv) for benefits 'arising from the business' also indicates that such benefit must be a business receipt, or revenue receipt, in nature. This was a case of amalgamation in the nature of merger, an exercise in that of pooling of resources, as also pooling of assets, into the company in which two or more companies are blended. It is a process of corporate reconstruction and it is only with the approval of Hon'ble jurisdictional High Court that this exercise is carried out. As a result of amalgamation, the assessee, being the transferee company, will increase its assets and liabilities, and, even if there be any benefit in the process, such a benefit can only be in the capital field because it is relatable to the non trading assets and capital. What it affects is the capital structure of the assessee company and the manner in which business is consolidated. Applying the test laid down by in the case of Seshasayee Brothers (supra) the benefit is referable to the capital, and is thus not of an income nature. Even if, as the Assessing Officer observes, 'it can be surmised that the assessee is benefited in a myriad ways by way of amalgamation', it does not lead to the conclusion that the benefit is in revenue field which alone can be treated as income and thus be considered for taxability under section 28(iv) of the Act. The onus is on the AO to demonstrate that the receipt is of the revenue nature.There is no material whatsoever before us to indicate that the benefit, even if accruing to the assessee, was in revenue field, in the course of assessee's business dealings or of trading nature. Thus there was no occasion to invoke Section 28(iv) - CIT(A) was quite justified in his observations that 'the amalgamation is not an adventure in the nature of trade' and that 'this transaction is clearly a capital account transaction' - in favour of assessee. 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.