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TMI Blog2020 (8) TMI 796X X X X Extracts X X X X X X X X Extracts X X X X ..... to the scheme of amalgamation as its cost of acquisition in accordance with the terms of the court-approved scheme of amalgamation and the provisions of AS14. As per the accounting standard, upward revaluation of assets is permitted only in terms of AS 10 on Accounting for Fixed Assets . AS 13 which deals with Accounting for Investments , does not permit a company to revalue of its long-term investments at a value higher than the cost. For computing book profit, sub-section (2) of section 115JB of the Act mandates that every company shall prepare its Profit Loss Account in accordance with the provisions of Parts I and II of Schedule III of the Companies Act, 2013 (corresponding to Parts II and III of the erstwhile Companies Act further provides that for computing book profit under the said section, the same accounting policy and Accounting Standards as are adopted for preparing the accounts laid before the shareholders at the Annual General Meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (corresponding to section 210 of the Companies Act; 1956) shall be adopted. Since, the capital reserve is out of purview of Section 115JB, and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .R. KUMAR, ACCOUNTANT MEMBER: The present appeal has been fi led by the assessee against the order of ld. CIT (A)-4, New Delhi dated 20.01.2020. 2. Following grounds have been raised by the assessee: 1. That the Commissioner of Income-tax (Appeals) [ CIT(A) ] erred on facts and in law in confirming the action of the assessing officer in determining book profit under section 115JB of the Income Tax Act, 1961 ( the Act ) at ₹ 275,16,44,730 as against book loss of ₹ 90,74,679 declared by the appellant. 2. That the CIT(A) erred on facts and in law in upholding the action of the assessing officer in making upward adjustment of ₹ 247,52,73,951 to book profit in terms of clause (j) of Explanation 1 to section 115 JB of the Act. 2.1. That the CIT(A) erred in not holding that the assessing officer had exceeded his jurisdiction in making the aforesaid upward adjustment, contrary to the mandate of section 115JB of the Act, since the appellant had computed book profit strictly in accordance with the books of account as mandated by the said section. 2.2. That the CIT(A) erred in not appreciating that the accounting treatment in the books of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme of amalgamation duly approved by the Hon'ble High Court of Delhi vide order dated 08.05.2015, five companies viz., (i) Hespera Real Estate Private Limited, (ii) Hespera Infrastructure Private Limited, (Hi) Hespera Properties Private Limited, (iv) Hespera Realcon Private Limited and (v) Hespera Construction Private Limited (collectively in short 'amalgamating companies') amalgamated with the assessee company as under: Step 1: Wholly owned subsidiaries of the group merged into their respective parent companies I - Merger of wholly owned subsidiaries into their respective parent companies as under: - M/s. Hespera Real Estate Pvt. Ltd. amalgamated with Hespera Realcon Pvt. Ltd. - M/s. Hespera Infrastructure Pvt. Ltd. M/s. Hespera Properties Pvt. Ltd. amalgamated with the assessee company. Step 2: Thereafter, M/s. Hespera Realcon Pvt. Ltd. and Hespera Constructions Pvt. Ltd amalgamated with the assessee-company. The diagrammatic representation depicting the amalgamation of various companies with the assessee is as follows: II - Merger of remaining companies 4. The salient features of the scheme of amalgamation were as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termined at ₹ 410.10 per share being the closing price of the shares on the day prior to the effective date. Accordingly shares in Indiabulls were recorded in the books of the assessed company as received pursuant to transfer under the Scheme at ₹ 410.10 per share. 9. During the relevant previous year; out of the aforesaid shares of Indiabulls, 95,15,021 shares were sold on a recognized stock exchange for total consideration of ₹ 423,30,90,600, after payment of securities transaction tax (in short STT ) thereon. 10. The gains/ loss arising on transfer of 95,15,021 shares in Indiabulls, both, while computing income under the normal provisions as well as while computing deemed income under section 115JB was computed by the assessee and shown as such in the return of income. 