TMI Blog2012 (6) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... atment of sum transferred by the assessee to its General Reserve - Held that:- The amount of Rs. 2,899.68 lakhs transferred by the assessee to its General Reserve was not generated out of trading operations. The surplus in fact arose out of acquisition of capital assets. - It was a transaction in the capital segment. In fact, there is no surplus. It was only an accounting notion. It was necessarily to be reflected in the accounts so as to tally the balance sheet. - Even if the surplus is attributed to a capital transaction, there again section 47(vi) provides that any surplus arising in such cases of amalgamation cannot be brought to capital gains tax, as the act of amalgamation is not treated as 'transfer' for the purposes of section 45. - The sum of Rs. 2,899.68 lakhs is not in the nature of any benefit or perquisite and thus, not taxable u/s 28(iv) of the Income-tax Act, 1961. - IT Appeal No. 440 (Mds.) of 2011 - - - Dated:- 2-4-2012 - HARI OM MARATHA, N.S. SAINI, JJ. ORDER Hari Om Maratha, Judicial Member This appeal of the assessee, for assessment year 2002-03, is directed against the order of the ld. CIT, passed u/s 263 of the Act on 10.2.2011. 2. In nut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he erstwhile M/s Spencer's Industrial Fund Ltd and held by them for an aggregate amount of Rs. 43,88,77,240/- (comprising of listed securities Rs. 2,53,77,240/- and un-listed securities Rs. 41,35,00,000/-). Consequent upon the Merger, the said investments aggregating to Rs. 43,88,77,240/- of the erstwhile M/s Spencer's Industrial Fund Ltd were included in the investments in our books and were shown under the head "Investments". We therefore submit that we did not purchase these investments during the previous year but merely accounted for the same upon Merger of M/s. Spencer Industrial Fund Ltd with our Company. Further we would like to mention that M/s Spencer industrial fund Ltd did not have any borrowings from any Bank/Financial Institution at the time of its Merger in our Company. We therefore submit that the allegation made in the recorded reasons that we had purchased investments during the previous year from out of borrowed funds is wrong and without appreciating the facts available on records." 4. The Assessing Officer decided the objections raised against proposed re-opening vide order dated 15.02.2008, overruling the same. Finally, order u/s 143(3) r.w.s 147 was pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad "profits and gains of business or profession". From the above, it is clear that M/s. Spencer and Co. Ltd has benefited to the tune of Rs. 2899.68 lakhs on account of the scheme of amalgamation which requires to be treated as business income and taxed accordingly. This issue has not been considered by the AO at the time of completing the assessment u/s 143(3) of the Act. Hence the order passed by the AO is erroneous and prejudicial to the interests of the revenue. 5. In view of the above, you are requested to show cause why the assessment u/s 143(3) r.w.s 147 of the Act should not be revised, as it is erroneous and prejudicial to the interests of revenue." 5. Against the above show cause notice, a reply running in 26 pages was filed, a copy of which is enclosed in the paper book. The company challenged the proposed actions legally as well as on merits. The assessee-company's stand is that by not assessing the sum of Rs. 2899.68 lakhs as business income u/s 28(iv) of the Act no error has been committed by the Assessing Officer and concomitantly no prejudice to the interest of Revenue has been caused. A preliminary legal objection was raised that proceedings u/s 263, can be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence, he has held the assessment order as erroneous in so far as it was prejudicial to the interests of the Revenue and consequently, has set it aside with a direction to assess the amount of Rs. 2899.68 lakhs in the hands of the assessee as per law. Against this order dated 10.2.2011, the assessee-company is aggrieved and has raised the following grounds: "1. For that on the facts and in the circumstances of the case, the CIT was unjustified in law and on facts in passing an order of revision u/s 263 of the Act for A.Y. 2002-03 even though the period of limitation for passing of the revision order had long expired. 2. For that on the facts and in the circumstances of the case, the CIT erred in justifying the assumption of jurisdiction u/ s 263 beyond the period of limitation on the ground that the original return was processed u/s 143(1) and therefore, the period of limitation was to be determined with reference to date on which the order u/s 143(3)/147 was passed. 3. For that on the facts and in the circumstances of the case, the AO having initiated the reassessment proceeding for the purpose of making disallowance u/s 14A of the Act, the CIT was unjustified In holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany no benefit or perquisite either actually or notionally accrued to the appellant and therefore no income chargeable to tax could be assessed in the appellant's hand in A.Y.2002-03 u/s. 28(iv) of the I.T. Act, 1961. 10. For that on the facts and in the circumstances of the case, since the transaction in question was amalgamation within the meaning of Sec 2(IB) of the IT Act and further there being specific provisions in the Act dealing with "amalgamation" according to which such transaction was one of "acquisition" of a "capital asset", the CIT grossly unjustified in directing the AO to assess the sum of Rs. 2988.68 (sic 2899.68) lakhs as benefit or perquisite arising in the course of business. 