9911796707
TMI Blog2012 (6) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... s 148 was issued to the assessee-company after obtaining the requisite approval of Addl. CIT, Range VI, on 26.9.2007 to disallow interest u/s 14A. At the request of the assessee-company, a copy of reasons recorded by the Assessing Officer was supplied to the assessee vide letter dated 19.11.2007. The reasons for reopening are as under: "That you had incurred interest expenses to the tune of Rs. 3,38,38,6651/- on an accumulated loan amount of Rs. 31,92,55,749/- whereas the funds amounting to Rs. 9,60,70,1481/- and Rs. 43,51,29,845/- have been given as loans and made as investments respectively to/in subsidiary/associate companies. As there is direct nexus between loans obtained and investments made, expenditure incurred in relation to income not includible in total income (assessable) shall not be deductible under Section 14A. In the above said circumstances, initiation of proceedings under Section 147 is set in motion to re-compute income for AY 2002-03 thereby to assess the interest expenditure of Rs. 3,38,38,6651/- which has escaped assessment". 3. The main objection of the assessee-company was as under: "a. First of all we would like to submit that during the previous year re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opening of assessment, an adjudication order was passed on 15.02.2008 overruling the objections. Finally, order u/s 143(3) r.w.s. 147 of the Act was passed on 24.12.2008 disallowing interest u/s 14A of the Act to the tune of Rs. 2,56,53,000/- and assessed the total income at Rs. 4,86,14,640/-. 3. From a perusal of the records, it is seen that the amalgamation of M/s Spencer Industrial Fund Ltd. (transferor company) with M/s. Spencer and Co. Ltd. (transferee company) w.e.f 01.04.2001 pursuant to the order of the Hon'ble Madras High Court dated 25.10.2002 provides among other things as under: The net fair value of assets of the transferor company as reduced by the paid up value of shares to be issued and allotted by the transferee company pursuant to this scheme shall be adjusted with the General Reserves in the books of account of the transferee company." In accordance with the above provision, the rights and obligations of M/s. Spencer Industrial Fund Ltd. have been recorded at their respective face values under the "purchase method of accounting for amalgamation". Thus, the excess of fair value of net assets taken over by the company over the paid up value of equity shares amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, proceedings u/s 263 on this issue, as detailed in the show cause notice, should have been initiated within two years from 31.3.2005, because the return was processed u/s 143(1) on 19.7.2004. However, no revisional proceeding u/s 263 was initiated on or before 31.3.2007. Hence, this action of the ld. CIT is barred by limitation. 6. On merits, it was stated that the company namely, M/s Spencer Industrial Fund Ltd (SIFL) got amalgamated with the assessee-company with effect from 1.4.2001 by virtue of an order of the Hon'ble Madras High Court in Petition Nos.207 and 208/2002 [Connected Comp. Appln. Nos.983 & 1008/2002]. Pursuant to the amalgamation, the assets and liabilities and rights and obligation of SIFL vested in the assessee-company which were recorded in the company's books at their fair values under the "Purchase method of accounting for amalgamation". The excess of fair value of net asets taken over by the assessee-company over the paid up value of equity shares was computed at Rs. 2899.68 lakhs which was transferred to the General Reserve of the assessee-company, which is evident from page 19 of the Annual Report under Schedule B - Reserves and Surplus. According to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant u/s 28(iv) of the Act. 6. For that on the facts and in the circumstances of the case, the accounting entries regarding creation of reserve and takeover of the assets and liabilities having been made in the accounts to give effect to the approved scheme of amalgamation of Spencer Industrial Fund Ltd sanctioned by the Madras High Court, the CIT was unjustified in holding that the Reserve created in the books of the amalgamated company represented benefit or perquisite arising from carrying on of a business, assessable u/s 28(iv). 7. For that on the facts and in the circumstances of the case, the appellant not being in the business of acquiring companies or undertakings through amalgamation, the CIT was grossly unjustified in holding that the General Reserve created in the books to give effect to amalgamation was benefit or perquisite accruing to the appellant in the course of carrying on of business. 