11. Thus, the assessee declared long-term capital gains of ₹ 280,62,54,440 (being the difference between sale consideration of ₹ 423,30,90,600 and original purchase cost of ₹ 142,68,36,160 in the hands of the amalgamating companies) and claimed it as exempt from tax under section 10(38) of the Act since the shares were transferred on a recognized stock exchange and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ultimate parent entity (i.e. Maritime India Trust) does not get affected , clearly shows that application of this method, was just for revaluing the assets in the disguise, without having any commercial purpose. As stated in preceding paragraphs it is very clear that when the High Court order approving the amalgamation scheme was passed on 08.05.2015 the majority investment by the group companies which was in the form of investment into the shares of IBHFL was already offloaded. It all the more shows that the entire amalgamation process was orchestrated has treated a mere sham to reduce the tax liability. It may be said that the Hon'ble Delhi High Court was kept in dark as the actual motive of amalgamation was never brought to the notice of the Hon'ble Court. Even while validating the genuine tax planning the Hon'ble Supreme Court in the case of Vodafone International Holdings has observed that it should be bonafide and the series of transactions in form also should have some commercial purpose. The assessee has failed to show any commercial purpose of amalgamation. 16. The AO held that the entire scheme of transaction was colourable device only, it is to no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not, a ground to escape tax on transfer of a Capital Asset under and as per provisions of the Act. (ii) McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 wherein it has been held clearly that the taxpayer cannot be allowed to get away with any colourable device or artificial sham transaction. The Hon'ble Supreme Court, while applying the doctrine, had observedITA Tax planning is legitimate provided it is within the frame work of law. Colourable devices cannot be part of tax planning, and it is wrong to encourage or entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Therefore, it becomes an important function of the income tax authorities to look into the devices and natures of transactions used by the assessee, and decide upon the character and nature of such devices and transactions. (iii) A similar observation was made in the Supreme Court's decision in the case of Workmen v. Associated Rubber Industry [1986] 157 ITR 77 wherein the Hon'ble Court had observed- It is true that in law the Associated Rubber ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t's claim about the amount being her winnings from races is not genuine. (vi) In the case of CIT v. Wipro Limited (Karnataka High Court)[2014] 50 taxmann.com 421 (Karnataka),while deciding a case of alleged sham transaction, the Hon'ble High Court has held as under: The question whether a transaction is sham or colorable and entered into with the sole intention of evading payment of tax is purely a question of fact. On appreciation of the material on record and thereafter keeping in mind the statutory provisions in particular, the charging section and the section under which the tax is exempted, the Court has to record the finding of fact. Unless the statutory provisions provide for exemption from payment of tax, the question of an assessee trying to take advantage of the said provision would not arise. Therefore, in each case, the question is, the way the assessee has avoided to pay tax relying on the statutory provisions is legitimate or not is to be considered by the Court. The Court has to bear in mind that it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. An obligation is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tively impact the management, control and supervision of the said companies/the amalgamated company. It also emanates from the assessment order that as on the appointed date of merger i.e. 01.08.2014, the investment in shares of India Bulls Housing Finance Ltd. (IBHFL)of the merging companies was as under:- S. No. Name of the company Number of shares of IBHFL 1 Hespera Real Estate 33,50,000 2 Hespera Properties 25,60,909 3 Hespera Infrastructure 36,04,112 Total 95,15,021 ..In pursuance to the restructuring of the India Bulls group, the above mentioned shares of IBHFL were sold by Hespera Real Estate Pvt. Ltd from 06- 08- 2014 to 31.10.2014, by Hespera Properties Pvt. Ltd from 05.11.2014 to 03.12.2014 and by Hespera Infrastructure Pvt. Ltd. from 02.12.2014 to 16.01.2015. However, during the course of amalgamation proceedings and hearing before the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sale value and the book value of shares of IBHFL as on 31.07.2014 and claimed exempt income of ₹ 280,62,54,440/-. However, for the computation of book profit u/s 115JB, the assessee has taken the difference of sale value and the book value of shares in the hands of the amalgamated company as on 01.08.2014 at ₹ 33,09,80,488/-. The difference amount of ₹ 247,52,73,952/- [(390,21,10,112 shown at fair market value of 25,15,021 shares @ ₹ 410.10) minus 142,68,36,160 (historical cost of such shares)] has been taken to Capital Reserve and the book profits have been reduced to the said extent. 