TMI Blog2023 (5) TMI 834X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the shares of various companies and in consideration thereof, had allotted the number of shares at face value of Rs.10/- to various shareholders of the said 11 amalgamating companies. In this way / practice, not only, the transfer of 11 amalgamating companies have taken place but also the transfer of unlisted / listed shares / preferential shares below the market rate have taken place. The argument of the ld.AR is that there is no transfer of shares in the eyes of law, as there is absence of transferor and transferee and there is no receive of shares, whatever transfer of receive of shares happened that was in pursuance to the statutory approved scheme of amalgamation done by the Hon ble High Court can not be accepted and is rejected. The reading of section 56(2)(viia) makes abundantly clear that there is no requirement of transfer as argued by the ld. AR. The requirement under the provision is the receive of any property being the share of a company without or inadequate consideration which is less than the Fair Market Value. Admittedly, the assessee is a company in which public are not substantially interested. Further, the assessee had received any property being sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals)-5, dated 16.03.2018 for the AY 2014-15, on the following grounds : 1. The Ld.CIT (Appeals) erred in restricting the disallowance u/s.14A to RS.14,00,0000/- without appreciating the provisions of section 14A(3) of the Income-tax Act (Act). 2. The LdCIT (Appeals) erred in holding that the shares received by the assessee company on account of amalgamation, for a price lower than the FMV of the shares, does not attract provisions of the section 56(2)(viia) of the Act. 3. The Ld.ClT (Appeals) erred in holding that provisions of sec.56 (2) (viia) are not applicable to the transactions defined u/s.47(vi), even though the proviso to section 56(2)(viia) does not specify the transactions defined u/s.47(vi) as exception to section 56(2)(viiia) 4. The Ld.CIT (Appeals) erred in holding that the shares purchased by the assessee company for a price lower than the FMV of the shares, does not attract provisions of section 56(2)(viia) and accordingly deleting the addition of Rs.5, 14,80,879/-. 5. Any other ground that may be urged at the time of hearing. 2. The brief facts of the case ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of hearing the AR stated that the appellant has no objection to the disallowance u/s. 14A to the extent of Rs. 14,00,000/-. In view of the above the disallowance is restricted to a sum of Rs. 14,00,000/- and the ground no.l (i) is partly allowed. As regards ground no. l(ii) regarding the addition made to the book profit to the extent of disallowance u/ s. 14A, it is seen that as per clause(f) to explanation to section 115JB, the amount of expenditure relatable to the exempt income as specified in that clause has to be added back. There is no ambiguity in that regard, therefore, the disallowance u/s. 14A to the extent of the amount confirmed above of Rs. 14,00,000/- has to be added back to the computation of book profit u/s. 115JB therefore, the ground no. 1 (ii) is dismissed accordingly to the extent of quantification above. The ground no. 4 relates to the claim of the appellant that the income tax refund should have been reduced while computing the book profit u/ s. 115JB. The section 115JB does not leave any room for discretion or interpretation and the items mentioned in clause (i) to (viii) to the explanation to section 115JB can only be reduce from only book p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nother 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 after the winding up of the first mentioned company;] Therefore, the amalgamation in the present appellant company was as per law and was approved by the High Court accordingly. In the Income Tax Act, the amalgamation process which as defined above results in the amalgamation of assets also and thus the property are vested with the entity in which all the companies have merged. This transfer of property or assets as specified in the clause (i) of the definition u/s. 2(18) is now with the new entity and such transfer is not considered as transfer as specified u/s. 47 of the Income Tax Act. The relevant sub clause (vi) of section 47 is reproduced as under: (vi) any transfer in the scheme of amalgamation of capital asset by the amalgamating company to the amalgamated company, if that amalgamated company is an Indian company. The plain reading of the above implies that all capital assets which includes shares, property, movable assets, immovable assets etc., of the amalgamating companies becoming the property of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. As there is no ambiguity, regarding the date of transfer and the year of taxability, in case such transfers are taxable in the Income Tax Act, 1961. As there is no doubt regarding the same, just because the High Court order has been passed on 10.10.2013 cannot invoke the taxability