TaxTMI 
TaxTMI 
2020 (8) TMI 796
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....tion 115 JB of the Act. 2.1. That the CIT(A) erred in not holding that the assessing officer had exceeded his jurisdiction in making the aforesaid upward adjustment, contrary to the mandate of section 115JB of the Act, since the appellant had computed 'book profit' strictly in accordance with the books of account as mandated by the said section. 2.2. That the CIT(A) erred in not appreciating that the accounting treatment in the books of accounts, being strictly in accordance with the binding scheme of amalgamation as approved by the Hon'ble High Court, the provisions of the Companies Act and duly approved by the shareholders/ di rectors/ ROC was sacrosanct for the purpose of computing book profit under section 115JB of the Act. 2.3. That the CIT(A) erred on facts and in law in confirming the action of assessing officer in treating capital reserve created under the scheme of amalgamation on account of vesting of assets in the appellant by purchase method, to be in the nature of "revaluation reserve" referred to in clause (j) of Explanation 1 to section 115JB of the Act. 2.4. That the CIT(A) erred in upholding the false/ baseless al legations made ....
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....Ltd. - M/s. Hespera Infrastructure Pvt. Ltd. & M/s. Hespera Properties Pvt. Ltd. amalgamated with the assessee company. Step 2: Thereafter, M/s. Hespera Realcon Pvt. Ltd. and Hespera Constructions Pvt. Ltd amalgamated with the assessee-company. The diagrammatic representation depicting the amalgamation of various companies with the assessee is as follows: II - Merger of remaining companies 4. The salient features of the scheme of amalgamation were as follows: a) In terms of the scheme, 01.08.2014 was the appointed date, as approved by the Hon'ble High Court; b) Pursuant to the Scheme, all assets and properties of the five amalgamating companies, including various investments held, and all liabilities, stood transferred to and vested in the appellant with effect from the appointed date; c) As per para 9 of the Scheme, all the assets and liabilities of the five amalgamating companies stood transferred to and vested in the appellant-company at their respective fair values (refer para 9.1). 5. Pursuant to the aforesaid scheme of amalgamation, various assets and investment(s) held by the five amalgamating companies, which inter-alia....
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....income under section 115JB was computed by the assessee and shown as such in the return of income. 11. Thus, the assessee declared long-term capital gains of Rs. 280,62,54,440 (being the difference between sale consideration of Rs. 423,30,90,600 and original purchase cost of Rs. 142,68,36,160 in the hands of the amalgamating companies) and claimed it as exempt from tax under section 10(38) of the Act since the shares were transferred on a recognized stock exchange and STT was paid thereon, thereby satisfying the conditions prescribed in the said section. 12. In the books of account, since shares were transferred to and stood vested in the assessee at their fair value pursuant to the Scheme, (which was determined at Rs. 410.10 per share), the resultant gain of Rs. 33,09,80,489, was credited as part of "Other income - profit on sale of equity shares" in the profit and loss account. 13. For the purpose of computing deemed income under section 115JB of the Act, net profit/ loss as per audited profit and loss account, which included the aforesaid gain on sale of equity shares was considered, and the specified upward/ downward adjustments, as prescribed in Explanation 1 thereto ....
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....tion was never brought to the notice of the Hon'ble Court. Even while validating the genuine tax planning the Hon'ble Supreme Court in the case of Vodafone International Holdings has observed that it should be bonafide and the series of transactions in form also should have some commercial purpose. The assessee has failed to show any commercial purpose of amalgamation. 16. The AO held that the entire scheme of transaction was colourable device only, it is to note that the cost of acquisition of the said shares was only Rs. 142,68,36,160/- and post amalgamation (as the amalgamation was account by purchase method) the said book value was calculated at Rs. 390,21,10,112/-. The difference on account of market value and cost of acquisition of these shares was credited to the capital reserve account in the new entity along with fair market value of other assets re-valued (not sold during the year). 17. Having said so, the AO held that although, it is called as Capital Reserve, through the scheme of amalgamation presented, in effect and in essence it is only a Revaluation Reserve. For the purposes of book profit, the profit on sale of investment was recorded as sales conside....
