TaxTMI 
TaxTMI 
TaxTMI 
2024 (10) TMI 534
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.... income is generated on account of credit of Rs.149,29,00,000/- as reserve and surplus, ignoring the fact that no consideration was paid by the assessee company to the shareholders of the amalgamating company. 2. On the facts and in the circumstances of the case, the learned CIT (A) is not justified in holding that the reserve and surplus credited in the balance sheet of the assessee company (amalgamated company) of Rs.149,29,00,000/- as a capital in nature without appreciating the fact that no basis what so ever was furnished by the assessee about the value of assets taken over by the amalgamated company of Rs.150,12,85,900/-. The appellant craves to leave, to add, to amend and/ or to alter any of the ground of appeal, if need be. The appellant, therefore, prays that on the ground stated above, the order of the learned CIT (A)-51, Mumbai may be set aside and that of the Assessing Officer Restored. " 03. Assessee is a Company engaged in the business of Real Estate, filed its return of income on 29.09.2018 at a total income of Rs. 19,09,730/-. This return was picked up for scrutiny under the e-assessment scheme 2019 on the issue of amalgamation or demerger. The assessee is a Comp....
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.... the holding company of Celina Buildcon. Thus, the merger of Celina Buildcon into the assessee is not covered. Thus, the merger of Celina Buildcon into the assessee is not covered under the provisions of Clause(v) of Section 47 of the Act. Consequently, the assessee cannot claim the benefit of Section 56(2)(X) (c) of the Act. According to the Assessing Officer all the three companies are different entities. The Assessing Officer further noted that the Directors of Celina and Orval are the same persons and all three companies belonged to the same group. He held that there cannot be any reasons as to how an investment made by Group Company Orval into its subsidiary Celina which ultimately merged into the holding company of Orval i.e., assessee can have hundred percent diminution in value in the very same year. Further if there is no liability to be paid back at the end of the year by Celina to Orval, the assessee got richer with an asset of Rs. 149.29 crores for which it must pay corresponding amount as merger consideration. Thus, it is evident that the assessee company has received assets worth Rs. 149.29 crores without consideration. Accordingly, the provisions of Section 56(2)(x) ....
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....ubmitted that the above receipt is not chargeable to tax as income at all. The assessee relied on the several judicial precedents. vii. With respect to the taxability u/s. 41(1) of the Act, the assessee submitted that the amount received by Celina was not in the form of any loss or expense or trading liability for which allowance or deduction was allowed to Celina, but it was by way of share capital and, therefore, the provisions of Section 41(1) does not apply. viii. Thus, the claim of the assessee is that neither the above sum is taxable u/s. 56(2)(x) of the Act and nor u/s. 41(1) of the Act. ix. The assessee also submitted that even otherwise the assets acquired by the assessee does not fall within the meaning of the term property and, therefore, the provisions of Section 56(2)(x)(c) of the Act does not apply. 09. The learned Assessing Officer rejected the contentions of the assessee and held that the assessee has received assets worth Rs. 149.29 crores without consideration and, therefore, the same is required to be added u/s. 28(iv) of the Act. 010. Accordingly, the assessment order u/s. 143(3) of the Act read with section 144B of the Act was passed on 29.04.2021 deter....
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....y shall be void." 11. Thus, abiding the provisions as stated above, no shares were issued by appellant to the shareholders of Celina as consideration for the merger as it would indirectly be tantamount to appellant issuing its shares to itself. No company is allowed to hold its own shares and therefore, if the appellant had issued any shares to Celina, it would have been in gross violation of this basic principle and also the abovementioned provisions of the Companies Act. 12. Further the said contention was also mentioned in the scheme of amalgamation between the parties. Your goodself's attention is draw to Clause 5 of the Scheme out by the Regional Director (Ministry of Corporate Affairs) dated 08.05.2018. The same has been reproduced below: "For the purpose of this Scheme, it is hereby clarified that the equity shares in Transferor Company are wholly owned by Orval Corporate Solutions Private Limited, which in tum is a wholly owned subsidiary of the Transferee Company. Hence the Transferee Company would not issue any equity shares as consideration for merger." Copy of the scheme as mentioned in enclosed in the paper book. Thus, considering the provisions of the sc....