8. For that on the facts and in the circumstances of the case, the creation of reserve having been created in the course of a transaction carried out by the appellant for taking over "undertaking" of the amalgamating company, the CIT should ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction by the ld. CIT. Let us examine this contention of the ld. AR, Shri Dilip S. Damle vis-à-vis the facts culled out on record. Undisputedly, the assessee-company had filed return of income u/s 139(1) for assessment year 2002-03, on 30.10.2002. A revised return was filed consequent upon amalgamation approved by the Hon'ble Madras High Court on 25.10.2002 whereby SIFL was ordered to be amalgamated with the assessee-company, with a view to incorporate the operational results of the amalgamating company for financial year 2001-02 [corresponding assessment year 2002-03] because the decision of the Hon'ble High Court was effective from 1.4.2001. The assessee company revised its return u/s 139(5) by filing a return on 23.11.2003 disclosing information regarding amalgamation of SIFL with it. The returns filed u/s 139(1) and 139(5) were processed u/s 143(1). Precisely, the revised return was processed u/s 143(1) on 19.7.2004. Thereafter, the Assessing Officer believed that income chargeable to tax has escaped assessment so, he recorded the requisite reason u/s 148(2), that disallowance u/s 14A was required to be made out of interest paid. Thus, in Assessing Officer's opinion, tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Madras High Court reported in 264 ITR 269. Apart from the above, the ld. AR has also relied on other decisions which we will discuss later. 8. On the other hand, the case of the ld. DR, Shri R. Clement Ramesh Kumar, is that as stated in the written submission filed by the assessee in regard to show cause notice, the ld. CIT has proceeded to revise the order dated 24.12.2008 passed u/s 143(3) r.w.s 147 of the Act. He categorically submitted that the Assessing Officer has not at all touched the impugned issue in his order dated 24.12.2008. According to him, the processing of return of income u/s 143(1) is simply an intimation and cannot be treated as an assessment order. The assessment order was framed for the first time on 24.12.2008 and therefore, the limitation would start from that date and not from 31.3.2005 (143(1) passed on 19.7.2004). He has referred to the amalgamation and has submitted that the differential amount of Rs. 2899.68 lakhs by which the assessee was benefited on account of this scheme of amalgamation was not at all touched, discussed, or decided by the Assessing Officer. He has also relied on some decisions to substantiate his contention. 9. After c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any proceeding under this section is stayed by an order or injunction of any court shall be excluded." 11. Before we discuss and decide the issue, we may mention that in case the relevant date is found to be 19.7.2004, the limitation to raise this issue has expired long back but in other case, if the limitation starts from the re-assessment order dated 24.12.2008 the order in question is well within the limitation. It would be beneficial to understand the scheme of the Act regarding making assessment, re-assessment and revision so that this issue can be set at rest by passing a reasoned order. Sections 143 to 145 of the Act lay down the provisions dealing with the processes which should be the culmination of the first but a crucial stage dealing with the very object and purpose of the Act, viz. the determination by the Assessing Officer of the total income and tax payable by an assessee in any assessment year. The Act clearly provides, for the purpose of making assessment or re-assessment, a complete code which is contained in Chapter XIV except for the undisclosed income found as a result of search or requisition, which is the subject matter of Chapter XIVB of the Act. The word ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. But there was some confusion to understand the scope of this provision of making prima-facie adjustments in a judicious manner which resulted in multiplicity of proceedings by way of appeals and/or rectifications, etc. Resultantly, this provision was given go by with effect from 1.6.1999. By Finance Act, 1999, with effect from 1.6.1999, a new section 143(1) was substituted where under if the return has been filed u/s 139 or in response to notice u/s 142(1) 'intimation' shall be sent to the assessee specifying the sum payable by or refundable to him or in other cases acknowledgement of the return shall be deemed to be the 'intimation'. The period of limitation for sending such intimation u/s 151 is two years from the end of the assessment year in which the income was first assessable. The remedy against such intimation shall be by way of rectification as per the provisions of section 154(1)(b) of the Act. 13. Now coming to assessment proceedings u/s 143(3) which are commonly known as regular assessment proceedings. Assessment could be made even in respect of assessment made under pre-1989 section 143(1) provided the Assessing Officer would consider it necessary or expedient to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: [Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.] Explanation 1. - Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139 :] Provided that in a case- (a) where a return has been furnished during the period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005 in response to a notice served under this section, and (b) subsequently a notice has been served under sub-section (2) of section 143 after the expiry of twelve months specified in the proviso to sub-section (2) of section 143, as it stood immediately before the amendment of said sub-section by the Finance Act, 2002 (20 of 2002) but before the expiry of the time limit for making the assessment, re-assessment or recomputation as specified in sub-section (2) of section 