2025 (4) TMI 582 - AT - Income Tax

Section 56(2)(vii)(c) doesn't apply to public companies in amalgamation cases involving new share allotment

The ITAT Rajkot dismissed the revenue's appeal challenging deletion of addition made under Section 56(2)(vii)(c)(ii) for excess value transferred to ... Addition made on account of excess value transferred to beneficiary within the meaning of provision of Section 56(2)(vii) (c)(ii) - excess value transferred to beneficiary related parties was added to the returned income of the assessee- public limited company, on a protective addition by the assessing officer while passing the assessment order. HELD THAT:- Provision of section 56(2)(vii)(c)(ii) does not apply in the case of Public limited company, it is only applicable to individual and HUF- assessees. New shares allotment by amalgamated company does not give rise to a transfer of shares and hence also section 56(2)(vii) (c) has no application and proviso (h) excludes the transfer from rigor of deeming provision. In case of shares issued under amalgamation, there are no two parties to a transfer of a property. There are tripartite arrangements between amalgamated company, amalgamating company and shareholder of the amalgamating company. Transfer of shares in a scheme of amalgamation is not considered as 'transfer' u/s 47 (vii) of the Act. If it is not transferred, then the application of section 56(2) is not applicable. There is no anti- abuse of provision and the new share is allotted as per the Amalgamation scheme under the supervision of the High Court after hearing of all stake holders including the Government. The Scheme of amalgamation under which an exchange ratio of shares is approved by the high court, and it is conclusive. So, question of skewed swap ratio or issuing shares at discounted rate does not arise. Based on the above factual position and position in Law, the conclusions arrived at by the CIT(A) are, therefore, correct and admit no interference by us. We, approve and confirm the order of the CIT(A). Appeal filed by the revenue is dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal issue considered in this judgment was whether the protective addition made by the Assessing Officer (AO) on account of the excess value transferred to beneficiaries under Section 56(2)(vii)(c)(ii) of the Income Tax Act, 1961, was valid. Specifically, the questions were:Whether the issuance of shares under a scheme of amalgamation constitutes a 'transfer' under the Income Tax Act.Whether Section 56(2)(vii)(c)(ii) applies to the issuance of shares in an amalgamation scheme.Whether the swap ratio used in the amalgamation was skewed to benefit related parties, thus warranting an addition to the assessee's income.ISSUE-WISE DETAILED ANALYSIS1. Legal Framework and PrecedentsThe relevant legal framework involves Section 56(2)(vii)(c)(ii) of the Income Tax Act, which addresses the taxation of property received for inadequate consideration. Additionally, Section 47(vii) of the Act exempts certain transfers in schemes of amalgamation from being treated as transfers for tax purposes. Precedents from the Gujarat High Court and ITAT decisions were considered, which clarified that share allotment in an amalgamation does not constitute a transfer.2. Court's Interpretation and ReasoningThe Tribunal interpreted that the issuance of shares under a court-approved scheme of amalgamation does not constitute a 'transfer' under Section 47(vii) of the Act. Consequently, Section 56(2)(vii)(c)(ii), which applies to transfers, does not apply to such transactions. The Tribunal noted that the scheme of amalgamation was approved by the High Court and involved no actual transfer of property, thus excluding it from the purview of Section 56.3. Key Evidence and FindingsThe Tribunal relied on the approved scheme of amalgamation, which was sanctioned by the High Court of Gujarat. It also considered the Fairness Report by M/s Market Creaters Ltd, which was not deemed a valuation exercise. The Tribunal noted that the shares were issued in accordance with a legally sanctioned scheme, which involved no transfer of shares as defined by the Act.4. Application of Law to FactsThe Tribunal applied the provisions of Section 47(vii) to conclude that the transaction did not involve a transfer. It also referred to Section 56(2)(vii)(c)(ii) and determined that it was not applicable, as the shares were issued under a scheme of amalgamation, which does not constitute a transfer. The Tribunal noted that the shares were issued at a fair market value, as per the scheme approved by the High Court.5. Treatment of Competing ArgumentsThe Revenue argued that the swap ratio was skewed, benefiting related parties at the expense of minority shareholders. However, the Tribunal found that the scheme of amalgamation was approved by the High Court, and the shares were issued at a fair market value. The Tribunal also noted that the provisions of Section 56(2)(vii)(c)(ii) apply only to individuals and HUFs, not to public limited companies.6. ConclusionsThe Tribunal concluded that the protective addition made by the AO was not sustainable. It held that the issuance of shares under a court-approved scheme of amalgamation does not constitute a transfer, and therefore, Section 56(2)(vii)(c)(ii) does not apply. The Tribunal upheld the CIT(A)'s decision to delete the protective addition.SIGNIFICANT HOLDINGS1. Verbatim Quotes of Crucial Legal Reasoning'The provisions of Section 56(2) would not be applicable to the issue of new shares which is also submitted by the explanatory notice to the Finance Bill, 2010, wherein, it is clarified that sec.56(2)(vii)(c) of the Act ought to be applied only in the case of transfer of shares.''In case of shares received upon amalgamation, there are no two parties to a transfer of a property. One receives shares in lieu of shares already held.'2. Core Principles EstablishedThe issuance of shares under a court-approved scheme of amalgamation does not constitute a transfer under Section 47(vii) of the Income Tax Act.Section 56(2)(vii)(c)(ii) does not apply to the issuance of shares in an amalgamation scheme.The scheme of amalgamation approved by the High Court is conclusive and binding.3. Final Determinations on Each IssueThe protective addition made by the AO was deleted as the issuance of shares did not constitute a transfer.The Tribunal upheld the CIT(A)'s decision, confirming that Section 56(2)(vii)(c)(ii) does not apply to public limited companies in the context of amalgamation.The Tribunal dismissed the Revenue's appeal, affirming that the swap ratio was fair and approved by the High Court.