2016 (1) TMI 1505 - AT - Income Tax

Accrual of income - real income - Amalgamation reserve treated as income u/s. 28(iv) r.w.s. 2(24)(vd) - HELD THAT - We find that this is a simple case of accounting reserve which is created in the books of the amalgamated company to give accounting effect to the amalgamation. According to us, this is nothing but an entry passed in the Balance Sheet with a sole object to balance the accounts which are maintained on double entry system of accounting. This view of ours is supported by the decision of Bharat Development P. Ltd. 1980 (8) TMI 18 - DELHI HIGH COURT wherein held an accounting reserve which is created in the books of the amalgamated company to give accounting effect to the amalgamation is nothing but an entry passed with the sole object to balance the books of account which are maintained on the principle of double entry system of book keeping. As such, when the exchange of shares was based on fair valuation basis, there was no question of any benefit or perquisite being earned by the assessee or by the amalgamating companies. In our view section 28(iv) of the Act therefore had no application in the assessee s case. AO was not justified in assessing this amount as income of the assessee u/s 28(iv) of the Act because such reserve did not represent real income and secondly it did not constitute any benefit or perquisite arising from the business activity of the assessee. Hence we confirm the order of CIT(A) and this issue of revenue s appeal is dismissed.

Summary

Issues involved:
- Appeal by revenue and Cross Objection by assessee arising from order of CIT(A)-XII regarding Assessment Year 2003-04.
- Revenue's appeal against CIT(A)'s deletion of addition made by AO on account of amalgamation reserve as income u/s. 28(iv) read with section 2(24)(vd) of the Act.

Analysis:
1. Cross Objection Dismissal: The Cross Objection by the assessee was dismissed as not pressed since the counsel for the assessee stated lack of interest in prosecuting it, which was not objected by the Ld. CIT, DR.

2. Revenue's Appeal - Amalgamation Reserve: The main issue in the revenue's appeal was the deletion of the addition made by the AO on account of amalgamation reserve treated as income u/s. 28(iv) read with section 2(24)(vd) of the Act. The CIT(A) deleted the addition after considering submissions, citing a similar third member decision in another case.

3. Facts and Arguments: The assessee company engaged in manufacturing electrical goods created an amalgamation reserve following the amalgamation of three companies. The AO treated this reserve as income, triggering the appeal. The assessee argued that the reserve did not constitute a benefit or perquisite, and the exchange of shares was based on fair valuation, not resulting in any income or benefit.

4. Tribunal's Decision: The Tribunal heard both sides and found the reserve to be a simple accounting entry to balance the books post-amalgamation, following the decision of the Hon'ble Delhi High Court. As the exchange of shares was based on fair valuation, no benefit or perquisite was earned. Therefore, section 28(iv) of the Act did not apply, and the AO was unjustified in assessing the reserve as income.

5. Judgment: The Tribunal confirmed the CIT(A)'s order, dismissing the revenue's appeal. The decision highlighted that the amalgamation reserve did not represent real income and did not arise from the business activity, hence not constituting a benefit or perquisite. Consequently, the appeal of the revenue was dismissed, and the Cross Objection of the assessee was also dismissed as not pressed.