TaxTMI 
TaxTMI 
2019 (4) TMI 1283
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....as determined at Rs. 65,47,56,587/- as against the declared Book profit u/s 115JB of the Act at Rs. 2,75,39,440/-. 2. That on the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in law and in facts in making the addition of Rs. 61,56,80,326/- to the Book profit u/s 115JB of the Act holding the same to be the amount standing in the Revaluation Reserve relating to the stock sold by the Appellant. 2(a). That on the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in law and in facts in treating the Capital Reserve as a Revaluation Reserve. 2(b). That on the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in law and in facts in not appreciating the Amalgamation Scheme duly approved by the Hon'ble High Court which clearly laid out the modus operandi of the said Amalgamation. 2(c). That on the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in law and in facts in applying the provisions of the Clause (j) of Explanation 1 to section 115JB of the Act to the Capital Reserve created by the Appellant Company pursuant to the Scheme of Amalgamati....
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....Rs. 1,15,36,821/- made u/s 14A of the Act to the profit for purposes of section 115JB of the Act. 10. That, as the order of Ld. CIT(A) suffers from illegality and is devoid of any merit, the same should be quashed and your appellant be given such relief(s) as prayed for. 11. That the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/ or rescind any or all of the above grounds." 3. The core issue involved in this case relates to addition of Rs. 61,56,80,326/- on account of adjustment made in the book profit u/s 115JB made by the Assessing Officer, which has been confirmed by the Ld. CIT(A). 4. The facts, in brief, qua the adjustment made in the book profit are that, the assessee company is engaged in the business of development of infrastructure and realestate. For the relevant assessment year, the assessee had filed its return of income by way of e-filing on 06.07.2017, declaring income of Rs. 3,28,09,280/- under the normal provisions of the Act; and book profit u/s. 115JB was declared at Rs. 2,75,39,440/-. During the relevant financial year 2014-15, two wholly subsidiaries of the assessee company, i.e., M/s. Priapus Real Estate....
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....ed into loss and therefore, the assessee was not liable for MAT liability u/s. 115JB. 5. The learned Assessing Officer required the assessee to furnish the details about the nature of capital reserves and also asked the assessee as to why the amount credited to the capital reserves for 20,42,053 shares sold by the assessee should not be considered for the purpose of calculation of book profit u/s. 115JB and adjustment be made in the book profit. In response, the assessee submitted detailed reply, which has been incorporated in the assessment order. The working of the capital reserve in the books of account and in the financial statement shown by the assessee in terms of the scheme of amalgamation was disclosed in the following manner:- Particulars Priapus Properties Pvt Ltd. Priapus Real Estate Pvt Ltd. Priapus Developers Pvt Ltd. Total On revaluation of shares 232,19,92,283 85,84,92,000 318,04,84,283 On revaluation of Land 3,27,760 3,27,760 3,27,760 9,83,280 On Purchase consideration 62,80,58,323 14,95,05,680 77,75,64,003 It was further submitted that, neither the books of account nor audited statement....
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....e laws relied by the assessee that capital reserve created out of amalgamation schemecannot be added to the book profit on the ground that what is proposed is not addition of entire capital reserve but that of the amount which is present in the reserve created on revaluation of assets while those assets were disposed of during the year. * Lastly, reserve created due to revaluation of assets does not route through profit accounts directly, which is not correct and therefore, in terms of clause (v) of Explanation 1 makes it clear that for the purpose of book profit, such revaluation of reserve relating to revalued assets has to be increased. 6. Finally, the addition was made by the Assessing Officer in the following manner: - i. In consequence of amalgamation of M/s. PPPL and M/s PREPL with the assessee company, the shares of IHFL held by the two companies were revalued on market price as on the date of amalgamation. A reserve was created out of such revaluation and Rs. 318,04,84,283/- were credited to the balance sheet directly and the same was not routed through profit and loss account. ii. Of the 1,06,39,926/- shares which were received by the assesse....
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.... 1961 is being made by Rs. 61,56,80,325.76." 7. The ld. CIT(A) too has confirmed the said addition after detailed reasoning and also strongly relied upon the judgment of ITAT Ahmedabad Bench in the case of Infibeam Incorporation Ltd. vs. ITO in ITA No. 3391/Ahd/2015. The sum and substance of his reasoning for rejecting the assessee's contention and upholding the action of the Assessing Officer can be summarized in the following manner:- a. Amalgamation has been used by the assessee as a tool for tax evasion. The assessee cannot take shelter behind judiciary and prohibit the revenue from examining the evasion. He held that the power of amalgamation is the administrative power of the Hon'ble High Court. The power has been granted by the Companies Act to ensure that the interest of the creditors and share-holders are protected. The amalgamation order of the judiciary is therefore not in the nature of judicial order of the High Court. b. Sub-section 5 of section 115JB provides that "save as other-wise provided in this section or other provisions of this Act shall apply to every assessee, being assessee company mentioned in this section". Thus, clearly proviso to se....
