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TMI Blog2015 (2) TMI 942X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. The appellant prays that in case the total expenditure is not allowed to be written off in the year under consideration, the same should be allowed to be written off in five equal annual installments i.e. @ 20% p.a. under Section 35D of the Act. Ground No.3: On the facts and in the circumstances of the case and in law, the Ld. CIT(A) grossly erred in confirming the Ld. AO's treatment of general reserve on amalgamation of Rs. 31,61,92,500/- as share premium. The appellant prays that the A.O. may be directed to treat the amount of Rs. 31,61,92,500/- as general reserve as per the direction of the Hon'ble Bombay High Court. Ground No.4: On the facts and in the circumstances of the case and in law, the Ld. CIT(Aross1y erred in holding that the general reserve of Rs. 31,61,92,500/- is the appellant's income and taxable as "income from other sources" under Section 56(1) of the Act. The appellant prays that it has neither collected share premium from its shareholders nor the general reserve so created as result of the amalgamation was in any manner income of the appellant and accordingly not taxable under Income Tax Act, 1961. Thus, the addition made u/s 56 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a question of fact to be ascertained on the facts and circumstances of each case and considering the nature and type of the particular business and no universal test or formula applicable to all types of businesses can be laid down. In recognition of this position the Indore Bench of the Madhya Pradesh High Court in Precision Electricals And Electronics (P) Ltd. vs Commissioner Of Income-Tax (1989) 176 ITR 453 has held that the question as to when the business of the assessee had commenced is a question of fact and if the Tribunal as, after appreciating the entire material on record, found that the business of the assessee was setup on a particular date, it would be a finding of fact from which no question of law can be said to arise. The attempt, therefore, should be to see as to whether the Tribunal had taken note of the appropriate circumstances and applied the proper tests in arriving at the conclusion which it did. The locus classicus on the question as to when a business can be said to have been set-up is the judgment of the Bombay High Court speaking through Chief Justice Chagla, in Western India Vegetable Products Ltd. v. CIT (1954) 26 ITR 151. The following pithy observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's business had been set-up and it was ready to commence business. The learned senior standing counsel for the revenue would, however, state that till the land is acquired, the business is not set- up. The difficulty in accepting the argument is that an assessee may not be successful in acquiring land for long period of time though he is ready to commence his business in real estate, and that would result in the expenses incurred by him throughout that period not being computed as a loss under the head "business" on the ground that he is yet to set-up his business. That would be an unacceptable position. The other argument of the learned standing counsel for the revenue that the tax auditors of the assessee have themselves pointed out that the assessee is yet to commence its business is also irrelevant because of the distinction between the commencement of the business and setting-up of the same. 10. We do not feel constrained to refer to the authorities cited by both the sides on the question of setting-up of a business except the judgment of the Bombay High Court (supra) because as we have already observed, the question is essentially one of fact depending upon the nature of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed area of land and extracting limestone from it was as much an activity in the course of carrying on the business as the other two activities of manufacture of cement and sale of manufactured cement. This activity came first in point of time and laid the foundation for the second activity and the second activity when completed laid the foundation for the third activity. Hence, the assessee commenced its business when it started the activity of extraction of limestone. Since extraction of limestone commenced in 1958, the assessee was carrying on business during the relevant years of account. The expenditure incurred by the assessee in carrying on the activity of extraction of limestone as also depreciation allowance and development rebate in respect of machinery employed in extracting limestone were deductible in computing the trading profits of the assessee for the assessment years 1960-61 and 1961- 62". 11. The AR also relied on the decision of Swire Holding (P) Ltd. vs ITO reported in 6 SOT 621 (Bang), wherein the Coordinate Bench of the ITAT held, "The fact that the assessee's main business was real estate business, and that the assessee had advanced money to various land owne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts pertaining to the issue are, that the assessee company declared an amount of Rs. 32,40,89,219/- as General Reserves on Amalgamation. As seen from Note No. 3 of Schedule 9, it is mentioned that scheme of amalgamation has been approved by Hon'ble High Court of Judicature at Bombay vide its order dated 25.06.2010 and the scheme became effective on 25.07.2010 and the appointed date of scheme being 01.11.2009 (mentioned as 01.11.2010 in the Notes). Pursuant to the scheme, the assets, liabilities, rights and obligations of the erstwhile M/s Aims Merchant Pvt. Ltd. (AMPL), M/s Reliant Viniyog Pvt. Ltd. (RVPL) and M/s Virgo Textiles Pvt. Ltd. (VTPL) had been vested with the assessee company from 01.11. 