153, every such notice referred to in this clause shall be deemed to be a valid notice: [Provided further that in a case- (a) whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year." Apparently, from the above proviso, it appears that it is applicable only for the assessments which have been made u/s 143(3) or u/s 147 but in cases of assessment u/s 143(1) no limitation would apply. In principle, in cases where an intimation u/s 143(1) is not valid by an order u/s 143(3), there would be no difference underlined i.e the assessment is completed for that assessment year. This is further verified by the amendment made to section 143 wherein an Explanation has been added by the Finance (No.2) Act, 1991 with effect from 1.10.1991 whereby such an order u/s 143(1) has been specifically made liable to revision u/s 264 of the Act. Further, the scope of this Explanation was expanded by the Finance Act, 1994 with effect from 1.6.1994 whereby such an order u/s 143(1) has been specifically made appealable u/s 236 of the Act. This situation would apply for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as admittedly said to consist of the office of the Chief Engineer, Industrial Engineering Department, drawing office, etc. Consequently the necessary drawings connected with the work of 'the factory was being done in this block. In such circumstances the administrative building could be considered only as part and parcel of the factory buildings. Similarly latrines, compound walls, workers' gate, etc., were also factory buildings. The Tribunal was, therefore, justified in its view that the administrative buildings, latrines, compound walls, etc., were entitled to a higher rate of depreciation. In order to find out whether a particular structure or construction falls within the category of factory buildings or not, the court has to approach the question from the functional point of view." 21. Likewise, the case of Hon'ble Supreme Court in the case of Kundanlal v. CST, Tax LD.AR 2094 S.C also states the similar view. We may make it clear that circumstances in which an order u/s 147 and order u/s 154 can be passed are not mutually exclusive and may overlap. There is nothing in the provisions of these two sections to suggest any conflict between them of such a nature that the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 304, was rendered before the amendment/substitution of section 143(1). At that time, the summary assessment order was made u/s 143(1)(a) of the Act. This decision was rendered when the Tribunal put a view that the ld. CTT had no jurisdiction to revise the order passed in summary assessment. The Hon'ble Madras High Court by following its own earlier judgment in the case of CIT v. Smt. R.G. Umaranee, 262 ITR 507, held that even summary assessment could be revised u/s 263 of the Act. Since there is no longer such summary assessment as per the provision in the Act, this decision will not apply to the given facts of this case. 24. Reliance was placed on the decision of Hon'ble Supreme Court rendered in the case of CIT v. Alagendran Finance Ltd, 293 ITR 1. The facts of that case are that assessee for various assessment years were completed u/s 143(3). The question framed for the answer by the High Court was as under: "As to whether in the facts and circumstances of the case, the revision u/s 263 should be done by taking into account the date of the original assessment order under section 143(3) and not the order of re-assessment under section 147 read with section 143(3) of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any, income would arise can be charged to tax under the head 'capital gains' and not under the head 'profits and gains of business'. Anyway, the argument of the ld. AR is that if any income accrued or arose from this transaction, it would be assessable in the hands of transferor and not the transferee(assessee) as per the provisions of section 55 of the Act and not under Sections 28 to 44 of the Act. But it was clarified that this amalgamation did not result any capital gains to the transferee either because in this case transfer of the following assets was involved: (i) amalgamation of 'undertaking' which constituted a 'capital asset' (ii) The shareholders of the amalgamating company were allotted shares of the amalgamated company because of the scheme of amalgamation and that too result into 'capital of asset' being the shares of the amalgamating company. 25. It was argued that no such capital gain arises although capital asset is transferred in view of section 47(iv) of the Act. The case as put forth by the ld. AR is that consequent on transfer of the 'undertaking' of the amalgamating company 'capital asset' owned by SIFL became the assessee-company's capital as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. The outside shareholders of the amalgamating company were allotted shares of the amalgamated company i.e the assessee. In the books of amalgamated company entries were passed to give effect to the amalgamation consequent to which a 'capital reserve' was recognized and accounted for in the books of account of the assessee. The assessee claimed that the transaction in question was an amalgamation within the meaning of section 2(IB) of the Act therefore, no profit or gain was assessable in the hands of the transferee. The Assessing Officer was not