11. For that on the facts and in the circumstances of the case, the order of the CIT directing the AO to assess Rs. 2688.68 (sic 2899.68) lakhs as income u/s 28(iv) be vacated because the assessment order passed by the AO was neither erroneous nor prejudicial to the interest of the revenue within the meaning of Sec 263 of the Act. 12. For that on the facts and in the circumstances of the case, the AO having followed one of the permissible course available to him in law the CIT wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 24.12.2008. The reopening was on account of disallowance of interest expenses in terms of section 14A. This issue even travelled upto the Tribunal. Subsequently, the ld. CIT called for the records of this assessment order dated 24.12.2008 on the premise that the Assessing Officer should have assessed the sum of Rs. 2899.68 lakhs as assessee's business income u/s 28(iv) of the Act, being the value of benefit arising from its business on account of the scheme of amalgamation which requires to be treated as business income and tax accordingly. This issue had not been considered at all by the Assessing Officer in the assessment order made for the first time on 24.12.2008. On this reason, the ld. CIT, gave a notice u/s 263 to show cause as to why the order should not be revised. After considering the contentions of the assessee, the ld. CTT has set aside the order dated 24.12.2008 with a direction to redo the same vide order dated 10.2.2011, which is assailed by the assessee to be beyond permitted limit as provided u/s 263. The essence of this issue is that in the re-assessment, there is no whisper about alleged benefit arising from the amalgamation. According to the ld. AR, the per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the return was processed and the fact regarding amalgamation of the companies approved by the Hon'ble Madras High Court was brought to the notice of the Assessing Officer, and he did not rake up this issue while processing the return or at best while making the re-assessment order because he was convinced that there was no such alleged benefit which have arisen and can be taxed as business income u/s 28(iv) of the Act. This issue becomes settled as on 19.7.2004, more particularly when this was not a ground for reopening as well. On the other hand, the crux of the submission of the ld. Jt. CIT/DR is that the assessment order made on 24.12.2008 is the first assessment order and the proceeding done on 19.7.2004 is not an assessment order. Hence, the limitation shall be counted with reference to 24.12.2008 and not 19.7.2004. 10. We have treaded through the relevant law and also the precedents on which both parties have relied upon and have also circumspectiously considered the minute nuances involved in this legal tangle. Section 263 of the Act provides in sub-section (2) a period of two years from the end of the financial year in which the order sought to be revised was passed for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axable income of the assessee has to be arrived at; ( ii ) Determination of the sum payable by the assessee on the income computed or the amount refundable to him thereon; and ( iii ) The service on the assessee of the notice of demands specifying the sum payable by him. 12. After 1.4.1989, the actual assessment proceedings are preceded by a stage which is in financial parlance known as pre-assessment in the sense that the assessee is required to comply with the other requirement of advance tax, TDS procedures et al. The pre-assessment stage assumes colossal overtures. Upto 31.3.1989, after return of income was filed, the Assessing Officer could make an assessment u/s 143(1) without requiring the presence of the assessee or production by him of any evidence in support of the return. But when the assessee would object to such an assessment or where the officer was of the opinion that the assessment so made was incorrect or incomplete or in a case where an Officer did not complete the assessment u/s 143(1), but wanted to make a further enquiry, a notice u/s 143(2) was to be issued to the assessee requiring him to produce the evidence in support of his return. After consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... understated the income or has not computed excessive loss or has not under paid the tax in any manner. In case the Assessing Officer does not get any aid or books of account and other information which may be in possession of the assessee and which could form the basis for a well reasoned assessment order, in cases where there is a failure to file return, failure to comply with all the terms of notice issued u/s 142(1), failure to comply with the direction u/s 142(2A) or special audit and failure to comply with all the terms of 143(2), the Assessing Officer is empowered to make best judgment assessment u/s 144 of the Act. 14. The Act provides for the machinery in Chapter XIV u/ss 147 to 153 for the assessment of escaped income in certain circumstances. The fundamental principle underlined these provisions is that in case income assessable in one assessment year has escaped assessment then in order to bring such escaped income to tax, the completed assessment is required to be reopened and it has to be redone in order to include the escaped income so that the income of that particular year is assessed accordingly. 15. After 1.4.1989, there has been a major change in the sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount which is not chargeable to income-tax ; ( b ) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; ( c ) where an assessment has been made, but - ( i ) income chargeable to tax has been under assessed ; or ( ii ) such income has been assessed at too low a rate ; or ( iii ) such income has been made the subject of excessive relief under this Act ; or ( iv ) excessive allowance or any other allowance been computed.] [ Explanation 3 . - For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.] 