TMI Blog2019 (4) TMI 1283X X X X Extracts X X X X X X X X Extracts X X X X ..... g that it should have been routed through regular profit and loss account. The reasoning given by the CIT (A) too cannot be upheld for the same reason. As regards the capital gain computed u/s. 10(38), and application of 49(1) for computing the capital gain, the same would be relevant while computing the normal computation of capital gain in the computation of book profit where the sale of investment is included in the books prepared and profit and loss is included in the profit and loss account. It is only in such situation the said exemption u/s. 10(38) cannot be included. Here in this case, the difference between the cost of acquisition of the amalgamated assets and sale consideration has resulted in loss and the same has been duly recorded in the profit and loss account; and thus the contention of the CIT (A) that in computation of book profit capital gain should be computed by taking historical cost of assets is not correct. The proviso to section 10(38) resorted by the CIT (A) cannot be read independently as the same has to read alongwith clause (ii) of section 115JB. Such a finding of the CIT (A) to uphold the addition in our opinion is not correct. Thus, we hold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in law and in facts in passing and upholding the Assessment Order u/s 143(3)/ Rectification order u/s 154 of the Act wherein the Income under the normal provisions was assessed at ₹ 4,43,46,101/- as against the Returned Income of ₹ 3,28,09,280/-, and the Book profit U/s 115JB of the Act for MAT purposes was determined at ₹ 65,47,56,587/- as against the declared Book profit u/s 115JB of the Act at ₹ 2,75,39,440/-. 2. That on the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in law and in facts in making the addition of ₹ 61,56,80,326/- to the Book profit u/s 115JB of the Act holding the same to be the amount standing in the Revaluation Reserve relating to the stock sold by the Appellant. 2(a). That on the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in law and in facts in treating the Capital Reserve as a Revaluation Reserve. 2(b). That on the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in law and in facts in not appreciating the Amalgamation Scheme duly approved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in law and in facts in making disallowance of ₹ 1,15,36,821/- u/s 14A of the Act even though no expenditure was incurred to make such investment or earn dividend. 9. That on the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in disallowance of ₹ 1,15,36,821/- made u/s 14A of the Act to the profit for purposes of section 115JB of the Act. 10. That, as the order of Ld. CIT(A) suffers from illegality and is devoid of any merit, the same should be quashed and your appellant be given such relief(s) as prayed for. 11. That the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/ or rescind any or all of the above grounds. 3. The core issue involved in this case relates to addition of ₹ 61,56,80,326/- on account of adjustment made in the book profit u/s 115JB made by the Assessing Officer, which has been confirmed by the Ld. CIT(A). 4. The facts, in brief, qua the adjustment made in the book profit are that, the assessee company is engaged in the business of development of infrastructure and realestate. For the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial statement as per the requirement under the Companies Act. However, while filing the return, the assessee has suo motto disallowed the loss of ₹ 52,59,843/- for the purpose of computing its profit from business and profession. Accordingly, it was submitted that since net result in the profit and loss account drawn in accordance with the provisions of the Companies Act had resulted into loss and therefore, the assessee was not liable for MAT liability u/s. 115JB. 5. The learned Assessing Officer required the assessee to furnish the details about the nature of capital reserves and also asked the assessee as to why the amount credited to the capital reserves for 20,42,053 shares sold by the assessee should not be considered for the purpose of calculation of book profit u/s. 115JB and adjustment be made in the book profit. In response, the assessee submitted detailed reply, which has been incorporated in the assessment order. The working of the capital reserve in the books of account and in the financial statement shown by the assessee in terms of the scheme of amalgamation was disclosed in the following manner:- Particulars Priapus Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out of revaluation of shares held by M/s. PREPL and PPPL in their books of accounts, which has been credited in the balance sheet as capital reserves is nothing but revaluation of shares created out of excess of revaluation of assets and therefore, the contention of the assessee that it is not revaluation of reserves does not have any merit; Secondly, the Hon ble High Court has merely approved the Amalgamation but has not comment upon accounting treatment given in pursuance to the amalgamation of the companies. Hon ble High court has not discussed at all the merits of accounting treatment in its order; Thirdly, he rejected various case laws relied by the assessee that capital reserve created out of amalgamation schemecannot be added to the book profit on the ground that what is proposed is not addition of entire capital reserve but that of the amount which is present in the reserve created on revaluation of assets while those assets were disposed of during the year. Lastly, reserve created due to revaluation of assets does not route through profit accounts directly, which is not correct and therefore, in terms of clause (v) of Explanation 1 makes it clear that for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for every single share of IHFL that was revalued at the time of amalgamation, ₹ 298.92 were credited to the reserve. Now assessee company during the year under consideration has disposed 20,42,053 shares of IHFL. Further, for these shares sold, assessee has debited in its statement of profit and loss account a sum of ₹ 52,69,843/- towards loss on sale of shares. The working of calculation of the amount as per clause (i) of explanation 1 to section 115JB of the IT Act, 1961 is as follows: No. of shares sold by the assessee : 20,42,053 Amount credited to the reserve for each share : 298.92 Total amount in the reserve for the disposed shares : 61,04,10,482.76 Less: Amount credited to Profit loss account on Sale of shares : 52,69,843/- Total adjustment to be made to the book profit u/s. 115JB : 61,56,80,325.76 In view of the above discussion, adjustment to the book profit is being made into clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 where it has been held that amount of profit eligible u/s 10(38) should alone be considered for the purpose of tax liability u/s 115JB of the Act. d. As per AS-13 for accounting for investments, investments are to be carried at cost and not fair market value. However, the appellant company by its own admission is carrying the investments at fair market value. Further AS-13 also clarifies that difference between carrying amount and disposal proceeds net of expenses, has to be recognised in the P/L A/c. Thus, the assessee has not even followed the accounting treatment required to be followed as per AS-13. If the assessee had correctly followed the accounting treatment as per AS-13, then difference of sale proceeds of investment and cost thereof (and not fair market value) would have been recognised in the Profit Loss A/c. Further, the afore-said treatment of stating the investment at Fair Market Value is contrary to assessee company s own accounting policy stated in its financial statements. e. While computing book profit and capital gain u/s 10(38), the assessee is adopting different costs of acquisition . The claim of assessee appears to be that cost of acquisiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered to be the part of capital reserve of the transferee company and such capital reserve shall not be for any purpose considered to be a reserve created by transferee company and any deficit shall be considered to form part of the goodwill. Thereafter, he drew our attention to the order of the Hon ble High Court, which has approved and sanctioned the said Scheme of Amalgamation vide judgment and order dated 18.02.2016, copy of which has been placed in the paper book from pages 21 to 26. He also pointed out that during the pendency of Amalgamation Scheme, Ministry of Corporate Affairs had issued notice to all the stake holders including the Income Tax Department and it was specifically stated that the Regional Director shall invite specific comments from Income-tax Department within 15 days of receipt of notice before filing its response to the court and in case no response is received from IT department, then the same may presumed that the Incometax Department has no objection to the action proposed u/s. 391 394 of the Companies Act. Thereafter, notice was also sent from the Hon ble High Court of Delhi to the Assessing Officer and therein it was specifically required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Once, there is no revaluation of any asset, then there is no question of making any addition to the book profit u/s. 115JB under clause (j) to Explanation . Apart from that, the profit and loss account of the assessee has been prepared strictly in compliance with part-I and part-II of the Companies Act, 2013, corresponding to Part II III of the Schedule of Companies Act, 1956 and also Accounting Standard issued by ICAI has been strictly followed. Relying upon the decision of Hon ble Supreme Court in Appollo Tyres Ltd vs. CIT reported in 255 ITR 273 , he submitted that once the accounts have been prepared in accordance with Companies Act, which have been scrutinized and certified by Statutory Auditors and approved by Company s AGM, the Assessing Officer is bound by the same. 10. Ld. Counsel also distinguished the judgment of ITAT Ahmedabad Bench in the case of Infibeam (supra) as relied upon by the ld. CIT(A) and pointed out that same do not apply factually and legally in the case of assessee for the following reasons: In the case of Infibean the assessee had revalued its assets and created a revaluation reserve whereas in the case of the appellant there is no reval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Out of 1,06,39,926/- shares of Indiabulls Housing Finance Ltd., received by the appellant on amalgamation with M/s PREPL M/s PPPL, 20,42,053/- shares were sold by the appellant company at a recognised stock exchange on which securities transaction tax was paid. These shares were sold @ ₹ 453.88 per share resulting in a short term capital loss of ₹ 52,69,843/- [difference between value at which shares acquired on amalgamation being ₹ 456.47 and sale value of ₹ 453.88 per share]. This loss was included in its profit and loss account prepared and accepted by the auditors and shareholders. 8.11 Further long-term capital gain of ₹ 70.90 croreswas claimed exempt u/s 10(38) of the Act. The same was computed by deducting from the sales proceeds of ₹ 92.68 crores cost to the previous owner being ₹ 21.79 crores. 8.12 It is the case of the department that :- a. such income from long term capital gain should be taken into consideration while computing book profit u/s 115JB. In this regard, reliance has been placed on the decision of the Hon ble Bangalore Bench of the ITAT in the case of Karnataka State Industrial Infrastructure D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sanctioned. Post the sanction of the scheme the appellant assessee having acquired the assets of the amalgamating company at fair market value was bound by the order to record the acquisition value of the amalgamated assets. Hence the same were recorded in its balance sheet at the acquisition value. 8.17 As regards capital gain computed u/s 10(38) and application of section 49(1) of the Income Tax Act, 1961 for computing capital gain it needs to be noted that the same applies to normal computation of capital gain. In case of computation of book profit by applying clause (ii) to Explanation of section 115JB where sale of investments is included in the books prepared and profit/loss from such sale included in the profit and loss account, then the said exemption u/s 10(38) of the Act cannot be included. 8.18 In this case the difference between cost of acquisition of the amalgamated assets and the sale consideration resulted in loss and the same was duly recorded in the profit and loss account. The CIT(A) s argument that in computation of book profit capital gain should be computed by taking historical cost of assets is completely flawed. 12. Before us, the ld. DR strong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its books of accounts as per the purchase Method specified under the Accounting Standard 14 Accounting for Amalgamation . 9.2 All the assets and liabilities of Transferor Company No. 1 and Transferor Company No. 2 shall be transferred to and vested in Transferee Company pursuant to this Scheme and shall be recorded at their respective fair values. 9.3. Any excess arising on transfer of assets and liabilities of Transferor Company No. 1 and transferor company No. 2 after giving effect to clause 9.4 below would be considered to form part of the Capital Reserve of Transferee Company . Such Capital Reserve shall be a reserve which arises pursuant to this Scheme and shall not be, for any purpose, be considered to be a reserve created by Transferee Company. Any deficit shall be considered to form part of Goodwill. 14. Aforesaid scheme thus clearly provides that, firstly , the purchase method as prescribed in AS-14 was adopted stating that the transferee company shall account for amalgamation of transferor companies in its books of account; secondly , all assets and liabilities of the transferor companies shall be transferred and would be recorded in the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ator under the first and second provisos to Section 394(1). A joint reading of Sections 394 and 394A makes it clear that the duties to be performed by the Registrar and Official Liquidator under Section 394 and of the Regional Director concerned acting on behalf of the Central Government under Section 394A are quite different. 3. An instance has recently come to light wherein a Regional Director did not project the objections of the Income Tax Department in a case under Section 394. The matter has been examined and it is decided that while responding to notices on behalf of the Central Government under Section 394A, the Regional Director concerned shall invite specific comments from Income Tax Department within 15 days of receipt of notice before filing his response to the Court. If no response from the Income Tax Department is forthcoming, it may be presumed that the Income Tax Department has no objection to the action proposed under Section 391 or 394 as the case may be The Regional Directors must also see if in a particular case feedback from any other sectoral Regulator is to be obtained and if it appears necessary for him to obtain such feedback, it will also be dealt wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hoed by the Hon ble Gujrat High Court in the case of Wood Polymer Ltd. (supra), wherein Hon ble Court has observed and held as under:- 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. In winding up the manner in which affairs of a company are conducted can be probed in depth; but a scheme of amalgamation which provides for merger of the transferor-company with the transferee-company, would destroy any opportunity for examination of the affairs of the transferor-company. The second proviso would provide the last opportunity to peep into the affairs of the transferor company before it gets virtually extinct. The court is, therefore, charged with a duty before it finally confirms burial-cum-cremation of the transferor-company, to peep into its affairs to ascertain whether they have been carried on not only in a manner not prejudicial to its members but in even public interest. The expression public interest must take its colour and content from the context in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest looms large in this background, and the machinery of judicial process is sought to be utilized for defeating public interest and the court would not lend its assistance to defeat public interest, namely, tax provision. Thus, when amalgamation scheme has been approved by the Court, it is not open for the Assessing Officer and CIT (A) to hold that amalgamation has been used by the assessee company as a tool for tax evasion. The amalgamation order passed by the High Court is a judicial order and has statutory force and in case, the department had any objection, then same should have been given before the Hon ble High Court for which sufficient time was allowed. Now, the department cannot clamour that such an amalgamation have been used by the assessee as a tool for tax evasion or as colourable device. 16. Here in this case, by transferring the excess fair market value of the assets/shares to capital reserve could not be treated as a tax evasion practice. The difference between the fair market value of assets and liabilities taken over as per the book values, which has resulted in capital reserve , was recorded in the books in the following manner:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, because no such reserve has been created by the assessee on revaluation of shares. Revaluation of assets takes place only when the assessee decides to revalue the asset existing in the balance sheet. Lastly, in this case all the assets belonged to amalgamating companies, that is, the shares of IHFL originally belonged to PREPL and PPPL and appeared in their balance sheet; and these assets entered in the books of assessee by virtue of amalgamation valued on fair market value as mandated by the order of Hon ble High Court. Thus, it would be wrong to say that there was any kind of revaluation of assets. Therefore, there could not be any question of invoking clause (j) of Explanation to section 115JB for calculation of book profit u/s. 115JB. Here in this case, nowhere it has been disputed that the profit and loss account has not been prepared in compliance of requirement of Part-I and Part-II of the Companies Act, 2013 and as per accounting standard. The profit and loss account has been approved by the Statutory Auditors and also laid before the Members in the AGM, which is sacrosanct for computing the book profit u/s. 115JB. Thus, once the accounts have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee company has earned dividend income of ₹ 7,73,92,423/- on shares and ₹ 92,345/- on mutual funds. The dividend was earned from shares of IHFL, which was acquired by the assessee company on amalgamation. Hence, it was stated that it has not incurred any expenditure. Further, no loan fund was utilized for making any investment. However, the assessee had suo moto calculated the disallowance at ₹ 7,74,848/-. The Assessing Officer without examining the books of account, nature of expenditure debited, has proceeded to apply Rule 8D mechanically and calculated disallowance of ₹ 1,58,96,544/- which is mostly on account of indirect expenditure calculated u/s. 8D(2)(ii) which has been confirmed by the ld. CIT(A) also following the Special Bench decision of ITAT in the case of Daga Capital Management (P) Ltd. 26 SOT 603 (Mum). 21. After considering the rival submissions and on perusal of the relevant findings given in the impugned orders, we find that the Assessing Officer while making the addition has not examined the veracity of claim made by the assessee nor has he examined the books of account which is a statutory mandate provided in subsection (2) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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