agreeable and held that what was approved by the High Court was a composite Scheme of Arrangement not amounting to amalgamation within the meaning of section 2(IB). So, he assessed the sum of Rs. 6.43 crores recorded as capital reserve in the books of the amalgamated company as 'income from other sources'. On appeal, the ld. CIT(A) and Tribunal held that the Scheme of Arrangement was approved by the Hon'ble Madras High Court which also deals with the amalgamation. It was further held that all conditions of section 2(IB) were fulfilled and it was a case of amalgamation. So, no income was assessable in the hands of the assessee being the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue cannot be allowed and stands dismissed. On merits: 29. On merits, the facts of the case are that the amalgamation of the assessee-company with SIFL took place as approved by the Hon'ble Madras High Court vide its judgment/order dated 25.10.2002 and the scheme of arrangement was provided as follows: "With effect from the Appointed Date", the "Undertaking" of the Transferor Company shall, without further act or deed, be transferred to and vest in an shall in and shall be deemed to have been transferred to and vested in the Transferee Company pursuant to section 394 of the act as a going concern, subject however, to all charges, liens, mortgages, if any, then affecting the same or any part thereof." The expression 'Undertaking of the Transferor Company' was defined in Clause E of Part I of the Scheme as follows: "Undertaking of the Transferor Company" means and includes: (i) All the properties, investments, assets and liabilities of the Transferor Company immediately before the amalgamation, including the Business as a going concern. (ii) Without prejudice to the generality of the foregoing clause, the said Undertaking shall also include all rights, powers, int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 become the property of the amalgamated company by 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 by virtue of the amalgamation, (iii) Shareholder holding not less than (three fourths) in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alteram partem as envisaged in the Constitution of India as well in section 263. As order can be treated as 'erroneous' if it was passed in utter ignorance or in violation of any law; or passed without taking into consideration all the relevant facts or by taking into consideration irrelevant facts. The 'prejudice' that it contemplated under section 263 is the prejudice to the Income Tax administration as a whole. The revision has to be done for the purpose of setting right distortions and prejudices caused to the Revenue in the above context. The fundamental principles which emerge from the several cases regarding the powers of the CIT under section 263 may be summarized below: (i) The CIT must record satisfaction that the order of the Assessing Officer is erroneous and prejudicial to the interests of the revenue. Both the conditions must be fulfilled. (ii) Section 263 cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer and it is only when an order is erroneous, that the section will be attracted. (iii) An incorrect assumption of facts or an incorrect application of law will suffice for the requirement or or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rement that business of the transferor company should be carried on by the transferee company (the assessee). As a result of amalgamation, there was increase in Net Asset value (NAV) on account of the scheme and the same was completed as per the business expediency which resulted into increase in General Reserve to the tune of Rs. 2899.68 lakhs. Section 28(iv) of the Act reads as under: "Profits and gains of business or profession. 28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",- ** ** ** (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;]" 33. Now, we have to see whether the assessee has got any profit or benefit out of this transaction or not. If we analyze the facts of this case, we can clearly understand that this amalgamation scheme was to augment the business of the assessee-company and definitely to be benefited by this scheme. This transaction can be read as a 'business expediency', transaction done by the assessee and thus the excess NAV credit or General reserve are to be assessed u/s 28(iv) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28(iv) of the Act. The Hon'ble Madras High Court in the case of CIT v. Aries Advertising Pvt. Ltd. 255 ITR 510, has held that transfer of any amount to the General Reserve is to be treated as profits of business. This decision has a binding effect on all the authorities operating in Tamil Nadu. We may further mention that the above decision was rendered after following the decision of Hon'ble Supreme Court rendered in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT 132 ITR 559. In our considered opinion, the ld. CIT has correctly come to the conclusion that since the Assessing Officer has not applied the provisions of section 28(iv) on this amount at all, order of the Assessing Officer is erroneous and also prejudicial to the interests of the Revenue. There is a distinction between 'lack of inquiry' and 'inadequate inquiry'. If there is any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263, merely because he has a