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....erefore, it becomes an important function of the income tax authorities to look into the devices and natures of transactions used by the assessee, and decide upon the character and nature of such devices and transactions." (iii) A similar observation was made in the Supreme Court's decision in the case of Workmen v. Associated Rubber Industry [1986] 157 ITR 77 wherein the Hon'ble Court had observed- "It is true that in law the Associated Rubber Industry Ltd. and its subsidiary were two independent companies with separate legal existence and, therefore, the profits made by the subsidiary could not be treated as profits made by the parent. But in our view that was not an end of the matter. It is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke screen and discover the true state of affairs. The courts is not satisfied with form and leave alone the substance of the transaction." (iv) In the context of above, the AO fount it essential to refer to the case of Commissioner of Income-tax v. Durga Prasad More [1971] 082 ITR 0540-SC, wherein the Hon'ble Supreme Court had once....
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....or exemption from payment of tax, the question of an assessee trying to take advantage of the said provision would not arise. Therefore, in each case, the question is, the way the assessee has avoided to pay tax relying on the statutory provisions is legitimate or not is to be considered by the Court. The Court has to bear in mind that it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. An obligation is cast on every citizen to pay the taxes without resorting to subterfuges. When the statute provides certain rights, which if properly applied would reduce the tax burden on the assessee or exempts him from the payment of tax, the assessee is entitled to the said benefit. However, if he is invoking the said provisions with the intention of evading payment of tax, then it would be a colorable device to avoid payment of tax, which cannot be entertained by the Court. It is in this context, Court has to find out whether the transaction is real or unreal and then record a finding whether it is a colorable device or sham transaction." Order of the ld. CIT (A): 19. The ld. CIT (A) mainly r....
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....8- 2014 to 31.10.2014, by Hespera Properties Pvt. Ltd from 05.11.2014 to 03.12.2014 and by Hespera Infrastructure Pvt. Ltd. from 02.12.2014 to 16.01.2015. ... However, during the course of amalgamation proceedings and hearing before the Hon'ble Delhi High Court which went upto passing of the order i.e. 8.5.2015, this fact of restructuring of India Bulls group and sale of shares of India Bulls Group by the amalgamating companies was never admitted before the Hon'ble Court. Neither was this a part of the preamble of amalgamation nor was such a crucial fact brought to the notice of the Hon'ble Court at that point of time. From this, concludes the AO, the purpose of amalgamation was not the same as what was stated on oath before the Hon'ble High Court. Then, he goes on to discuss the subsequent events as under: "6.3.1 As a result of the amalgamation order of the Hon'ble Delhi High Court with retrospective effect from 01.08.2014, the sale of shares of India Bulls Housing Finance Ltd. originally made by Hespera Real Estate Pvt. Ltd., Hespera Properties Pvt. Ltd. and Infrastructure Pvt. Ltd. as per para 6.2. above have been shown to be sold by the app....
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....ee and the observation of the AO in the assessment order reiterated the deliberations of the Assessing Officer in the assessment order wherein the AO observed as under: i) The purpose of amalgamation as stated on oath before the Hon'ble High Court was not the actual intent behind the amalgamation. On one hand the assessee's group companies (which were proposed to be merged with the assessee) were selling the shares of IBHFL and on the other hand they were submitting superfluous reasons far away from reality as the reason for amalgamation. The group companies pleaded amalgamation so as to streamline the holding structure of the companies, ensure focused management in a single combined entity, derive synergies, achieve economies of scale etc. A perusal of the balance sheets of the six companies clearly indicates that the said companies were never into active business in the pre-merger period. It is important to note that the final amalgamated company (the assessee company) in the postmerger period was also not into active business of any kind. Though the object of the assessee company as stated by it is to undertake infrastructure projects, and to purchase, sell, dev....
