9911796707
TMI Blog2020 (8) TMI 796X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 accounts, being strictly in accordance with the binding scheme of amalgamation as approved by the Hon'ble High Court, the provisions of the Companies Act and duly approved by the shareholders/ di rectors/ ROC was sacrosanct for the purpose of computing book profit under section 115JB of the Act. 2.3. That the CIT(A) erred on facts and in law in confirming the action of assessing officer in treating capital reserve created under the scheme of amalgamation on account of vesting of assets in the appellant by purchase method, to be in the nature of "revaluation reserve" referred to in clause (j) of Explanation 1 to section 115JB of the Act. 2.4. That the CIT(A) erred in upholding the false/ baseless al legations made by the assessing officer to conclude that the scheme of amalgamation approved by the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after, 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: a) In terms of the scheme, 01.08.2014 was the appointed date, as approved by the Hon'ble High Court; b) Pursuant to the Scheme, all assets and properties of the five amalgamating companies, including various investments held, and all liabilities, stood transferred to and vested in the appellant with effect from the appointed date; c) As per para 9 of the Scheme, all the assets and liabilities of the five amalgamating companies stood transferred to and vested in the appellant-company at their respective fair values (refer para 9.1). 5. Pursuant to the aforesaid scheme of amalgamation, various assets and investment(s) held by the five amalgamating companies, which inter-alia included 95,15,021 shares in M/s. Indiabulls Housing Finance Ltd. (hereinafter referred to as 'Indiabulls'), stood transferred to and vested in the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e difference between sale consideration of Rs. 423,30,90,600 and original purchase cost of Rs. 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 STT was paid thereon, thereby satisfying the conditions prescribed in the said section. 12. In the books of account, since shares were transferred to and stood vested in the assessee at their fair value pursuant to the Scheme, (which was determined at Rs. 410.10 per share), the resultant gain of Rs. 33,09,80,489, was credited as part of "Other income - profit on sale of equity shares" in the profit and loss account. 13. For the purpose of computing deemed income under section 115JB of the Act, net profit/ loss as per audited profit and loss account, which included the aforesaid gain on sale of equity shares was considered, and the specified upward/ downward adjustments, as prescribed in Explanation 1 thereto were made. Order of the Assessing Officer: 14. The Assessing Officer has disregarded the aforesaid treatment adopted by the assessee and proceeded to make upward adjustment of Rs. 247,52,73, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onafide 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 note that the cost of acquisition of the said shares was only Rs. 142,68,36,160/- and post amalgamation (as the amalgamation was account by purchase method) the said book value was calculated at Rs. 390,21,10,112/-. The difference on account of market value and cost of acquisition of these shares was credited to the capital reserve account in the new entity along with fair market value of other assets re-valued (not sold during the year). 17. Having said so, the AO held that although, it is called as Capital Reserve, through the scheme of amalgamation presented, in effect and in essence it is only a Revaluation Reserve. For the purposes of book profit, the profit on sale of investment was recorded as sales consideration minus book value post-merger as is exactly the case in case of revaluation reserve. The book value effectively was a sum of cost of acquisition plus capital reserve (the same effectively as is in the case of Revaluat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervation 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 Industry Ltd. and its subsidiary were two independent companies with separate legal existence and, therefore, the profits made by the subsidiary could not be treated as profits made by the parent. But in our view that was not an end of the matter. It is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke screen and discover the true state of affairs. The courts is not satisfied with form and leave alone the substance of the transaction." (iv) In the context of above, the AO fount it essential to refer to the case of Commissioner of Income-tax v. Durga Prasad More [1971] 082 ITR 0540-SC, wherein the Hon'ble Supreme Court had once again reiterated the vital role of 'surrounding circumstances" while deciding on merits of documents submitted by the assessee. The Hon'ble Court has held as under: "It is true that an apparent must be considered real until it is shown that there are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt. 