in this year by any stretch of imagination or can be considered doubtful for the arising of the transfer and the consequent chargeability for the present year under consideration. Therefore, the addition invoked by the AO for the transfer of property in the appellant entity by the amalgamating companies is completely wrong and out of jurisdiction, therefore, the protective addition made by the AO in the assessment order is hereby deleted on the basic reasons that there is no case for a protective addition for the year under consideration at all. Further, as already discussed above that as per provisions of section 47(vi), the amalgamation as defined u/s. 2(IB) of the Income Tax Act would not be considered a transfer [or the purpose of taxation. The definition of capital asset is as per section 2(14) of the Income Tax Act which includes any property of any kind held by the appellant, whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s including no doubt shares from the purview of transfer. However, in case where the entity are not Indian and it relates to status of restructuring, undertaking etc., there has been a specific mention to exempt the same from the purview of taxation u/s. 56 of the Income Tax Act. Therefore, on the basis of discussion above, the AO did not have any basis to make the protective addition in the case of the appellant on account of the unquoted shares and preference shares received pursuant to amalgamation. Therefore, the ground no. 2(i) is allowed accordingly. Further, as 47(vi) exempts the amalgamation from the purview of transfer, therefore section 56(2)(viia) cannot be invoked, as this is not a case of receipt of shares in isolation but the merger of all property irrespective of shares and also 56(2)(viia) is not applicable for such amalgamation, therefore the invocation of the said section in the case of appellant is incorrect and therefore, the ground no. 2(ii) is allowed accordingly. The ground no.2(iii) pertaining to invocation of Rule 11 VA becomes academic as the relief has already been granted on ground no. 2(i) and 2(ii) therefore there is no need of adjudicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e suo motu itself had disallowed the amount of Rs.49,94,540/- and further, had disallowed an amount of Rs.4,30,245/-. It was submitted that in these facts, the ld.CIT(A) had restricted the disallowance for Rs.14,01,557/-. He also relied upon various decisions : 1. Aamby Valley Ltd Vs. ACIT (2019) 102 taxmann.com 385 2. M.N. Chhaya Vs. P.R.S. Mani (2005) 63 SCL 509 (High Court of Bombay). 3. IRM Limited Vs. DCIT (2016) 72 taxmann.com 288 (High Court of Gujarat) 4. Dalmia Power Limited Vs. ACIT (2019) 112 taxmann.com 252 (SC). 9. We have heard the rival contentions of the parties and perused the material available on record. Admittedly, the total expenditure incurred by the assessee which wad debited to the Profit and Loss account was Rs.68,26,342/- and out of the said amount, the assessee had suo motu disallowed the amount of Rs. 49,94,540/- and further disallowed an amount of Rs.4,30,245/-. Now the dispute before us is whether the ld.CIT(A) was right in restricting the disallowance to an amount of Rs.14,01,557/- or it should be restricted to the difference of Rs.82,72,958/- (-) Rs. 49,94,540/- (-) Rs.4,30,245/- which is equivalent to Rs.28,48,173/-. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry of Holderind Investments Ltd., Mauritius, which was formed as a holding company for 'making downstream investments in cement manufacturing ventures in India. In the return of income filed for the Assessment Year 2007-08, the respondent-assessee declared loss of Rs. 8.56 Crores approximately. The respondent-assessee had declared revenue receipts of Rs. 18,02,274/- which included interest of Rs. 726/- from Fixed Deposit Receipts and profit on sale of fixed assets of Rs. 16,52,225/-. As against this, the respondent assessee had claimed administrative and miscellaneous expenditure written off amounting to Rs. 8.75 Crores. For the Assessment Year 2008-09, the assessee had filed return declaring loss of Rs. 6.60 Crores approximately. The assessee had declared revenue receipts in the form of foreign currency fluctuation difference gain of Rs. 12,46,595/-. It had claimed expenses amounting to Rs. 7.02 Crores as personal expenses, operating and other expenses, depreciation and financial expenses. 