16. The existing legal interpretation that once an assessment has been reopened, any other income that has escaped ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n sub-section (2) of section 153, every such notice referred to in this clause shall be deemed to be a valid notice.] [ Explanation. For the removal of doubts, it is hereby declared that nothing contained in the first proviso or the second proviso shall apply to any return which has been furnished on or after the 1st day of October, 2005 in response to a notice served under this section.] [(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.]" 17. Since all the requirements laid down under these two sections have been clearly followed and the re-assessment proceedings are not under challenge in this appeal, we are not required to discuss in detail other aspects of the assessment proceedings. But the fact remains that the re-assessment was done in this case for the reason that disallowance u/s 14A resulted into escapement of income while processing the revised income. 18. Under section 263, the ld. CIT may call for and examine the records of any proceeding under this Act and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer cannot issue any notice after the expiry of four years from the end of the relevant assessment year unless the assessee has failed to disclose fully and truly all material facts necessary for his assessment for that assessment year. 20. In effect, as per the provisions of section 263(1), where an original order is rectified by an order of rectification, it ceases to exist and a rectified order comes into existence. After the date of rectification, there remains no original order in existence. The ld. CIT cannot exercise his power of revision with reference to the original order. Once an order of rectification is passed, the assessment itself is modified and what remains thereafter is, not the order of rectification but the assessment as rectified. In this regard, decisions of Hon'ble Madras High Court in the case of Vedantham Raghaviah v. Third Addl. Income-tax Officer, 49 ITR 314 and that of S. Arthanari v. First Income-tax Officer , 83 ITR 828, are relevant. Likewise, once the re-assessment order is passed, the original assessment order ceases to exist. In this regard, the decision of Hon'ble Madras High Court's decision rendered in the case of CIT v. Standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order is made, the original assessment order gets merged with the subsequent order and the date for computing limitation will have reference to the date of the subsequent order and not the previous order. Once the order is reopened, it is reopened for all practical purposes, so it cannot be said that when the intimation passed u/s 143(1) was reopened after recording reasons for escapement of a particular income, the limitation will start from the date of intimation, particularly in relation to a different kind of income which is the subject matter of revision. This is an illogical interpretation of the provisions of the Act. 22. The case of CIT v. Alagendran Finance Ltd., 293 ITR 1, is not applicable to the facts of this case. The Assessing Officer is not empowered to apply his mind while passing the intimation or processing the returns of income for a particular year. Therefore, the decision of Hon'ble Supreme Court ( supra ) will not apply to the facts of this case because in that case regular assessment u/s 143(3) had already been made and thereafter re-assessment was made in relation to certain items of income. Under the provisions of section 147, the power v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order which was made prior to making the assessment u/s 143(3)/147 (which was the first assessment order in this case). If for the sake of discussion we say that this case applies to the facts of this case, its ratio decidendi will go against the interest of the assessee. As per the ld. AR, the scope and nature of transaction under the scheme of amalgamation approved by the Hon'ble Madras High Court u/ss 391 to 394 of the Companies Act, 1956, SIFL was an independent company incorporated on 31.3.2001 having independent corporate identity. It owned numerous assets and liabilities of its own. It was an independent taxable entity and assessed to tax separately. By virtue of approval granted on 25.10.2002, the entire 'undertaking' consisting of assets, rights, privileges and liabilities of SIFL stood vested in the assessee-company with retrospective effect from 1.4.2001. Consequently, SIFL stood wound up automatically. Consequently, all the assets and all liabilities vested in the assessee-company by operation of law. All shareholders of SIFL automatically became entitled to be the assessee's shareholders. The assessee-company allotted one share of Rs. 10/- each against every 20 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the assessee had purchased stock exchange card issued by BSE and the cost of acquisition was shown at Rs. 2.8 crores on which it claimed depreciation. The assessee received shares in exchange of membership card. Such exchange was specifically kept outside the purview of section 45 because of the exemption provided by section 47(xiiia). But the Assessing Officer sought to assess the difference between the fair value of shares received and WDV of the stock exchange card by invoking section 28(iv) of the Act. On further appeal, the Tribunal held that the transfer of stock exchange card in lieu of the shares issued by stock exchange in the scheme of corporatization was not a transfer in view of section 47(xiiia) of the Act and therefore, no income as capital gains was chargeable to tax. The Tribunal has held that corporatization of the stock exchange was an independent event which did not occur in the course of the assessee's business. It was held that this transaction did not result in accrual of any benefit from the assessee's conduct of business. Finally, it was held that it was not a benefit