2009 (mentioned as 01.11.2010 in the Notes) at their book value. 20,505 equity shares of face value Rs. 10/- each relating to the equity share capital of AMPL, RVPL and VTPL were to be issued as fully paid up to the shareholders of amalgamating companies, without any payment received in cash and the face value of such shares has been shown as equity shares suspense. Further, it is also mentioned that excess of book value of net assets taken over by the company over the aid up val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/s Reliant Mercantile Pvt. Ltd. (RMPL), M/s Aim Merchants Pvt. Ltd. (AMPL) and M/s Virgo Textiles Pvt. Ltd. (VTPL) were acquired by Mr. Rajendra R. Chaturvedi, Ms. Veena R. Chaturvedi and Mr. Tapes R. Chaturvedi, existing shareholders of the assessee company, for inadequate considerations. Immediately thereafter the reserves and surplus available with the companies in the form of share premium were diverted to the account of the assessee company as loan & advances. Amalgamation of these companies with the assessee company is nothing but smoke screen to hide the real intent of evading taxation. Subsequent to amalgamation these diverted funds has been shown as General Reserve. The transactions between the existing shareholders of the assessee company and alleged shareholders of RMPL, AMPL & VTPL and subsequent diversion of so called share premium amount to the assessee company have no commercial prudence and unusual in nature and character. Furthermore, the share premium collected is not utilized for the purpose of the objectives for which the same was collected and as such the conditions specified under companies Act, 1956 are violated. Therefore, the amount brought in to the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be mentioned that the Hon'ble Supreme Court in a plethora of judgments have held that the Accountancy Principles cannot override the provisions of the Incometax Act. Hence, the arguments of the assessee relying on 'expert opinion' appearing in 'CA journal' read with Accounting Standards cannot be of any help to the assessee. As stated earlier, the shares of AMPL, RVPL and VTPL issued to various concerns at a premium of Z 390/-, which was later on transferred to two companies, were in turn transferred to Rajendra R. Chaturvedi and his family members, at par, and the amount appearing in the Balance Sheet as 'share premium' was transferred to the Assessee Company as loans. Hence, the 'share premium' received by AMPL, RVPL and VTPL were without adequate consideration, as the purported share premium was only a paper transaction". and "For the sake of discussion even if the said money received without consideration is treated as 'share premium', still it fails the test of being share premium. During the course of assessment proceedings, the Assessee Company was asked to submit the details of utilization of share premium. The Assessee Company has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lose its character and will become the trading receipts, as laid down by the Honourable Supreme Court in the case of Bharat Fire & General insurance Ltd. v. Commissioner Of Income-tax (1964) 53 ITR 108 (SC). In this connection, reliance is placed on the full Bench decision of the Kerala High Court in the case Ram Bahadur Thakur Ltd., 261 ITR 390. Reliance is also placed on the Honourable Supreme Court decision in the case of V V R N M Subbayya Chettiar Vs. Commissioner of Income Tax 19 ITR 168 (SC) wherein it has been held that "in the absence of the material evidence to which this reference has been made, the finding of the Asst. Commissioner that the onus of proving such facts as would bring his case within the exception had not been discharged by the assessee and the normal presumption must be given effect to, appears to be a legitimate conclusion". The Honourable Punjab & Haryana High Court in the case of Lachhman Dass Oswal (1980) 16 CTR (P&H) 48 (1980) 126 ITR 446 (P&H) has held the case against the assessee after quoting from the Honourable Supreme Court judgment in the case of Kale Khan Mohammad Hanif vs. CIT (1963) 50 ITR 1 (SC) "The onus of proving the source of a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e principles of purposive construction. The principles of purposive construction or the mischief rule will apply, while interpreting a newly inserted provision, if there was a mischief in the earlier provision, For that what we have to see is the rule laid down in the HEYDON'S case (1584) 3 Co. Rep. 7a. p. 71b: 76 ER 637. The rule was explained in the case of Bengal Immunity Company Vs. State of Bihar AIR 1995 SC 661, p 674 by S.R. DAS, CJI that for the sure and true interpretation of all Statues in general four things are to be discerned and considered: (i) What was the common law before the making of the Act? (ii) What the common law did not provide? (iii) What remedy the Parliament hath resolved and appointed to cure the disease of the commonwealth? And (iv) The true reason of the remedy. In the instant case, if we see the provisions of section 56, there was no mischief in the provisions of section 56(1), because of which the new provisions of subsection (viib) was inserted by Finance Act, 2012. Even in the Explanatory Notes to the Finance Act, 2012, it is mentioned that "Section 56(2) provides for the specific category of incomes that shall be chargeable to incometax un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riers, supra). To harmonise is not to destroy. A familiar approach in all such cases is to find out which of the two