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 cast on every citizen to pay the taxes without resorting to subterfuges. When the statute provides certain rights, which if properly applied would reduce the tax burden on the assessee or exempts him from the payment of tax, the assessee is entitled to the said benefit. However, if he is invoking the said provisions with the intention of evading payment of tax, then it would be a colorable device to avoid payment of tax, which cannot be entertained by the Court. It is in this context, Court has to find out whether the transaction is real or unreal and then record a finding whether it is a colorable device or sham transaction." Order of the ld. CIT (A): 19. The ld. CIT (A) mainly rel ied on the assessment order and also derived support from the fact that Sh. Saurabh Mittal has already rel inquished his control in India Bul ls Group and in the amalgamating companies have been held control led by The Maritime India Trust. The relevant part of the order of the ld. CIT (A) is as under: "It has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s group and sale of shares of India Bulls Group by the amalgamating companies was never admitted before the Hon'ble Court. Neither was this a part of the preamble of amalgamation nor was such a crucial fact brought to the notice of the Hon'ble Court at that point of time. From this, concludes the AO, the purpose of amalgamation was not the same as what was stated on oath before the Hon'ble High Court. Then, he goes on to discuss the subsequent events as under: "6.3.1 As a result of the amalgamation order of the Hon'ble Delhi High Court with retrospective effect from 01.08.2014, the sale of shares of India Bulls Housing Finance Ltd. originally made by Hespera Real Estate Pvt. Ltd., Hespera Properties Pvt. Ltd. and Infrastructure Pvt. Ltd. as per para 6.2. above have been shown to be sold by the appellant. AO also gives the details of the sale and purchase '") transaction of shares of IBHFL, which are reproduced as under:- S. No. Name of the Company Number of shares of IBHFL Book Value of investment in shares of IBHFL as on 31.07.2014 (in Rs.] Book Value of Shares of IBHFL as on 01.08.2014 shown in the books of the Hespera Realty Pvt. Ltd. (amalgamated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the other hand they were submitting superfluous reasons far away from reality as the reason for amalgamation. The group companies pleaded amalgamation so as to streamline the holding structure of the companies, ensure focused management in a single combined entity, derive synergies, achieve economies of scale etc. A perusal of the balance sheets of the six companies clearly indicates that the said companies were never into active business in the pre-merger period. It is important to note that the final amalgamated company (the assessee company) in the postmerger period was also not into active business of any kind. Though the object of the assessee company as stated by it is to undertake infrastructure projects, and to purchase, sell, develop, construct, hire or otherwise acquire and deal in all real or personal estate/properties, no such activity is visible in the postmerger period also up to 31.03.2017. Hence at the very outset, the facts have not been put up before the Hon'ble Delhi High Court in its true sense. ii) Sh. Saurabh Mittal who directly or indirectly owned the said six companies had entered into an agreement with the India Bulls Group and filed a statement be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies right: from the beginning is focused and pointed towards avoidance of tax arising as a result of gain from sale of shares of IBFHL. 22. The ld. CIT (A) has also supported the judgments relied upon by the Assessing Officer which have been duly mentioned as the part of the assessment order in this order. 23. The ld. CIT (A) held that in view of the comments of the AO, he was inclined to agree with the observations made by the AO that the amalgamation scheme was planned and undertaken by the assessee and its group companies as an attempt to reduce liability for payment of minimum alternate tax (MAT) under section 115JB arising due to offloading/sale of shares of IBHFL. 24. In view of the foregoing, the ld. CIT (A) held that the entire amalgamation scheme and choice of purchase method for accounting of assets were employed by the assessee to evade payment tax u/s 115JB by artificial jacking up of cost price of the shares sold, by way of applying purchase method for revaluation of assets. 25. The ld. CIT (A) held that having considered the submission and arguments made by the appellant assessment order and the documents on record, he was entirely in agreement with the AO wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that the assessee had employed any colorable device. 29. It was 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 above, aimed at deriving synergies and achieve economies of scale arising out of consolidation of businesses of companies in order to efficiently and optimally utilize resources of all businesses under a single combined entity. 30. Regarding the accounting treatment, it was argued that the accounting treatment in the books of accounts of the assessee was strictly in accordance with the binding scheme of amalgamation as approved by the Hon'ble High Court, the provisions of the Companies Act and mandatory accounting standards and duly approved by the shareholders/ directors/ ROC and was, therefore, correct while computing book profit under section 115JB of the Act. 31. Regarding the colourable device embarked by the assessee, it was argued that the assessee and its group companies were orig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble High Court, the revenue has the right to look into the taxability of the revenues arise out of such amalgamation. It was reiterated that the entire amalgamation scheme was a surruptious action on the part of the assessee to evade taxes payable. Though the reserve created is treated as Capital Reserve in effect and truly it is a Revaluation Reserve liable for upward revision for computation of profits u/s 115JB. 35. Heard the arguments of both the parties and perused the material available on record. 