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2021 (4) TMI 592 - AT - Income TaxAddition u/s 56(2)(viib) - difference of net asset value credited in the books - excess consideration received qua face value of shares issued on account of amalgamation - CIT-A deleted the addition - 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? - HELD THAT - It may be possibly argued that Section 56(2)(viib) does not oust its applicability in the event of shares issued pursuant to amalgamation. The amalgamation is a compromise or arrangement between the parties, which inter alia includes the amalgamated company issuing the shares and the shareholders of the amalgamating company, which is supervised by the Court, in terms of the Companies Act - there is an agreement or arrangement between the amalgamated company issuing the shares and the shareholders of the amalgamating company. The clause contemplates the issue of shares and the receipt of consideration from a resident person and it is fulfilled on amalgamation. This perspective seeks to cover the issue of shares arising from amalgamation with equal measure. We may also look at the scheme of the Act in totality for contextual understanding of the issue. The Legislature has contemplated that there arises transfer of shares by the shareholders of amalgamating company in consideration of the allotment of shares by the amalgamated company and consequently with a view to neutralize tax effect, the Act provides for suitable exclusion/ exemption, from the ambit of expression transfer , under section 47(vii) which is also of deeming nature. In other words, as per the provisions of the Act, the consideration for issue of shares by the amalgamated company, in so far as the shareholder is concerned, is the shares held in the amalgamated company by way of transfer (except for the saving clause in s.47(vii) of the Act). A bare issue of shares contemplated in S. 56(viib) thus cannot be equated with a situation of transfer gathered from an intent implicit in S. 47(vii). Thus, the consideration and the issue of shares envisaged by section 56(2)(viib) is not found compatible with scheme enacted, when seen from the perspective of revenue. Thus the issue of shares at face value by the amalgamated company (assessee) to the shareholders of amalgamating company in pursuance of scheme of amalgamation legally recognized in the Court of Law neither falls with scope ambit of clause (viib) to S. 56(2), when tested on the touchstone of objects and purpose of such insertion i.e. to deem unjustified premiums charged on issue of shares as taxable income; nor does it fall in its sweep when such deeming clause is subjected to interpretative process having regard to the scheme of the Act. We see no error in the conclusion drawn by the CIT(A) in this regard. The CIT(A) in our view, has rightly found inapplicability of S. 56(viib) in the facts of the present case.
Issues Involved:
1. Deletion of addition made under Section 56(2)(viib) of the Income Tax Act. 2. Fair market value of shares. 3. Disallowance of Architect fees attributable to unsold inventory. Detailed Analysis: 1. Deletion of Addition Made Under Section 56(2)(viib) of the Income Tax Act: The Revenue appealed against the deletion of an addition of ?43,99,66,156/- made by the Assessing Officer (AO) under Section 56(2)(viib) of the Income Tax Act. The AO observed that the assessee received net assets worth ?54,21,16,156/- from the amalgamating company (KEPL) against the issue of shares worth ?15,00,00,000/-. The AO considered the excess value of assets received as taxable income under Section 56(2)(viib). The Commissioner of Income Tax (Appeals) [CIT(A)] reversed the AO's decision, noting that the shares were issued at face value as part of a court-approved amalgamation scheme. The CIT(A) emphasized that Section 56(2)(viib) aims to tax share premiums exceeding fair market value, not shares issued at face value during amalgamation. The CIT(A) concluded that the provision does not apply to this case, as the shares were issued without any premium. The Tribunal upheld the CIT(A)'s decision, stating that the issue of shares at face value in a court-approved amalgamation does not fall under the purview of Section 56(2)(viib). The Tribunal also noted that the legislative intent behind Section 56(2)(viib) is to tax unjustified premiums, not transactions like amalgamations. 2. Fair Market Value of Shares: The AO determined the fair market value of the shares at ?6.81 per share, based on Rule 11UA of the Income Tax Rules. The AO argued that the shares issued by the assessee carried an intrinsic value of ?10,21,50,000/- (1,50,00,000 shares x ?6.81 per share) against the net assets acquired worth ?54,21,16,156/-. The AO considered the difference of ?43,99,66,156/- as taxable income. The CIT(A) disagreed, stating that the shares were issued at face value as part of an amalgamation scheme, not at a premium. The CIT(A) noted that the fair market value determination was irrelevant in this context, as Section 56(2)(viib) does not apply to shares issued at face value during amalgamation. The Tribunal supported the CIT(A)'s view, emphasizing that the provision targets share premiums, not face value transactions in amalgamations. 3. Disallowance of Architect Fees Attributable to Unsold Inventory: The AO disallowed ?1,49,137/- as architect fees attributable to unsold inventory. The CIT(A) deleted the disallowance, and the Revenue appealed against this decision. The Tribunal did not provide a detailed analysis of this issue in the judgment, as the primary focus was on the applicability of Section 56(2)(viib). Conclusion: The Tribunal dismissed the Revenue's appeal and the assessee's cross-objection, upholding the CIT(A)'s decision to delete the additions made under Section 56(2)(viib). The Tribunal concluded that the provision does not apply to shares issued at face value during a court-approved amalgamation. The judgment emphasized the legislative intent behind Section 56(2)(viib) and the inapplicability of the provision to the case at hand.
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