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TMI Blog2024 (10) TMI 534X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d company) of ₹149,29,00,000/- as a capital in nature without appreciating the fact that no basis what so ever was furnished by the assessee about the value of assets taken over by the amalgamated company of ₹150,12,85,900/-. The appellant craves to leave, to add, to amend and/ or to alter any of the ground of appeal, if need be. The appellant, therefore, prays that on the ground stated above, the order of the learned CIT (A)-51, Mumbai may be set aside and that of the Assessing Officer Restored. 03. Assessee is a Company engaged in the business of Real Estate, filed its return of income on 29.09.2018 at a total income of Rs. 19,09,730/-. This return was picked up for scrutiny under the e-assessment scheme 2019 on the issue of amalgamation or demerger. The assessee is a Company incorporated under the Companies Act and during the year, with an intent to simplify the group structure, rationalize the administrative overhead and to achieve greater administrative efficiency, M/s Celina Buildcon and Infra Private Ltd. was amalgamated with the assessee company as per the scheme of amalgamation approved by the Regional Director, Western Region, Mumbai. In accordance with the sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. The Assessing Officer further noted that the Directors of Celina and Orval are the same persons and all three companies belonged to the same group. He held that there cannot be any reasons as to how an investment made by Group Company Orval into its subsidiary Celina which ultimately merged into the holding company of Orval i.e., assessee can have hundred percent diminution in value in the very same year. Further if there is no liability to be paid back at the end of the year by Celina to Orval, the assessee got richer with an asset of Rs. 149.29 crores for which it must pay corresponding amount as merger consideration. Thus, it is evident that the assessee company has received assets worth Rs. 149.29 crores without consideration. Accordingly, the provisions of Section 56(2)(x) (c) of the Act are applicable. 07. Thus, according to him, the issue of diminution in value of investment can be separately dealt with in the hands of Orval Corporate Solutions Pvt. Ltd. but assessee was issued a show cause notice as to why the amount of Rs. 149.29 crores be not taxed under the provisions of Section 56(2)(x)(c) of the Act. 08. The assessee submitted its reply stating that. i. Amalgamati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of Section 41(1) does not apply. viii. Thus, the claim of the assessee is that neither the above sum is taxable u/s. 56(2)(x) of the Act and nor u/s. 41(1) of the Act. ix. The assessee also submitted that even otherwise the assets acquired by the assessee does not fall within the meaning of the term property and, therefore, the provisions of Section 56(2)(x)(c) of the Act does not apply. 09. The learned Assessing Officer rejected the contentions of the assessee and held that the assessee has received assets worth Rs. 149.29 crores without consideration and, therefore, the same is required to be added u/s. 28(iv) of the Act. 010. Accordingly, the assessment order u/s. 143(3) of the Act read with section 144B of the Act was passed on 29.04.2021 determining total income of the assessee at Rs. 149,48,9,730/- against the returned income of Rs. 19,09,730/- thereby making an addition of Rs. 149.29 crores. 011. The assessee aggrieved with assessment order preferred appeal before the learned CIT(A) contesting that the above sum is neither taxable u/s. 28(iv) of the Act and nor u/s. 56(2)(x)(c) of the Act. The learned CIT(A) considered the above submission of the assessee as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Companies Act. 12. Further the said contention was also mentioned in the scheme of amalgamation between the parties. Your goodself's attention is draw to Clause 5 of the Scheme out by the Regional Director (Ministry of Corporate Affairs) dated 08.05.2018. The same has been reproduced below: For the purpose of this Scheme, it is hereby clarified that the equity shares in Transferor Company are wholly owned by Orval Corporate Solutions Private Limited, which in tum is a wholly owned subsidiary of the Transferee Company. Hence the Transferee Company would not issue any equity shares as consideration for merger. Copy of the scheme as mentioned in enclosed in the paper book. Thus, considering the provisions of the scheme of amalgamation approved by the Regional Director (Ministry of Corporate Affairs) and the restrictions provided under the Companies Act, the appellant had rightly not provided any shares to shareholders of its subsidiary le Celina Buildcon and Infra Private Limited. 