2009 (3) TMI 520 - HC - Income Tax

Business Income- Whether the Tribunal was right in coming to the conclusion that the value of the assets taken over on amalgamation should be taken at book value as was existing in the hands of the amalgamated company for working out the cost of the shares for purposes of determining the gains or loss thereon ? Held that- the Income Tax Officer thus rightly held that there was incurred loss of Rs. Only 8,850. The Income tax Officer was therefore also right in allowing loss of Rs. 876 for sale of the shares of the second company, as against profit of Rs. 7974 out of sale of the shares held by the first company. Instead of allowing total loss as claimed, the Income Tax Officer correctly disallowed loss.

Issues Involved:
1. Reopening of assessment by the Income-tax Officer (ITO) under section 148 of the Income-tax Act, 1961.
2. Determination of the value of assets taken over on amalgamation for calculating gains or losses on the sale of shares.
3. Application of the Supreme Court judgment in CIT v. Mugneeram Bangur and Co. [1965] 57 ITR 299 to the present case.
4. Validity of the method adopted by the ITO for determining the value of shares.

Issue-wise Detailed Analysis:

Reopening of Assessment:
The assessment year in question is 1973-74, which was reopened by the ITO through a notice issued under section 148 of the Income-tax Act, 1961, on January 2, 1978. The reopening was based on the claim that the assessee did not disclose true facts of its income. The assessee filed a return on February 14, 1978, and the ITO passed the assessment order under section 147(a)/143(3) of the Act on December 22, 1981, disallowing the claimed loss on the sale of shares.

Determination of Value of Assets:
The central question was whether the value of the assets taken over on amalgamation should be taken at the book value as existing in the hands of the amalgamated company for working out the cost of shares for determining gains or losses. The assessee claimed a loss on the sale of shares of M/s. Baranagore Jute Factory and M/s. Equitable Coal Co., which were acquired through amalgamation. The ITO recalculated the value of these shares and concluded that there was a profit instead of a loss, leading to a disallowance of the claimed loss.

Application of Supreme Court Judgment:
The Commissioner of Income-tax (Appeals) relied on the Supreme Court's judgment in CIT v. Mugneeram Bangur and Co. [1965] 57 ITR 299, which dealt with the transfer of a business as a going concern and held that it was not possible to allocate the purchase price among the assets taken over. However, the High Court found that the facts of the Mugneeram Bangur case were not applicable here since the present case involved the subsequent sale of assets acquired through amalgamation, not a lump-sum transfer of a going concern.

Validity of Method Adopted by ITO:
The ITO's method of determining the value of shares was challenged by the assessee. The ITO calculated the proportionate value of the shares based on the total purchase consideration paid for the assets. The High Court supported the ITO's method, noting that the value of shares should be based on their book value in the hands of the amalgamated companies and their selling price. The court held that the ITO was correct in disallowing the claimed loss and recalculating the profit/loss based on the proportionate value of the shares.

Conclusion:
The High Court concluded that the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal erred in law by allowing the assessee's claim. The court answered the question of law in favor of the Revenue and against the assessee, upholding the ITO's method of determining the value of the shares and the subsequent disallowance of the claimed loss.

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