TaxTMI 
TaxTMI 
2012 (6) TMI 289
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 19.7.2004. Subsequently, a notice u/s 148 was issued to the assessee-company after obtaining the requisite approval of Addl. CIT, Range VI, on 26.9.2007 to disallow interest u/s 14A. At the request of the assessee-company, a copy of reasons recorded by the Assessing Officer was supplied to the assessee vide letter dated 19.11.2007. The reasons for reopening are as under: "That you had incurred interest expenses to the tune of Rs. 3,38,38,6651/- on an accumulated loan amount of Rs. 31,92,55,749/- whereas the funds amounting to Rs. 9,60,70,1481/- and Rs. 43,51,29,845/- have been given as loans and made as investments respectively to/in subsidiary/associate companies. As there is direct nexus between loans obtained and investments made, expenditure incurred in relation to income not includible in total income (assessable) shall not be deductible under Section 14A. In the above said circumstances, initiation of proceedings under Section 147 is set in motion to re-compute income for AY 2002-03 thereby to assess the interest expenditure of Rs. 3,38,38,6651/- which has escaped assessment". 3. The main objection of the assessee-company was as under: "a. First of all we would li....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nge-VI, Chennai. As the assessee objected to the-reopening of assessment, an adjudication order was passed on 15.02.2008 overruling the objections. Finally, order u/s 143(3) r.w.s. 147 of the Act was passed on 24.12.2008 disallowing interest u/s 14A of the Act to the tune of Rs. 2,56,53,000/- and assessed the total income at Rs. 4,86,14,640/-. 3. From a perusal of the records, it is seen that the amalgamation of M/s Spencer Industrial Fund Ltd. (transferor company) with M/s. Spencer and Co. Ltd. (transferee company) w.e.f 01.04.2001 pursuant to the order of the Hon'ble Madras High Court dated 25.10.2002 provides among other things as under: The net fair value of assets of the transferor company as reduced by the paid up value of shares to be issued and allotted by the transferee company pursuant to this scheme shall be adjusted with the General Reserves in the books of account of the transferee company." In accordance with the above provision, the rights and obligations of M/s. Spencer Industrial Fund Ltd. have been recorded at their respective face values under the "purchase method of accounting for amalgamation". Thus, the excess of fair value of net assets taken over by....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... while processing and issuing the intimation u/s 143(1) and therefore, proceedings u/s 263 on this issue, as detailed in the show cause notice, should have been initiated within two years from 31.3.2005, because the return was processed u/s 143(1) on 19.7.2004. However, no revisional proceeding u/s 263 was initiated on or before 31.3.2007. Hence, this action of the ld. CIT is barred by limitation. 6. On merits, it was stated that the company namely, M/s Spencer Industrial Fund Ltd (SIFL) got amalgamated with the assessee-company with effect from 1.4.2001 by virtue of an order of the Hon'ble Madras High Court in Petition Nos.207 and 208/2002 [Connected Comp. Appln. Nos.983 & 1008/2002]. Pursuant to the amalgamation, the assets and liabilities and rights and obligation of SIFL vested in the assessee-company which were recorded in the company's books at their fair values under the "Purchase method of accounting for amalgamation". The excess of fair value of net asets taken over by the assessee-company over the paid up value of equity shares was computed at Rs. 2899.68 lakhs which was transferred to the General Reserve of the assessee-company, which is evident from page 19 of the An....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Spencer Industrial Fund Ltd was assessable as business income of the appellant u/s 28(iv) of the Act. 6. For that on the facts and in the circumstances of the case, the accounting entries regarding creation of reserve and takeover of the assets and liabilities having been made in the accounts to give effect to the approved scheme of amalgamation of Spencer Industrial Fund Ltd sanctioned by the Madras High Court, the CIT was unjustified in holding that the Reserve created in the books of the amalgamated company represented benefit or perquisite arising from carrying on of a business, assessable u/s 28(iv). 7. For that on the facts and in the circumstances of the case, the appellant not being in the business of acquiring companies or undertakings through amalgamation, the CIT was grossly unjustified in holding that the General Reserve created in the books to give effect to amalgamation was benefit or perquisite accruing to the appellant in the course of carrying on of business. 