11.9 In both the assessment orders, the Assessing Officer held that the respondent-assessee had not commenced business activities as they had not undertaken any manufacturing activity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Standing Counsel for the-Revenue, to state in his own words, their stand before us. During the course of hearing, the submission raised was that the shares would have yielded dividend, which would be exempt income and therefore, the CIT(A) had invoked Section 14A to disallow the entire expenditure. The aforesaid submission does not find any specific and clear narration in the reasons or the grounds given by the CIT(A) to make the said addition. Possibly, the CIT(A), though it is not argued before us, had taken the stand that the respondent-assessee had made investment and expenditure was incurred to protect those investments and this expenditure cannot be allowed under Section 14A. 11.13 Thus, Hon'ble Delhi High Court primarily decided the issue regarding applicability of section 14A even if no dividend income was earned. The Hon'ble High court in paras 14 to 16 of its decision observed as under: '14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not all improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax. 16. what is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent-assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o express provision in clause (f) of Explanation 1 to section 115JB of the Act to that extent. 11. The Co-ordinate bench of this Court in Pr. CIT v. Mphasis Software and Services (India) (P.) Ltd. [IT Appeal No. 244 of 2021, dated 25-10-2021] where one of us Hon'ble SSJ was member, while considering the applicability of section 154 of the Act has held that invoking of section 154 would be untenable when there is no mistake apparent on the face of the record i.e., when the matter requires adjudication upon the issue which is a debatable issue. 12. In the light of these judgments, the finding given by the Tribunal on the points inasmuch as invoking of section 154 and Explanation 1 (f) to section 115JB being squarely covered, the same cannot be found fault with. We are of the considered view that the Miscellaneous Petition filed by the revenue under section 254(2) of the Act was wholly misconstrued. The Tribunal has distinguished the case of Sobha Developers (supra) relied upon by the revenue with VireetInvestment (P.) Ltd. (supra) and has rightly come to the conclusion that the judgment of the VireetInvestment (P.) Ltd. (supra) rendered by the Special Bench consisting o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. can be attributed for improper consideration. 13. With respect to the above said issues, the ld.DR relied upon the order of the Assessing Officer. It was the further contention of the ld. DR that the definition of amalgamation provided under section 2(IB) cannot be read into by reference in section 56(2)(viia) of the Act. It was the contention that if on account of amalgamation of the company / companies, a company or a firm receives any property being the share of a company for a consideration which is less than the aggregate fair market value of the shares then such income shall deemed to be chargeable to Income Tax under the head Income from other sources under section 56(2)(viia) of the Act. 13.1. Further it was submitted that the finding recorded by the ld.CIT(A) that no addition can be made in the hands of the assessee for the year under consideration on protective basis was incorrect. It was submitted that as per the case of the assessee, that as on August, 19, 2015, the Vertex Projects Limited was converted into a limited liability partnership (LLP) under the name and style Vertex Projects LLP . It was also the contention of the ld. DR that in the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head Income from other sources , if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head Income from other sources , namely : . .. [(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested, (i)without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii)for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Mr. GVK Reddy and his wife ('Group A '); Mrs. Shalini Bhupal, daughter of Mr. GVK Reddy, and her family members ('Group B') and Mr. Sanjay Reddy, son of Mr. GVK Reddy, and his family members ('Group C') (Refer to Pg 366 of Paper book). The beneficial/ultimate percentage of shareholding held by each of such Group in such companies were identical [i.e. Group 1 held 34 percent stake; Group 2 held 33 percent stake; and Group 3 held 33 percent stake]. Considering the same, no separate valuation was obtained for determining the swap ratio for amalgamation of the amalgamating companies into Vertex Projects Limited. One Equity Share of Vertex Projects Limited were allotted to the respective shareholders for every one share held by them in amalgamating companies, on the rationale that the ultimate group-wise shareholdings in all the amalgamating companies vis-a-vis the shareholding in the amalgamated company would remain the same (Refer Pg 36- of Paperbook], iv. The Ld. AO contended that the Assessee (i.e. amalgamated company) received such investment in such closely held companies for inadequate consideration and the same is taxable under section 56(2)(viia) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii. The Assessee submits that a substantive assessment must precede the protective assessment. In simple words there must be some substantive assessment/addition first which enables the tax officer to make a protective assessment/addition. In this regard, reliance can be placed on the decision of the Hon 'ble Mumbai Tribunal in the case of M.P. Ramachandran [S.No.7 - Pg. 51 of the Case Law Compilation]: 22 .... We have noted above about the validity and presumption of the protective assessment in general. Protective assessment cannot be independent of substantive assessment. Thus protective assessment is always successive to the substantive assessment. There may be a substantive assessment without any protective assessment, but there cannot be any protective assessment without there being a substantive assessment. In simple words there has to be some substantive assessment/addition first which enables the Assessing Officer to make a protective assessment/addition. (Emphasis Supplied) iv. The mere reason that the Ld. AD provided is that, since the Hon'ble He order approving the merger is received in the FY relevant to the impugned AY, additions has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition, there can be no protective addition as well. When the very basis of the income 'goes', the addition in this Assessee's hands, which was treated as 'protective' in the impugned AY 2014-15, would also not survive. Without prejudice to our argument in regard to maintainability of the additions made under protective assessment. the Respondent would like to submit that the provisions of section 56(2)(viia) of the Act is not applicable in the instant case: b) Merger transactions are outside the purview of section 56(2)(viia) of the Act i. The purpose / context for which this provision was introduced can be understood by reference to the Explanatory Memorandum to Finance Bill 2010. The relevant extracts are reproduced below: ... A. These are anti-abuse provisions which are currently applicable only if an individual or an HUF is the recipient. Therefore. transfer of shares of a company to a firm or a company. instead of an individual or an HUF. without consideration or at a price lower than the fair market value does not attract the anti-abuse provision In order to prevent the practice of transferring unlisted shares at prices much belo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferor and transferee and transferred assets i.e., shares. In the case of amalgamation, it cannot be said that there is a transfer of shares as there is only statutory vesting of the assets by virtue of the Scheme. Section 56(2)(viia) is applicable only if assessee being a Company receives shares of a Company either without consideration or for a consideration which is less than the aggregate fair market value. In the instant case, due to Composite Scheme of Arrangement and Amalgamation, it cannot be said that there is no consideration or inadequate consideration .... 110 .... We, therefore, hold that provisions of Section 56(2)(viia) cannot be applied in respect of this transaction as it is a case where the transfer in the case of assessee falls under section 47(vii) of the Income- Tax Act. We, accordingly, delete the addition under Section 56(2)(viia) also. (emphasis supplied) v. Reliance is also placed on the decision of the Hon'ble Ahmedabad Tribunal in the case of Ozone India Ltd: [S.NO.12 - Pg. 83 of the Case Law Compilation], which although passed in the context of section 56(2)(viib) of the Act, has upheld the view that issue of shares at face value b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al/ statutory bodies (whether granted or pending), receivables, benefit of any deposits, assets, properties or other Interests, financial assets including investments made by way of equity by the Transferor Transferee Companies in other Body Corporates which are not party to this scheme, all kinds of funds belonging to or utilized for the Transferor Companies, bank accounts, privileges, all other rights and benefits including any tax, direct or indirect including advance tax paid or any tax deducted in respect of any Income received, exemptions, tenancies in relation to office and/ or residential properties for the employees, memberships, lease rights, powers and facilities of every kind, nature and description whatsoever, rights to use and avail of telephones, Internet servers, facsimile connections and installations, utilities, electricity, and other services, provisions, funds, benefits of all agreements, contracts and arrangements, letters of Intent, memoranda of understanding, expressions of interest whether under agreement or otherwise and all other Interests in connection with or relating to the Transferor Companies shall, under the provisions of Sections 391 to 394 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ari [S.NO.11 - Pg. 74 of the Case Law Compilation], wherein it was held that section 56(2)(vii) would not be applicable in the cases where there is neither increase or decrease in the wealth of the shareholder. iv. The section 56(2)(viia) of the Act was introduced to avoid transactions resulting in change of property in the group's hands and the avoidance of tax during the change of transfer of ownership within the group. In the instant case there is no intentional avoidance of tax but the transaction is incidental as a result of amalgamation of various companies with the amalgamated company which is undertaken to avoid