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....sions of section 49(3) (i.e., cost to the previous owner) is applicable only for the purpose of "computation of capital gain". If we go by this logic, the exemption from definition of the word "transfer" as provided in sub-section (vi) of section 47 will also apply only in respect of computation of "book profit". As per this argument, the entire appreciation recorded in the books of accounts post amalgamation, would become taxable for the purpose of computation of "book profit" u/s 115JB. f. Clause (j) of explanation 1 to section 115JB, states that "the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset" needs to be added to "book profit". The adoption of fair market value of the Investments is nothing but revaluation. Merely, the credit of increase in value to "capital reserve" would not alter the true character and substance of the event. Revaluation is not confined to only "land & building" but can be in respect of any asset and investment in shares is one of them. In this regard, reliance was placed on the decision of Hon'ble ITAT, Mumbai Bench in the case of M/s Sumer Builders Pvt Ltd., vs DCIT Centra....
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....t any observation or comment in this regard should be sent to the Regional Director, Northern Region, Ministry of Corporate Affairs. The notices sent by Hon'ble High Court are appearing at page 103 to 105 of the paper book. He submitted that, once there was clear cut Scheme which has been approved by Hon'ble High Court, it has statutory force and binding upon all. Ld. Counsel also relied upon catena of judgments wherein scope of High Court order in regard to amalgamation has been explained and that the High Court judgment has to be given full effect to. The key judgments relied upon by him, first of all was on the decision of Hon'ble Gujarat High court in the case of Wood Ploymer Ltd., reported in 109 ITR 177; and the judgment of Hon'ble Supreme Court in the case of J.K. (Bombay) Pvt. Ltd. vs. New Kesar-e-Hind Spinning and Weaving Co. reported in 1971 AIR 1041. Ld. Counsel thus submitted that, once the Hon'ble High Court after due diligence and conducting detailed enquiry before sanctioning the Scheme and after examining the entire public interest has passed the order, then same has to be accepted and if any Scheme is formulated for the purpose of tax evasion, then same could not h....
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.... assets as brought out in earlier paragraphs. Revaluation of assets can only occur if the assets existing in balance sheet are revised which is not true in the case of the appellant assessee. • In the case of Infibeam the auditors had clearly qualified the accounts by stating that AS-11 was not properly followed. This is brought out at para 5.11 of the judgment which states that "in the instant case, the auditors have clearly qualified the report on such accounts, stating that upward revaluation of investment in subsidiary company is not in line with the AS 13 issued by the ICAI. Thus, it cannot be said that when the Accounting Standard required to becomplied with by the appellant company is not complied, then the profit as shown in the profit and loss account is not in accordance with the Companies' Act, whereas in the case of the appellant the auditors have expressed their satisfaction regarding the compliance of provisions of Companies Act and accounting standards. • In fact, the case of Infibeam brings out what the appellant has been trying to say all along. In this regard, attention was sought to para 5.13 of the judgment of Infibeam, wherein....
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....e Developers Co. Ltd., vs DCIT 76 taxmann.com 360. b. AS-13 demands that investments be carried at their cost. However, the appellant has carried the same at fair market value. Further AS-13 requires that difference between cost and sale value net of expenses should be recognised in the profit and loss account. The appellant assessee has thus failed to follow AS-13 c. Appellant assessee has taken different costs for the purpose of "book profit" and Long term Capital Gain. d. Appellant assessee has failed to apply clause (j) of explanation (1) to section 115JB. 8.13 The above findings of the lower authorities are illegal as brought out in the following discussion:- 8.14 Attention is sought to para 1 and 3.1 of the AS-13 reproduced here-under for your ready reference:- Para 1- This standard deals with accounting for investments in the financial statements of enterprises and related disclosure issues. Inage 91 of paper book| Para 3.1 Investments are assets held by an enterprise for earning income by way of dividends, interest and rentals, for capital. 8.15 AS-13 deals with investments. Further investments are defi....
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....y flawed." 12. Before us, the ld. DR strongly referred to various observations made by the Assessing Officer and submitted that here in this case on the date of Amalgamation, the shares were valued at FMV and not on cost and once, the shares were amalgamated it became part of reserve of assessee, therefore, such revaluation amounts to revaluation of reserves. Here, the nature remains the same, because post amalgamation, there was revaluation of shares and such shares were sold, therefore, it is clearly hit by clause (j) of Explanation to section 115JB. He further referred to various observation of Ld. CIT (A) and submitted that the High Court Order cannot be interpreted to mean that the matter cannot be examined under the provisions of Income Tax Act. Here what is required to be seen is that whether adjustment in book profit can be made u/s 115JB or not. He thus strongly relied upon the order of Ld. CIT (A). 13. We have heard the rival submissions and also perused the relevant findings given in the impugned order as well as material referred to before us at the time of hearing. The sole issue involved in this case is, whether the addition of Rs. 61,56,80,326/- can be made in ....