8. For that on the facts and in the circumstances of the case, the creation of reserve having been created in the course of a transaction carried out by the appel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 263, is time barred and thus it cannot survive being based on invalid assumption of jurisdiction by the ld. CIT. Let us examine this contention of the ld. AR, Shri Dilip S. Damle vis-à-vis the facts culled out on record. Undisputedly, the assessee-company had filed return of income u/s 139(1) for assessment year 2002-03, on 30.10.2002. A revised return was filed consequent upon amalgamation approved by the Hon'ble Madras High Court on 25.10.2002 whereby SIFL was ordered to be amalgamated with the assessee-company, with a view to incorporate the operational results of the amalgamating company for financial year 2001-02 [corresponding assessment year 2002-03] because the decision of the Hon'ble High Court was effective from 1.4.2001. The assessee company revised its return u/s 139(5) by filing a return on 23.11.2003 disclosing information regarding amalgamation of SIFL with it. The returns filed u/s 139(1) and 139(5) were processed u/s 143(1). Precisely, the revised return was processed u/s 143(1) on 19.7.2004. Thereafter, the Assessing Officer believed that income chargeable to tax has escaped assessment so, he recorded the requisite reason u/s 148(2), that disallowance u/s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dered in the case of CIT v. Alagendran Finance Ltd (293 ITR 1), by upholding the decision of the Hon'ble Madras High Court reported in 264 ITR 269. Apart from the above, the ld. AR has also relied on other decisions which we will discuss later. 8. On the other hand, the case of the ld. DR, Shri R. Clement Ramesh Kumar, is that as stated in the written submission filed by the assessee in regard to show cause notice, the ld. CIT has proceeded to revise the order dated 24.12.2008 passed u/s 143(3) r.w.s 147 of the Act. He categorically submitted that the Assessing Officer has not at all touched the impugned issue in his order dated 24.12.2008. According to him, the processing of return of income u/s 143(1) is simply an intimation and cannot be treated as an assessment order. The assessment order was framed for the first time on 24.12.2008 and therefore, the limitation would start from that date and not from 31.3.2005 (143(1) passed on 19.7.2004). He has referred to the amalgamation and has submitted that the differential amount of Rs. 2899.68 lakhs by which the assessee was benefited on account of this scheme of amalgamation was not at all touched, discussed, or decided by the Asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded." 11. Before we discuss and decide the issue, we may mention that in case the relevant date is found to be 19.7.2004, the limitation to raise this issue has expired long back but in other case, if the limitation starts from the re-assessment order dated 24.12.2008 the order in question is well within the limitation. It would be beneficial to understand the scheme of the Act regarding making assessment, re-assessment and revision so that this issue can be set at rest by passing a reasoned order. Sections 143 to 145 of the Act lay down the provisions dealing with the processes which should be the culmination of the first but a crucial stage dealing with the very object and purpose of the Act, viz. the determination by the Assessing Officer of the total income and tax payable by an assessee in any assessment year. The Act clearly provides, for the purpose of making assessment or re-assessment, a complete code which is contained in Chapter XIV except for the undisclosed income found....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rn, accounts or documents, when the deduction, allowance or relief claimed was obviously and patently inadmissible. But there was some confusion to understand the scope of this provision of making prima-facie adjustments in a judicious manner which resulted in multiplicity of proceedings by way of appeals and/or rectifications, etc. Resultantly, this provision was given go by with effect from 1.6.1999. By Finance Act, 1999, with effect from 1.6.1999, a new section 143(1) was substituted where under if the return has been filed u/s 139 or in response to notice u/s 142(1) 'intimation' shall be sent to the assessee specifying the sum payable by or refundable to him or in other cases acknowledgement of the return shall be deemed to be the 'intimation'. The period of limitation for sending such intimation u/s 151 is two years from the end of the assessment year in which the income was first assessable. The remedy against such intimation shall be by way of rectification as per the provisions of section 154(1)(b) of the Act. 13. Now coming to assessment proceedings u/s 143(3) which are commonly known as regular assessment proceedings. Assessment could be made even in respect of assessm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ourse of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: [Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.] Explanation 1. - Production before the Assessing Of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee a notice requiring him to furnish within such period, [* * *] as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139 :] Provided that in a case- (a) where a return has been furnished during the period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005 in response to a notice served under this section, and (b) subsequently a notice has been served under sub-section (2) of section 143 after the expiry of twelve months specified in the proviso to sub-section (2) of section 143, as it stood immediately before the amendment of said sub-section by the Finance Act, 2002 (20 of 2002) but before the expiry of the time limit for making the assessment, re-assessment or recomputation as specified in sub-s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s that to initiate re-assessment proceedings a time limit has been prescribed that "after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year." Apparently, from the above proviso, it appears that it is applicable only for the assessments which have been made u/s 143(3) or u/s 147 but in cases of assessment u/s 143(1) no limitation would apply. In principle, in cases where an intimation u/s 143(1) is not valid by an order u/s 143(3), there would be no difference underlined i.e the assessment is completed for that assessment year. This is further verified by the amendment made to section 143 wherein an Explanation has been added by the Finance (No.2) Act, 1991 with effect from 1.10.1991 whereby such an order u/s 143(1) has been specifically made liable to revision u/s 264 of the Act. Further, the scope of this Explanation was expande....