different opinion in the matter. In this regard, the recent decision of Hon'ble Delhi High Court rendered in the case of CIT v. Sunbeam Auto Ltd. 332 ITR 167, is relevant. Accordingly, we confirm setting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,899.68 lakhs credited by the assessee in general reserve by treating the said amount as income by invoking provisions of section 28(iv) of the Act. In other words, subject matter of impugned order passed u/s 263 is quite distinct and different from the subject matter of re-assessment order passed u/s 147 of the Act on 24.12.2008. On the above facts and circumstances of the case, the first issue which fell for our consideration is whether the impugned order passed on 10.02.2011 under section 263 of the Act is barred by limitation or not. 39. In the instant case, it is also not in dispute that period of limitation provided in sub-section (2) of section 263 if reckoned from the date of order passed under section 147 then the impugned order will be within time otherwise the same will be barred by limitation and bad in law. I would also like to clarify that we are, in the instant case, not concerned with the issue that where the return of income has acquired finality because of non-issuance of notice under section 143(2) within the prescribed time, whether such assessment or deemed assessment can be revised by the CIT by invoking provisions of section 263 of the Act or not. The issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d tax earlier Cases of under assessment are also treated as instances of escaped assessment. The Revenue is similarly bound......." 41. The contention that since no regular assessment under section 143(3) was framed in the instant case before passing of the order under section 147/143(3) of the Act on 24.12.2008 and as the said order passed under section 147 was the first regular assessment in the instant case, therefore, irrespective of the Issue involved in the proceedings under section 147, the CIT can pass order under section 263 in respect of any issue whether the same was subject matter of proceedings under section 147 or not and the time limit for passing order under section 263 even in respect of issues which were not the subject matter of proceedings under section 147 will also begin to run from the date of passing of order under section 147, in my considered opinion has no force. It is a well settled position that even in cases where return has acquired finality only after processing under section 143(1) of the Act because of non-issuance of notice under section 143(2) within the prescribed time, the scope of proceedings u/s 147 is limited to the assessment of income esc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the date of 147 order and consequently, the same was passed beyond the time limit provided in the statute and therefore, bad in law and is accordingly, quashed. 43. The next issue relates to treating of Rs. 2,899.68 lakhs as business income under section 28(iv) of the Act in a proceeding initiated under section 263 of the Act. In the impugned order u/s 263 of the Act, the CIT has held that a sum of Rs.2899.68 lakhs credited to the general reserve by the assessee was chargeable to tax in the hands of the appellant as perquisite or benefit accruing to it in the course of business assessable u/s 28(iv) of the Act. 44. The facts relevant to this issue are that the SIFL was a wholly owned subsidiary of Spencer International Hotels Limited, which in turn was a wholly owned subsidiary of the assessee company. In other words SIFL was a step down subsidiary of the assessee and within the provisions of section 4 of the Companies Act, SIFL was also a subsidiary of the assessee. The said SIFL amalgamated with the assessee company. From the scheme of the amalgamation, which is placed at page nos. 76 to 101 of the paper book, which was approved by the Hon'ble Madras High Court it appeare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity shares in Spencer and Company Ltd. (613.35) Cancellation of Debentures issued to Spencer And Company Ltd. (530.00) Current account with Spencer and Company Limited (18.19) Special Reserve Fund (5.26) (1,166.80) Balance transferred to General Reserve 2,899.68 (iv) Had the said Scheme not prescribed the above treatment, an amount of Rs 2,899.68 lakhs would have been credited to Capital Reserve instead of General Reserve as required by the Accounting Standard 14 (AS-14) 'Accounting for amalgamations'. (v) Till the date of amalgamation, the core business of SIFL was investment activity. (vi) Consequent to the order of Hon'ble High Court of Madras, the Authorised Share Capital of the Company will be increased to Rs. 12 Crores comprising of 12,000,000 equity shares of Rs. 10 each. After setting off of the value of liabilities from the fair value of the assets taken over by the assessee, the net sum of Rs. 3513.03 lakhs was payable by way of consideration for taking over the undertaking of SIFL. The said consideration was fully satisfied by the assessee by issuing 61,33,505 nos. of equity s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net asset of Rs. 3,513.03 lakhs. The assessee has credited face value of the shares amounting to Rs. 613.35 Lakh in share capital account and credited the balance of Rs. 2,899.68 in general reserve account in accordance with the scheme approved by the Hon'ble Madras High Court. 