TaxTMI 
TaxTMI 
2014 (7) TMI 962
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....despite the fact that the same were before Hon'ble jurisdictional High Court before approval of this scheme." "Whether, in the given facts and circumstances of the case, the amalgamation in the present case itself is a colourable device to evade the tax by amalgamating companies or not." "Whether, in the given facts and circumstances of the case, since due to cross holdings inter se the share holdings got neutralized and cancelled, no shares were required to be issued by the transferee company i.e. the assessee company" For this issue, Revenue has raised following 1 to 6 grounds:- "1. That on the facts and circumstances of the case and in law, the Ld. CIT(Appeals)-VIII, Kolkata, has erred in deleting the addition of Rs. 69,64,34,089/- on the ground that the jurisdictional High Court has approved the scheme of amalgamation when the Hon'ble Apex Court in the case of M/s. Marshal & Sons and Co.(I) Ltd. -vs- ITO, 223 809 (SC) has decided that it is open even if there may be an amalgamation as per the company's Act 1956, there may be separate proceedings as per the I.T. Act, 1961 and the assessee has violated section 2(1B) of the I.T. Act, 1961. 2. That on the facts....
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....ssment year for which the assessment has made. 6. That on the facts and circumstances of the case and in law, the Ld. CIT(Appeals) -VIII, Kolkata, has erred in deleting the addition of Rs. 69,64,34,089/- on the ground that the section 68 is not applicable when the assessee could offer no explanation how the share capital in the amalgamating companies has increased for a sum more than Rs. 69 crores during the previous year by adjustment acquisition of shares at the flat rate of Rs. 2/- and the assessee itself has retreated from its earlier explanation that the shares were acquired through bank and no bank account could be produced and the assessee later submitted that it was acquired through adjustment without any evidence." 3. Facts relating to the above issue are that the following four companies amalgamated with the assessee-company during the year:- (a) Preetam Marketing Pvt. Ltd. w.e.f. 31.03.2004 (b) Xenix Exports Pvt. Ltd. w.e.f. 31.03.2004 (c) Burman Trexim Pvt. Ltd. w.e.f 31-03-2005 (d) Varsha Fabrics Pvt. Ltd. w.e.f. 31.03.2005 During the course of assessment proceedings, AO noticed from accounts of the assessee that a sum of Rs. 69,64,39,089/- was cre....
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....or concealment & furnishing of inaccurate particulars of Income." Aggrieved, assessee preferred appeal before CIT(A). 4. The CIT(A) after considering the submission of the assessee and legal position as argued before him, deleted the addition by observing as under:- "These grounds being interrelated are taken up together. In these grounds the appellant is disputing the Assessing Officer's (AO) action in adding the Amalgamation Reserve credited in the books under Sec. 68 of the Income Tax Act, 1961. It appears from the assessment order that the amalgamation of four companies with the appellant is a consequence of an order of the jurisdictional High Court. In my opinion, the order of the jurisdictional High Court in this matter is final and all other considerations, which have been raised by the AO in his order, are secondary. These cannot, in any way detract from the legal position, as determined by the order of the jurisdictional High Court. The AO has raised the issue of inter se holdings and purpose of shares and the purported date of the shareholders' meeting. However, once the Hon'ble jurisdictional High Court approves the scheme of amalgamation, it is a natural cor....
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.... fully reflected and for which reconciliation was submitted before the AO. He taken us to page 215 of the assessee's paper book, wherein the details of shares of amalgamating companies are filed and which is as under:- Ld. counsel for the assessee further taken us to page-216 of the assessee's paper book wherein details of amalgamation reserve and inter se debit balance of transferor company with transferee company is provided by assessee and the same was filed before AO also. The relevant reconciliation is as under:- The Ld counsel for the assessee stated that it is true that on amalgamation no shares were allotted to the shareholders of the amalgamating companies due to cross-holding as the shares of four amalgamating companies inter se got cancelled. He explained that this was because due to cross-holding between the four companies, the holding of each company with other, got neutralized. As regards to application of Sec. 2(1B) of the Act by the AO, the Ld. counsel for the assessee stated that 100% shares being held by the transferor companies between themselves and it is more than ¾ and further it is being held by the transferor company after the date of amalgamati....