X X X X Extracts X X X X
X X X X Extracts X X X X
....treet-lights, co-operative stores, buildings, etc., are essential adjuncts to the factory premises. Accordingly these items are part of factory buildings. The administrative block was admittedly said to consist of the office of the Chief Engineer, Industrial Engineering Department, drawing office, etc. Consequently the necessary drawings connected with the work of 'the factory was being done in this block. In such circumstances the administrative building could be considered only as part and parcel of the factory buildings. Similarly latrines, compound walls, workers' gate, etc., were also factory buildings. The Tribunal was, therefore, justified in its view that the administrative buildings, latrines, compound walls, etc., were entitled to a higher rate of depreciation. In order to find out whether a particular structure or construction falls within the category of factory buildings or not, the court has to approach the question from the functional point of view." 21. Likewise, the case of Hon'ble Supreme Court in the case of Kundanlal v. CST, Tax LD.AR 2094 S.C also states the similar view. We may make it clear that circumstances in which an order u/s 147 and order u/s 154 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The decisions relied on by the ld. AR are the cases in which the facts are totally distinguishable. The decision in the case of K.S. Subbiah Pillai & Co. (India) Pvt. Ltd. v. CIT, 260 ITR 304, was rendered before the amendment/substitution of section 143(1). At that time, the summary assessment order was made u/s 143(1)(a) of the Act. This decision was rendered when the Tribunal put a view that the ld. CTT had no jurisdiction to revise the order passed in summary assessment. The Hon'ble Madras High Court by following its own earlier judgment in the case of CIT v. Smt. R.G. Umaranee, 262 ITR 507, held that even summary assessment could be revised u/s 263 of the Act. Since there is no longer such summary assessment as per the provision in the Act, this decision will not apply to the given facts of this case. 24. Reliance was placed on the decision of Hon'ble Supreme Court rendered in the case of CIT v. Alagendran Finance Ltd, 293 ITR 1. The facts of that case are that assessee for various assessment years were completed u/s 143(3). The question framed for the answer by the High Court was as under: "As to whether in the facts and circumstances of the case, the revision u/s 263....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... involved in making profits or gain by acquiring and selling 'business undertaking' in a business like manner. Since the transaction involved transfer of the undertaking on going concern basis, if any, income would arise can be charged to tax under the head 'capital gains' and not under the head 'profits and gains of business'. Anyway, the argument of the ld. AR is that if any income accrued or arose from this transaction, it would be assessable in the hands of transferor and not the transferee(assessee) as per the provisions of section 55 of the Act and not under Sections 28 to 44 of the Act. But it was clarified that this amalgamation did not result any capital gains to the transferee either because in this case transfer of the following assets was involved: (i) amalgamation of 'undertaking' which constituted a 'capital asset' (ii) The shareholders of the amalgamating company were allotted shares of the amalgamated company because of the scheme of amalgamation and that too result into 'capital of asset' being the shares of the amalgamating company. 25. It was argued that no such capital gain arises although capital asset is transferred in view of section 47(i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee, all remaining assets and liabilities of LAC became properties and liabilities of the assessee. For giving effect to the amalgamation, shares held by the assessee in the subsidiary were cancelled. The outside shareholders of the amalgamating company were allotted shares of the amalgamated company i.e the assessee. In the books of amalgamated company entries were passed to give effect to the amalgamation consequent to which a 'capital reserve' was recognized and accounted for in the books of account of the assessee. The assessee claimed that the transaction in question was an amalgamation within the meaning of section 2(IB) of the Act therefore, no profit or gain was assessable in the hands of the transferee. The Assessing Officer was not agreeable and held that what was approved by the High Court was a composite Scheme of Arrangement not amounting to amalgamation within the meaning of section 2(IB). So, he assessed the sum of Rs. 6.43 crores recorded as capital reserve in the books of the amalgamated company as 'income from other sources'. On appeal, the ld. CIT(A) and Tribunal held that the Scheme of Arrangement was approved by the Hon'ble Madras High Court which also deals....