20. The ld. CIT (A) considered that the arguments of the assessee placed before him containing the following contentions: i) that the amalgamation is as per the Scheme approved by the Hon'ble Delhi High Court. Therefore, there is no illegality in it. ii) The capital reserve accounted by the appellant is as per the scheme approved by the Hon'ble High Court and is in accordance with Accounting Standered-14. iii) No adjustment is warranted under clause (b) to Explanation 1 to section 115JB of the Act, since unlike revenue reserve a capital reserve is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rought in the knowledge of the Court. The assessee and the group companies thus misled the High Court by suppressing the crucial facts. iii) The historical cost of the 95,15,021 shares offloaded by Hespera Real Estate Pvt. Ltd. Hespera Properties Pvt. Ltd. and Hespera Infrastructure Pvt. Ltd. during the financial year under consideration was ₹ 142,68,36,160 and were sold at ₹ 423,30,90,600. However, on amalgamation scheme being approved by the Hon'ble High Court with retrospective effect from 01.08.2014 these shares were shown to be transferred to the assessee company at fair market value of the shares of IBHFL @ ₹ 410.10 per share which comes to total of ₹ 390,21,10,112. Accordingly, the book profit on sale of these shares was reduced by the assessee's group companies to the tune of ₹ 247,52,73,952/-. iv) It is worthwhile to note that ultimate control over the assessee and the other group companies was of the parent entity Maritime India Trust. This, thus, indicates that the merger of the five companies into the assessee did no effectively impact the management, control and supervision of the said companies/ the amalgamated company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by taking the difference of sale value and book value of the shares of IBHFL on 31.07.2014 (pre-amalgamation) i.e. ₹ 423,30,90,600 ₹ 142,68,36,160 = ₹ 280,62,54,440/- claimed as exempt u/s 10(38). b. For computation of book profit, the sale value and book value of the shares as on 01.08.2014 was considered (Post-amalgamation) i.e. ₹ 423, 30,90,600 - ₹ 390,21,10,112 = ₹ 33,09,80,488/- c. Capital Reserve created taking into consideration FMV of shares of IBHFL and historical cost of the shares i.e. ₹ 390,21,10,112 ₹ 142,68,36,160 = ₹ 247,52,72,952/- 27. We find that the ld. CIT (A) confirmed the addition basically on the following grounds: a. This amalgamation scheme was planned and undertaken by the assessee in its group companies as an attempt to reduce liability for payment of MAT u/s 115JB arising due to sale of shares of IBHFL. b. There was no commercial purpose for applying purchase method as all entities are ultimately owned by Maritime India Trust. c. The real motive of amalgamation was never brought to the notice of the Hon ble High Court. d. The Capital Reserve created to the scheme of amalgama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ensure focused management in a single combined entity; (ii) Derive synergies and achieve economies of scale arising out of consolidation of businesses of the Companies; (iii) Efficiently and optimally utilize resources of all the businesses under a single combined entity; (iv) Facilitate administrative and compliance convenience and reduce overhead, operating and administrative costs and consequently improve profitability; and (v) Increase the net worth by consolidating the net worth of all the Companies, which could facilitate attracting funds from strategic investors. 32. It was reiterated that the amalgamation was purely a business and a strategic decision and the allegation of the assessing officer that it was a sham transaction for the purpose of evading tax is completely false, baseless and without any evidence. 33. It was further argued that the amalgamating companies had been originally incorporated with the objective of developing different real estate/infrastructure projects. However, it was proposed to consolidate the businesses of all the companies into one single entity, for improved synergies and management focus. Further, the scheme, as stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivate Limited 3. khasra No. 2726. 