or perquisite assessable as business income and therefore, no income could be brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is that the benefit or perquisite should necessarily arise from the business which the assessee carries on during the relevant previous year. It was argued that such a benefit or perquisite should not have remote nexus with business but should have direct and live and proximate nexus and it should not be nominal or notional. For invoking section 28(iv) it is imperative to prove the existence of a business which should have live nexus with the benefit or perquisite according to the assessee. In this regard, reliance was placed on the decision of Hon'ble Bombay High Court rendered in the cases of Mahindra Mahindra P. Ltd. v. CIT , 261 ITR 501, of Gujarat High Court in the case of CIT v. Alchemic P. Ltd (130 ITR 168) and of Hon'ble Delhi High Court in the case of Ravinder Singh v. CIT (205 ITR 353). Finally it was argued that in such circumstances the Assessing Officer has not committed any error by not making addition with reference to the entries passed in the books to give effect to the amalgamation of SIFL. 27. On the other hand, the ld. Jt. CIT/DR has repeated similar arguments as were recorded as reasons by the ld. CIT. 28. In those cases, there was an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , leases or agency and all other interests and rights in or arising out of such property together with all licenses, trade marks, import entitlement and other quotas, if any, held, applied for or as may be obtained hereafter by the Transferor Company or which the Transferor Company is entitled to and all debts, liabilities, duties and obligations of the Transferor Company of whatsoever kind." Clause 5 of Para II of the said Scheme further provided as follows: "Upon the Scheme being sanctioned by the Hon'ble High Court at Madras and transfer taking place as stipulated under Clause 1 hereof- ( a ) The Transferee Company shall, without further application, issue to SIHL, for itself as well as in behalf of its nominees, one (1) Equity Share of all the face value of Rs. 10/- each in the Transferee Company, credited as fully paid up for every Twenty (20) equity shares of the face value of Rs.10/- each held by them in the Transferor Company. The above ratio was arrived at based on the report of an external expert namely, M/s. Price Waterhouse Coopers. Such issue of shares shall be subject to the provisions of Clause 6(a) hereunder contained. ( b ) All debentures and loans held b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lgamation, as per the ld. CIT had to be assessed as business income only as per the provisions of section 28(iv) of the Act. 31. Before we deal with the merits of this case, we would like to detail the scheme of the Act regarding revision u/s 263 of the Act. It is trite that an order can be revised only and only if twin conditions of 'error in the order' and 'prejudice caused to the Revenue' co-exist. "The subject of 'revision under section 263' has been vastly examined and analysed by various Courts including that of Hon'ble Apex Court. The revisional power conferred on the CIT vide section 263 is of vide amplitude. It enables the CIT to call for and examine the records of any proceeding under the Act. It empowers the CIT to make or cause to be made such an enquiry as he deems necessary in order to find out if any order passed by Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue. The only limitation on his powers is that he must have some material(s) which would enable him to form a prima facie opinion that the order passed by the Officer is erroneous in so far as it is prejudicial to the interest of the Revenue. Once he comes to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT does not agree, it cannot be treated as an erroneous order, unless the view taken by the Assessing Officer is unsustainable under the law. ( vi ) if while making the assessment, the Assessing Officer examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income, the CIT, while exercising his power under section 263, is not permitted to substitute his estimate of income in place of the income estimated by the Assessing Officer. ( vii ) The Assessing Officer exercise quasi-judicial power vested in him and if he exercise such power in accordance with law and arrives as a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. ( viii ) The CIT, before exercising his jurisdiction under section 263, must have material on record to arrive at a satisfaction. ( ix ) If the Assessing Officer has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation be a letter in writing and the Assessing Officer allowed the claim on being satisfied with the explanation of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 559. It is an admitted fact that the Assessing Officer has not applied his mind to this aspect of the case at all, hence, in view of above discussed legal proposition, this is a pure case of non-application of mind by the Assessing Officer which, in turn, tantamounts to an error and this error has definitely resulted into jeopardizing the interests of the Revenue. Thus, both the conditions laid down in section 263 do co-exist in this case which makes the assessment order in question revisionable. 34. We will now discuss the other contentions of the assessee raised orally as well as in written submission before us. After considering the rival claims, we find that the call for a business restructuring can be met by amalgamations, mergers/demergers, slump sales etc. Each of the methods has its own pros and cones . In a merger, all assets and liabilities of the selling company become that of the purchasing company. 