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is case and not from the date of intimation as has been claimed by the assessee-company. Hence, the order passed u/s 263 is within limitation and the jurisdiction assumed by the ld. CIT is valid. The legal issue cannot be allowed and stands dismissed. On merits: 29. On merits, the facts of the case are that the amalgamation of the assessee-company with SIFL took place as approved by the Hon'ble Madras High Court vide its judgment/order dated 25.10.2002 and the scheme of arrangement was provided as follows: "With effect from the Appointed Date", the "Undertaking" of the Transferor Company shall, without further act or deed, be transferred to and vest in an shall in and shall be deemed to have been transferred to and vested in the Transferee Company pursuant to section 394 of the act as a going concern, subject however, to all charges, liens, mortgages, if any, then affecting the same or any part thereof." The expression 'Undertaking of the Transferor Company' was defined in Clause E of Part I of the Scheme as follows: "Undertaking of the Transferor Company" means and includes: (i) All the properties, investments, assets and liabilities of the Transferor Compa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Section 2(IB) of the Act defines the expression "Amalgamation" as follows: "amalgamation ", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that- (i) all the property of the amalgamating company or companies immediately before the amalgamation become the property of the amalgamated company by virtue of the amalgamation, (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation, (iii) Shareholder holding not less than (three fourths) in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalga....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ered and unchequred discretion to revise an order. The CIT is required to exercise revisional power within the bounds of the law and has to satisfy the need of fairness in administrative action and fair play with due respect to the principle of audi alteram partem as envisaged in the Constitution of India as well in section 263. As order can be treated as 'erroneous' if it was passed in utter ignorance or in violation of any law; or passed without taking into consideration all the relevant facts or by taking into consideration irrelevant facts. The 'prejudice' that it contemplated under section 263 is the prejudice to the Income Tax administration as a whole. The revision has to be done for the purpose of setting right distortions and prejudices caused to the Revenue in the above context. The fundamental principles which emerge from the several cases regarding the powers of the CIT under section 263 may be summarized below: (i) The CIT must record satisfaction that the order of the Assessing Officer is erroneous and prejudicial to the interests of the revenue. Both the conditions must be fulfilled. (ii) Section 263 cannot be invoked to correct each and every type ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of Amalgamation approved by the Hon'ble Madras High Court). Further, as per AS-14 of the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI), which is mandatory for companies of amalgamation in this case has to be satisfied the requirement that business of the transferor company should be carried on by the transferee company (the assessee). As a result of amalgamation, there was increase in Net Asset value (NAV) on account of the scheme and the same was completed as per the business expediency which resulted into increase in General Reserve to the tune of Rs. 2899.68 lakhs. Section 28(iv) of the Act reads as under: "Profits and gains of business or profession. 28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",- ** ** ** (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;]" 33. Now, we have to see whether the assessee has got any profit or benefit out of this transaction or not. If we analyze the facts of this case, we can clearly understand that this amalgamati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....amount can be assessed as 'capital gains'. The addition to general reserve was due to increase in NAV on account of this scheme of amalgamation and the same was completed as per business expediency and the increase in General Reserve to the tune of Rs. 2899.68 lakhs is thus taxable u/s 28(iv) of the Act. The Hon'ble Madras High Court in the case of CIT v. Aries Advertising Pvt. Ltd. 255 ITR 510, has held that transfer of any amount to the General Reserve is to be treated as profits of business. This decision has a binding effect on all the authorities operating in Tamil Nadu. We may further mention that the above decision was rendered after following the decision of Hon'ble Supreme Court rendered in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT 132 ITR 559. In our considered opinion, the ld. CIT has correctly come to the conclusion that since the Assessing Officer has not applied the provisions of section 28(iv) on this amount at all, order of the Assessing Officer is erroneous and also prejudicial to the interests of the Revenue. There is a distinction between 'lack of inquiry' and 'inadequate inquiry'. If there is any inquiry, even inadequate that would not by itself give