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....lant qualifies as an amalgamation u/s 2(1B) and consequently all the exemptions provided in the Act should be available to the said merger. 15. Further, we would like to draw the reference to clause 4.7 of the Scheme which states as under: "This Part of the Scheme has been drawn up to comply with the conditions relating to "Amalgamation as specified under Section 2(1B) of the Income Tax Act, 1961. If any terms or provisions of the Scheme are found or interpreted to be Inconsistent with the provisions of the said Section of the Income Tax Act, 1961, at a later date including resulting from an amendment of law or for any other reason whatsoever, the provisions of the said Section of the Income Tax Act, 1961, shall prevail and the Scheme shall stand modified to the extent determined necessary to comply with Section 2(1B) of the Income Tax Act, 1961. Such modification will however not affect the other parts of the Scheme." Considering the scheme has been approved by the Regional Director on behalf the Central Government (powers delegated to Regional Director), issuance of shares by appellant to its wholly owned subsidiary would have violated the provisions of the Companies Act. ....
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....se to any benefit or perquisite in the course of the business. The only relationship between two companies were that of indirect holding between them. The reserve arose out of the amalgamation pursuant to the scheme sanctioned by the Regional Director on behalf the Central Government (powers delegated to Regional Director). In this factual background, it cannot be said that the amalgamation reserve arose out of any business activity of the appellant. Thus, the reserve created on account of amalgamation is capital in nature and cannot be said to be created on account of business activity. In this regard. reliance is placed on the following judicial pronouncements wherein it has held concluded that reserve arising out of amalgamation is capital in nature and cannot be treated as revenue under the ambit of section 28(lv) of the Act. The same are reproduced as under-. * CIT Vs Stad Ltd., ITA No. 118 of 2015 (Madras High Court) A plain reading of the above-said provision makes it clear that the amount reflected in the balance sheet of the assessee under the head reserves and surplus cannot be treated as a benefit or perquisite arising from business or exercise of profession. The dif....
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....ax Act." * Nerka Chemicals P. Ltd. Vs. DCIT ITA No. 4423/ Mum/2014, 4585/ Mum/2015 & 4850/Mum/2016 * Spencer & Co. Ltd. V. ACIT, Chemical, Madras ITAT 440/Mad/2011 * ITO Vs Shreyas Investment P. Ltd., 1485/Ko/2014. Kolkata ITAT Thus, examining the present case the touchstone of aforesaid judicial pronouncements, we humbly submit that the capital reserve cannot be treated as an Income u/s 28(iv) of the Act. 19. Further without prejudice to the above, the Ld. AO in his assessment order on page 3 has mentioned as follows: "It is an undisputed fact that Samagra is not the holding company of Celina buildcon rather it is Orval corporate solution. Thus, the merger of Celina Buildcon into Samagra wealthmax is not covered under the provision of Clause 9(v) of Section 47 of the of Act. However, invoking the provision of section 47 (V) of the Act into the instant Situation intends to ignore the above fundamental principle of corporate laws. Consequently, assessee Company is not entitled to claim the benefit of Section 56 (2)(c) of the Act." 20. In this regard, we would like to re-iterate that the appellant was holding 100% equity shares of M/s. Orval Corporate Solutions Privat....
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....2)(x) of the Act on account of the specific exemption provided. Your goodself may also appreciate that the merger has complied with all the conditions mentioned under section 2(1B) of the Act. Thus, the Ld. AO's allegation that the said transaction cannot be regarded as a transfer as it does not falls within the ambit of Section 47(v) of the Act is erroneous and bad in law. Therefore, we humbly submit that the reserves and surplus arising out of amalgamation should not be treated as Income of the appellant in either section 28(iv) of the Act nor in section 56(2)(x) of the Act. 7.2 The submissions of the appellant and the findings of the AO have been considered. It is noted that during the year under consideration, Celina Buildcon and Infra Private Limited was amalgamated with the assessee company as per the scheme of amalgamation approved by the Regional Director, Ministry of Corporate Affairs, Western Region, Mumbai. In accordance with the scheme approved by the Regional Director, Ministry of Corporate Affairs, an amount of Rs 1,49,29,00,000/- was credited to the capital reserve by the assessee company. The AO in his assessment order has added Rs. 1,49,29,00,000/- to the t....
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....ves arising due to recording of the shares in the balance sheet of the assessee at their market value. 7.6 Further, it is also observed that a book entry recording a reserve is a consequence of the amalgamation, which is required to be passed for the limited purpose of balancing the accounts based on the double entry system employed and cannot give rise to any benefit or perquisite in the course of the business. The only relationship between the two companies i.e., Samagra and Celina was that of indirect holding between them. In this factual background, it cannot be said that the amalgamation reserve arose out of any business activity of the appellant Scheme of Amalgamation cannot also be regarded as an adventure in the nature of trade. Thus, the reserve created on account of amalgamation is capital in nature and cannot be said to be created on account of regular business activity. Similar view has been taken by the Hon'ble Madras High Court, in the case of CIT vs Stads Ltd., (2015) 373 ITR 313 (Mad.) in which in para 11 was held as Under: "A plain reading of the above said provision makes it clear that the amount reflected in the balance sheet of the assessee under the hea....