90% of the equity shareholders became shareholders of the purchasing company. The consideration is paid fully in the form of shares alone and fractional portion may be settled in cash. There must be an intention to carry on the same business. There should be a uniform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brother. After discussions with the learned brother, neither I have been able to persuade myself to concur with the opinion proposed in the draft order nor could convince my learned brother to agree with my point of view. I, therefore, proceed to write this separate and dissenting order. 37. The facts relevant to the issue, grounds of appeal taken in the appeal and submissions of the parties before us are recorded in the proposed order of my learned brother, and therefore, for the sake of brevity, I refrain from repeating the same except to the extent considered necessary hereinafter for the sake of convenience. 38. The undisputed facts of the case relevant to the first issue raised before us are that the revised return of income filed by the assessee on 23.11.2004 was processed under section 143(1) on 29.03.2004 and such return of income became final because of non-issuance of notice under section 143(2) of the Act by 30.11.2004. Subsequently, the return which became so final was re-opened by issuance of a notice under section 148 of the Act and in pursuance thereof assessment u/s 147/143(3) was completed on 24.12.2008. Thereafter, the impugned order under section 263 was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue in relation to that issue only, the time limit for section 263 is to be reckoned from the date of such order passed under section 147 or not? 40. In my considered opinion, the above issue is no more res intigra and the same is squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT v. Alagendran Finance Limited [2007] 293 ITR 1 as well as the decision of the Hon'ble Jurisdictional High Court in the case of CWT v. A.K. Thanga Pillai [2001] 252 ITR 260 (Mad) in favour of the assessee. In the case of Alagendran Finance Limited ( supra ), the Hon'ble Supreme Court observed that the CIT has exercised its revisional jurisdiction only in respect of lease equalization fund and the said lease equalization fund was not the subject matter of reassessment proceedings. Proceedings under section 147 had nothing to do with the income relating to lease equalization fund. In the above circumstances, it was held that the period of limitation provided under sub-section (2) of section 263 would begin to run from the date of original assessment and not from the date of reassessment The Hon'ble Supreme Court in the above decision has quoted the following w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... likes to probe if any other income has escaped assessment or not. The above view finds support from the decision of the Hon'ble Punjab Haryana High Court in the case of Vipan Khanna v. CIT [2002] 255 ITR 220. If shall be suffice to extract the followings from the aforesaid decision which is at page 234:- "Thus, we are of the considered view that as per the law laid down by the Apex Court in the case of Sun Engineering Works Pvt. Ltd . [1992] 198 ITR 297, when proceedings under section 147 of the Act are initiated, the proceedings are open only qua items of under assessment. The finality of the assessment proceedings on other issues remains undisturbed. According to us it makes no difference whether the assessment proceedings have become final on account of framing of an assessment under section 143(3) of the Act or on account of non-issue of a notice under section 143(2) of the Act within the stipulated period. The amendment made in sections 143 and 147 of the Act with effect from April 1, 1989, do not in any manner negate this proposition of law as enunciate by the Supreme Court in the case of Sun Engineering Works Pvt. Ltd. [1992] 198 ITR 297." To the above effect i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the consideration was paid in the form of allotment of shares by the amalgamated company to the shareholders of the amalgamating company. This is clear from para 5(a) of Part-II of the Scheme of Arrangement approved by the Court. The said shares were to be allotted by the assessee in the ratio of 1 share for every 20 shares held by the shareholders in the amalgamating company. In the financial accounts for the year ended 31.3.2002, the assessee gave accounting effect to the assets and liabilities taken over and the shares allotted to the shareholders of the amalgamating company. In Note No. 13 of the Schedule Q. of the audited accounts, the following disclosures were made by the assessee concerning accounting of amalgamation of SIFL:- In terms of a Scheme of amalgamation sanctioned by the Hon'ble High Court of Madras vide Order dated October 25, 2002, Spencer Industrial Fund Ltd. (SIFL) has been amalgamated with the Company with effect from April 1, 2001. In accordance with the said Scheme: ( i ) the assets, liabilities, rights and obligations of SIFL have been vested in the Company with effect from April 1, 2001 and hove been recorded at their respective fair values under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was adopted at about Rs. 57/- per share under the scheme approved by the Hon'ble Madras High Court. As the face value of shares was Rs. 10/-, the difference or premium of about Rs. 47/- per share works out to Rs. 2,899.68 Lakhs. This difference between the value of net assets taken over and the face value of shares allotted amounted to Rs. 2,899.68 lakhs was credited to the general reserve by the assessee in terms of the scheme approved by the Hon'ble Madras High Court. According to the CIT, the said amount of Rs. 2,899.68 lakhs is assessable under section 28(iv) of the Act as business income and the contention of the assessee is that it is not income at all and therefore not taxable. 