occa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of section 14A of the Act after recording reasons to that effect and in that proceedings there was no whisper at all about the amount of Rs. 2,899.68 lakhs which was credited by the assessee in its general reserve. The impugned order under section 263 was passed for assessing said amount of Rs. 2,899.68 lakhs credited by the assessee in general reserve by treating the said amount as income by invoking provisions of section 28(iv) of the Act. In other words, subject matter of impugned order passed u/s 263 is quite distinct and different from the subject matter of re-assessment order passed u/s 147 of the Act on 24.12.2008. On the above facts and circumstances of the case, the first issue which fell for our consideration is whether the impugned order passed on 10.02.2011 under section 263 of the Act is barred by limitation or not. 39. In the instant case, it is also not in dispute that period of limitation provided in sub-section (2) of section 263 if reckoned from the date of order passed under section 147 then the impugned order will be within time otherwise the same will be barred by limitation and bad in law. I would also like to clarify that we are, in the instant case, not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....does not extend to reopening the entire assessment for the purpose or redoing the same de novo. An assessee cannot agitate in any such reassessment proceedings matters forming part of the original assessment which are not required to be dealt with for the purpose of levying tax on that which had escaped tax earlier Cases of under assessment are also treated as instances of escaped assessment. The Revenue is similarly bound......." 41. The contention that since no regular assessment under section 143(3) was framed in the instant case before passing of the order under section 147/143(3) of the Act on 24.12.2008 and as the said order passed under section 147 was the first regular assessment in the instant case, therefore, irrespective of the Issue involved in the proceedings under section 147, the CIT can pass order under section 263 in respect of any issue whether the same was subject matter of proceedings under section 147 or not and the time limit for passing order under section 263 even in respect of issues which were not the subject matter of proceedings under section 147 will also begin to run from the date of passing of order under section 147, in my considered opinion has n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble in the instant case also. I, therefore, respectfully following the same hold that the impugned order under section 263 being passed on a issue which was not the subject matter of proceedings under section 147 of the Act in the instant case and therefore, the time limit for such 263 order cannot be reckoned from the date of 147 order and consequently, the same was passed beyond the time limit provided in the statute and therefore, bad in law and is accordingly, quashed. 43. The next issue relates to treating of Rs. 2,899.68 lakhs as business income under section 28(iv) of the Act in a proceeding initiated under section 263 of the Act. In the impugned order u/s 263 of the Act, the CIT has held that a sum of Rs.2899.68 lakhs credited to the general reserve by the assessee was chargeable to tax in the hands of the appellant as perquisite or benefit accruing to it in the course of business assessable u/s 28(iv) of the Act. 44. The facts relevant to this issue are that the SIFL was a wholly owned subsidiary of Spencer International Hotels Limited, which in turn was a wholly owned subsidiary of the assessee company. In other words SIFL was a step down subsidiary of the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n lakhs Fair value investments 4,388.78 Current assets 9.03 Total assets 4,397.81 Less : Liabilities taken over (331.33) Net assets taken over 4,066.48 Less: Consideration payable by way of allotment of equity shares in Spencer and Company Ltd. (613.35) Cancellation of Debentures issued to Spencer And Company Ltd. (530.00) Current account with Spencer and Company Limited (18.19) Special Reserve Fund (5.26) (1,166.80) Balance transferred to General Reserve 2,899.68 (iv) Had the said Scheme not prescribed the above treatment, an amount of Rs 2,899.68 lakhs would have been credited to Capital Reserve instead of General Reserve as required by the Accounting Standard 14 (AS-14) 'Accounting for amalgamations'. (v) Till the date of amalgamation, the core business of SIFL was investment activity. (vi) Consequent to the order of Hon'ble High Court of Madras, the Authorised Share Capi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... fair value, the Hon'ble Madras High Court approved the exchange ratio of 1 share of Rs.10/- each of the amalgamated company to be issued in exchange of 20 shares held by the shareholders in the amalgamating company while sanctioning the scheme of arrangement. Accordingly the assessee issued 61,33,505 Equity Shares of Rs.10/- each in exchange of 12,26,70,100 nos. equity shares issued by SIFL and in consideration of receipt of net asset of Rs. 3,513.03 lakhs. The assessee has credited face value of the shares amounting to Rs. 613.35 Lakh in share capital account and credited the balance of Rs. 2,899.68 in general reserve account in accordance with the scheme approved by the Hon'ble Madras High Court. 47. In view of the above facts in my considered opinion Rs. 2,899.68 lakhs represents premium value of shares having face value of Rs. 613.35 lakhs issued by the assessee company. The same represents difference between the fair value and face value of shares issued by the assessee company. The same is of the nature of share premium received by a company on issue of its own share capital which is capital in nature. It is an established position of the law that the character of a recei....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... from business or exercise of profession. The phrase 'arise from business' in the context of section 28(iv) contemplates not only some connection with the business undertaking of the assessee but it envisages that the benefit or perquisite must arise out from actual conduct of the business of the assessee. In other words, before sub-section (iv) of S.28 is invoked it is necessary to show and prove the proximate cause or nexus between the alleged benefit or perquisite and the business actually carried on by the assessee. The nexus or the proximate cause must be real, immediate and not illusionary or imaginary. The benefit or perquisite contemplated by S.28(iv) must necessarily have a live connection with the business carried on by the assessee and the benefit must accrue or arise in the course of carrying on of such business. The benefit or perquisite should be in the nature of trade receipt. The nature of assessee's business during the year under consideration as stated in the order of assessment is "Bread franchisee operations, property rentals and licence fees". It is admitted position that the amount of Rs. 2,899.68 lakhs in question has not arisen from the aforesaid business ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or perquisite to the assessee in future. I find that the general reserve was credited by Rs. 2,899.68 lakhs and the same was not in relation to any trade receipt or for any receipt in the course of conduct of actual business of the assessee but because of implementation of a scheme of amalgamation or in connection with recording of transactions of amalgamation of SIFL. Thus, in my considered view, even the second limb of section 28(iv) is also not satisfied in the instant case. 51. My above view finds support from the decision of the Hon'ble Madras High Court in the case of Iskrameco Regent Ltd v. CIT, a copy of which has been placed at pages 172 to 186 in the paper book, wherein the Hon'ble Jurisdictional High Court has analyzed the provisions of S.28(iv) of the Act and found that in case of waiver of principal amount of loan received by an assessee who is not engaged in trading in money transactions, the benefit accrued to the assessee cannot be held as arising from business. The Hon'ble High Court has categorically held that grant of loan by the bank could not be termed as a trading transaction and therefore could not be construed to be in the course of business. Indisputably....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion became legally effective on and from 1.4.2001 and accordingly the income or loss of SIFL for the period 1.4.2001 to 31.3.2002 was also assessable in the hands of the assessee company only. He contended that in case it is held that Rs. 2,899.68 lakh is held as income of the assessee on account of receiving of net asset of Rs. 3,513.03 lakh in consideration for issuance of shares of Rs. 613.35 Lakh only and thereby crediting Rs. 2,899.68 lakh to general reserve then, on the same analogy loss of similar amount should also be held as accrued to SIFL. He explained that on the same analogy it has to be held that SIFL on transfer of net assets having fair value of Rs. 3,513.03 lakh received shares of Rs. 613.35 lakhs only and thus suffered loss of Rs. 2,899.68 lakh. As the income or loss of SIFL is also assessable in the hands of the assessee company for the relevant period, the CIT should have allowed deduction for this loss of Rs. 2,899.68 lakh also. He also submitted that not only this loss of Rs. 2,899.68 lakhs but in that case, the assessee's income should be further reduced by Rs. 8,752.95 lakhs. He explained that the cost of investments in the books of SIFL were Rs. 13,141.73 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of taxable income where transferee of an asset simply acquires an asset for a cost even when such cost is less than the fair market value of assets acquired. It is not the case of anybody that the transaction in question is hit by the provisions of section 56(vii)/(viii) of the Act. Thus, even when things are looked from this angle also, no taxable income can be held to be accrued to the assessee. 55. In view of the discussions made hereinabove, I am of the considered opinion that Rs. 2,899.68 lakh is not assessable as income in the hands of the assessee under section 28(iv) of the Act, since neither any benefit or perquisite arose to the assessee of the said value during the year under consideration nor the same arose from the business carried on by the assessee. I, therefore, find the directions issued by the CIT u/s 263 for assessment of the said amount as income u/s 28(iv) is unsustainable and without merit and therefore, cancel the same. 56. In view of my above decision, the other grounds of appeal taken by the assessee in this appeal have become academic in nature requiring no separate adjudication and therefore, not adjudicated upon. 57. In the result, the appeal fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 143(3), read with section 147, on 24-12-2008 on a total income of Rs. 4,86,14,640/-. 3. On a perusal of the assessment records, it was noticed that a company by name M/s. Spencer Industrial Fund Ltd. (SIFL) got amalgamated with the assessee company with effect from 1st April, 2001. The amalgamation was effected through a Court Order dated 25-10-2002. 4. Pursuant to the amalgamation, the assets and liabilities and the rights and obligations of SIFL vested with the assessee company and those items have been recorded at their fair values. The excess of fair value of net assets taken over by the assessee company over the paid up value of allotted equity shares worked out to Rs. 2,899.68 lakhs. This surplus amount has been transferred by the assessee to its General Reserve Account. 5. The Commissioner of Income-tax further observed that this surplus amount of Rs. 2,899.68 lakhs was not subjected to tax as business income under section 28(iv) of the Income-tax Act, 1961. The Commissioner found that this issue was not at all examined by the assessing authority. Therefore, he proposed to revise the assessment, as it was erroneous and prejudicial to the interests of the Revenue.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....made for the first time under section 143(3), read with section 147 and there was no occasion to look into any order passed under section 143(3). The Commissioner also pointed out that the Assessing Officer has not looked into the assessability of Rs. 2,899.68 lakhs under section 28(iv) and this itself makes the assessment order erroneous in the light of the decision of the Hon'ble Gujarat High Court rendered in the case of Additional Commissioner of Income-tax v. Mukur Corporation 111 ITR312. 8. Regarding the objection of the assessee against the head of income, the Commissioner of Income-tax held that a head of income for assessment cannot be reduced to a level of a ritualistic formula. It also cannot be put in a watertight compartment. Assessing an income under the proper head depends upon the facts and circumstances of each case. He held that once the business of the transferor company is carried on by the assessee, the excess of Rs. 2,899.68 lakhs, arising out of the amalgamation, has to be assessed as business income. 9. The Commissioner of Income-tax also observed that the addition to General Reserve was due to increase in Net Asset Value (NAV) and the same was complet....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dvertising Co. Pvt. Ltd. 255 ITR 510, the learned Judicial Member held that transfer of any amount to the General Reserve is to be treated as business profit. He further observed that the above decision of the Hon'ble Madras High Court was rendered, following the judgment of the Hon'ble Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT 132 ITR 559. He held that the surplus amount of Rs. 2,899.68 lakhs is taxable as business income. 14. The learned Accountant Member, on the other hand, found that the revision order passed by the Commissioner of Income-tax is not in accordance with law. He found force in the argument advanced by the assessee company. The learned Accountant Member found that the decision of the Hon'ble Supreme Court in the case of CIT v. Alagendran Finance Ltd. 293 ITR 1 and the decision of the Hon'ble Madras High Court in the case of CWT v. A.K. Thanga Pillai 252 ITR 260 are applicable to the present case and as such the limitation period cannot be reckoned with the date of passing of the assessment order under section 147. This is because the issue raised by the Commissioner of Income-tax in his revision order was not the subject matter of proceed....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2. Whether any issue of income on which the Assessing Officer did not apply his mind while passing the assessment order u/s 143 r.w.s. 147 would give a valid jurisdiction to the ld. CIT to revise that order or not ?" 20. The points of difference framed by the learned Accountant Member are as follows:- "1. Whether the order passed by the ld. CIT u/s 263 in the given case is barred by limitation or not? 2. Whether, on the facts and circumstances of the case any prejudice was caused to the interest of the Revenue by the order passed under section 147 of the Act by the Assessing Officer? 3. Whether, on the facts and circumstances of the case, there was any error in the order passed u/s 147 of the Act on 24.12.2008 by the Assessing Officer, which can be considered as erroneous, in so far as prejudicial to the interest of the Revenue? 4. Whether, on the facts and circumstances of the case, the ld. CIT was justified in holding that Rs. 2899.68 lakhs was income assessable in view of the provisions of section 28(iv) of the Act?" 21. The Hon'ble President has nominated me as the Third Member and that is how the matter has been placed befo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 28(iv) of the Income-tax Act, 1961. 27. Both the sides argued at length on the question of section 263 as well. 28. After hearing both sides in detail, I may first examine the question whether the revision order passed by the Commissioner of Income-tax under section 263 of the Act is sustainable in law or not. 29. The return filed by the assessee was initially processed under section 143(1) of the Act. The assessee had thereafter filed a revised return. An order under section 154 was carried out thereafter. It is when the matter was resting so, that the notice under section 148 was issued, as a result of which the assessment was completed under section 143(3), read with section 147. It is the latest assessment order passed under section 143(3), read with section 147, which has been revised by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961. 