2017 (10) TMI 582 - AT - Income Tax

Appeal successful on Short Term Capital Gain post-amalgamation treatment

The appeal was allowed in favor of the assessee regarding the treatment of Short Term Capital Gain (STCG) post-amalgamation. The dispute arose from the ... Sale of block of assets by the amalgamated entity - Excess of sales consideration received over Written Down Value (WDV) of the block of plant and machinery - Short Term Capital Gain - Held that:- There is no dispute that even after the transfer of the said assets the assessee was still having balance in the block of assets of plant and machinery. Therefore the conditions as stipulated under Section 50 of the Act have not been satisfied so that any capital gain arising in the hand of the assessee can be deemed as per the provisions of Section 50 of the Act. It is also not in dispute that the assessee while filing the revised return of income has claimed depreciation on the consolidated block of assets and thereby the claim of depreciation was reduced after giving effect to the transfer of the asset in question. Therefore though the transfer of block of assets by the erstwhile entity Makino Asia Pte Limited had resulted STCG in the hand of the said entity but it exists only so long there was no merger/amalgamation. Once the merger / amalgamation was effected from 1.4.2002 ail the transactions thereafter would be treated as transactions of the new entity post amalgamation. Thus when there is no extinguishment of block of assets of plant and machinery in the hand of the assessee then the transfer of assets in question after 1.4.2002 would not result in deemed capital gain under Section 50 of IT Act. The revenue has not disputed the facts relating to the transfer of the assets and therefore the question of invoking the provisions of Section 50 of the Act does not arise. We hold that the enhancement made by the CIT (Appeals) is not sustainable and accordingly the addition on account of enhancement being STCG is deleted. - Decided in favour of assessee. Issues:Enhancement of income due to Short Term Capital Gain (STCG) arising from the sale of block of assets by the amalgamated entity.Analysis:The appeal was against the Commissioner of Income Tax (Appeals) order for the Assessment Year 2003-04, where the only issue was the enhancement of assessment concerning STCG from the sale of assets by the amalgamated entity. The amalgamation of two companies resulted in the creation of a new entity, and the dispute arose regarding the treatment of STCG post-amalgamation. The Assessing Officer disallowed depreciation claimed by the assessee, which was later allowed upon submission of supporting documents. However, the CIT (Appeals) sought to enhance the assessment by the STCG amount originally offered by the amalgamated company pre-merger. The contention was whether the transfer of assets by the amalgamated company post-amalgamation should result in STCG for the new entity.The assessee argued that the addition in the block of assets was greater than the sale proceeds from the amalgamated company, thus no STCG should arise. The assets of both entities were consolidated, and as there was no extinguishment of the block of assets in the hands of the assessee, the transfer should not trigger STCG. On the contrary, the Departmental Representative contended that all income of the amalgamated company became the income of the amalgamating company post-merger, making the STCG taxable for the new entity. The Departmental Representative also highlighted that the transfer of assets was not disclosed in the amalgamation scheme or the High Court order approving the merger.Upon review, it was found that the amalgamation had taken place as approved by the High Court, and the revised return was filed based on consolidated accounts. The dispute centered on the STCG arising from the sale of assets by the amalgamated company pre-merger. The provisions of Section 50(1) of the Act regarding STCG on depreciable assets were examined. Since there was no extinguishment of the block of assets post-amalgamation and the assessee still had assets remaining, the conditions for STCG under Section 50 were not met. The transfer of assets by the amalgamated company did not result in deemed capital gain for the new entity post-merger. Therefore, the enhancement made by the CIT (Appeals) was deemed unsustainable, and the addition for STCG was deleted.In conclusion, the appeal of the assessee was allowed, and the decision favored the assessee regarding the treatment of STCG post-amalgamation.