1 Bigha 05 Biswa Hespera Constructions Private Limited 4. khasra No. 2726. 1 Bigha 05 Biswa Hespera Realcon Private Limited 5. khasra No. 2726. 1 Bigha 05 Biswa Hespera Infrastructure Private Limited 6. khasra No. 2726. 1 Bigha 05 Biswa Hespera Real Estate Private Limited TOTAL 8 Bigha 04 Biswa 38. On amalgamation, the land has been consolidated to suit the business requirements. The case laws relied by the Assessing Officer deal with the real intent vis- -vis rising of the corporate veil and the structured scheme on record. We find the ratio of cases have no applicability to the instant case. The revenue went in a rhetoric but could not bring anything tangible on record to prove the surruptious nature of the assessee to treat the scheme of amalgamation as Sham. The motive of the tax evasion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion reserve. 42. Before us, during the argument, the ld. AR argued that as per AS- 14. Paragraph 12 of AS-14, which is to be mandatorily followed, permits the transferee company to record the assets and liabilities of the amalgamating companies, acquired under the scheme of amalgamation, at fair values as on the date of amalgamation. 43. The clause 9 of the scheme of amalgamation provides that all assets/ properties and liabilities of the amalgamating companies, including investments held in shares of indiabulls, which stood transferred to and vested in the assessee with effect from the appointed date, shall be recorded at fair values, by following Purchase Method . 44. Regarding the argument of the revenue that the Capital Reserve treated as the Revaluation Reserve for computation of the profit u/s 115JB, the ld. AR argued that the assets and liabilities of the amalgamating companies (including shares of Indiabulls) pursuant to the scheme of amalgamation becoming effective, stood vested and recorded in the audited financial statements of the assessee at their fair value. In that view of the matter, the difference arising on account of acquisition of net assets of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Act pertaining to computation of book profits as per Section 115JB are examined. 50. What Section 115JB provides for !!! 51. Section 115JB provides for 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of incometax at the rate of eighteen and one-half per cent. (2) Every assessee,- (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956): or (b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re recognized. As per Sections 391 to 394 of Companies Act, amalgamation was regarded as amalgamation in nature of purchases and hence purchase method of the AS 14 is applicable to the assessee. 57. Then what accounting standard AS 14 prescribes !!! 58. AS 14 prescribes Methods of Accounting for Amalgamations: 7. There are two main methods of accounting for amalgamations. (a) the pooling of interests method (b) the purchase method. 8. The use of the pooling of interests method is confined to circumstances which meet the criteria referred to in paragraph 3(e) for an amalgamation in the nature of merger. 9. The object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. This method is used in accounting for amalgamations in the nature of purchase. The Pooling of Interests Method 10. Under the pooling of interests method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts (after making the adjustments required in paragraph 11). 11. If, at the time of the amalgamat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional consideration in the form of cash or other assets) and the amount of share capital of the transferor company is adjusted. 17. If the amalgamation is an amalgamation in the nature of purchase , the identity of the reserves, other than the statutory reserves dealt with in paragraph 18, is not preserved. The amount of the consideration is deducted from the value of the net assets of the transferor company acquired by the transferee company. If the result of the computation is negative, the difference is debited to goodwill arising on amalgamation and dealt with in the manner stated in paragraphs 19-20. If the result of the computation is positive, the difference is credited to Capital Reserve . 59. Hence, the observation of the AO and ld. CIT (A) that the reserve created is in the nature of Revaluation Reserve cannot be acceded to as it is in fact Capital Reserve . 