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....e transferred and would be recorded in the respective fair values; and lastly, any excess arising on transfer of assets and liabilities of the transferor companies would be considered to form part of the "capital reserves" of the transferee company and such capital reserve shall not be for any purpose be considered to be a reserve created by the transferee company. Ergo, if there is an excess on account of valuation on purchase method determining the fair market value was to form part of the capital reserve and no other mandate was given to the transferee company. The shares of IHFL was held by the amalgamating companies which has been transferred to the assessee company and thus, it was akin to acquisition of an asset which as per the mandate of Amalgamation Scheme has to be treated as part of the capital reserve. Now, this scheme has been duly approved by Hon'ble Delhi High Court vide judgment and order dated 18.02.2016. In the conclusion of the said order, Hon'ble Court has specifically observed that any person interested shall be at liberty to apply to the court in the above matter for any directions that may be necessary. The said order of Hon'ble High Court sanctioning the en....
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....f it appears necessary for him to obtain such feedback, it will also be dealt with in a like manner. 4. It is also emphasized that it is not for the Regional Director to decide correctness or otherwise of the objections/views of the Income tax Department or other Regulators. While ordinarily such views should be projected by the Regional Director in his representation, if there are compelling reasons for doubting the correctness of such views, the Regional Director must make a reference to this Ministry for taking up the matter with the Ministry concerned before filing the representation under Section 394A. 5. This Circular is effective from the date of issue." 15. Thereafter, Hon'ble High Court had also issued notices to the Income Tax Department through Assessing Officer which was received in the office of the Assessing Officer on 18.05.2015. The Assessing Officer/ Department nowhere had objected to said Scheme at any point of time, neither in pursuance of circular issued by Ministry of Corporate Affairs nor when the notice was issued by the High Court. Thus, Scheme of Amalgamation sanction by Hon'ble High court had become final. Such an order has a binding e....
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....public interest. The expression "public interest" must take its colour and content from the context in which it is used. The context in which the expression "public interest" is used should permit the court to bring out why the transferor-company came into existence, for what purpose it was set up, who were its promoter, who were controlling it, what object was sought to be achieved through creation of the transferor-company and why it is now being dissolved by merging it with another company. All these aspects will have to be examined in the context of the satisfaction of the court whether its affairs have not been carried on in a manner prejudicial to public interest. That is the colour and content of the expression "public interest" as used in section 394(1), second proviso and the facts of this case will have to be examined keeping in view the colour and content of the expression "public interest". The scheme of amalgamation must have some purpose or object to achieve. It was repeatedly inquired what purpose or object was to be achieved by a scheme of amalgamation offered for court's sanction.It was said that the property belonging to the transferor-company will be....
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....ich has resulted in 'capital reserve', was recorded in the books in the following manner:- Particulars Priapus Properties Pvt Ltd. Priapus Real Estate Pvt Ltd. Priapus Developers Pvt Ltd. Total On revaluation of shares 232,19,92,283 85,84,92,000 318,04,84,283 On revaluation of Land 3,27,760 3,27,760 3,27,760 9,83,280 On Purchase consideration 62,80,58,323 14,95,05,680 77,75,64,003 As per said scheme itself, such capital reserve was prohibited for any purpose by the transferee company. Thus, such a creation of capital reserve cannot be questioned by the Assessing Officer or CIT(A) or perceive it as any kind of tax evasion practice. Here in this case, the assets transferred to the assessee company from transferor companies pursuant to Scheme of Amalgamation, included 1,06,39,926 shares of India bull Housing Finance Ltd. in the following manner:- M/s. Priapus Properties Pvt Ltd. held 70,39,926 shares (acquired by them at Rs. 89,15,22,739/-); M/s. Priapus Real Estates Pvt. Ltd. held 36,00,000 shares (acquired by them at Rs. 78,48,00,000/-). The fair market value of the said shares on the d....
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.... Hon'ble Supreme Court in the case of Apollo Tyres (supra). Here the Assessing Officer cannot tinker with such profit and loss account or treat the part of capital reserve by holding that it should have been routed through regular profit and loss account. The reasoning given by the ld. CIT (A) too cannot be upheld for the same reason. 18. As regards the capital gain computed u/s. 10(38), and application of 49(1) for computing the capital gain, the same would be relevant while computing the normal computation of capital gain in the computation of book profit where the sale of investment is included in the books prepared and profit and loss is included in the profit and loss account. It is only in such situation the said exemption u/s. 10(38) cannot be included. Here in this case, the difference between the cost of acquisition of the amalgamated assets and sale consideration has resulted in loss and the same has been duly recorded in the profit and loss account; and thus the contention of the ld. CIT (A) that in computation of book profit capital gain should be computed by taking historical cost of assets is not correct. It is clear from plain reading of clause (ii) of Explanation....
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....ee could have incurred any kind of indirect expenses for earning of dividend income. It is trite and well settled law by Hon'ble Delhi High court and Now by the Hon'ble Apex Court in Maxopp Investment reported in 402 ITR 640 (SC), that if the Assessing Officer has not recorded his satisfaction to disbelieve the disallowance made by assessee, he cannot resort to the provisions of Rule 8D. Relevant observations of Hon'ble Supreme Court read as under: * In the first instance, it needs to be recognised that as per section 14A(1), deduction of that expenditure is not to be allowed which has been incurred by the assessee in relation to income which does not form part of the total income under this Act. Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in....