47. In view of the above facts in my considered opinion Rs. 2,899.68 lakhs represents premium value of shares having face value of Rs. 613.35 lakhs issued by the assessee company. The same represents difference between the fair value and face value of shares issued by the assessee company. The same is of the nature of share premium received by a company on issue of its own share capital which is capital in nature. It is an established position of the law that the character of a receipt does not depend upon the accounting treatment given by the assessee in its books of account and tax is to levied as per the actual character of the receipt and not merely on the basis of accounting treatment given by the assessee to that receipt in its books of account. 48. According to the CIT, the said amount of Rs. 2,899.68 lakhs is to be treated as income chargeable to tax within the meaning of section 28(iv) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alleged benefit or perquisite and the business actually carried on by the assessee. The nexus or the proximate cause must be real, immediate and not illusionary or imaginary. The benefit or perquisite contemplated by S.28(iv) must necessarily have a live connection with the business carried on by the assessee and the benefit must accrue or arise in the course of carrying on of such business. The benefit or perquisite should be in the nature of trade receipt. The nature of assessee's business during the year under consideration as stated in the order of assessment is "Bread franchisee operations, property rentals and licence fees". It is admitted position that the amount of Rs. 2,899.68 lakhs in question has not arisen from the aforesaid business activity of the assessee. In the impugned order, the CIT has alleged that by virtue of amalgamation of the undertaking, the assessee company was likely to derive in future certain commercial gains and benefits and for this reason he has held that income was chargeable u/s 28(iv) because the acquisition of business undertaking was to provide the assessee with economic advantages at future unspecified date resulting in increase in profitabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also not satisfied in the instant case. 51. My above view finds support from the decision of the Hon'ble Madras High Court in the case of Iskrameco Regent Ltd v. CIT, a copy of which has been placed at pages 172 to 186 in the paper book, wherein the Hon'ble Jurisdictional High Court has analyzed the provisions of S.28(iv) of the Act and found that in case of waiver of principal amount of loan received by an assessee who is not engaged in trading in money transactions, the benefit accrued to the assessee cannot be held as arising from business. The Hon'ble High Court has categorically held that grant of loan by the bank could not be termed as a trading transaction and therefore could not be construed to be in the course of business. Indisputably, the loan was obtained for investing in capital assets and a part of the principal loan along with interest was waived under the agreement. According to the Court, waiver of the principal loan amount did not result in the change of character with regard to original receipt which was capital in nature and the same did not change towards a trading transaction. The High Court therefore held that provisions of S.28(iv) of the Act is not applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h to general reserve then, on the same analogy loss of similar amount should also be held as accrued to SIFL. He explained that on the same analogy it has to be held that SIFL on transfer of net assets having fair value of Rs. 3,513.03 lakh received shares of Rs. 613.35 lakhs only and thus suffered loss of Rs. 2,899.68 lakh. As the income or loss of SIFL is also assessable in the hands of the assessee company for the relevant period, the CIT should have allowed deduction for this loss of Rs. 2,899.68 lakh also. He also submitted that not only this loss of Rs. 2,899.68 lakhs but in that case, the assessee's income should be further reduced by Rs. 8,752.95 lakhs. He explained that the cost of investments in the books of SIFL were Rs. 13,141.73 lakhs which were transferred on amalgamation to the assessee company at a fair value of Rs. 4,388.78 lakhs only. Consequently, on transfer of investments from SIFL to the assessee company, the SIFL suffered a further loss of Rs. 8,752.95 lakhs. If one has to infer accrual of benefit or perquisite of Rs. 2,899.68 lakhs in the hands of the amalgamated company in relation to transaction of amalgamation, then by same logic and on the same principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I am of the considered opinion that Rs. 2,899.68 lakh is not assessable as income in the hands of the assessee under section 28(iv) of the Act, since neither any benefit or perquisite arose to the assessee of the said value during the year under consideration nor the same arose from the business carried on by the assessee. I, therefore, find the directions issued by the CIT u/s 263 for assessment of the said amount as income u/s 28(iv) is unsustainable and without merit and therefore, cancel the same. 56. In view of my above decision, the other grounds of appeal taken by the assessee in this appeal have become academic in nature requiring no separate adjudication and therefore, not adjudicated upon. 57. In the result, the appeal filed by the assessee is allowed. Reference under section 255(4) of the Income-tax Act, 1961 There being a difference of opinion between the Members who heard this matter, the same is being referred to the Hon'ble President with a request to nominate a 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.&nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and those items have been recorded at their fair values. The excess of fair value of net assets taken over by the assessee company over the paid up value of allotted equity shares worked out to Rs. 2,899.68 lakhs. This surplus amount has been transferred by the assessee to its General Reserve Account. 5. The Commissioner of Income-tax further observed that this surplus amount of Rs. 2,899.68 lakhs was not subjected to tax as business income under section 28(iv) of the Income-tax Act, 1961. The Commissioner found that this issue was not at all examined by the assessing authority. Therefore, he proposed to revise the assessment, as it was erroneous and prejudicial to the interests of the Revenue. 6. When this proposal was communicated to the assessee, the following objections were raised by the assessee for the consideration of the Commissioner of Income-tax: - 1. The period of limitation to issue notice under section 263 cannot be reckoned with the order dated 24-12-2008, when the income-escaping assessment was completed under section 143(3), read with section 147. This is because the issue of surplus arising on amalgamation was not the subject matter of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Regarding the objection of the assessee against the head of income, the Commissioner of Income-tax held that a head of income for assessment cannot be reduced to a level of a ritualistic formula. It also cannot be put in a watertight compartment. Assessing an income under the proper head depends upon the facts and circumstances of each case. He held that once the business of the transferor company is carried on by the assessee, the excess of Rs. 2,899.68 lakhs, arising out of the amalgamation, has to be assessed as business income. 9. The Commissioner of Income-tax also observed that the addition to General Reserve was due to increase in Net Asset Value (NAV) and the same was completed as per business expediency and, therefore, the increase reflected in the General Reserve Account is taxable in terms of section 28(iv) of the Act. He further observed that the Hon'ble Madras High Court in the case of CIT v. Aries Advertising Co. Pvt. Ltd. 255 ITR 510, has held that transfer of any amount to the General Reserve is to be treated as profits of the business. He also drew strength from the decision of the Hon'ble Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT 132 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the revision order passed by the Commissioner of Income-tax is not in accordance with law. He found force in the argument advanced by the assessee company. The learned Accountant Member found that the decision of the Hon'ble Supreme Court in the case of CIT v. Alagendran Finance Ltd. 293 ITR 1 and the decision of the Hon'ble Madras High Court in the case of CWT v. A.K. Thanga Pillai 252 ITR 260 are applicable to the present case and as such the limitation period cannot be reckoned with the date of passing of the assessment order under section 147. This is because the issue raised by the Commissioner of Income-tax in his revision order was not the subject matter of proceedings under section 147 of the Act. He accordingly held that the order under section 263, passed by the Commissioner of Income-tax, was beyond the time limit provided in the statute and, therefore, the order is bad in law. He quashed the revision order. 15. On merits of the case, the learned Accountant Member observed that in consideration of receipt of net assets of Rs. 3,513 lakhs the assessee has issued own shares having fair value of Rs. 3,496 lakhs approximately and, therefore, it cannot be held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ld. CIT was justified in holding that Rs. 2899.68 lakhs was income assessable in view of the provisions of section 28(iv) of the Act?" 21. The Hon'ble President has nominated me as the Third Member and that is how the matter has been placed before me for adjudication. 22. Even though the Hon'ble Members of the original Division Bench has framed different sets of questions to be referred to the Third Member, in effect, the two issues to be considered in the present appeal are the following:- 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 is to be treated as income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng so, that the notice under section 148 was issued, as a result of which the assessment was completed under section 143(3), read with section 147. It is the latest assessment order passed under section 143(3), read with section 147, which has been revised by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961. 