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Issues: (i) Whether, after approval of a scheme of amalgamation by the jurisdictional High Court, the Revenue could still question the creditworthiness and genuineness of the amalgamating companies and invoke section 68 to treat the amalgamation reserve as unexplained credit; (ii) whether the amalgamation could be characterised as a colourable device to evade tax; and (iii) whether, because of inter se cross-holdings, no shares were required to be issued by the transferee company to the shareholders of the amalgamating companies.
Issue (i): Whether, after approval of a scheme of amalgamation by the jurisdictional High Court, the Revenue could still question the creditworthiness and genuineness of the amalgamating companies and invoke section 68 to treat the amalgamation reserve as unexplained credit.
Analysis: The approved scheme of amalgamation had been placed before the High Court after disclosure of the relevant facts and accounts. The amalgamation reserve arose from the restructuring reflected in the books of the transferor companies, and the material on record showed that the alleged credit was not an independent unexplained inflow into the assessee's accounts. Once the scheme was sanctioned, the Revenue could not disregard the sanctioned arrangement and re-characterise the accounting treatment as unexplained cash credit merely on suspicion.
Conclusion: The issue was decided against the Revenue and in favour of the assessee.
Issue (ii): Whether the amalgamation could be characterised as a colourable device to evade tax.
Analysis: The scheme and the surrounding transactions were disclosed before the High Court, which sanctioned the amalgamation after considering the relevant materials. The record did not show any hidden or sham transaction, and the accounting treatment of the reserve was consistent with the amalgamation process. The materials relied upon by the Revenue did not establish any subterfuge or device lacking commercial reality.
Conclusion: The issue was decided against the Revenue and in favour of the assessee.
Issue (iii): Whether, because of inter se cross-holdings, no shares were required to be issued by the transferee company to the shareholders of the amalgamating companies.
Analysis: The evidence showed that the shareholdings between the amalgamating companies had neutralised one another and were cancelled through the cross-holding structure before the scheme was sanctioned. The High Court's order also recorded that, because the shares were held inter se by the transferor companies, no shares were required to be issued by the transferee company. The Revenue's objection based on section 2(1B) was therefore not sustained on the facts found.
Conclusion: The issue was decided against the Revenue and in favour of the assessee.
Final Conclusion: The sanctioned amalgamation and the resulting accounting treatment were upheld, and the Revenue's challenge to the deletion of the addition failed in entirety.
Ratio Decidendi: Once a scheme of amalgamation is sanctioned by the competent High Court after disclosure and consideration of the relevant materials, the Revenue cannot, in separate income-tax proceedings, disregard the sanctioned scheme and treat the resulting amalgamation reserve as unexplained credit or a colourable device absent independent evidence of a sham transaction.
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