TaxTMI 
TaxTMI 
2024 (10) TMI 534
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.... learned CIT (A) is not justified in holding that no 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 ....
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....mpany of Celina Buildcon, but Orval Corporate Solution Pvt. Ltd. is 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 with....
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....)(x) of the Act. Thus, the claim of the assessee is that the above merger is tax neutral. vi. Assessee submitted 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 ....
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....ompany and no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company 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.....
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....irtue of the amalgamation. However, the said sub-clause (iii) provides an exception in case the shares of the amalgamating company are already held by the amalgamated company or its subsidiary Thus, based on the above, the said merger of Celina Into the appellant 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....
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....a sine qua non of the same is that the recipient has gained as a consequence of the transaction. b) Thereafter, it is submitted that, a book entry recording a reserve is a consequence of the amalgamation, which entry is required to be passed for the limited purpose of balancing the account based on the double entry system employed, cannot give rise 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. T....
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....posite Scheme of Arrangement and Amalgamation cannot be regarded to be the one carried into during the course of carrying on the business. We, therefore, hold that provisions of Section 28(iv) is not applicable to the facts and circumstances of the case. We, accordingly, set-aside the orders of the authorities below and delete the addition of Rs 46,999.38 crores made under section 28(IV) of the Income Tax 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 provisi....
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....actions not regarded as transfer." 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:" Since the merger qualifies as an exempt transfer u/s 47(vi) of the Act, receipt of any property by the appellant (amalgamated company), pursuant to merger from Celina (amalgamating company) should be exempt in hands of appellant u/s 56(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 co....
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....s the ultimate holding company having the shares of Celina through its 100% subsidiaries and nominees which after the amalgamation led to the direct ownership of the assets in the appellant's name. In the whole process, the appellant has neither become richer nor poorer. If any benefit or perquisite does not arise from the business or profession carried on by the assessee, the provisions of Section 28(iv) in any case cannot be applied. It is evident that the intention of the Legislature is not to apply the provisions of Section 28(iv) to a case where there is increase in the general reserves 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 amalgamat....
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....d. It is a process of corporate reconstruction, and it is only with the approval of Hon'ble jurisdictional High Court that this exercise is carried out. In the present case also, as stated in paragraph 4 of Part I of Schedule A (i.e. scheme of amalgamation) to Hon'ble Calcutta High Court's order dated 9th April 2008, "for the purpose of better, efficient and economical management, control and running of the business and to withstand the recessionary trend in the economy of the business undertaking concerned and for administrative convenience and to obtain advantage of economies of large scale, the present 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 a....
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....al with the issue before us in any other manner. There is no material whatsoever before us to indicate that the benefit, even if accruing to the assessee, was in revenue field, in the course of assessee's business dealings or of trading nature in view of these discussions, we are of the considered view that the benefit, if any, derived by the assessee on account of amalgamation by way of merger was not in revenue field, and not of an Income nature, Accordingly there was no occasion to invoke Section 28(iv) of the Act. Learned CIT(A) was quite justified in his observations that "the amalgamation is not an adventure in the 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 amalgamatio....
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....r in which the AO has treated this amount is not in consonance with section 28 (iv) and other relevant provisions of the Income-tax Act, 1961. Accordingly, the addition made by the AO is deleted and the ground of appeal raised by the appellant is allowed." 012. In view of above facts, the learned CIT(A) deleted the above addition. The Assessing Officer is aggrieved and is in appeal before us. 013. In the appeal of the assessee, the Assessing Officer raised the ground that the addition is deleted by the learned CIT(A), holding that no income is generated on account of credit of Rs. 149.29 crores and further by Ground No.2 that the learned CIT(A) is not correct in holding 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 ....
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....dates of the respective sections. 018. We have carefully considered the rival contention and perused the orders of the learned lower authorities. We have also considered paper book filed as well as judicial precedents relied on up by parties. 019. Brief facts of the case are that the assessee i.e., Samagra Wealthmax Private Limited, along with its nominee, held the entire share capital of Orval Corporate Solutions Private Limited ('Orval'). Orval, along with its nominee, in turn held the entire share capital of Celina Buildcon and Infra Private Limited ('Celina'). In other words, Celina was an indirect wholly owned subsidiary of the Samagra. During the year under consideration, 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 Directo....
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....ng company are already held by the amalgamated company or its subsidiary. Thus, based on the above, the said merger of Celina into the appellant qualifies as an 'amalgamation' u/s 2(1B) and consequently all the exemptions provided in the Act should be available to the said merger. Due to the above exception, this clause is not applicable in the case of assessee company. 022. Ld. CIT DR relied on the decision of Hyderabad Tribunal in the case of Vertex Projects LLP (150 taxmann.com 109) wherein it was concluded that where pursuant to scheme of amalgamation several companies amalgamated with assessee-company in which public were not substantially interested and shares of amalgamating companies were received by assessee at a price lower 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 ....
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....ot, arising from business or the exercise of profession." 027. Thus, in order to tax any amount u/s. 28(iv) of the Act, the following prerequisites need to be satisfied: a. there must be benefit or perquisite arising to the company. b. it must arise out of the business or profession carried on by the recipient; and c. it must be revenue in nature. 028. In this regard, there is absolutely no benefit or perquisite arising out of the scheme of amalgamation. The appellant was ultimate holding company having the shares of Celina through its 100% subsidiary along with its nominees which after the amalgamation led to the direct ownership of the assets in the appellant's name. In the whole process, the appellant has neither become richer nor poorer. Thus, the first condition of section 28(iv) of the Act i.e., receipt of a benefit or perquisite, is completely absent in the present case as a sine qua non of the same is that the recipient has gained as a consequence of the transaction. 029. It is also contested that recording a reserve in consequence to amalgamation order is required to be passed for the limited purpose of balancing the accounts based on th....