2024 (10) TMI 534 - AT - Income Tax

Nature of receipts - reserve arising out of amalgamation - Applicability of Section 28(iv) and Section 56(2)(x)(c) - whether receipt is capital in nature and thereby not taxable? - HELD THAT - In the instant case, it is admitted fact that the appointed date for the said amalgamation is with effect from 01.04.2017 being appointed date. The same was mentioned in the scheme approved by The Regional director, where appointed date defined as April 1, 2017, and also audited financial statements wherein the said facts have been mentioned. Thus, the said case law relied upon by the DR will not be applicable in the instant case as section 56(2)(viia) is applicable only till 31.03.2017. The appellant has received asset worth Rs. 149.29 Crore (on result of amalgamation) without consideration and ld. AO concluded that the said amount should be taxed u/s 28(iv) of the Act. 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. 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. 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 the double entry system employed and thereby cannot give rise to any benefit or perquisite in the course of the business - only relationship between two companies was that of indirect holding between them. In this factual background, it cannot be said that the amalgamation reserve arose out of any business activity of the appellant. Scheme of Amalgamation cannot be regarded to be the one carried into during the course of carrying on the business. Thus, the reserve created on account of amalgamation was contested as capital in nature and not created on account of business activity. CIT (A) considered several decisions wherein it is held that reserve arising out of amalgamation is capital in nature and cannot be treated as revenue under the ambit of section 28(iv) of the Act. Therefore, considering the aforesaid provisions, ld. CIT (A) is correct in holding that capital reserve cannot be treated as an Income u/s 28(iv) of the Act. Therefore, provision of section 28(iv) of the Act is not applicable to the present case. CIT(A) has rightly deleted the addition made by the ld. AO. Hence, we do not find any infirmity in the order of the learned CIT-A in deleting the addition made by the learned assessing officer. Decided against revenue.

Summary

Issues Involved:

1. Whether the credit of Rs. 149.29 crores as reserve and surplus in the balance sheet of the amalgamated company constitutes taxable income.
2. Whether the reserve and surplus credited as a result of the amalgamation is capital in nature and thereby not taxable.
3. Applicability of Section 28(iv) and Section 56(2)(x)(c) of the Income Tax Act, 1961 to the amalgamation transaction.
4. Compliance with the definition of "amalgamation" under Section 2(1B) of the Income Tax Act, 1961.
5. Interpretation of the Companies Act, 2013, particularly Section 19 regarding shareholding restrictions.

Detailed Analysis:

Issue 1: Taxability of Credit as Income

The Assessing Officer (AO) contended that the Rs. 149.29 crores credited as reserve and surplus should be treated as income, either under "income from other sources" or "business income" by invoking Section 41(1) of the Income Tax Act. The AO argued that no consideration was paid by the assessee company to the shareholders of the amalgamating company, thus generating taxable income. However, the CIT(A) and the ITAT concluded that the reserve was capital in nature, arising from the amalgamation scheme, and not a benefit or perquisite accruing to the assessee. Therefore, it should not be taxable as income under the Income Tax Act.

Issue 2: Nature of Reserve and Surplus

The CIT(A) examined whether the reserve and surplus credited in the balance sheet were capital in nature. It was determined that the reserve arose due to the amalgamation accounting treatment, which was in line with applicable accounting standards. The reserve was deemed capital in nature, not a revenue transaction, thus not subject to taxation under Section 28(iv) or Section 56(2)(x)(c) of the Act.

Issue 3: Applicability of Section 28(iv) and Section 56(2)(x)(c)

Section 28(iv) pertains to the value of any benefit or perquisite arising from business or profession. The CIT(A) and ITAT found no benefit or perquisite arising from the amalgamation, as the transaction was capital in nature and not part of the business activity. Furthermore, Section 56(2)(x)(c), which deals with taxation of property received without consideration, was deemed inapplicable due to the specific exemption under Section 47(vi), which covers transfers in amalgamation schemes not regarded as transfers.

Issue 4: Compliance with Definition of Amalgamation

The definition under Section 2(1B) requires that shareholders holding not less than three-fourths in value of the shares in the amalgamating company become shareholders of the amalgamated company. An exception exists if the shares are already held by the amalgamated company or its subsidiary. The ITAT concluded that the amalgamation qualified under this definition, as the shares were indirectly held by the assessee through its subsidiary, thus meeting the criteria for an exempt amalgamation.

Issue 5: Interpretation of Companies Act, 2013

Section 19 of the Companies Act prohibits a holding company from allotting shares to its subsidiary. The CIT(A) and ITAT noted that no shares were issued to the shareholders of the amalgamating company (Celina) due to this restriction, which was consistent with the approved amalgamation scheme. This compliance reinforced the argument that the transaction was capital in nature and not taxable.

Conclusion:

The ITAT upheld the CIT(A)'s decision to delete the addition made by the AO, concluding that the reserve arising from the amalgamation was capital in nature and not taxable under the provisions of the Income Tax Act. The appeal by the AO was dismissed, affirming that the transaction was compliant with the relevant sections of both the Income Tax Act and the Companies Act.