30. The contention of the assessee that the income-escaping assessment cannot be considered for computing the period of limitation on the ground that the issue considered by the Assessing Officer in the income-escaping assessment is not the subject matter if revision, is not an acceptable proposition in law. Section 263 empowers the Commissioner of Income-tax to call for and examine the record of any proceeding under this Act and if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the Revenue, he may pass such order as the circumstances of the case may justify, etc. The assessment order passed by the assessing authority under section 143(3), read with section 147 is coming under the expression 'any proceeding under this Act'. In simple terms, any statutory proceeding co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee has taken an alternative plea that if at all the said sum is exigible to tax, the same should have been taxed under the head 'capital gains'. I may not be able to subscribe to the above argument of the learned chartered accountant. Capital gain arises out of a deal of 'transfer'. In the present case, the assessee has not entered into any transaction of transfer. In fact, it has acquired the business of another company through the medium of amalgamation. As there is no transfer as such of any capital asset made by the assessee, the question of taxing capital gains does not arise. Moreover, section 47(vi) provides that any transfer, in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company, is not treated as a transfer for the purpose of levy of capital gains tax. Therefore, the argument of the assessee that if at all the income is liable for taxation, the same should be taxed as capital gains, is not a proposition sustainable in law. That is rejected. 37. A similar issue was considered by the C-Bench of this Tribunal in the case of M/s.Quintegra Solutions Ltd., through its co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s.Transys Technologies Pvt. Ltd. with the assessee company. The assessing authority treated the same as income under the provisions of section 28(iv) of the Income-tax Act, 1961. When this matter was considered in first appeal, the assessee argued at length that the finding of the Assessing Officer is erroneous in the facts of the case and there is nothing to be taken into consideration under section 28(iv). After hearing the detailed submissions of the assessee company, the Commissioner of Income-tax (Appeals) remanded the matter to the Assessing Officer, to which a remand report was furnished by the Assessing Officer. In the remand report dated 28-1-2010, the assessing authority himself has stated that where amalgamation is authorised by the High Court, the balancing figure on the asset side of the balance sheet takes the character of goodwill, which cannot be taxed. All the details relating to the computation of the figure, like the High Court order, the way the goodwill was arrived at and the details of other items of balance-sheets of both amalgamating and amalgamated companies were placed both before the assessing authority and the Commissioner of Income-tax(Appeals). In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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. On amalgamation, shares can be allotted only on its face value. At the same time, the market value of the shares is very high. The assets are taken over by the assessee and the number of shares to be allotted to the amalgamated company was computed on the basis of the market value of the shares evaluated on the basis of valuation report. Therefore, the acquisition transaction has been taken on the basis of the market value of the shares of the assessee company vis-a-vis net worth of those assets taken over. Therefore, the amalgamation transaction has taken place on the basis of comparable variables. It was a fair deal and approved by the Hon'bie High Court of Madras. There is no complaint against the method of valuation or the market value assigned, shares of the assessee company or the value assigned to the assets taken over. When the transaction of amalgamation is passed through a judicial process, the assessee has to record the values in its books of account. Obviously, the value of the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntention and purpose for which such appropriation has been made. The true nature and character of the appropriation must be determined with reference to the substance of the matter. This means that one must have regard to the intention with which and the purpose for which the appropriation has been made, such intention and purpose being gathered from the surrounding circumstances. In the present case, in fact there is no appropriation at all. The surplus of Rs. 2,899.68 lakhs has been generated in the present case as a result of amalgamation and arising out of the consequence of recording the financial transactions with reference to the face value of the shares allotted. Therefore, it is somewhat an automatic consequence of the process of amalgamation. The assessee has no role to appropriate any such amount towards reserve. The balancing figure has been conveniently transferred to General Reserve as it is a technical by-product of amalgamation. The said decision of the Hon'ble Supreme. Court enlightens on the principles governing the concept of provision and reserve, but does not apply to the facts of the present case. 44. In short, I agree with the learned Judicial Member to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X
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