2017 (7) TMI 661 - AT - Income Tax

Addition being capital reserve arising on amalgamation of wholly owned subsidiary company - Held that - In the case of the assessee, the subsidiary company was amalgamated with the assessee company and there was no business transaction in the amalgamation. Surplus on amalgamation is not taxable u/s.28(iv) of Income Tax Act and we set-aside the order of the lower authorities and allow the appeal of the assessee. Indexation benefit on capital gains u/s.48 - Held that - From the definition of the capital asset, the government securities are not excluded from the definition of capital asset. Therefore, the government securities are capital assets. As per Sec.2(42A) the expression security shall have the meaning assigned to Clause-11 of Securities Contracts Regulation Act, 1956 which includes government securities as discussed in the Ld.CIT(A) orders which was extracted above. From the above guidance note Bonds and securities distinguishable. The Bonds are not freely tradable and the securities are freely tradable. Therefore, the Bonds cannot be equated with the securities. The assessee has made investments in government securities and sold the securities after holding the period of more than 12 months to treat the securities as long term capital assets. The capital gains arising on transfer of long term company assets are entitled for the benefit of indexation as per Sec.48 of Income Tax Act. From the plain reading of 3rd proviso section 48 of I.T. Act, government securities are not excluded for indexation benefit only bond or debenture included in the third proviso to Sec.48. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. - Decided against revenue

Summary

Issues Involved:
1. Taxability of capital reserve arising on the amalgamation of a wholly-owned subsidiary under Section 28(iv) of the Income Tax Act.
2. Eligibility for indexation benefit on capital gains from the sale of government securities under Section 48 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Capital Reserve on Amalgamation:

The primary issue in the assessee's appeal was the inclusion of ?25,54,35,808/- as taxable income, representing the capital reserve arising from the amalgamation of a wholly-owned subsidiary. The Assessing Officer (AO) viewed this amount as a benefit or perquisite arising from business, thus taxable under Section 28(iv) of the Income Tax Act. The assessee contended that the transaction was in the capital field and not subject to Section 28(iv), which applies to revenue transactions in the normal course of business. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the surplus of assets over liabilities constituted a benefit to the amalgamated company and should be taxed under Section 28(iv).

Upon appeal, the Tribunal analyzed the arguments and the relevant legal provisions. It was noted that the surplus from amalgamation is typically subject to capital gains tax, which is exempt under Section 47 for transfers between holding and subsidiary companies. The Tribunal referenced the jurisdictional High Court's decision in CIT v. Stads Ltd., where it was held that amalgamation reserves do not fall under Section 28(iv) as they do not arise from normal business transactions but from a capital transaction. Consequently, the Tribunal concluded that Section 28(iv) was not applicable to the surplus on amalgamation and allowed the assessee's appeal, setting aside the lower authorities' orders.

2. Eligibility for Indexation Benefit on Sale of Government Securities:

The Revenue's appeal concerned the disallowance of indexation benefit on capital gains from the sale of government securities. The AO denied the indexation benefit based on the third proviso to Section 48, which excludes bonds and debentures from such benefits. The CIT(A) allowed the indexation benefit, distinguishing government securities from bonds and debentures as per the definitions in the Securities Contracts (Regulation) Act, 1956, and the Government Securities Act, 2006.

The Tribunal reviewed the definitions and the relevant legal provisions. It was clarified that government securities are capital assets and are distinct from bonds and debentures, which are specifically excluded from indexation benefits under the third proviso to Section 48. The Tribunal upheld the CIT(A)'s decision, confirming that government securities are eligible for indexation benefits, and dismissed the Revenue's appeal.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the non-taxability of the capital reserve under Section 28(iv) and dismissed the Revenue's appeal, affirming the eligibility of indexation benefits on the sale of government securities. The judgment was pronounced in the open court on 31st March 2017, in Chennai.