TaxTMI 
TaxTMI 
2021 (4) TMI 592
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.... as under: "(a) The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 43,99, 66,156/- made by the assessing officer u/ s 56(2)(viib) of the Act on account of difference of net asset value of Rs. 54,21, 16,156/- credited in the books without appreciating the factual backdrop of the case in which the addition was made by the Assessing Officer. (b) The Ld.CIT(A) has erred in law and on facts in not appreciating the fair market value of shares of assessee company @ Rs. 6. 81/- per share based on which addition was correctly made by the assessing officer. (c) The Ld CIT(A) has erred in law and on facts in deleting the addition of Rs. 1, 49,137/- made by assessing officer on account of disallowance of Architect fees attributable to the unsold inventory." 5. Briefly stated, the assessee company filed its return of income for AY 2013-14 in question which was subjected to scrutiny assessment. In the course of assessment proceedings, it was gathered by the AO that one M/s. Kalavir Estate Pvt. Ltd. (KEPL) amalgamated with the assessee company under the scheme of amalgamation. The object of amalgamation was stated to achieve better utilization of resources, higher ....
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....In the opinion of the AO, the excess value of assets so received by assessee company was liable for taxation in the hands of the assessee being excess consideration for issue of its share. A show cause was accordingly issued and reply thereon filed by the assessee was also recorded. However, the AO did not find merit in the defense propagated by the assessee in its reply. The AO observed that the accounting treatment given by the assessee is in departure with AS-14 issued by the ICAI. The AO simultaneously observed that the assessee is liable to tax on excess consideration received qua face value of shares issued under the head 'income from other sources' in terms of s.56(2)(viib) of the Act. It was thus essentially observed that the aggregate consideration in the form of net assets (i.e. total assets minus total liabilities acquired) received by the assessee company for issue of its shares which exceeds its fair value is liable to tax in terms of Section 56(2)(viib) of the Act. For determination of fair value of shares of issuing company i.e. assessee, the AO resorted to Rule 11UA of the Income Tax Rules. The fair value was computed at Rs. 6.81 per share as against the face valu....
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.... relevant operative para of the order of the CIT(A) is reproduced hereunder: "4.7. I have considered the assessment order and arguments of the appellant. The appellant company has issued 1.5 lac shares to the shareholders of M/s. Kalavir Estate Pvt. Ltd. as per the amalgamation scheme approved by Honourable High Court. The shares have been issued at the face value of Rs. 107 - per share in the ratio of 1 to 300 shares held by the shareholders in the amalgamating company. The relevant clause of scheme of amalgamation as approved by Honourable Gujarat High Court vide order dated 07/ 09/2012 in company petition No. 89 of 2012 is as under:- "Clause - 9 Upon the transfer of undertaking of KEPL to OIL and the vesting of the said assets and l iabilities and the amalgamation becoming effective in terms of this Scheme, then, in consideration of the amalgamation and subject to the provisions of this Scheme, OIL, shall, without any further act, application and deed, issue and allot to the, equity shareholders of KEPL 300 equity shares in OIL of Rs. 10/- each, credited as fully paid-up in the capital of OIL, for every equity shares of the face value of Rs. 10/- each held by the sharehold....
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....over and above the face value of share by way of share premium, in the instant case, shares have been issued at the face value and there is no share premium received, therefore, there is no question of applicability of section 56 (2)(viib). In fact, in the scheme of amalgamation, consideration is paid by the amalgamated company in the form of issue of share capita! rather than consideration being received by the appellant company as understood by the AO / Addl. CIT. The persons to whom shares have been allotted have not paid anything for allotment of shares. The shares have been allotted in consideration of their shareholding in. the amalgamating company. 4.9. Section 2 (1B) of Income Tax Act, 1961 defines the meaning of amalgamation as merger of one or more company with another company or merger of two or more company to form one company in such a manner that - 1) All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation. (2) All the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of the amalgamat....
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....hare premium or consideration for issue of share. Therefore, section 56 (2) (viib) has no applicability in the case of amalgamation on issue of shares at face value. 4.12. It is evident from Para - 4 of the assessment order that AO had initially proposed to tax the capital reserve of Rs. 39,21,16,1567 - on account of amalgamation, but subsequently invoked section 56 (2) (viib) of the I. T. Act, 1961. I have examined the issue of taxability on revaluation of land and credit of capital reserve account as a balancing figure in the case of amalgamation from this point as well. Appellant company but for the scheme of amalgamation approved by Honourable High Court transferring all assets except land at book value, was required to transfer all- assets including land at book value as per pooling of interest method prescribed in AS- 14. In that case, assets over liability of amalgamating company would have been only Rs. 8,59,449/- as against Rs. 54, 21, 16, 156/- accounted by appellant company which became the basis for invocation of Section 56 (2) (viib) by AO. Therefore, the net asset over liability of Rs. 54, 21, 16, 156 /- of amalgamating company is only due to revaluation of land a....