60. Clause (j) to Section 115JB provides for upward adjustment of revaluation reserve while computing profits u/s 115JB. The verbatim of the Clause is as under: Section 115JB .. Clause (j): the amount standing in revaluation reserve relating to revalued asset on the retirement or dispo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, why no adjustment should be made in the book profit with respect to valuation of shares, which is nothing but revaluation of reserve. The assessee in response had relied upon AS-14 and submitted that in case of purchase method the assets and liabilities are to be recorded at fair market value at the time of amalgamation and as per the scheme of amalgamation purchase method was adopted. The ld. Assessing Officer observed that reserve created on account of revaluation of shares was not credited to the profit loss account and therefore, he was of the opinion that the same has to be considered for determination of book profit. The assessee, however, squarely relied upon the Amalgamation Scheme and the order of Hon ble High Court on account of treatment given in the books of account. The detail submissions of the assessee in this regard are incorporated on page 4 to 6 of the assessment order. The ld. Assessing Officer held that in terms of clause (v) to Explanation 1 of section 115JB, such revaluation of shares has to be taken into account while computing the book profit. Finally, ld. Assessing Officer made the addition of ₹ 61,04,10,483/- in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not given to the revaluation reserve. 8.6. In view of the above facts, it can be stated that the provisions of clause (i) of explanation 1 to section 115JB squarely applies to the case of the assessee. Quantum of adjustment needs to be worked out in this regard which is as follows: Particulars No. of shares Value share price on 14.11.2014 Revalued share value Original Price Total PPPL 70,39,926 456.47 3213515021.22 891522739 232,19,92,282 PREPL 36,00,000 456.47 1643292000 78,48,00,000 85,84,92,000 Total 318,04,84,282 8.7. On the date of amalgamation, assessee company thus received, total of ₹ 1,06,39,926/- shares from M/s. PPPL and M/s. PREPL. Further, for 10639926 shares of IHFL, ₹ 318,04,84,282/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant clauses dealing with accounting standard and purchase method adopted for valuing the assets and liabilities at a fair market value and how any excess on such transfer of assets and liabilities has to be treated as part of the capital reserve, reads as under: 9.1. On the scheme becoming effective and with effect from the appointed date, Transferee company shall account for amalgamation of Transferor Company No. 1 and transferor Company No. 2 in its books of accounts as per the purchase Method specified under the Accounting Standard 14 Accounting for Amalgamation . 9.2 All the assets and liabilities of Transferor Company No. 1 and Transferor Company No. 2 shall be transferred to and vested in Transferee Company pursuant to this Scheme and shall be recorded at their respective fair values. 9.3. Any excess arising on transfer of assets and liabilities of Transferor Company No. 1 and transferor company No. 2 after giving effect to clause 9.4 below would be considered to form part of the Capital Reserve of Transferee Company. Such Capital Reserve shall be a reserve which arises pursuant to this Scheme and shall not be, for any purpose, be considered to be a res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: The assessee gained a loss of short term capital loss to the extent of ₹ 28,54,45,463 on purchase and redemption of mutual funds. The assessee in the return of income, suo-moto disallowed the short term capital loss incurred, in terms of provisions of section 94(7) of the Act. In the impugned assessment order, the Assessing Officer has made an upward adjustment of ₹ 28,54,45,463 in terms of clause (f) of Explanation 1 to section 115JB of the Act, by treating the said loss as expenditure relatable to earning exempt income. The ld. CIT (A) confirmed the addition on the grounds that as per the provisions of clause (f) of Explanation 1 to section 115JB of the Act the book profit is to be reduced by the amount of income to which any provisions of section 10 apply and increased by the amount of expenditure relatable to any income to which section 10 applies. Therefore, not only the dividend income has to be removed for the book profit but the loss or any other expenditure incurred for earning the dividend income has to be removed from the computation of book profit. 65. Before us, the ld. AR argued that there was no provision u/s 115JB for the upward adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X
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