45. From the above facts, I find that the entry of crediting of said amount of Rs. 2,899.68 lakhs in general reserve by the assessee in its books of account relates to the transaction of amalgamation of SIFL with the assessee company. Firstly, the amalgamation was in conformity with provisions of section 2(1B) of the Act. In terms of the order of the Court, the entire undertaking of the amalgamating company consisting of all assets and liabilities as on the date of amalgamation on going concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther convertible into money or not arising from business or the exercise of a profession" Thus, it is observed that the pre-requisites for applicability of the aforesaid provisions are firstly, there should be any benefit or perquisite arising in favour of the assessee. Further, the said benefit or perquisite should arise from business of the assessee. 49. In the instant case, it is observed that the fair value of a share of the assessee company as on the date of amalgamation was estimated by the valuer at Rs.57/- per share for the purpose of scheme of amalgamation by the valuer which was approved by the Hon'ble Madras High court. Accordingly, the aggregate fair value of 61,33,505 equity shares issued by the assessee company in respect of amalgamation transaction works out to Rs. 3,496 lakhs approx. The assessee company, in consideration of receipt of net asset of Rs. 3,513 lakhs issued own shares having fair value of Rs. 3,496 lakhs approx. Therefore, by no stretch of imagination it can be held that the assessee company received any benefit or perquisite of Rs. 2,899.68 lakhs in the above amalgamation transaction. The assessee company issued its own shares having fair value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same certainly will be assessed as business income and only because a transaction now undertaken will bring more commercial gain or benefit to the assessee in future does not entitle the CIT to treat the present transaction itself as benefit or perquisite arising from business and bring the value of the said transaction to tax by deeming the same as income under section 28(iv) of the Act. The grounds on which the CIT has invoked provisions of section 28(iv) is clearly untenable. In the present case the amalgamation between SIFL and the assessee was intended to result in larger company with larger resources enabling growth and development of business. It also envisaged that the amalgamation would result in increase in equity base which would improve the debt-equity ratio. The proposed amalgamation was also to enable the complementary business of both the companies to realize benefits for greater synergy by eliminating duplication of costs. However, with reference to these objectives which shows some benefit were likely to be achieved in future from amalgamation it cannot be said that the acquisition of the assets of SIFL resulted in realization of any present perquisite or benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before Section 28(iv) of the Act is invoked, it is necessary for the authority to ascertain the actual nature of the business of the assessee and to show that the value of benefit or perquisite accrued to the assessee from the actual conduct of that business. 52. Support for the above view can also be drawn from the decision of the Hon'ble Mumbai Bench of ITAT in the case of HDFC Securities Ltd v. ACIT (9 taxmann.com 23). In this case the assessee had purchased stock exchange card issued by BSE. The cost of acquisition was Rs. 2.8 crores on which it claimed depreciation. In the scheme of corporatization of BSE, the assessee received shares in exchange of membership card. The AO sought to assess the difference between the fair value of shares received and WDV of the stock exchange card by invoking Sec 28(iv) of the I T Act. The Tribunal inter alia held that corporatization of the stock exchange was an independent event which did not occur in the course of the assessee's business. Issue of shares in lieu of stock exchange card did not result in accrual of any "benefit" from the assessee's conduct of business. The Tribunal also held that the transaction was in the capital f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h) in the hands of amalgamating company due to transfer of assets to amalgamated company should also be taken into consideration in arriving at taxable income. It is not in dispute that in the assessment of the amalgamated company the income or loss of the amalgamating company for the A.Y. 2002-03 was also assessable. He submitted that different considerations cannot apply for assessment of income and assessment of loss. I find the above argument quite interesting at the first blush. But, on closer look, I find that it is not acceptable for two reasons. Firstly, as already stated above, in my considered opinion, no taxable income results from a mere transaction of amalgamation of two companies and Rs. 2,899.68 lakh is held by me as not taxable income in the hands of the assessee company. Secondly, it is an established position of law that no one can earn from himself or itself. On amalgamation which became effective on and from 1.4.2001, the assessee company and SIFL became one entity. Therefore, transaction between the same will not give rise to any taxable income or assessable loss. 54. Before concluding, I would also like to observe that in the instant case, the scheme o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er did not apply his mind while passing the assessment order u/s 143 r.w.s 147 would give a valid jurisdiction to the Id. CIT to revise that order or not?" Reference under section 255(4) of the income-tax act, 1961 As there is difference of opinion between the Members constituting the Bench, the same is being referred to the Hon'ble President with a request to nominate Third Member to resolve the difference. The points of difference are as follows: 1. Whether the order passed by the Id. CIT u/s. 263 in the given case is barred by limitation or not ? 