apparently conflicting provisions is more general and which is more specific and to construe the more general one as to exclude the more specific (South India Corporation (P) Ltd. v. Secretary, Board of Revenue, Trivandrum AIR 1964 SC 207, p. 215). The question as to the relative nature of the provisions general or special has to be determined with reference to the area and extent of their application either generally or specifically in particular situations (Collector of Central Excise Jaipur v. Raghuvar (India) Ltd. AIR 2000 SC 2027). The principle behind these interpretations are expressed in the maxims Generalia specialibus non derogant and Generalibus specialia derogant which means that general things do pot derogate from special things and special things derogate from general things. Thus, it is clear that the provisions of 56(2) do not limit the application of section 56(1) and subsection (1) & (2) of section 56 are only complimentary in nature. In view of the authoritative pronouncement by the Honourable Courts and in view of the detailed reasoning given in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree Company to its General Reserve Account or shall be debited to the "Goodwill Account" in the books as the case may be. d) In case of any differences in the accounting policy between the Transferor Companies and the Transferee Company, the impact of the same till the date of amalgamation will be quantified and adjusted in the 'General Reserve Account". 31. The AR thus submitted that it can be seen that the directions of the Hon'ble Court are precise and clear. The AR submitted that the revenue authorities have gone outside the scope as permitted by the Scheme of Amalgamations approved by the Hon'ble Bombay High Court. 32. The AR, further submitted that the provisions of section 56(1) as applied by the revenue authorities can only be attracted if the receipt has the character of income to the assessee and secondly the provisions itself will become operative w.e.f. 2012 onwards and therefore, the current year does not fall in the year of mischief. 33. The AR further submitted that the revenue authorities have brought to tax the amount the amount holding it to be share premium, but share premium itself is an item of capital field and not a revenue nature and therefore outsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a nonresident i.e. premium allegedly not received on application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. This is settled by the decision of this Court in Cadell Weaving Mill Co. vs. CIT 249 ITR 265 was upheld by the Apex Court in CIT vs. D.P. Sandu Bros. Chember (P) Ltd. 273 ITR 1. This Court has in Cadell Weaving Mills Co. (supra) inter alia, observed as under:- "It is well settled that all receipts are not taxable under the Income tax Act. Section 2(24) defines "income". It is no doubt an inclusive definition. However, a capital receipt is not income under section2(24) unless it is chargeable to tax as capital gains under Section 45. It is for this reason that under section 2(24)(vi) that the Legislature has expressly stated, inter alia, that income shall include any capital gains chargeable under section 45. Under Section 2(24)(vi), the Legislature has not included all capital gains as income. It is only capital gains chargeable under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a case of amalgamation, wherein, as seen from the order of Hon'ble Bombay High Court, the amounts collected as share premium by those three companies were ordered to be brought into the books of the assessee either as General Reserve or as Goodwill. This amount was shown by the assessee company in the General Reserve. 39. We have already seen that share premium would also be a capital receipt as per the decision of Hon'ble Bombay High Court in the case of Vodafone (supra). Now we have to examine whether Amalgamation Reserve or General Reserve could be brought to tax as income from other sources u/s 56(1). 40. First and foremost, to consider an item to be taxed u/s 56(1), the receipt should bear the character of income. Unless the receipt is not an income, back door entry of invoking section 56(1) cannot be allowed. We find support from the order of Green Infra Ltd. vs ITO, reported in 145 ITD 240 (where one of us was a party), it was observed, "10.3. A simple reading of this section show that income of every kind which is not to be excluded from the total income shall be chargeable to income tax. The emphasis is on that 'income of every kind', therefore, to tax any amount unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs Seshasayee Brothers Pvt Ltd (222 ITR 818)wherein Their Lordships, after elaborately surveying the legal precedents on this issue, concluded that, "Thus, a combined reading of the abovesaid judicial pronouncements would go to show that when a receipt is referable to fixed capital, it is not taxable, and it is taxable as a revenue receipt when it is referable to circulating capital or stock in trade". To sum up, unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv). Blending companies, the shareholders of each blending company becoming substantially the shareholder of the company which holds the blended undertaking. The expression 'amalgamating company' is used for the 'blending company' which loses its existence into the other company and the expression 'amalgamated company' is used for blended undertaking, which holds existence of those two or more companies. In essence thus, the whole exercise of amalgamation in the nature of merger ..... X X X X Extracts X X X X X X X X Extracts X X X X
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