TaxTMI 
TaxTMI 
2021 (4) TMI 592
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.... 4. Grounds of appeal raised by the Revenue read 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 a....
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....on which was credited by it as capital reserve of the amalgamated company. 5.2 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 Ta....
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....Consequently, the CIT(A) reversed the action of AO and deleted the impugned additions. The 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 ....
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....from other sources " It is therefore, legislative intent to cover the cases of closely held company who receives disproportionate amount while issuing shares 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 amalga....
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....of Rs. 39,21,16,156/- was credited on account of revaluation of land as balancing figure as per the scheme of amalgamation and Accounting Standard - 14. Capital reserve account which is notional by no stretch of imagination can be called as a share 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....
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.... accepted that where the assessees had received shares and bonds because of amalgamation there was no transfer within the meaning of s.2 (47), it was held that in the present case also there is no transfer as contemplated under s. 2 (47) of the Act. Thus, according to the 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 th....
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.... the plain language of deeming fiction in s.56(2)(viib) of the Act does not permit the Revenue to cover the impugned transactions arising from amalgamation within its sweep. 9.3 It was contended that as rightly observed by the CIT(A), in terms of section 2(1B) of the I.T. Act,1961 and AS-14 issued by 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 wh....
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.... to be vested in the amalgamated company(the Assessee) as a going concern. The amalgamated company has issued 300 equity shares of its company at face value for each shares of amalgamating company in consideration of such vesting of assets, liabilities etc. as per the scheme of amalgamation duly approved by the Jurisdictional High Court. As a result, shares worth Rs. 15 crore of the 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 amalg....
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.... behalf of the assessee. 10.6 To decipher the true purport of iteration of law in the context and object for insertion of the provision, it may be useful to refer to the explanations given at the time of enactment of the provision. Explanatory Memorandum to Finance Bill, 2012 Share premium in excess of the fair market value to be treated as income Section 56 (2) provides for the 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 receive....
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...." income" under sub-clause (xvi) of clause (24) of section 2. (ii) Considering that the proposed amendment may cause avoidable difficulty to investors who invest in start-ups where the fair market value may not be determined accurately, i t is proposed to provide an exemption to any other class of investors as may be notified by the Central Government. These amendments will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013- 14 and 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 (n....
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....ittle different perspective as well. In amalgamation, the issue of shares is made by inviting subscription from the persons to whom offer is made. The issue of shares is to give effect to the amalgamation, as per mutual agreement and the Court order. In other words, it may be argued that the issue of shares does not trigger any consideration and in converse, the obligation to give consideration, triggers issue of shares. Secondly, the clause contemplates 'receipt' of the consideration for the shares from a resident 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,....