2. Whether, on the facts and circumstances of the case any prejudice was caused to the interest of the Revenue by the order passed under section 147 of the Act by the Assessing Officer ? 3. Whether, on the facts and circumstances of the case, there was any error in the order passed u/s 147 of the Act on 24.12.2008 by the Assessing Officer, which can be considered as erroneous, in so far as prejudicial to the interest of the Revenue? 4. Whether, on the facts and circumstances of the case, the Id. CIT was justified in holding that Rs. 2899.68 lakhs was income assessable in view of the provisions of section 28(iv) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e question of disallowance of expenditure under section 14A. The limitation is to be computed from the date of processing of the revised return under section 143(1), made on 19-7-2004. Therefore, the notice issued under section 263 is barred by limitation. 2. The proper head of income under which the income arising from the amalgamation of two companies could be assessed was 'capital gains' and not 'profits and gains of business'. 3. A benefit or perquisite that does not arise from carrying on of a business activity by the assessee, but arises in the course of acquiring a capital asset, is not taxable under section 28(iv). 4. Creation of reserve in the books of an amalgamated company to give accounting effect to the amalgamation does not represent income chargeable to tax. 7. The Commissioner of Income-tax considered the objections raised by the assessee and also the judicial pronouncements relied on by the assessee. The assessee had placed reliance on the decision of the Hon'ble Supreme Court rendered in the case of CIT v. Alagendran Finance Ltd., 293 ITR 1. This is with reference to the issue of notice under section 263. The Commissioner of Income-tax distingu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he objections raised by the assessee and directed the Assessing Officer to assess the amount of Rs. 2,899.68 lakhs in the hands of the assessee company. 11. It is against the above revision order of the Commissioner of Income-tax that the assessee company has come in appeal before the Tribunal. 12. A Division Bench of this Tribunal, consisting of Hon'ble Judicial Member and Hon'ble Accountant Member, heard the appeal. The assessee had taken two sets of grounds before the Tribunal, one relating to limitation and the other relating to merits. The learned Judicial Member agreed with the view taken by the Commissioner of Income-tax and dismissed the appeal filed by the assessee company. He held that the limitation period has to be computed from 24-12-2008, being the date of passing the first assessment order under section 143(3), read with section 147. Accordingly, he held that the order passed under section 263 of the Act is not barred by limitation. Regarding the merits of the case, the learned Judicial Member held that the failure on the part of the assessing authority even to look into the matter of surplus credit in the General Reserve Account, has made the assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rquisite of Rs. 2,899.68 lakhs in the amalgamation process. He has pointed out that the assessee company issued its own shares having fair value of Rs. 3,496 lakhs. But the face value of the shares so issued being Rs. 613.30 lakhs, the excess of fair value over face value of Rs. 2,899.68 lakhs had to be credited in the General Reserve. But for this no gain was made by the assessee company. 16. The learned Accountant Member further held that the surplus cannot be treated as income under section 28(iv) of the Act. For the purpose of section 28(iv) the benefit or perquisite must arise from business or exercise of profession. The phrase 'arising from business' in the context of section 28(iv) contemplates not only some connection with the business undertaking of the assessee, but it envisages that the benefit or perquisite must arise from actual conduct of the business itself. The benefit or perquisite should be in the nature of trade receipt. In order to invoke section 28(iv), it is not sufficient to show that some capital asset has been acquired by the assessee, which has resulted in accrual of benefit or perquisite, that too in future. Ultimately, he held that the alleged amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eard Shri Dilip S.Damle, the learned chartered accountant appearing for the assessee, and Shri R.B.Naik, the learned Commissioner of Income-tax appearing for the Revenue. 24. The learned chartered accountant has raised all those grounds raised before the Division Bench. Therefore, those arguments and other premises are not repeated for fear of platitude. In short, the argument of the learned chartered accountant is that the reserve created by the assessee company to give effect to the amalgamation in the annual account, did not represent its income assessable under section 28(iv) of the Act. The sum of Rs. 2,899.68 lakhs, in fact, represented the difference between the face value of shares allotted to the shareholders of the amalgamating company and the value of 'net assets' taken over on amalgamation. The reserve accounted in company's books was nothing but an accounting adjustment carried out in assessee's books to balance the assets and liabilities side of the Balance Sheet, and, therefore, no real income could be assessed under section 28(iv) with reference to the sum of Rs. 2,899.68 lakhs. 25. On conclusion of the hearing, the assessee has also caused to file a copy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the revisional jurisdiction of the Commissioner of Income-tax under section 263 of the Act. This authority of the Commissioner of Income-tax cannot be denied on the ground that the issue considered in the income-escaping assessment and the issue proposed to be considered in the revision are different. The authority of the Commissioner of Income-tax is not issue-based. His authority is proceeding-based. 