TMI Blog2014 (7) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... me approved by Hon’ble Calcutta High Court – Decided against Revenue. Colourabel device to evade tax – Whether the amalgamation itself is a colourable device to evade the tax by amalgamating companies or not – Held that:- No colourable device which the assessee has adopted in the scheme of amalgamation as sanctioned by High Court - The amalgamation reserve has properly been explained by the assessee by filing details of assets and liabilities in consequence to amalgamation - The Balance Sheet of transferor companies, wherein the assets and liabilities have been transferred to the transferee company i.e. the amalgamated company are on the record of the revenue and everything is explained before the AO - The AO could not pin point any defect in the issue of non-allotment of shares on amalgamation to the shareholders of amalgamating companies due to cross holding and due to that shares of the four companies inter se got cancelled - Following the decision in Union of India And Another Versus Azadi Bachao Andolan And Another [2003 (10) TMI 5 - SUPREME Court] - the revenue must have found out what is tangible in an objective manner but they failed to do so - assessee has completely di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re required to be issued by the transferee company i.e. the assessee company For this issue, Revenue has raised following 1 to 6 grounds:- 1. That on the facts and circumstances of the case and in law, the Ld. CIT(Appeals)-VIII, Kolkata, has erred in deleting the addition of ₹ 69,64,34,089/- on the ground that the jurisdictional High Court has approved the scheme of amalgamation when the Hon ble Apex Court in the case of M/s. Marshal Sons and Co.(I) Ltd. vs- ITO, 223 809 (SC) has decided that it is open even if there may be an amalgamation as per the company s Act 1956, there may be separate proceedings as per the I.T. Act, 1961 and the assessee has violated section 2(1B) of the I.T. Act, 1961. 2. That on the facts and circumstances of the case and in law, the Ld. CIT(Appeals) VIII, Kolkata, has erred in deleting the addition of ₹ 69,64,34,089/- on the ground that the creditworthiness of the amalgamating companies are attested by their balance sheet when in all the four last balance sheets of the amalgamating companies there was no reflection of the shares of inter se holding and the assessee has admitted it also as appeared in para-3 of page-37 of the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revious year by adjustment acquisition of shares at the flat rate of ₹ 2/- and the assessee itself has retreated from its earlier explanation that the shares were acquired through bank and no bank account could be produced and the assessee later submitted that it was acquired through adjustment without any evidence. 3. Facts relating to the above issue are that the following four companies amalgamated with the assessee-company during the year:- (a) Preetam Marketing Pvt. Ltd. w.e.f. 31.03.2004 (b) Xenix Exports Pvt. Ltd. w.e.f. 31.03.2004 (c) Burman Trexim Pvt. Ltd. w.e.f 31-03-2005 (d) Varsha Fabrics Pvt. Ltd. w.e.f. 31.03.2005 During the course of assessment proceedings, AO noticed from accounts of the assessee that a sum of ₹ 69,64,39,089/- was credited as amalgamation reserve in the accounts. The total share capital of the assessee-company as on 31-03-2005 and 31-03-2006 was at ₹ 5,04,600/-. According to AO no shares were allotted to the shareholders of amalgamating companies in lieu of the transfer of substantial undertaking in the amalgamated company. According to him, nonissue of the shares to the shareholders of the amalgamating companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer s (AO) action in adding the Amalgamation Reserve credited in the books under Sec. 68 of the Income Tax Act, 1961. It appears from the assessment order that the amalgamation of four companies with the appellant is a consequence of an order of the jurisdictional High Court. In my opinion, the order of the jurisdictional High Court in this matter is final and all other considerations, which have been raised by the AO in his order, are secondary. These cannot, in any way detract from the legal position, as determined by the order of the jurisdictional High Court. The AO has raised the issue of inter se holdings and purpose of shares and the purported date of the shareholders meeting. However, once the Hon ble jurisdictional High Court approves the scheme of amalgamation, it is a natural corollary to presume that these issues were in the knowledge of the Hon ble High Court and, also, that such an order has been passed after due deliberations of all concerned issues. The AO has relied on a few case laws in support of his stand. These have been perused. I do not discern any latitude in these decisions which can empower any AO to challenge the jurisdictional High Court s order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r company with transferee company is provided by assessee and the same was filed before AO also. The relevant reconciliation is as under:- The Ld counsel for the assessee stated that it is true that on amalgamation no shares were allotted to the shareholders of the amalgamating companies due to cross-holding as the shares of four amalgamating companies inter se got cancelled. He explained that this was because due to cross-holding between the four companies, the holding of each company with other, got neutralized. As regards to application of Sec. 2(1B) of the Act by the AO, the Ld. counsel for the assessee stated that 100% shares being held by the transferor companies between themselves and it is more than and further it is being held by the transferor company after the date of amalgamation and due to cross-holding inter se the shareholding got neutralized and cancelled, no shares were required to be issued. It was clarified by him that as per clause-6(a) of part iv of amalgamation scheme there is no bar to hold / acquire the shares after effective of merger but before the merger order was passed. He argued that the assessee-company has filed complete explanation an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir Board resolution on 07-11-2005 after creating these cross holdings and approved the scheme of amalgamation in their Board Meeting. Thereafter the amalgamation application was filed before