Capital reserve on amalgamation not taxable as business benefit; merger also remained exempt from transfer and receipt taxation.

A reserve created on amalgamation as a book-entry balancing adjustment in a sanctioned scheme was treated as part of a capital restructuring exercise, not as a revenue benefit or perquisite arising from business or profession, so section 28(iv) did not apply and the addition was deleted. The amalgamation also satisfied the statutory requirements for exemption under section 47(vi), as the transfer of capital assets in the scheme was not regarded as a transfer; once that exemption applied, section 56(2)(x) was also excluded in respect of property received under the merger. The transaction was therefore tax neutral.

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Issues: (i) Whether the capital reserve arising on amalgamation was taxable under section 28(iv) of the Income-tax Act, 1961. (ii) Whether the amalgamation transaction attracted section 56(2)(x) of the Income-tax Act, 1961 or was protected by section 47(vi) of the Income-tax Act, 1961.

Issue (i): Whether the capital reserve arising on amalgamation was taxable under section 28(iv) of the Income-tax Act, 1961.

Analysis: The amalgamation was undertaken under a sanctioned scheme, and the resulting reserve arose as a book entry to balance the accounts after transfer of assets and liabilities. The transaction was held to be a capital restructuring exercise and not an ordinary business or trading transaction. The conditions for section 28(iv) require a benefit or perquisite arising from business or profession and being of revenue character. On the facts found, the assessee did not receive any revenue benefit or perquisite; the reserve was capital in nature.

Conclusion: The addition under section 28(iv) was not justified and was rightly deleted.

Issue (ii): Whether the amalgamation transaction attracted section 56(2)(x) of the Income-tax Act, 1961 or was protected by section 47(vi) of the Income-tax Act, 1961.

Analysis: The amalgamating company was an indirectly held subsidiary of the assessee, and the merger satisfied the statutory test of amalgamation because the shareholding exception applied where the amalgamating company was already held by the amalgamated company or its subsidiary. The transfer of capital assets in a scheme of amalgamation fell within section 47(vi), which treats such transfer as not regarded as transfer. Once that exemption applied, the proviso to section 56(2)(x) also prevented taxation of the property received pursuant to the amalgamation.

Conclusion: Section 56(2)(x) did not apply, and the merger remained tax neutral.

Final Conclusion: The Revenue failed to show any taxable revenue benefit arising from the amalgamation reserve, and the statutory exemption for transfers in amalgamation protected the transaction from taxation; the deletion of the addition was sustained.

Ratio Decidendi: A reserve created on amalgamation, when arising from a capital restructuring and not from a revenue benefit or perquisite, cannot be taxed under section 28(iv) of the Income-tax Act, 1961; where the amalgamation qualifies under section 47(vi), taxation under section 56(2)(x) is also excluded.

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