running costs of 11 companies and to obtain operational synergies and the same is approved by the Hon'ble High Court vide order dated October 10, 2013 read with amended order dated December 31, 2013, section 56(2)(viia) cannot be applied in the given case. e) The underlying investment held by Amalgamating company. Zinger Investments Pvt Ltd. was the preference shares of GVK Projects Technical Services Limited and not equity shares i. The underlying investment held by amalgamating company, Zinger Investments Pvt Ltd, was 0.001% non-convertib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exure- 3 to this written submission): (1)Metro Architects Contractors (P.) Limited, had the following underlying investments (refer pg. 247 of paperbook) -(ii equity shares of Vertex Infratech Private Limited which is also an amalgamating company and (ii) quoted shares of GVK Power Infrastructure Ltd. (2) Trinity Advisors Private Limited had the following underlying investments (refer pg. 256 of paper book) -(i) equity shares of Vertex Infratech Private Limited and (ii) equity shares of GVK Energy Holdings Pvt Ltd, both of which are amalgamating companies (3) Vertex Infratech Private Limited, had the following underlying investments (refer pg. 267 of paperbook) -(i) equity shares of GVK Energy Holdings Pvt Ltd - which is also an amalgamating company and (ii) quoted shares of GVK Power Infrastructure Ltd. ii. AO in its order stated that the Amalgamated company i.e. the Assessee received shares of such companies pursuant to merger, without, appreciating the fact such companies got amalgamated with the amalgamated company resulting in cancellation of shares. Further the provisions of section 56(2)(viia) is not applicable to quoted shares. Based on the above s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submits that the said section is applicable only in the case of receipt of shares pursuant to 'transfer' and not in the case of receipt of shares pursuant to allotment of shares to recipient of shares by an investee company. The investee company is never the owner of the shares it creates on allotment. Therefore, there can never be a 'transfer' of shares from the company to an allottee on allotment. ii. The Assessee submits that one would need to ascertain the real meaning of this term while keeping the context of section 56(2)(viia) in mind. Generally, the term receive indicates 'to acquire' or 'come into possession of or 'to get.' iii. The Assessee submits that the said provision applies when a firm or a company receives shares of another closely-held company. The act of 'receiving' implies that there is an act of 'giving' on the other side. In short, there must be a transaction in which there is a 'giver' and a 'receiver' involved. The 'giving' and 'taking' further implies that there must a 'passage' of the property from one hand to another i.e. a 'transfer'. In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision. In order to prevent the practice of transferring unlisted shares at price which is below their fair market value, it is proposed to amend section 56 to also include within its ambit transaction undertaken in shares of a company (not being a company in which the public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which the public are substantially interested) vi. Reliance can also be placed on the CBDT Circular NO.1 of 2011, explaining the provisions of Finance Act 2010. At para 13.2, the Circular explicitly refers to the term transfer while explaining the scope of s. 56(2)(viia). The relevant extracts from the Circular are reproduced below: 13.2. These are anti-abuse provisions which were applicable only if an individual or an HUF is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or an HUF, without consideration or at a price lower than the fair market value was not attracted by the anti-abuse provision. In order to prevent the practice of transferring unlisted shares at prices much belo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty is read in totality along with the terms, receives, being, etc., then property should be existing property and not something which comes into existence. The Hon'ble Apex Court in the case of R. Cawasjee Cooperv has clarified that shares are not property in the hands of the issuing company. iv. Further, the Hon'ble Apex Court in the case of R D Goyal -vs.