ITAT held that the reserve created on amalgamation is capital in nature and not taxable as perquisite

Recently, the Income Tax Appellate Tribunal, Mumbai held that the reserve created on amalgamation is capital in nature and not taxable as perquisite.

Facts of the Case:

The appeal is filed by the Deputy Commissioner of Income Tax, Central Circle-Mumbai for Assessment Year (A.Y.) 2018-19 against the appellate order passed by the Commissioner of Income Tax (Appeals) (“learned CIT(A)”), Mumbai dated 13.03.2023 wherein the appeal filed by Samagra Wealthmax Private Limited (the assessee, also referred to as Samagra) against the assessment order passed by National e-assessment, Delhi (the Assessing Officer) dated 29.04.2021, was partly allowed.  

1. Assessee is a Company engaged in the business of Real Estate, during FY 2017-18, 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. (referred to as Celina) was amalgamated with the assessee company as per the scheme of amalgamation approved by the Regional Director, Western Region, Mumbai.
2. Celina Buildcon and Infra Pvt. Limited was step down wholly owned subsidiary company of the assessee and as a result, no consideration was discharged on amalgamation.
3. Pursuant to the merger, the share capital of Celina Buildcon and Infra Pvt. Limited was knocked off and generated capital reserve in the books of the assessee company of Rs.149.29 crore.

Assessing Officer’s View:

• Why the amount of Rs.149.29 crores should not be treated as income of the assessee company for A.Y. 2018-19 either as income from other sources or business income by invoking the provisions of Section 41(1) of the Act.
• The learned Assessing Officer alternatively also held that assessee is not the holding company of Celina Buildcon, Thus, the merger of Celina Buildcon into the assessee is not covered under the provisions of Clause(v) of Section 47 of the Act. Consequently, the assessee cannot claim the benefit of Section 56(2)(X) (c) of the Act.
• 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.

Assessee’s Submission:

• As the shareholding of Celina is held by subsidiary of assessee company, thus no consideration is being issued, the merger qualifies as an amalgamation and all the exemptions provided should be available.  
• The provisions of the Companies Act,2013 doesn’t permit issuance of shares by assessee to its wholly owned subsidiary
• No consideration was paid pursuant to the merger, Orval (Direct holding Company of Celina & Wholly owned subsidiary of Assessee) wrote off its entire investment in the shares of Celina. Orval did not claim the diminution in the value of the investment as an expense at the time of filing its return of income. Thus, no benefit has been claimed by Orval on the write-off of the investment.
• Reserve has arisen in the books of the assessee company pursuant to the accounting treatment provided in the scheme. The same was reserve of capital nature and, therefore, should not be taxable in the hands of the assessee.
• Receipt of any property by assessee i.e., amalgamated company pursuant to merger from Celina i.e., amalgamating company does not amount to transfer and, therefore, nothing is taxable in the hands of the assessee u/s. 56(2)(x) of the Act
• With respect to the taxability u/s. 41(1) of the Act, the assessee submitted that the amount received by Celina was not in the form of any loss or expense or trading liability for which allowance or deduction was allowed to Celina, but it was by way of share capital and, therefore, the provisions of Section 41(1) does not apply

CIT(A) View

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. The assessee aggrieved with the assessment order preferred appeal before the learned CIT(A).

On submission of facts & various case law references by the Assesee before learned CIT(A), the learned CIT(A) deleted the above addition made by the Assessing officer. Therefore, the Assessing Officer is aggrieved and is appealed before Hon’ble Tribunal.

Hon’ble ITAT’s View:

• Based on the exception carved out sub-clause (iii) of section 2(1B), the said merger of Celina into the appellant qualifies as an ‘amalgamation’ u/s 2(1B) and consequently all the exemptions provided in the Act should be available to the said merger. Due to the above exception, this clause is not applicable in the case of assessee company.
• In order to tax any amount u/s. 28(iv) of the Act, the following pre-requisites need to be satisfied:

_{a. there must be benefits 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. 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.
• It is 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.

Decision:

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, the provision of section 28(iv) of the Act is not applicable to the present case.