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.... order granting exemption p from payment of stamp duty, taxes or any other charges, if payable in accordance with law; or permission/ compliance with any other requirement which may he specifically required under any law." ... It is clear from the observations of the Hon'ble High Court that the amalgamation scheme should not be used as a device to evade payment of Government dues including taxes. In this light, the AO finds that the intention of the assessee and its group companies right: from the beginning is focused and pointed towards avoidance of tax arising as a result of gain from sale of shares of IBFHL. 22. The ld. CIT (A) has also supported the judgments relied upon by the Assessing Officer which have been duly mentioned as the part of the assessment order in this order. 23. The ld. CIT (A) held that in view of the comments of the AO, he was inclined to agree with the observations made by the AO that the amalgamation scheme was planned and undertaken by the assessee and its group companies as an attempt to reduce liability for payment of minimum alternate tax (MAT) under section 115JB arising due to offloading/sale of shares of IBHFL. 24. In view of t....
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....there was no ambiguity as to the amalgamation undertaken by the assessee and its legal and economic effect. While doing so, the assessee followed the prescribed procedure. Everything that the assessee did was permitted by law and was perfectly legal in the eyes of law. There was no device, subterfuge or dubious method adopted by the assessee in the aforesaid transaction to hoodwink the Revenue. Further the legal effect of each of the aforesaid transactions undertaken by the assessee was achieved. It thus, cannot, be alleged by the assessing officer that the assessee had employed any colorable device. 29. It was argued that the amalgamating Companies had been originally incorporated with the objective of developing different real estate/infrastructure projects. However, it was proposed to consolidate the businesses of all the companies into one single entity, for improved synergies and management focus. Further, the Scheme, as stated above, aimed at deriving synergies and achieve economies of scale arising out of consolidation of businesses of companies in order to efficiently and optimally utilize resources of all businesses under a single combined entity. 30. Regarding th....
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....ces of all businesses under a single combined entity. It was argued that it is a fact on record that the assessee proposed to set up a hospitality project envisaging a 4-Star full service resort project with need based food and beverage outlets and recreational facilities with focus on health & spa related activities at Dev Nagar, Tehsil Bilara, Jaipur-Jodhpur Highway in Rajasthan. 34. The ld. DR supported the order of the Assessing Officer and the ld. CIT (A) which have been duly mentioned in this order. The crux of the argument is that though the scheme of amalgamation was approved by the Hon'ble High Court, the revenue has the right to look into the taxability of the revenues arise out of such amalgamation. It was reiterated that the entire amalgamation scheme was a surruptious action on the part of the assessee to evade taxes payable. Though the reserve created is treated as Capital Reserve in effect and truly it is a Revaluation Reserve liable for upward revision for computation of profits u/s 115JB. 35. Heard the arguments of both the parties and perused the material available on record. 36. The main allegation of the revenue as seen from the order of the Assessing O....
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....the assessee had, under the garb of amalgamation, adopted 'Purchase Method' and transferred the same to 'Capital Reserve', which in essence represented 'Revaluation Reserve', in order to undermine its book profit for the purposes of section 115JB of the Act. The revenue held that although it is called as Capital Reserve, through the scheme of amalgamation presented in effect and in essence it is only a Revaluation Reserve. For the purposes of book profit, the profit on sale of investment was recorded as sales consideration minus book value post-merger as is exactly the case in case of revaluation reserve. The book value effectively was a sum of cost of acquisition plus capital reserve (the same effectively as is in the case of Revaluation Reserve). The profit on sale of investment was thus reduced to the extent of this capital reserve created post merger. Thus, AO concludes that in view of provision of clause (j) to Explanation 1 of Section 115JB, the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, needs to be increased in computation of the book profit u/s 115JB. Therefore, as the shares in ques....