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....e facts of the case. It is a fact that in between 6.10.2005 to 2.11.2005 the share holders purchased the shares of inter se holdings and due to the cross holdings between the four companies ultimately the shareholding between them got neutralized for which no further shares were required to be issued to the share holders of these companies. The four amalgamating companies held their Board resolution on 07-11-2005 after creating these cross holdings and approved the scheme of amalgamation in their Board Meeting. Thereafter the amalgamation application was filed before the Hon'ble High Court on 21-11-2005, which, after detailed appraisal of the accounts, verification etc., was approved by the Hon'ble Calcutta High Court on 22-03-2006. Copy of the amalgamation order of the Hon'ble Calcutta High Court is part of assessee's paper book. According to AO, amalgamation reserve was created after amalgamation and the share capital of the amalgamated company was same as before, but according to us findings and observations of AO are not contemporaneous to the evidences on records, and it is clear from balance sheets of the amalgamating companies the shareholdings between them got neutralized f....
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....iness of the trading, buying, selling and distributing of textile products and general commodities. The Transferee Company is proposes to engaged in power production. 5.9. As per para 4.6 the assessee's reply regarding the acquisition of inter se holding is "The shares were acquired by the transferor companies from parties with whom transactions had been carried out in the normal course of business and the amount payable to them have been adjusted / squared off with the amount receivable from -/ payable to them. Hence no bank statement is required to be submitted." So the assessee wanted to say that the amalgamating companies have transactions with the share holders of each in the normal course of business. The transactions are claimed to have done in the FY 2005-06 for which the scrutiny is being done. No reflection of any such transaction is there in the TAR of this year in the part of disclosure u/s 40A(2)(b). The tax auditor has audited the entire sale and purchase for the year including that of the amalgamated companies. Hence, it should have been noticed by him as after 01.04.2005, the adjustments were claimed to have done. The claim of acquisition of the sharers at a flat....
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....391, 392 and 394 of the Act are filed with the Registrar of companies, West Bengal Page 13 para IV, Para 6(a) Since all the shares in the Transferor companies are held inter se by the transferor companies no shares shall be issued by the Transferee company to the shareholders of the Transferor companies. By no stretch of imagination, in view of the above discussion, the amalgamation reserve which is a capital receipt could be treated as a revenue receipt in the hands of the amalgamated company, and as such reserves and surplus are appearing as a capital in the balance sheets of the amalgamating companies and also admitted by the AO in parts of the assessment order. 10. In view of the above factual position now we have to discuss the provisions of section 394A of the Companies Act, wherein notice has to be given to the central government for applications made u/s. 391 and 394 of the Act. The provision of section 394A of the Companies Act, 1956 reads as under: "S. 394-A Notice to be given to Central Government for applications under sections 391 and 394 - The court shall give notice of every application made to it under section 391 or 394 to the Central Government, and....
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.... stake holders have been heard and it is open to the revenue i.e. the Income tax department, as one of the class of creditors, to put forward any objection it may have against the amalgamation the court will refuse sanction of amalgamation scheme, where the scheme proposed is not bona fide or workable or where it is shown that there is something wrong with the scheme. In case the purpose discernable behind the amalgamation scheme is to defeat the liabilities of revenue the court can refuse sanctioning the scheme. Hon'ble Gujarat High Court in Wood Polymer Ltd., in re and Bengal Hotels Pvt. Ltd. in re supra has laid down certain principles regarding the expression 'public interest' and the 'scheme of amalgamation' and the relevant paras of the judgment read as under: "Similar is the position in Rodwell Securities v. Inland Revenue Commissioners [1968] 1 All ER 257. The benefit of exemption from the stamp duty was denied on the construction of statute granting exemption but the following observation was relied upon in support of the submission that a mere setting up of a chain of companies is not open to lurking suspicion, that it has been done with an avowed object of defeating t....
