2024 (9) TMI 521 - AT - Income Tax

ITAT upholds deletion of Section 28(iv) addition on capital reserves from amalgamation share allotment

The ITAT Chennai-AT ruled in favor of the assessee regarding an addition under Section 28(iv) for amounts credited to Capital Reserves from share ... Addition u/s 28(iv) - amount credited to Capital Reserves on account of allotment of shares allotted by the amalgamated company with respect to the shares held in the amalgamating company by the assessee - Whether allotment of shares to the assessee is not a voluntary transaction? - CIT(A) deleted addition - HELD THAT:- As decided in M/s Kyal Developers Pvt. Ltd. [2013 (12) TMI 1544 - ITAT KOLKATA] the benefit, even if accruing to the assessee, on account of amalgamation by way of merger as not in revenue field, and not of an income nature. Accordingly, there was no occasion to invoke Section 28(iv) of the Act. According to us, 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' and he was justified in deleting the addition. We upheld the order of the CIT(A) that the capital reserve could not be considered as benefit accrued to the assessee as per section 28(iv) - Assessee appeal allowed. Issues Involved:1. Deletion of addition under Section 28(iv) of the Income Tax Act, 1961.2. Applicability of Section 28(iv) to capital reserves from amalgamation.3. Nature of the transaction (capital vs. revenue receipt).4. Reference to judicial precedents and their applicability.Detailed Analysis:1. Deletion of Addition under Section 28(iv) of the Income Tax Act, 1961:The primary issue in this case is whether the addition of Rs. 1,75,27,500 under Section 28(iv) of the Income Tax Act, 1961, representing the amount credited to Capital Reserves due to the allotment of shares by the amalgamated company, was correctly deleted by the Commissioner of Income Tax (Appeals) [CIT(A)].2. Applicability of Section 28(iv) to Capital Reserves from Amalgamation:The Assessing Officer (AO) added the capital reserve of Rs. 1,75,27,500 under Section 28(iv) of the Act, considering it a benefit accruing to the assessee. The CIT(A) held that Section 28(iv) was not applicable as the transaction was not voluntary and the increase in the value of shares was only notional, not representing any income. The CIT(A) emphasized that the shares were converted based on the approved swap ratio and not received without consideration or for a consideration less than the fair market value.3. Nature of the Transaction (Capital vs. Revenue Receipt):The Tribunal examined whether the benefit from the amalgamation was a capital or revenue receipt. Referring to the case of Kyal Developers Pvt. Ltd., it was established that the benefit arising from amalgamation is in the capital field and not revenue. The Tribunal reiterated that Section 28(iv) applies to benefits or perquisites arising from business or profession, which must be revenue in nature. The distinction between capital and revenue receipts was emphasized, noting that capital receipts are inherently outside the scope of income chargeable under Section 28(iv).4. Reference to Judicial Precedents and Their Applicability:The Tribunal referred to several judicial precedents:- Mahindra & Mahindra Ltd. vs. CIT (261 ITR 501): Held that waiver of the principal amount in respect of imports of plant and machinery could not be treated as business income under Section 28(iv).- Padmaraje R Kadambande vs. CIT (195 ITR 877): Emphasized that capital receipts are not income within the meaning of Section 2(24) of the Income Tax Act.- CIT vs. Seshasayee Brothers Pvt Ltd. (222 ITR 818): Differentiated between fixed capital (not taxable) and circulating capital or stock in trade (taxable).- Rupee Finance & Management (P) Ltd. vs. ACIT (120 ITD 539): Clarified that purchase of shares below market price as an investment is not income and cannot be taxed under Section 28(iv).- CIT vs. Nalwa Investments Ltd. (Delhi High Court) [2020] 118 taxmann.com 278: Distinguished between shares held as capital assets (exempt from capital gains tax under Section 47(vii)) and those held as stock-in-trade (taxable as business income).The Tribunal concluded that the capital reserve arising from the amalgamation could not be considered a benefit under Section 28(iv) as it was a capital receipt. The CIT(A)'s decision to delete the addition was upheld, confirming that the transaction was a capital account transaction and not an adventure in the nature of trade.Conclusion:The appeal by the Revenue was dismissed, and the deletion of the addition of Rs. 1,75,27,500 under Section 28(iv) was upheld. The Tribunal affirmed that the capital reserve from the amalgamation did not constitute a taxable benefit under Section 28(iv) of the Income Tax Act, 1961.