30. The contention of the assessee that the income-escaping assessment cannot be considered for computing the period of limitation on the ground that the issue considered by the Assessing Officer in the income-escaping assessment is not the subject matter if revision, is not an acceptable propositi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er section 143(3), read with section 147. The revision order passed by the Commissioner of Income-tax is within the period of limitation. 34. Therefore, on the question of legality of the revision order passed under section 263, I agree with the view taken by the Hon'ble Judicial Member. 35. Now, it is the question whether the sum of Rs. 2,899.68 lakhs, accounted in the company's books as a 'reserve', could be treated as income in the hands of the assessee company under section 28(iv) of the Income-tax Act, 1961 or not? 36. In this context I have to state that the assessee has taken an alternative plea that if at all the said sum is exigible to tax, the same should have been taxed under the head 'capital gains'. I may not be able to subscribe to the above argument of the learned chartered accountant. Capital gain arises out of a deal of 'transfer'. In the present case, the assessee has not entered into any transaction of transfer. In fact, it has acquired the business of another company through the medium of amalgamation. As there is no transfer as such of any capital asset made by the assessee, the question of taxing capital gains does not arise. Moreover, section 47(vi) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ansys Technologies Pvt. Ltd. and M/s. Sophia Software Ltd. The excess of cost of acquisition over the carrying value of the net asset on the date of merger has been brought in the financial statement of the assessee company as goodwill. The assessee has adopted this method on the principle that the carrying value of the goodwill is susceptible to the events and changes taking place in the surrounding circumstances. This accounting entry to adjust for the balancing figure has been treated by the assessing authority as receipt of Rs. 35,98,25,190/- in the event of the merger of M/s.Transys Technologies Pvt. Ltd. with the assessee company. The assessing authority treated the same as income under the provisions of section 28(iv) of the Income-tax Act, 1961. When this matter was considered in first appeal, the assessee argued at length that the finding of the Assessing Officer is erroneous in the facts of the case and there is nothing to be taken into consideration under section 28(iv). After hearing the detailed submissions of the assessee company, the Commissioner of Income-tax (Appeals) remanded the matter to the Assessing Officer, to which a remand report was furnished by the Assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t quality. The court held that it becomes a definite trade surplus. The court also observed that the assessee itself treats the money as its own money and takes the amount to its profit and loss account. It is in those circumstances that the Hon'ble High Court has held that those amounts are assessable in the hands of the assessee. In the present case, the facts are diametrically opposite. The amount of Rs. 2,899.68 lakhs transferred by the assessee to its General Reserve was not generated out of trading operations. The surplus in fact arose out of acquisition of capital assets. It was a transaction in the capital segment. In fact, there is no surplus. It was only an accounting notion. It was necessarily to be reflected in the accounts so as to tally the balance sheet. On amalgamation, shares can be allotted only on its face value. At the same time, the market value of the shares is very high. The assets are taken over by the assessee and the number of shares to be allotted to the amalgamated company was computed on the basis of the market value of the shares evaluated on the basis of valuation report. Therefore, the acquisition transaction has been taken on the basis of the market....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erved that reserve is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business. Even though the court has mentioned that a reserve may be a surplus, the court has equally characterized it as part of capital employed in the business. Further, the Hon'ble Supreme Court has observed that the question whether an amount would constitute reserve or not will have to be decided having regard to the true nature and character of the sum so appropriated depending on the surrounding circumstances, particularly the intention and purpose for which such appropriation has been made. The true nature and character of the appropriation must be determined with reference to the substance of the matter. This means that one must have regard to the intention with which and the purpose for which the appropriation has been made, such intention and purpose being gathered from the surrounding circumstances. In the present case, in fact there is no appropriation at all. The surplus of Rs. 2,899.68 lakhs has been generated in the present case as a result of amalgamation and arising out of the consequence of recording the fina....