the Hon ble High Court on 21-11-2005, which, after detailed appraisal of the accounts, verification etc., was approved by the Hon ble Calcutta High Court on 22-03-2006. Copy of the amalgamation order of the Hon ble Calcutta High Court is part of assessee s paper book. According to AO, amalgamation reserve was created after amalgamation and the share capital of the amalgamated company was same as before, but according to us findings and observations of AO are not contemporaneous to the evidences on records, and it is clear from balance sheets of the amalgamating companies the shareholdings between them got neutralized for which no further shares were required to be issued, wherein the reserve and surplus are fully reflected for which reconciliation was also submitted before the AO, and even now before us, which has been reproduced in the order, and is also part of assessee s paper book . We find that particulars of the amalgamation reserves credited to the accounts to the extent of ₹ 64, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the normal course of business and the amount payable to them have been adjusted / squared off with the amount receivable from -/ payable to them. Hence no bank statement is required to be submitted. So the assessee wanted to say that the amalgamating companies have transactions with the share holders of each in the normal course of business. The transactions are claimed to have done in the FY 2005-06 for which the scrutiny is being done. No reflection of any such transaction is there in the TAR of this year in the part of disclosure u/s 40A(2)(b). The tax auditor has audited the entire sale and purchase for the year including that of the amalgamated companies. Hence, it should have been noticed by him as after 01.04.2005, the adjustments were claimed to have done. The claim of acquisition of the sharers at a flat rate of ₹ 2/- per share as discussed above as are like it has been acquired from air of impossibility and thus totally covered by the dictum as expressed by the Hon ble Apex Court in the case of Smt. Sumati Dayal v. CIT 214 ITR 301 (SC). It is totally improbable and unnatural and can happen only if it is preplanned and with a common intension of all the five compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cussion, the amalgamation reserve which is a capital receipt could be treated as a revenue receipt in the hands of the amalgamated company, and as such reserves and surplus are appearing as a capital in the balance sheets of the amalgamating companies and also admitted by the AO in parts of the assessment order. 10. In view of the above factual position now we have to discuss the provisions of section 394A of the Companies Act, wherein notice has to be given to the central government for applications made u/s. 391 and 394 of the Act. The provision of section 394A of the Companies Act, 1956 reads as under: S. 394-A Notice to be given to Central Government for applications under sections 391 and 394 The court shall give notice of every application made to it under section 391 or 394 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing any order under any of these sections. The case law cited by revenue of Hon ble Supreme Court in the case of Marshall Sons Company India Ltd., supra wherein Their Lordships of the Supreme Court had made it clear that they have not expressed any opinion on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In case the purpose discernable behind the amalgamation scheme is to defeat the liabilities of revenue the court can refuse sanctioning the scheme. Hon ble Gujarat High Court in Wood Polymer Ltd., in re and Bengal Hotels Pvt. Ltd. in re supra has laid down certain principles regarding the expression public interest and the scheme of amalgamation and the relevant paras of the judgment read as under: Similar is the position in Rodwell Securities v. Inland Revenue Commissioners [1968] 1 All ER 257. The benefit of exemption from the stamp duty was denied on the construction of statute granting exemption but the following observation was relied upon in support of the submission that a mere setting up of a chain of companies is not open to lurking suspicion, that it has been done with an avowed object of defeating taxing statute. The observation relied upon reads as under: It is worthwhile observing that where you have a chain of companies it is always possible by arranging the transfer in a certain way, to obtain the benefit of exemption under the section. It cannot be said that this observation had laid down a broad proposition of law. The observation cannot be torn out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of investing public. Interest of the investing public is interest of general public which expression would be covered by public interest . Pursuant to this directive and as a consequence of its finding, the Commission recommended introduction of a provision by which the court while examining the scheme of amalgamation, would have an opportunity to ascertain whether the affairs of the transferor-company which will be dissolved without winding up were carried on in a manner prejudicial to its members or public interest. This recommendation found its echo in the second proviso to section 394(1). Apart from the recommendation, the voluminous report of the Commission throws a lurid light on how the machinery of company formation and company management were used to subserve the interest of those controlling the affairs of the company with scant regard for the interest of the society or event of the investing public. The expression public interest is to be found in the second proviso and in the context of a company which, if, scheme of amalgamation is sanctioned, is likely to lose its identity by getting merged with the transferee-company. It is to be dissolved without winding up. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribed in the scheme of amalgamation. No apparent understandable purpose or object behind the scheme is discernible. The purpose and the only purpose appears to be to acquire capital asset of the DOC Pvt. Ltd. through the intermediary of the transferor-company which was created for that very purpose to meet the requirement of law, and in the process to defeat tax liability that would otherwise arise. If such be the scheme of amalgamation and if such is the use made of the transferor-company by those controlling it, it can never be said that the affairs of the transferor company sought to be amalgamated, created for the sole purpose of facilitating transfer of capital asset, through its medium, have not been carried on in a manner prejudicial to public interest. Public interest looms large in this background, and the machinery of judicial process is sought to be utilised for defeating public interest and the court would not lend its assistance to defeat public interest, namely, tax provision. It must be confessed that it is open to a party to so arrange its affairs so as to reduce its tax liability. The assessee or party can arrange its affairs so that he or it may not incur any t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court on appeal, Division Bench laid down certain principles as under (as reproduced from head notes): Held, allowing the appeal, (i) that if any amount was required to be paid to the Income-tax Department by the transferor company, the Income-tax Department could be said to be a creditor so far as its claim against the transferor company was concerned. Considering the fact, it could not be said that the Income-tax Department had no locus standi to put forward its objections in this behalf. Even if no objections were received against the scheme pursuant to the public advertisement, yet the court was required to examine the scheme while giving its approval. The single judge had rightly allowed the Income-tax Department to have its say by raising objections in connection with the scheme in question. A similar objection had been raised by the Income-tax Department before the Delhi High Court which had considered the objections raised by the Income-tax Department on its own merits. The Income-tax Department had the right to place its objections against sanctioning of the scheme in question. The Income-tax Department would be free to examine the aspect of any tax payable as a re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in the case of Wood Polymer Ltd., in re and Bengal Hotels Pvt. Ltd. in re, supra and Vodafone Essar Gujarat Ltd., supra, evidently makes the purpose clear that if the revenue wants to object to the proposed scheme of amalgamation, it has to do so in the course of proceedings before the High Court but before the final order is passed. Whenever such objections have been raised, these have been considered on merits by the concerned High Court and also incorporated the condition for safeguarding the interest of revenue in the very scheme. As a matter of public policy, once a scheme of amalgamation is approved by Hon ble High Court no authority should be allowed to tinker with the scheme. In the present case of the assessee, neither the official liquidator nor the Regional Director nor Central Government raised any objection to the scheme of amalgamation. In such circumstances, we are of the view that the revenue has nothing to say at the time of approval of scheme by Hon ble High Court in the present case. 12. In view of the above facts and legal position discussed above, it is not open to the revenue to go into the amalgamation reserve as per amalgamation scheme approved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any sinister sense : for it has to be recognised that the subject, whether poor and humble or wealthy and noble, has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax. The only function of a court of law is to determine the legal result of his dispositions so far as they affect tax. Lord Tomlin said (page 521) : There may, of course, be cases where documents are not bona fide nor intended to be acted upon, but are only used as a cloak to conceal a different transaction. In Snook v. London and West Riding Investments Ltd. [1971] 1 All ER 518 at 528 (CA) Lord Diplock L. J., explained the use of the word sham as a legal concept in the following words : it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the sham which are intended by them to give to third parties or to the court the appearance of crating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C). If any, the principle appears to have been reiterated with approval by the Constitutional Bench of this court in Mathuram s case [1999] 8 SCC 667 at page 12. We are, therefore, unable to accept the contention of the respondents that there has been a very drastic change in the fiscal jurisprudence, in India, as would entail a departure. In our judgment, from Westminster s case [1936] AC 1 (HL); 19 TC 490 to Bank of Chettinad s case [1940] 8 ITR 522 (PC) to Mathuram s case [1999] 8 SCC 667, despite the hiccups of McDowell s case [1985] 154 ITR 148 (SC), the law has remained the same. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents. In view of the facts and circumstances of the present case and principles laid down by Hon ble Supreme Court in the case of Azadi Bachao Andolan Anr., supra, we find no colourable device which the assessee has adopted in the scheme of amalgamation as sanctioned by Hon ble Calcutta High Court in the present case. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Calcutta High Court, which was duly approved. Hence, our answer to second issue framed by us is in negative i.e. against revenue and in favour of assessee. 15. Further, on the issue of balancing of charge on the valuation of shares of the amalgamating company vis- -vis that of amalgamated company which is, whether capital or revenue receipt, Hon ble Delhi High Court in the case of CIT Vs. Bharat Development Pvt, Ltd. (1982) 135 ITR 456 has held as under: This is the only form in which the amalgamated companies pay for the assets of the amalgamating companies. These shares may be issued at any convenient value. The shareholders of the previous company, i. e., the transferring company, may be given more shares than they previously had or they may be given less shares. This depends on the scheme of amalgamation entered into between the two sets of shareholders which is again subject to the approval of the court. If less shares are issued, i.e., for lesser than par value, then a surplus appears in the account. If more shares of greater than par value are issued, then a deficit will appear in the amalgamated account. In no event will this surplus or deficit be a capital or re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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