31. Another important point is that all the proceedings prior to the passing of the assessment order under section 143(3), read with section 147, have been merged with the assessment order passed under section 143(3), read with section 147. Therefore, it is to be seen that no proceeding exists before the Commissioner of Income-tax, other than the latest proceeding of assessment concluded under section 143(3), read with section 147. Therefore, genetically itself, the Commissioner of Income-tax is competent to exercise his jurisdiction under' section 263 on the income-escaping assessment order passed by the Assessing Officer under section 143(3), read with section 147. 32. Moreover, the income-escaping assessment order passed by the Assessing Officer under section 143(3), rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. The reference of the order is [ITA Nos. 1526 to 1530 and 2056(Mds)/2010]. In the above case of M/s.Quintegra Solutions Ltd., an exactly similar case of amalgamation was considered by the Tribunal. The issue was whether section 28(iv) was applicable or not. In that case, pursuant to amalgamation of two companies, the amalgamated company had issued its equity shares to the shareholders against the value of 'net asset' taken over. The differential amount between the two figures was adjusted in the books of the amalgamated company by way of 'goodwill'. The amount of goodwill credited in the books of the amalgamated company for giving accounting effect to the amalgamation, was assessed by the assessing authority as benefit or perquisite arising in the course of business under section 28(iv) of the Income-tax Act, 1961. In first appeal, the Commissioner of Income-tax(Appeals) agreed with the contention raised by the assessee that the differential amount between the face value of the shares allotted and the value of net assets taken over did not represent any income assessable under section 28(iv) because such amount was merely a balancing figure adjusted in the books of the amalgamate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stated remand report, the Commissioner of Income-tax (Appeals) deleted the addition. 4.3. We do not find any merit in the ground raised by the Revenue in the present appeal. There is no doubt that the amalgamation was authorised by the High Court. The relevant particulars were filed before the lower authorities. The balancing figure has been correctly worked out. The assessing authority himself has fairly admitted in his remand report that the said balancing figure cannot be treated as income taxable under section 28(iv). We find that there is no merit in the ground raised by the Revenue. 4.4. The appeal for the assessment year 2003-04 in ITA No. 1527(Mds)/2010 is liable to be dismissed." 39. I find that the issue agitated in this Third Member Case is squarely covered by the order of the co-ordinate Bench, in which myself was a party, who, in fact, has authored that order. 40. The learned Judicial Member has relied on the judgment of the Hon'ble Madras High Court in the case of Commissioner of Income-tax v. Aries Advertising Pvt. Ltd. , 255 ITR 510, as the anchor of his reasoning to decide the issue against the assessee by holding that the amount is taxable under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to be accounted at its net worth value as taken over by the assessee company. As already stated, the assets are compared to the market value of the shares of the assessee company. The face value is obviously less. Therefore, in such a transaction of amalgamation, there is inherent possibility of the assessee gaining a "book surplus" being the difference between the market value and the face value of the shares. This is not in the revenue segment and not in the nature of any benefit or perquisite. Therefore, section 28(iv) does not apply to the case even remotely. Therefore, the decision of the Hon'ble Madras High Court in the case of CIT v. Aries Advertising Co. Pvt Ltd. 255 ITR 510, relied on by the learned Judicial Member, is not applicable to the present case. 41. Even if the surplus is attributed to a capital transaction, there again section 47(vi) provides that any surplus arising in such cases of amalgamation cannot be brought to capital gains tax, as the act of amalgamation is not treated as 'transfer' for the purposes of section 45. 42. As held by the Tribunal in the case of M/s.Quintegra Solutions Pvt. Ltd., the sum of Rs. 2,899.68 lakhs is only a balanci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Member to hold that the order passed by the Commissioner of Income-tax under section 263 of the Act in this case is not barred by limitation and I agree with the learned Accountant Member to hold that the sum of Rs. 2,988.68 lakhs is not in the nature of any benefit or perquisite and thus not taxable under section 28(iv) of the Income-tax Act, 1961. The two questions referred to me are answered in the above manner. 45. Now, this case will be placed before the Regular Bench to pass concluding orders on the basis of majority view. ORDER N.S. Saini, Accountant Member - There being difference of opinion between Members constituting the Bench, the matter was referred to Third Member under section 255(4) of the Act for deciding the difference in opinion: 2. The Hon'ble Vice-President, sitting as the Third Member, has framed the following two issues for deciding the points of difference between the Members constituting the Bench: "1. Whether the Commissioner of Income-tax is justified in initiating action under section 263 of the Income-tax Act, 1961? And 2. Whether the sum of Rs. 2,899.68 lakhs transferred by the assessee to its General Reserve on amalgamation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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