13. Further in addition to the above, it is pertinent to reproduce the section 2(1B) of the Income Tax Act, 1961 which defines Amalgamation as follows: (1B) amalgamation , in relation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nconsistent with the provisions of the said Section of the Income Tax Act, 1961, at a later date including resulting from an amendment of law or for any other reason whatsoever, the provisions of the said Section of the Income Tax Act, 1961, shall prevail and the Scheme shall stand modified to the extent determined necessary to comply with Section 2(1B) of the Income Tax Act, 1961. Such modification will however not affect the other parts of the Scheme. Considering the scheme has been approved by the Regional Director on behalf the Central Government (powers delegated to Regional Director), issuance of shares by appellant to its wholly owned subsidiary would have violated the provisions of the Companies Act. Further, with regards to the allegation made by the Assessing Officer by adding the amount of Rs 149.25 crore u/s 28(iv) of the Act, it is submitted that the reserve has arisen on account of amalgamation pursuant to the accounting treatment provided in the Scheme (which was in accordance with the applicable accounting standards) and that the said reserve was a reserve of capital nature and not a benefit or a perquisite or advantage of any kind accruing to the appellant and thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is capital in nature and cannot be said to be created on account of business activity. In this regard. reliance is placed on the following judicial pronouncements wherein it has held concluded that reserve arising out of amalgamation is capital in nature and cannot be treated as revenue under the ambit of section 28(lv) of the Act. The same are reproduced as under-. CIT Vs Stad Ltd., ITA No. 118 of 2015 (Madras High Court) A plain reading of the above-said provision makes it clear that the amount reflected in the balance sheet of the assessee under the head reserves and surplus cannot be treated as a benefit or perquisite arising from business or exercise of profession. The difference amount post amalgamation was the amalgamation reserve, and it could not be said that it is out of normal transaction of the business. The present transaction is capital in nature arose on account of amalgamation of four companies. Hence, we have no hesitation to hold that the manner in which the Revenue wants to treat this amount is not in consonance with Section 28(iv) of the Income Tax Act. ITAT Kolkata Bench in the case of ITO vs Kyal Developers (P.) Ltd (2014) 42 taxmann.com 70 held as under In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Samagra is not the holding company of Celina buildcon rather it is Orval corporate solution. Thus, the merger of Celina Buildcon into Samagra wealthmax is not covered under the provision of Clause 9(v) of Section 47 of the of Act. However, invoking the provision of section 47 (V) of the Act into the instant Situation intends to ignore the above fundamental principle of corporate laws. Consequently, assessee Company is not entitled to claim the benefit of Section 56 (2)(c) of the Act. 20. In this regard, we would like to re-iterate that the appellant was holding 100% equity shares of M/s. Orval Corporate Solutions Private Limited which in turn was holding 100% of the shares of M/s. Celina Buildcon and Infra Private Limited. Thus, the appellant was indirectly holding 100% shares of M/s. Celina Buildcon and Infra Private Limited. It is submitted that the term subsidiary as mentioned in Section 47(v) of the Act has not been defined in the Income Tax Act, 1961. Therefore, a reference needs to be made to the provisions of the Companies Act, 2013 to understand the meaning of the term subsidiary company. A perusal of the provisions of Section 2(87) of the Companies Act, 2013 would show as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions of the appellant and the findings of the AO have been considered. It is noted that during the year under consideration, Celina Buildcon and Infra Private Limited was amalgamated with the assessee company as per the scheme of amalgamation approved by the Regional Director, Ministry of Corporate Affairs, Western Region, Mumbai. In accordance with the scheme approved by the Regional Director, Ministry of Corporate Affairs, an amount of Rs 1,49,29,00,000/- was credited to the capital reserve by the assessee company. The AO in his assessment order has added Rs. 1,49,29,00,000/- to the total income of appellant u/s 28(iv) of the Income tax Act 1961. The appellant through its submission has submitted that the reserve has arisen on account of amalgamation pursuant to the accounting treatment provided in the Scheme and which was in accordance with the applicable accounting standards. The capital reserve had to be created as the appellant was the ultimate holding company of Celina and no shares were issued by the appellant to the shareholders of Celina as consideration for the merger in view of section 19 of the Companies Act 2013 which prohibits any holding company from allotting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity of the appellant Scheme of Amalgamation cannot also be regarded as an adventure in the nature of trade. Thus, the reserve created on account of amalgamation is capital in nature and cannot be said to be created on account of regular business activity. Similar view has been taken by the Hon'ble Madras High Court, in the case of CIT vs Stads Ltd., (2015) 373 ITR 313 (Mad.) in which in para 11 was held as Under: A plain reading of the above said provision makes it clear that the amount reflected in the balance sheet of the assessee under the head reserves and surplus cannot be treated as a benefit or perquisite arising from business or exercise of profession. The difference amount post amalgamation was the amalgamation reserve, and it could not he said that It is out of normal transaction of the business. 