- Reliance Industries Limited has held that shares before their allotment are not goods. Thus, shares are not goods for the allotting! issuing company and by analogy, they are not property for the purposes of section 56(2)(viia). v. In this connection, the Assessee would like to also refer to the following extracts from the Hon'ble Apex Court decision in the case of Khoday Distilleries Ltd. '3: There is a vital difference between creation and transfer' of shares. As stated hereinabove, the words allotment of shares have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person. A share is a chose in action. A chose in action implies existence of some person entitled to the rights in action in contradistinction from ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare which is not in existence prior to its allotment and hence not capable being sold. Further, the word 'sold' suggests that it has to be seen from the donor's perspective. Hence, if the share is such that the donor (transferor) cannot sell it, the provision may not be applicable. d) Without prejudice to the above. FMV of preference shares has to be computed as per Rule 11 UA(l)(c)(c). i. In this regard, the Respondent would like to submit that the valuation of unquoted preference shares has to be made in accordance with Rule 11UA(l)(C)(C) of the Rules which provides that: the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation. ii. However, while computing the fair market value of such preference shares for the purpose of section 56(2)(viia) of the Act, the Ld. AO erroneously applied valuation mechanism as per Rule 11UA(l)(C)(b) of the Rules as against Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cifies a date, there is little doubt that such date would be the date of amalgamation/date of transfer. But where the Court does not prescribe any specific date but merely sanctions the scheme presented to it as has happened in this case - it should follow that the date of amalgamation/date of transfer is the date specified in the scheme as 'the transfer date'. It cannot be otherwise. It must be remembered that before applying to the Court under section 391(1), a scheme has to be framed and such scheme has to contain a date of amalgamation/transfer. The proceedings before the Court may take some time; indeed, they are bound to take some time because several steps provided by sections 391 to 394A and the relevant Rules have to be followed and complied with. During the period, the proceedings are pending before the Court, both the amalgamating units, i.e., the transferor company and transferee company may carry on business, as has happened in this case but normally provision is made for this aspect also in the scheme of amalgamation. In the scheme before us, clause 6(b) does expressly provide that with effect from the transfer date, the transferor company (subsidiary company) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry levies etc. b) All profits or income accruing to transferor companies or losses or expenditure (including payment of penalty, damages, or such litigations) arising or incurred by them shall, for all purposes, be treated as the profits or income or losses or expenditure as the case may be of the transferee company. v. Reliance is also placed on the decision of the Hon'ble Bombay High Court in the case of M N Chhaya v. PHS Mani17 (refer Annexure-4), wherein the Hon'ble Court held that scheme of amalgamation will be effective from the appointed date and not from the date of sanction of the scheme by the High Court. The relevant extracts are reproduced below: 11. Insofar as the second issue is concerned, I am of the opinion that the scheme must come into effect not from the date when the scheme is sanctioned by the Court but from the appointed date which is prescribed under the scheme itself and I am also fortified in my aforesaid views by the judgment of the Apex Court in the case of Marshall Sons Co. (India) Ltd. v. ITO [1997] 88 Compo Cas. 528 and in which it has been held as under: .... It is, thus, clear that once a scheme is sanctioned by a Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd stand transferred to the transferee company. The Schemes come into effect from the Appointed Date, unless modified by the Court. (Emphasis Supplied) ix. There is a statutory vesting of all the assets and liabilities of the transferor company as a consequence of the scheme of merger being approved by the Hon'ble High Court. This view was upheld by the Hon'ble Delhi Tribunal in the case of Aamby Valley Ltd21, where on an identical fact pattern, the Hon'ble Tribunal held that section 56(2)(viia) does not apply to underlying investments received by the amalgamated entity on account of merger. The relevant extracts are reproduced below: In our view, the said Section can be applied if there is a transfer of shares in favour of a Firm or a Company. For the transfer of shares, we agree with the assessee that there must be a transferor and transferee and transferred assets i.e., shares. In the case of amalgamation, it cannot be said that there is a transfer of shares as there is only statutory vesting of the assets by virtue of the Scheme. Section 56(2)(viia) is applicable only if assessee being a Company receives shares of a Company either without considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding recorded against the appellant's brother, Lalji, in the ex parte assessment order which had originally been passed against him. It is no doubt true that the said ex parte order had held that Lalji was liable to pay the tax on the amount of income in question ; but the said order has been subsequently set aside, and, as we have already seen, fresh proceedings against Lalji have been commenced at Jamnagar. Mr. Nambiar also relied on the admission made by the respondent in his statement of the case before this court, and he contended that the respondent himself seems to concede that the assessment proposed to be made against the appellant is no more than precautionary. It is true that paragraph 3 of the statement avers that steps are being taken against the appellant for taxation of income in his hands only as a precautionary measure against the eventuality of its being finally held that the income is not liable to be taxed in his brother's hands , and it was added that the appellant's contention that such a procedure is not warranted under the Act is entirely untenable ; but in appreciating the effect of this statement it would be necessary to consider the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered in the said proceedings. Proceedings against Chhotalal may also be taken by the Income-tax Officer and continued and concluded, but until the proceedings against Lalji are finally determined no assessment order should be passed in the proceedings taken against Chhotalal. If in the proceedings taken against Lalji it is finally decided that it is Lalji who is responsible to pay tax for the income in question it may not become necessary to make any order against Chhotalal. If, however, in the said proceedings Lalji is not held to be liable to pay tax or it is found that Lalji is liable to pay tax along with Chhotalal it may become necessary to pass appropriate orders against Chhotalal. When we suggested to the learned counsel that we propose to make an order on these lines they all agreed that this would be a fair and reasonable order to make in the present proceedings. 15.2 In our considered opinion, the Hon'ble Supreme Court has held that the protective / precautionary assessment of tax is justified under the provisions of the Act. 15.3 Thereafter, he had also relied upon the decision in the case of M.P. Rama Chandran Vs. DCIT (Mumbai Tribunal reported in 32 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson in whose hands the Assessing Officer prima facie holds the opinion that the income is rightly taxable. Having done so and with a view to protect the interest of the revenue, if the Assessing Officer is not sure that the person in whose hands he had made the substantive addition rightly, he embarks upon the protective assessment. Thus the protective assessment is basically based on the doubt of the Assessing Officer as distinct from his belief which is there is the substantive assessment. Obviously there is no place for doubt in the scheme of reassessment, as it has to be belief of the Assessing Officer about the escapement of income, which is the foundation for assessment or reassessment under section 147. Even if for a moment we agree with the ld. DR that the protective addition is different from substantive addition and hence the reassessment proceedings be upheld, we find that ultimately the same conclusion will follow if the substantive addition is struck down at a place where it was made. In such a scenario the protective addition will get converted into substantive addition in the reassessment. That will also run contrary to the format of reassessment, being to tax an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed with the Assessing Officer during the course of original assessment proceedings in which an addition of Rs. 10,84,523 was made. It was claimed that there was no failure on the part of the assessee to disclose all the relevant facts and hence the reassessment be not made. Considering the provisions of section 147 and other relevant sections, the Assessing Officer came to the conclusion that his action was valid. One of the issues which weighed heavily with the Assessing Officer for issuing notice under section 148 was that the assessee had claimed expenditure on advertisement and publicity to the tune of Rs. 99.46 lakhs and as per the agreement entered into between the assessee and Jyothy Laboratories Limited (hereinafter referred to as JLL ), the assessee was entitled to the reimbursement of the advertisement expenses incurred by it from the company. It was noted from the analysis of the advertisement expenditure that the maximum amount was debited by the assessee in his books of account, whereas JLL had debited only the barest minimum amount. The Assessing Officer noted in the reasons that this issue was also taken up during the block assessment proceedings and it was found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the Hon ble Supreme Court in the case of CIT v. Alps Theatre [1967] 65 ITR 377 as per which the assessee was entitled to depreciation on building and land appurtenant to it. The Assessing Officer noted that the assessee had not furnished the area of land which was purchased in 1990 and the area on which building was constructed. He, therefore, estimated the depreciation claimed on the excess land held by the assessee at 50 per cent of the regular rate of depreciation of 10 per cent. Disallowance of Rs. 2,650 was made on this count and added to the total income. Another reason recorded by the Assessing Officer for reassessment, was that a sum of Rs. 5,057 was the amount of interest on refund received by the assessee from the Income-tax department on 21-6-1996, which was not offered for taxation in the return filed by the assessee. The Assessing Officer made addition for this sum also with a narration Previous year expenditure debited to Profit Loss Account . Resultantly the total income was computed at Rs. 5.60 crores and odd as against the originally computed income at Rs. 32.36 lakhs. 