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....rence. Commission was also directed to suggest the action which in the opinion of the Commission should be taken to act as a preventive in future cases and also to suggest measures which in the opinion of the Commission are necessary in order to ensure in the future that due and proper administration of the funds and assets of the companies and firms in the interest of investing public. Interest of the investing public is interest of general public which expression would be covered by "public interest". Pursuant to this directive and as a consequence of its finding, the Commission recommended introduction of a provision by which the court while examining the scheme of amalgamation, would have an opportunity to ascertain whether the affairs of the transferor-company which will be dissolved without winding up were carried on in a manner prejudicial to its members or public interest. This recommendation found its echo in the second proviso to section 394(1). Apart from the recommendation, the voluminous report of the Commission throws a lurid light on how the machinery of company formation and company management were used to subserve the interest of those controlling the affairs of th....
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....its factory at Billimora. The transferor-company appears to have not done any business except acquiring capital asset from its parent company of which it was a subsidiary company and got it revalued so that by the process of revaluation, the equity shareholders of the transferor-company can get large number of shares of the transferee-company by the exchange ratio prescribed in the scheme of amalgamation. No apparent understandable purpose or object behind the scheme is discernible. The purpose and the only purpose appears to be to acquire capital asset of the DOC Pvt. Ltd. through the intermediary of the transferor-company which was created for that very purpose to meet the requirement of law, and in the process to defeat tax liability that would otherwise arise. If such be the scheme of amalgamation and if such is the use made of the transferor-company by those controlling it, it can never be said that the affairs of the transferor company sought to be amalgamated, created for the sole purpose of facilitating transfer of capital asset, through its medium, have not been carried on in a manner prejudicial to public interest. Public interest looms large in this background, and the m....
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.... has considered a scheme of arrangement proposed by assessee for transfer of passive infrastructure assets. The scheme was objected to by the Revenue and Hon'ble single judge of the very High Court considering this objection, inter alia, held that the transaction was void in view of the provisions of section 281of the Act and refused to sanction the scheme. Hon'ble High Court on appeal, Division Bench laid down certain principles as under (as reproduced from head notes): "Held, allowing the appeal, (i) that if any amount was required to be paid to the Income-tax Department by the transferor company, the Income-tax Department could be said to be a creditor so far as its claim against the transferor company was concerned. Considering the fact, it could not be said that the Income-tax Department had no locus standi to put forward its objections in this behalf. Even if no objections were received against the scheme pursuant to the public advertisement, yet the court was required to examine the scheme while giving its approval. The single judge had rightly allowed the Income-tax Department to have its say by raising objections in connection with the scheme in question. A similar obje....
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....may be was to be kept intact and pending cases before the Tribunal were not be affected in view of the sanction of the scheme.] Order of the single judge in Vodafone Essar Gujarat Ltd., In re [2012] 342 ITR 135 (Guj) reversed." From the above provisions of section 394A of the Companies Act, 1956, legal position enunciated in the decisions of Hon'ble Gujarat High Court in the case of Wood Polymer Ltd., in re and Bengal Hotels Pvt. Ltd. in re, supra and Vodafone Essar Gujarat Ltd., supra, evidently makes the purpose clear that if the revenue wants to object to the proposed scheme of amalgamation, it has to do so in the course of proceedings before the High Court but before the final order is passed. Whenever such objections have been raised, these have been considered on merits by the concerned High Court and also incorporated the condition for safeguarding the interest of revenue in the very scheme. As a matter of public policy, once a scheme of amalgamation is approved by Hon'ble High Court no authority should be allowed to tinker with the scheme. In the present case of the assessee, neither the official liquidator nor the Regional Director nor Central Government raised any o....