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....ets. 45. The ld. DR's reiterated the arguments as taken by the Assessing Officer mentioned at page no. 16 to 17 of the assessment order have been duly perused. 46. Heard the arguments of both the parties and perused the material available on record on this issue. 47. We find that the Assessing Officer failed to appreciate that a "Revaluation Reserve" is created when an enterprise revalues its own assets, already acquired and recorded in its books at certain values. In other words, when an entity makes reinstatement of the book value of its existing assets, it amounts to revaluation of assets. In the instant case, the assessee has not revalued its existing asset but as only recorded the fair values of various assets and liabilities "acquired" by the assessee from the transferor/ "amalgamating companies" pursuant to the scheme of amalgamation as its "cost of acquisition" in accordance with the terms of the court-approved scheme of amalgamation and the provisions of AS14. As per the accounting standard, upward revaluation of assets is permitted only in terms of AS 10 on "Accounting for Fixed Assets". AS 13 which deals with "Accounting for Investments", does not permit a compa....
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....he company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act. 1956 (1 of 1956):" 52. For computing book profit, sub-section (2) of section 115JB of the Act mandates that every company shall prepare its Profit & Loss Account in accordance with the provisions of Parts I and II of Schedule III of the Companies Act, 2013 (corresponding to Parts II and III of the erstwhile Companies Act further provides that for computing book profit under the said section, the same accounting policy and Accounting Standards as are adopted for preparing the accounts laid before the shareholders at the Annual General Meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (corresponding to section 210 of the Companies Act; 1956) shall be adopted. 53. Then what Section 129 of the Companies Act, 2013 provides for !!! 54. Section 129 of the Companies Act, provides that the financial statements of the company shall be prepared to give a true and fair view of the state of affairs and the profit or loss of the company and shall comply with the Accounting Standards as prescribed by the Central Government. The said Section rea....
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....by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company. 13. Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company. For example, the transferee company may have a specialised use for an asset, which is not available to other potential buyers. The transferee company may intend to effect changes in the activities of the transferor company which necessitate the creation of specific provisions for the expected costs, e.g. planned employee termination and plant relocation costs. Treatment of Reserves on Amalgamation 16. If the amalgamation is an 'amalgamation in the nature of merger', the identity of the reserves is preserved and they appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor comp....
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....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 of accounts have been disqualified by the auditors nor ROC has taken any objec....
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....ion 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 assessee company in consequence to amalgamation, assessee company has sold 2....
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.... 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 the book profit u/s. 115 JB on account of shares sold by the assessee, which was held as 'capital reserve', which the Assessing Officer and CIT(A) have treated on account of amount standing in revalued reserve relating to revaluation of assets in terms of clause (j) of Explanation 1 of section 115JB. As discussed in the foregoing paragraphs, two subsidiary companies of the assessee, PREPL and PPPL were amalgamated with the assessee company being holding company, vide judgment and order dated 18.02.2016 of Hon'ble Delhi High court, wherein the Hon'ble Court has sanctioned the scheme of Amalgamation. First of all it would be quite pertinent to note the relevant clauses of Scheme of Amalgamation which are important for the purpose of adjudication of present controversy. The relevant clauses dealing with accounting standard and purchase method adopted for valuing the assets and liabilities at a fair market value and how any excess on such ....
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....he Companies Act, AS 14 of the recognized accounting standard, keeping in view the fact that the revenue has not brought any tangible material to prove that the scheme is a colourable device to avoid taxes, keeping in view the land holding which has been consolidated owing to the amalgamation of the companies and keeping view the accounting resorted by the group companies regarding the book value of investments in shares pre & post amalgamation, we hereby hold that, the appeal of the assessee on this ground is allowed. 64. Apropos, the ground dealing with upward adjustment in terms of Clause (f) of Explanation 1 of Section 115JB on account of expenditure relatable to earning of exempt income, the facts of the case are as under: The assessee gained a loss of short term capital loss to the extent of Rs. 28,54,45,463 on purchase and redemption of mutual funds. The assessee in the return of income, suo-moto disallowed the short term capital loss incurred, in terms of provisions of section 94(7) of the Act. In the impugned assessment order, the Assessing Officer has made an upward adjustment of Rs. 28,54,45,463 in terms of clause (f) of Explanation 1 to section 115JB of the Act....