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.... facts arising in that case, the Department accepted that whenever there is amalgamation of the two companies, there is no transfer and the question of levying capital gain tax does not arise.' The Honourable Mumbai Tribunal in the case of Makers Development Services Pvt. Ltd. Vs. Dy. CIT [40 ITD 185] has held that where the stock in trade was revalued on amalgamation and acquired by the amalgamated company at higher value, in absence of any specific provision of tax, there will not be any tax implication on such notional gain. The Income Tax Act has been subsequently amended to tax the revaluation of assets on amalgamation by inserting a new section 43C by Finance Act, 1988 which provided that where an asset acquired under the scheme of amalgamation is sold by an amalgamated company as its stock in trade, then in computing the business income, the cost of acquisition of such stock in trade shall be the cost of acquisition in the land of amalgamating company. Therefore, the revaluation of land does not attract tax at the time of amalgamation, but would be taxed at the t ime of its disposal. 4.13. In view of the above, the AO was not justified to invoke section 56 (2)(viib) ....
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....ICAI, the shareholders of amalagamating co. become shareholders of assessee co. by virtue of amalgamation and the consideration is to be discharged by the amalgamated co. (Assessee) by issue of its shares and not other way round where the subscriber of the shares pays money for subscription to the issuer company. 9.4 It was thus asserted that the CIT(A) has rightly deleted the wrongly fastened additions after full analysis of law and facts involved. He accordingly submitted that no interference with the first appellate order is called for. 10. We have dispassionately considered the rival submissions and perused the assessment order as well as first appellate order. The documents referred and relied upon has been taken cognizance in terms of Rule 18(6) of the Income Tax(Appellate Tribunal) Rules, 1963. 10.1 In the case in hand, the short question that arises in essence is whether the shares received by the amalgamating company in consideration of vesting of its assets, liabilities and undertaking in the amalgamated company pursuant to scheme of amalgamation is hit by the deeming provisions of Section 56(2)(viib) of the Act in the facts of the present case? 10.2 The AO has made i....
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.... amalgamated co. (assessee co.) were issued against the vesting of assets etc. The assessing officer observed that the value of net assets (assets less liabilities) vested in the amalgamated company under the scheme stands at Rs. 54,21,16,156 against which shares worth Rs. 15 crore were issued by it for such acquisition. The difference between the value of assets and corresponding shares issued amounting to Rs. 39,21,16,156/- credited by the assessee co.(amalgamated co.) to its capital reserve without any payment of taxes triggered the cause of action for the AO. In the course of assessment, the AO further found on a incisive verification that the intrinsic value of share of amalgamated co. issued at face value of Rs. 10 stands at Rs. 6.81 per shares only. The AO accordingly noted that the share of amalgamated co. so issued carries worth Rs. 10.22 crores only(1,50,00,000 *6.81= 10,21,50,000) as against the net assets acquired Rs. 54.21 crore. The AO after making reference to Addl. CIT under S. 144A has brought the difference of Rs. 43.99 crore within the ambit of taxable income with the aid of deeming provision of S. 56(2)(viib) of the Act and increased the assessed income to that ....
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....specific category of incomes that shall be chargeable to income-tax under the head "Income from other sources". It is proposed to insert a new clause in section 56(2). The new clause will apply where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head "Income from other sources. However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund. Further, it is also proposed to provide the company an opportunity to substantiate its claim regarding the fair market value. Accordingly, it is proposed that the fair market value of the shares shall be the higher of the value- (i) as may be determined in accordance with the method as may be prescribed; or (ii) as may be substantiate....
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....nd subsequent assessment years. 10.9 When the clause in Section 56(2)(viib) of the Act is read in tandem with elucidations provided in CBDT Circular; Finance Ministers' speech in Parliament disclosing his intentions behind such insertion and also Memorandum explaining Finance Bill, it appears that whole thrust for such insertion is to bring measures to tax hefty or excessive share premium received unjustifiably by private companies on issue of shares without carrying underlying value to support such uncalled for premium and thereby enriching itself without paying taxes legitimately due to them. It also seems that subscription to the shares issued by a company at a substantial premium (not necessarily backed by a valuation justifying the premium) was supposedly resorted to convert unaccounted money. The extant framework of law were not found sufficient by the legislature to curb such practices. Earlier attempts to tax such excessive receipts in the garb of share premium by private cos. did not arguably fructify. The provision was inserted to change the landscape for charging premium to tax of capital nature. 10.10 Section 56(2)(viib) creates a deeming fiction to imagine and ficti....
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....ident person. In other words, it contemplates a transaction between a resident person and the company issuing shares. In the case of an amalgamation, the consideration, which would be undertaking along with all its assets and liabilities is in the form of vesting by the amalgamating company, whereas the shares are issued to its shareholders. Thus, it is, in effect, a tripartite arrangement between (i) amalgamated co. (ii) amalgamating co. (iii) the shareholders of amalgamating co. Such tripartite arrangements in amalgamation cases are not contemplated in the deeming clause in question. 11.3 There is yet another perspective to dwell upon. As per the proviso to the clause, it does not apply 'to the consideration for issue of shares by a venture capital undertaking(VCU) from a venture capital company(VCC) or a venture capital fund(VCF)'. The proviso implies that there should issue of shares directly by the company to the subscriber, obviously, for a consideration. In other words, it contemplates a bilateral transaction. Further, it also contemplates a transaction in the nature of issue of shares at the instance of the company on its own and it does not contemplate a transaction in th....