2015 (3) TMI 717 - HC - Income Tax

Transfer to the General Reserve on amalgamation - whether is not in the nature of any benefit or perquisite and thus not taxable under Section 28(iv) - Held that - A plain reading of the provision of Section 28(iv) 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 difference amount post amalgamation was the amalgamation reserve and it could not be said that it is out of normal transaction of the business. The present transaction is capital in nature arose on account of amalgamation of four companies. Hence, we have no hesitation to hold that the manner in which the Revenue wants to treat this amount is not in consonance with Section 28(iv) of the Income Tax Act. Tribunal was right in holding that the amounts transferred by the assessee company to the General Reserve on amalgamation is not in the nature of any benefit or perquisite and thus not taxable under Section 28(iv) of the Income Tax Act, 1961 - Decided against revenue.

Summary

Issues:
1. Interpretation of Section 28(iv) of the Income Tax Act regarding the taxability of amounts transferred to General Reserve on amalgamation.

Analysis:
The case involved a dispute regarding the taxability of an amount transferred to General Reserve on amalgamation under Section 28(iv) of the Income Tax Act. The assessee, a software development company, had amalgamated with four other companies, resulting in a difference of Rs. 2,16,88,220 reflected as reserves and surplus in the balance sheet. The Assessing Officer taxed this amount under Section 28(iv) of the Income Tax Act. However, the Commissioner of Income Tax (Appeals) allowed the appeal, stating that the amount was a capital receipt arising from the amalgamation and not taxable. The Tribunal upheld this decision.

The Revenue challenged the Tribunal's order before the High Court, arguing that the amount should be considered as profit or perquisite arising from business activities. The High Court analyzed the provisions of Section 28(iv) which state that the value of any benefit or perquisite arising from business or profession is taxable. However, the Court held that the amount reflected in the balance sheet as reserves and surplus post-amalgamation cannot be treated as a benefit or perquisite under Section 28(iv). The Court emphasized that the amalgamation reserve was a capital receipt resulting from the amalgamation of companies and not a normal business transaction. Therefore, the Court confirmed the Tribunal's decision, dismissing the appeal by the Revenue.

In conclusion, the High Court clarified that the amount transferred to General Reserve on amalgamation was not taxable under Section 28(iv) of the Income Tax Act as it was a capital receipt arising from the amalgamation of companies, not a benefit or perquisite from business activities. The Court's decision aligned with the nature of the transaction and the legal provisions, ultimately upholding the Tribunal's order in favor of the assessee.