7.7 Further Hon'ble ITAT, Kolkata in the case of ITO vs Shreyans Investments Private Limited 141 ITD 672 (Kolkata-Tribunal) relying on the decision of the Hon'ble Bombay High Court in the case of Mahindra ang Mahindra 261 ITR 501 (Bom.) had taken a view that reserve arising out of amalgamation cannot be treated as income under section 28(iv) of the Income Tax Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conduct business more dynamically and earn more profit. So, the enhancement of its capital reserve, as a result of this amalgamation can only be construed as a benefit accrued to the assessee... , but then it is not even the case of the Assessing Officer that the benefit is in the revenue field, and unless the Assessing Officer is to discharge the onus of demonstrating that the benefit is in the revenue field, there cannot be any occasion to invoke Section 28(iv). Applying the test laid down by Hon'ble Madras High Court, in the case of Seshasayee Brothers (supra), also, we find that the benefit is referable to the capital and is thus not of an income nature. Even if. as the Assessing Officer observes, it can be surmised that the assessee is benefited in a myriad way by way of amalgamation , it does not lead to the conclusion that the benefit is in revenue field which alone can be treated as income and thus be considered for taxability under section 28(iv) of the Act. The onus is on the Assessing Officer to demonstrate that the receipt is of the revenue nature. 9. We have noted that the Assessing Officer's observations to the effect that 'business' under section 28 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n company, 7.9 Since in the given case, the amalgamation qualifies as an exempt transfer u/s 47(vi) of the Act, therefore, receipt of any property by the appellant (amalgamated company) pursuant to amalgamation with Celina (amalgamating company) would be considered as a transaction not regarded as transfer. Accordingly, the proviso of section 56(2)(x)(c) of the Act mentions that provisions of section 56(2)(x)(c) shall not apply to any sum of money, or any property received in certain cases. Transaction u/s 47(vi) of the Act is also included in this category. Thus, on combined reading of above two sections, it is clear that the provisions of section 56(2)(x)(c) of the Act would also not be applicable to the transfer in the given case on account of the specific exemption provided. 7.10 Furthermore, it is also pertinent to analyze the applicability of section 115JB of the Act to this transaction of amalgamation. The appellant has through its submissions submitted that both revaluation reserve and capital reserve are different terms, and it is pertinent to mention that capital reserve created in amalgamation cannot be regarded as revaluation reserve. It is evident that the capital rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets liabilities and reserves of Celina Buildcon and Infra Pvt. Ltd. as on 01.04.2017 have been taken over by the assessee at their book value. All the reserves of the transferor company have also been transferred as capital reserve of the assessee company. He submitted that Celina Buildcon and Infra Pvt. Ltd. has merged with the assessee company. Such merger is not covered into the definition of amalgamation as per Section 2(1B) of the Act as no shareholders of the Celina were made the shareholders of assessee company. Thus, there is a violation of Section 2(1B)(iii) of the Act. Because of this, the assessee is not entitled to the benefit of provisions of Section 47(vi) of the Act and, therefore, the impugned amalgamation is a transfer chargeable to tax. Further, the amount of Rs. 149.29 crores is chargeable to tax u/s. 56(2)(x) of the Act. It was submitted that the learned CIT(A) did not consider the above provisions correctly and, therefore, the order of the learned CIT(A) is not sustainable. x. He further submitted that the assessee has benefited by generation of the capital reserves of Rs. 149.29 crores and has also earned the assets of that value and, therefore, the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... na Buildcon and Infra Pvt. Ltd, therefore on merger the said shares were cancelled and no shares were issued by the assessee to the shareholders of Celina as consideration for the merger in view of the provisions of Section 19 of the Companies Act, 2013. 020. In this regard, it is pertinent to refer the provision of section 2 (1B) of the Act which is as under :- (1B) amalgamation , in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company virtue of the amalgamation. (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company virtue of the amalgamation. (iii) shareholders holding not less than three-fourths in value of the shares i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty, being shares of a company not being a company in which the public are substantially interested, (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property. (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation. For the purposes of this clause, fair market value of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii); 024. 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 as per 1.3 of the schemes. The same was mentioned in the scheme approved by The Regional director, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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