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....n connection with the incorporation under the Mauritious law, were deem it fit to enter a caveat here. These words are not intended to be used as magic mantras or catch-all phrases to defeat or nullify the effect of a legal situation. As Lord Atkin pointed out in Duke of Westminster's case [1936] AC 1 (HL); [1935] 19 TC 490, 511): 'I do not use the word device in any sinister sense : for it has to be recognised that the subject, whether poor and humble or wealthy and noble, has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax. The only function of a court of law is to determine the legal result of his dispositions so far as they affect tax.' Lord Tomlin said (page 521) : "There may, of course, be cases where documents are not bona fide nor intended to be acted upon, but are only used as a cloak to conceal a different transaction." In Snook v. London and West Riding Investments Ltd. [1971] 1 All ER 518 at 528 (CA) Lord Diplock L. J., explained the use of the word 'sham' as a legal concept in the following words : "... it is, I think, necessary to consider what, if any, legal concept is involved in the use of th....
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....le 372. Unless abrogated by an Act of Parliament, or by a clear pronouncement of this court, we think that this legal principle would continue to hold good. Having anxiously scanned McDowell's case [1985] 154 ITR 148 (SC), we find no reference therein to having dissented from or overruled the decision of the Privy Council in Bank of Chettinad's case [1940] 8 ITR 522 (PC). If any, the principle appears to have been reiterated with approval by the Constitutional Bench of this court in Mathuram's case [1999] 8 SCC 667 at page 12. We are, therefore, unable to accept the contention of the respondents that there has been a very drastic change in the fiscal jurisprudence, in India, as would entail a departure. In our judgment, from Westminster's case [1936] AC 1 (HL); 19 TC 490 to Bank of Chettinad's case [1940] 8 ITR 522 (PC) to Mathuram's case [1999] 8 SCC 667, despite the hiccups of McDowell's case [1985] 154 ITR 148 (SC), the law has remained the same. "We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the natio....
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....pra, the revenue must have found out what is tangible in an objective manner but they failed to do so. The principles enunciated in the above case by Hon'ble Supreme Court in respect to 'colourable device' has to be followed and applied. In the present case before us, the assessee has completely disclosed the transaction in the amalgamation scheme presented before Hon'ble Calcutta High Court, which was duly approved. Hence, our answer to second issue framed by us is in negative i.e. against revenue and in favour of assessee. 15. Further, on the issue of balancing of charge on the valuation of shares of the amalgamating company vis-à-vis that of amalgamated company which is, whether capital or revenue receipt, Hon'ble Delhi High Court in the case of CIT Vs. Bharat Development Pvt, Ltd. (1982) 135 ITR 456 has held as under: "This is the only form in which the amalgamated companies pay for the assets of the amalgamating companies. These shares may be issued at any convenient value. The shareholders of the previous company, i. e., the transferring company, may be given more shares than they previously had or they may be given less shares. This depends on the scheme of amal....
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....5/- 353.37 per she (Rs) 240.58 Xenix 100000 10,00,000/- 89,82,000/- 99,82,000/- 3,17,88,478/- 2211.63 31.3.04 + General reserve Varsha 600000 60,00,000/- 5,39,82,000/- 5,99,82,000/- 31.03.05 17,93,94,905/- 1,32,73,043/- 121.99 Document 2 Sl No of issued shares of transferor companies & N their names Name 0 No of shares Inter se holding Shares held by Shares held Shares held Shares held BTPI of No of by VFPL of Date of No of date by XEPL of by PMPL of No of date No of date Cost cost cost of cost Share Acquisition Rs 1 Burman Trexim Pvt Ltd 20000 32000 48000 (BTPL) 100000 21.10.05 21.10.05 21.10.05 40000 64000 9600 2 Varsha Fabrics Pvt.Ltd 225000 02.11.05 100000 275000 (VFPL) 600000 450000 02.11.05 20.10.05 200000 550000 3 Xenix Exports Pvt Ltd 22000 02.11.05 48000 30000 (XEPL) 100000 44000 21.10.05 21.10.05 96000 60000 4 Preetqam Marketing Pvt 394520 08.10.05 470000 280000 Ltd (PMPL) 129020 789040 08.10.05 08.10.05 940000 560000 2090020 641520 ....