36. The main allegation of the revenue as seen from the order of the Assessing Officer page no. 18 and the order of the ld. CIT (A) page no. 54, 55 is that the entire scheme of the assessee is a Sham transaction. The revenue relied on the judgments of SREI Infrastructure Finance Ltd. Vs ITSC, McDowell & Co. Ltd., Workmen Vs Associated Rubber Industries, CIT Vs Durga Prasad More, Sumati Dayal Vs CIT and held that the amalgamation scheme was planned and undertaken by the assessee and its group companies as an attempt to reduce the liability for payment of tax under MAT/115JB. 37. The group companies held various parcels of land as S. No. Khasra No. Area Owner of Land 1. kh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isition plus capital reserve (the same effectively as is in the case of Revaluation Reserve). The profit on sale of investment was thus reduced to the extent of this capital reserve created post merger. Thus, AO concludes that in view of provision of clause (j) to Explanation 1 of Section 115JB, the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, needs to be increased in computation of the book profit u/s 115JB. Therefore, as the shares in question have been disposed of during the year, the amount relating to these re-valued assets have to be added. Thus, the AO added the amount relating to these shares being Rs. 247,52,73,952/- [Rs. 390,21,10,112 (after revaluation, applying purchase method) minus Rs. 142,68,36,160/- (actual cost to the book profit of the assessee)]. 41. The ld. CIT (A) consented to the argument of the Assessing Officer. Thus, the short and long question is whether the increase in the value of investment is capital reserve or revaluation 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 transfere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... air values of various assets and liabilities "acquired" by the assessee from the transferor/ "amalgamating companies" pursuant 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. 48. In case of merger in the nature of purchase, the difference arising on account of acquisition of net assets of the amalgamating companies at fair value, and valuation of investments held in the assessee, which stood recorded under the head "Capital Reserve", cannot, by any stretch of argument, be regarded as "Revaluation Reserve". 49. In this background of the accounting methodology of "Capital Reserve" and "Revaluation Reserve", the 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies Act; 1956) shall be adopted. 53. Then what Section 129 of the Companies Act, 2013 provides for !!! 54. Section 129 of the Companies Act, provides that the financial statements of the company shall be prepared to give a true and fair view of the state of affairs and the profit or loss of the company and shall comply with the Accounting Standards as prescribed by the Central Government. The said Section reads as under: "129. (1) The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III." 55. Then what are the accounting standards notified for amalgamation !!! 56. As per, the above provisions of Sections, the accounting for amalgamation AS 14 is applicable. As per AS 14 of pooling of interest method and purchase method are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eserves on Amalgamation 16. If the amalgamation is an 'amalgamation in the nature of merger', the identity of the reserves is preserved and they appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company. Thus, for example, the General Reserve of the transferor company becomes the General Reserve of the transferee company, the Capital Reserve of the transferor company becomes the Capital Reserve of the transferee company and the Revaluation Reserve of the transferor company becomes the Revaluation Reserve of the transferee company. As a result of preserving the identity, reserves which are available for distribution as dividend before the amalgamation would also be available for distribution as dividend after the amalgamation. The difference between the amount recorded as share capital issued (plus any additional 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 par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80,58,323 14,95,05,680 77,75,64,003 It was further submitted that, neither the books of account nor audited statement of accounts have been disqualified by the auditors nor ROC has taken any objection and therefore, the book profit shown by the assessee cannot be tinkered with. It was further stated that, as per Scheme of Amalgamation, assessee had no option but to take the differential value of shares to capital reserves. In support, strong reliance was placed on the decision of ITAT Mumbai Bench in the case of United Estate Pvt. Ltd. The Assessing Officer then asked the 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 conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss account. ii. Of the 1,06,39,926/- shares which were received by the assessee company in consequence to amalgamation, assessee company has sold 20,42,053/- shares during the year. However, of the shares which were sold during the year, the consequent amount which was credited to the reserve was not reduced from the value of reserve and routed through profit and loss account. iii. Assessee in its profit and loss account has claimed loss on sale of these shares of IHFL amounting to Rs. 52,69,843/- however, corresponding effect of the same 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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 reserve created by Transferee Company. Any deficit shall be considered to form part of Goodwill." 16. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 adjustment on loss on account of dividends striping, the assessee was not required add back the same for computing 'book profit' under the said section. The assessing officer failed to appreciate that 'loss' arising on sale of units of mutual fund could not be regarded as 'expenditure' in terms of clause (f) of Explanation 1 to section 115JB of the Act and thereby no adjustment was called for. 66. The ld. CIT (DR) supported the rationale of ld. CIT (A) which h ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