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....t scheme is proposed to amalgamate the transferor company (i.e. VVPL) with the transferee company (i.e. the assessee)". As a result of amalgamation, the assessee, being the transferee company, will increase its assets and liabilities, and, even if there be any benefit in the process, such a benefit can only be in the capital field because its relatable to the non-trading assets and capital. What it affects is the capital structure of the assessee company and the manner in which business is consolidated. As the Assessing Officer himself observes, "......this exercise of amalgamation is also aimed at bolstering the capability of the assessee to conduct business more dynamically and earn more profit. So, the enhancement of its capital reserve, as a result of this amalgamation can only be construed as a benefit accrued to the assessee...", but then it is not even the case of the Assessing Officer that the benefit is in the revenue field, and unless the Assessing Officer is to discharge the onus of demonstrating that the benefit is in the revenue field, there cannot be any occasion to invoke Section 28(iv). Applying the test laid down by Hon'ble Madras High Court, in the case of Ses....
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....he nature of trade and that this transaction is clearly a capital account transaction." Learned CIT(A) was quite Justified in deleting the impugned addition, we uphold his conclusions, and we decline to interfere in the matter. 7.8 Further in order to analyze the applicability of section 56(2)(x) of the Act, we have to first see section 47 of the Act, which provides for certain "transactions not regarded as transfer" and is reproduced here below: Clause (vi) of Section 47 provides as follows: (vi) any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company," 7.9 Since in the given case, the amalgamation qualifies as an exempt transfer u/s 47(vi) of the Act, therefore, receipt of any property by the appellant (amalgamated company) pursuant to amalgamation with Celina (amalgamating company) would be considered as a transaction not regarded as transfer. Accordingly, the proviso of section 56(2)(x)(c) of the Act mentions that provisions of section 56(2)(x)(c) shall not apply to any sum of money, or any property received in certain cases. Transaction u/s 47(vi) of the Act is ....
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....g that reserve & surplus credited in the balance sheet of the assessee company of Rs. 149.29 crores is capital in nature. 014. The learned CIT(DR) vehemently supported the order of the learned Assessing Officer. He submitted that :- i. He referred to the annual account of the assessee company for F.Y. 2017-18 and submitted that in Schedule-III of the reserve and surplus assessee has credited Rs. 149.35 crores as capital reserve on the merger of the company. He referred to Note No.21 to the financial statement and stated that Celina Buildcon Infra Pvt. Ltd. has been merged with the assessee company as per order of Ministry of Corporate Affairs dated 09.05.2018. All the assets' liabilities and reserves of Celina Buildcon and Infra Pvt. Ltd. as on 01.04.2017 have been taken over by the assessee at their book value. All the reserves of the transferor company have also been transferred as capital reserve of the assessee company. He submitted that Celina Buildcon and Infra Pvt. Ltd. has merged with the assessee company. Such merger is not covered into the definition of amalgamation as per Section 2(1B) of the Act as no shareholders of the Celina were made the shareholders of assessee ....
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....Celina had raised the capital by issuing 83,87,079 equity shares of Rs. 10/- each at Rs. 178/- per equity share thereby raising a total amount of Rs 149,29,00,000/-. Further it was mentioned that with an intent to simplify the group structure, rationalize the administrative overheads and to achieve greater administrative efficiency, Celina was amalgamated with assessee as per the section 233 of the Companies Act, 2013. The said scheme of amalgamation was approved by the Regional Director of Ministry of Corporate Affairs vide order dated 9th May 2018, copy of order and amalgamation scheme is available in paper book. Since, the appellant was the ultimate holding company of M/s. Celina Buildcon and Infra Pvt. Ltd, therefore on merger the said shares were cancelled and no shares were issued by the assessee to the shareholders of Celina as consideration for the merger in view of the provisions of Section 19 of the Companies Act, 2013. 020. In this regard, it is pertinent to refer the provision of section 2 (1B) of the Act which is as under :- "(1B) "amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more com....
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....wer than fair market value of shares, Assessing Officer had rightly charged difference on account of price paid by assessee and FMV of shares as income of assessee under section 56(2)(viia) of The Act. We find that order of Vertex Projects LLp deals with the addition made u/s 56(2)(viia) of the Act. In this regard, it is submitted that section 56(2)(viia) is applicable from 01.06.2010 to 31.03.2017. 023. Provision of section 2 (56) (via) the Act are as under: "(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June 2010 but before the 1st day of April 2017, any property, being shares of a company not being a company in which the public are substantially interested,- (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property. (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration ....