TMI Blog2021 (4) TMI 592X X X X Extracts X X X X X X X X Extracts X X X X ..... tes the issue of shares and the receipt of consideration from a resident person and it is fulfilled on amalgamation. This perspective seeks to cover the issue of shares arising from amalgamation with equal measure. We may also look at the scheme of the Act in totality for contextual understanding of the issue. The Legislature has contemplated that there arises transfer of shares by the shareholders of amalgamating company in consideration of the allotment of shares by the amalgamated company and consequently with a view to neutralize tax effect, the Act provides for suitable exclusion/ exemption, from the ambit of expression transfer , under section 47(vii) which is also of deeming nature. In other words, as per the provisions of the Act, the consideration for issue of shares by the amalgamated company, in so far as the shareholder is concerned, is the shares held in the amalgamated company by way of transfer (except for the saving clause in s.47(vii) of the Act). A bare issue of shares contemplated in S. 56(viib) thus cannot be equated with a situation of transfer gathered from an intent implicit in S. 47(vii). Thus, the consideration and the issue of shares envisaged by sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- per share based on which addition was correctly made by the assessing officer. (c) The Ld CIT(A) has erred in law and on facts in deleting the addition of ₹ 1, 49,137/- made by assessing officer on account of disallowance of Architect fees attributable to the unsold inventory. 5. Briefly stated, the assessee company filed its return of income for AY 2013-14 in question which was subjected to scrutiny assessment. In the course of assessment proceedings, it was gathered by the AO that one M/s. Kalavir Estate Pvt. Ltd. (KEPL) amalgamated with the assessee company under the scheme of amalgamation. The object of amalgamation was stated to achieve better utilization of resources, higher return on capital, economy of scale, optimum utilization of available resources and effective control for better profitability. The scheme of amalgamation of KEPL with assessee company was approved by the Hon ble Gujarat High Court vide order dated 07.09.2012 effective from 01.04.2012 whereby all the assets and liabilities of M/s. KEPL were vested with the assessee company as per scheme placed before the Hon ble Court. Hence, on coming into effect of the scheme on 01.04.2012, all the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture with AS-14 issued by the ICAI. The AO simultaneously observed that the assessee is liable to tax on excess consideration received qua face value of shares issued under the head income from other sources in terms of s.56(2)(viib) of the Act. It was thus essentially observed that the aggregate consideration in the form of net assets (i.e. total assets minus total liabilities acquired) received by the assessee company for issue of its shares which exceeds its fair value is liable to tax in terms of Section 56(2)(viib) of the Act. For determination of fair value of shares of issuing company i.e. assessee, the AO resorted to Rule 11UA of the Income Tax Rules. The fair value was computed at ₹ 6.81 per share as against the face value of ₹ 10/- per share issued to KEPL on amalgamation as noted above. The total fair market value of shares issued to shareholders of KEPL was consequently worked out at ₹ 10,21,50,000/- (1,50,00,000 x 6.81). The AO thus concluded that on amalgamation, the assessee is benefitted by receiving net consideration worth ₹ 54,21,16,156/- in the form of excess value of assets of KEPL against which shares carrying intrinsic value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 to 300 shares held by the shareholders in the amalgamating company. The relevant clause of scheme of amalgamation as approved by Honourable Gujarat High Court vide order dated 07/ 09/2012 in company petition No. 89 of 2012 is as under:- Clause - 9 Upon the transfer of undertaking of KEPL to OIL and the vesting of the said assets and l iabilities and the amalgamation becoming effective in terms of this Scheme, then, in consideration of the amalgamation and subject to the provisions of this Scheme, OIL, shall, without any further act, application and deed, issue and allot to the, equity shareholders of KEPL 300 equity shares in OIL of ₹ 10/- each, credited as fully paid-up in the capital of OIL, for every equity shares of the face value of ₹ 10/- each held by the shareholders in KEPL 4.8. The Clause - 10 of the scheme of amalgamation for accounting of assets and l iabilities of M/s. Kalavir Estate Pvt. Ltd. (KEPL) in the appellant company (OIL) has been mentioned as under: - 10.1. Upon the coming into effect of the scheme, OIL shall record all assets (except land) and liabilities vested in OIL pursuant to the scheme at their book values. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capita! rather than consideration being received by the appellant company as understood by the AO / Addl. CIT. The persons to whom shares have been allotted have not paid anything for allotment of shares. The shares have been allotted in consideration of their shareholding in. the amalgamating company. 4.9. Section 2 (1B) of Income Tax Act, 1961 defines the meaning of amalgamation as merger of one or more company with another company or merger of two or more company to form one company in such a manner that 1) All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation. (2) All the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of the amalgamated company by virtue of the amalgamation. (3) Shareholders holding at least three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamated company or its nominee) becomes the shareholders of the amalgamated company by virtue of the amalgamation. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1567 - on account of amalgamation, but subsequently invoked section 56 (2) (viib) of the I. T. Act, 1961. I have examined the issue of taxability on revaluation of land and credit of capital reserve account as a balancing figure in the case of amalgamation from this point as well. Appellant company but for the scheme of amalgamation approved by Honourable High Court transferring all assets except land at book value, was required to transfer all- assets including land at book value as per pooling of interest method prescribed in AS- 14. In that case, assets over liability of amalgamating company would have been only ₹ 8,59,449/- as against ₹ 54, 21, 16, 156/- accounted by appellant company which became the basis for invocation of Section 56 (2) (viib) by AO. Therefore, the net asset over liability of ₹ 54, 21, 16, 156 /- of amalgamating company is only due to revaluation of land and for accounting purposes, as land of book value of ₹ 5.38 crore has been revalued at ₹ 59.55 crore and taken as stock in trade. The Honourable Supreme Court in the case of Chain Rup Sampatram Vs. CIT [224 ITR 481] and CIT Vs. Hind Construction Ltd. [83 ITR 211] has held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Services Pvt. Ltd. Vs. Dy. CIT [40 ITD 185] has held that where the stock in trade was revalued on amalgamation and acquired by the amalgamated company at higher value, in absence of any specific provision of tax, there will not be any tax implication on such notional gain. The Income Tax Act has been subsequently amended to tax the revaluation of assets on amalgamation by inserting a new section 43C by Finance Act, 1988 which provided that where an asset acquired under the scheme of amalgamation is sold by an amalgamated company as its stock in trade, then in computing the business income, the cost of acquisition of such stock in trade shall be the cost of acquisition in the land of amalgamating company. Therefore, the revaluation of land does not attract tax at the time of amalgamation, but would be taxed at the t ime of its disposal. 4.13. In view of the above, the AO was not justified to invoke section 56 (2)(viib) ' on issue of shares at face value to the shareholders of the amalgamating company as per the scheme of amalgamation approved by Honourable High Court. The addition made by the AO, is therefore, deleted. The ground of appeal is accordingly allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bscriber of the shares pays money for subscription to the issuer company. 9.4 It was thus asserted that the CIT(A) has rightly deleted the wrongly fastened additions after full analysis of law and facts involved. He accordingly submitted that no interference with the first appellate order is called for. 10. We have dispassionately considered the rival submissions and perused the assessment order as well as first appellate order. The documents referred and relied upon has been taken cognizance in terms of Rule 18(6) of the Income Tax(Appellate Tribunal) Rules, 1963. 10.1 In the case in hand, the short question that arises in essence is whether the shares received by the amalgamating company in consideration of vesting of its assets, liabilities and undertaking in the amalgamated company pursuant to scheme of amalgamation is hit by the deeming provisions of Section 56(2)(viib) of the Act in the facts of the present case? 10.2 The AO has made impugned additions towards excess consideration solely under S. 56(2)(viib) in terms of approval granted by the Addl. CIT on reference made under S. 144A of the Act. Hence, no other point such as cursory allegation of violation of AS- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y under the scheme stands at ₹ 54,21,16,156 against which shares worth ₹ 15 crore were issued by it for such acquisition. The difference between the value of assets and corresponding shares issued amounting to ₹ 39,21,16,156/- credited by the assessee co.(amalgamated co.) to its capital reserve without any payment of taxes triggered the cause of action for the AO. In the course of assessment, the AO further found on a incisive verification that the intrinsic value of share of amalgamated co. issued at face value of ₹ 10 stands at ₹ 6.81 per shares only. The AO accordingly noted that the share of amalgamated co. so issued carries worth ₹ 10.22 crores only(1,50,00,000 *6.81= 10,21,50,000) as against the net assets acquired ₹ 54.21 crore. The AO after making reference to Addl. CIT under S. 144A has brought the difference of ₹ 43.99 crore within the ambit of taxable income with the aid of deeming provision of S. 56(2)(viib) of the Act and increased the assessed income to that extent. 10.4 In the backdrop of facts capsuled above, it is the contention of the assessee that impugned transaction of vesting of assets of amalgamated co. in ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause in section 56(2). The new clause will apply where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head Income from other sources. However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund. Further, it is also proposed to provide the company an opportunity to substantiate its claim regarding the fair market value. Accordingly, it is proposed that the fair market value of the shares shall be the higher of the value- (i) as may be determined in accordance with the method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tandem with elucidations provided in CBDT Circular; Finance Ministers speech in Parliament disclosing his intentions behind such insertion and also Memorandum explaining Finance Bill, it appears that whole thrust for such insertion is to bring measures to tax hefty or excessive share premium received unjustifiably by private companies on issue of shares without carrying underlying value to support such uncalled for premium and thereby enriching itself without paying taxes legitimately due to them. It also seems that subscription to the shares issued by a company at a substantial premium (not necessarily backed by a valuation justifying the premium) was supposedly resorted to convert unaccounted money. The extant framework of law were not found sufficient by the legislature to curb such practices. Earlier attempts to tax such excessive receipts in the garb of share premium by private cos. did not arguably fructify. The provision was inserted to change the landscape for charging premium to tax of capital nature. 10.10 Section 56(2)(viib) creates a deeming fiction to imagine and fictionally convert a capital receipt into revenue income. It is well entrenched by the body of cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and the company issuing shares. In the case of an amalgamation, the consideration, which would be undertaking along with all its assets and liabilities is in the form of vesting by the amalgamating company, whereas the shares are issued to its shareholders. Thus, it is, in effect, a tripartite arrangement between (i) amalgamated co. (ii) amalgamating co. (iii) the shareholders of amalgamating co. Such tripartite arrangements in amalgamation cases are not contemplated in the deeming clause in question. 11.3 There is yet another perspective to dwell upon. As per the proviso to the clause, it does not apply to the consideration for issue of shares by a venture capital undertaking(VCU) from a venture capital company(VCC) or a venture capital fund(VCF) . The proviso implies that there should issue of shares directly by the company to the subscriber, obviously, for a consideration. In other words, it contemplates a bilateral transaction. Further, it also contemplates a transaction in the nature of issue of shares at the instance of the company on its own and it does not contemplate a transaction in the nature of issue of shares for discharging the consideration or issue of shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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