TMI Blog2010 (12) TMI 912X X X X Extracts X X X X X X X X Extracts X X X X ..... rly when existence of a company is legally finished, the benefit of assets held by it (including shares of other company) will pass on to its shares holders. Under the circumstances, it is fully agreeable with the view of the CIT(Appeals) and do not find any infirmity or illegality in his order. Against revenue. - ITA Nos. 1184 and 2460/Del/2008, - - - Dated:- 23-12-2010 - Rajpal Yadav, Shamim Yahya, JJ. Ajay Vohra, Adv. and Gaurav Jain, CA for the Appellant B. Kishore, DR for the Respondent ORDER Shamim Yahya:- 1. These appeals by the revenue are directed against the respective orders of the Ld. Commissioner of Income Tax (Appeals) pertaining to assessment years 2004-05 and 2005-06. 2. Since the issues involved are connected and the appeals were heard together. These appeals are being disposed of by this common order for the sake of convenience. 3. One common issue raised in both the appeals pertains to restricting the disallowance of Rs.1,14,17,833/- for assessment year 2004-05 and Rs. 1,75,62,196/- for assessment year 2005-06 made by the Assessing Officer on account of earning exempt income to 1/3rd. 4. For the assessment year 2004-05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause the income relevant to that is computed under specific section. If that is done the results obtained would be anomalous as happened in this case where 99.64% of the general expenses were allocated and held to be incurred for earning of tax free income from dividend and bonds. On the other hand it is noted that while allocating the expenses, the appellant has included sale value of securities in the turn over and worked out only about 6.23% of expenses attributable to huge tax free income. The allocations made both by Assessing Officer and by the appellant are not correct and are at two extremes. Proper allocation of expenses that can be attributed to different types of income can be done only if a balanced view is taken. 4.4 It is found that the expenses that are being allocated are those incurred by the erstwhile IIPL. That company earned income only from dividend interest and sale of investments. In other words it may been seen that IIPL was basically Investment Company which was managing investments. It may further be noted that it is a composite activity which results in the income by way of return on investment (dividend and interest) as also profit / loss on sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. We have heard both the counsel and perused the records. 7.1 We find that in this case Assessing Officer has noted that while allocating the expenditure towards exempt income the sale of securities and investments has been treated as turnover alongwith tax free income. In the computation statement the income from sale of investment has been computed under the head long term capital gain and short term capital gain. Therefore, for the purpose of allocation of expenditure the sale consideration of securities, the Assessing Officer has made the allocation to tax free income in the ratio of turnover other than sale of investments and securities. The said turnover was worked by the Assessing Officer at Rs.13,85,51,993/- out of which the tax free income was Rs.13,80,61,476/- which came to about 99.64% of the total turnover. Accordingly, the said percentage of the total expenditure was allocated towards tax free income and hence a sum of Rs.1,13,76,728/- was disallowed. Ld.Commissioner of Income Tax (Appeals) on the other hand found that the Assessing Officer's line of action is not proper. He has noted that allocation in the ratio of turnover is not justified because interests and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he share capital worth Rs. 14.70 crores was held by M/s Indrama Investment P Ltd. After the merger share capital of the assessee company is Rs. 6 crores. Share holding of Indrama Investment P Ltd. has been cancelled pursuant to the merger. As a result of merger more than 51% of share capital which was held earlier by M/s Indrama have reduced to NIL. Assessing Officer held that above change in the share holding pattern has resulted in violation of conditions laid down in section 79 of the Income Tax Act for allowability of set off of carried forward business loss. Assessee in response to query claimed that share holding continues to be with the same beneficiary holders of shares. Earlier these particular share holders were holding through M/s Indrama Investment P Ltd. whereas now they are holding more than 51% share directly. Therefore, it was claimed that provisions of section 79 have not been violated. Assessing Officer did not accept these contentions and he proceeded to disallow the claim of the assessee. 10. Upon assessee's appeal Ld. Commissioner of Income Tax (Appeals) elaborately considered the issue. He found that assessee's contention that section 79 was not applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lder to his relatives, as defined in section 2(41) of the Income Tax Act, 1961. It may be noted that the intention of legislature was not to clause hardship in genuine cases. Accordingly an exception has been provided by way of first proviso to Clause (a) of 79. We may examine the reason for change in shareholding from another point of view. When IIPL was merged into appellant company its existence came to an end which is akin to death of share holder. In case of death of a living person the shares held by him get transferred to his legal heirs. Similarly when existence of a company is legally finished, the benefit of assets held by it (including shares of other company) will pass on to its shares holders. Therefore there appears to be a change in the share holders of the appellant company holding more than 51% shares, because earlier IIPL was appearing in the list of share holders and now the individuals were the majority share holders. However, actually there was no change in the control and management of the company because even earlier the management of the appellant company was with the same persons who were share holders of the holding company IIPL as discussed earlier. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany continue to be the share holders of the amalgamated or the resulting foreign company." 15. Now examining the present case, we find that IIPL was holding 98% of the shares of the assessee company. On the other hand 100% shares of IIPL were held by four persons of the family who were having the control and management of the IIPL as well as of the assessee company. Because of the merger of IIPL into the assessee company, the former came to an end as a result of which the shares of amalgamated company were allotted to the share holders of IIPL. Thus, it is clear that there is no change in the management of the Company which remained with the same family (set of persons) who was earlier exercising control. The assessee submitted a list of directors on the Board of the two companies prior to merger as well as the directors on the Board of merged company. It remained in the same hands. Thus, the Ld. Commissioner of Income Tax (Appeals) is correct in holding that change in more than 51% was due to merger in two companies. There was no change in control and management. We also find considerable cogency in the part of the Ld. Commissioner of Income Tax (Appeals)'s adjudication where ..... X X X X Extracts X X X X X X X X Extracts X X X X
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