17. From the combined reading of facts mentioned in Para 2 and the conclusion in P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is brought to tax in the relevant year on protective basis. The assessment for A.Y. 2012-13 will be reopened and the income u/s 56(2)(viia) will be brought to tax on substantive basis separately. 20.1. As mentioned hereinabove, the year of chargeability would be the year in which the assessee received the properties i.e., the assessment year under consideration and therefore, the Assessing Officer had rightly charged the income under section 56(2)(viia) of the Act. 21. The contention of the ld.AR that there has to be substantive addition then only the protective addition can take place. In this regard, we are of the opinion that the above said principle is not universally applicable and is required to be applied with caution and on case to case basis. In the present case, the Assessing Officer was wrongly harboring the view that the additions were required to be made on substantive basis in the year of transfer i.e., A.Y. 2012-13. Admittedly no proceedings were pending at the time of passing of assessment order dt.31.12.2016, therefore it is not possible to make the addition on substantive basis for A.Y. 2012-13. If we hold the same, then the Bench would be asking the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e required to be converted into substantive addition. 22. The other submission made by the assessee is that there is no transfer on account of amalgamation and therefore, it will not attract the rigours of section 56(2)(viia) of the Act. In this regard, the ld.CIT(A), had referred to the definition of amalgamation mentioned in section 2(IB) of the Act. It was the finding of the ld.CIT(A) that because the share holding and shareholders were identical prior to and post amalgamation i.e., in the same ratio, and further, the transfer of property / assets as defined in clause (i) of the definition u/s 2(IB) of the Act to the new entity, the same would not be a transfer within the meaning of section 47(vi) of the Act. At this stage, it is relevant to reproduce section 47(vi) of the Act which provides as under : [(vi) 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;] 23. The capital asset has been defined under the Income Tax in section 2(14) which provides as under : (14) capital asset means (a) property of any kind held by an assessee, whether or not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e chargeable under income from other sources. The proviso to section 56(2)(viia) has provided an exception to its applicability. It had only excluded such properties received by way of transaction not regarded as transfer which are mentioned in clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47 of the Act. 24.3 On the basis of the plain reading of the above mentioned provisions, we can safely conclude that the transfer as contemplated under section 47(vi) will be forming part of section 56(2) of the Act and therefore, transfer / receive of shares of a company in which public are not substantially interested will be chargeable as income from other sources in the hands of recipient. 24.4 It may be mentioned that section 47(vi) of the Act, is an exemption of income arising on account of capital gain, on account of amalgamation of company, in the hands of the amalgamating companies, whereas section 56(2)(viia) is chargeable in the hands of the recipient of shares, if the consideration paid for receive of shares is below the fair market value, then the same is chargeable in the hands of amalgamated company . 24.5 The deemed income on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamation and demerger which are not regarded as transfer under clauses (via), (vic), (vicb), (vid) and (vii) of section 47 of the Act. ( emphasis supplied by us) 13.3 Applicability -This amendment has been made effective from 1st June, 2010 and accordingly, apply in relation to the assessment year 2011-12 and subsequent years. 13.4 The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income. The provisions were intended to extend the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. Therefore, the definition of property has been amended to provide that section 56(2)(vii) will have application to the 'property' which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient. 13.5 In several cases of immovable property transactions, there is a time gap between the booking of a property and the receipt of such property on registrati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia) or (vic) or (vicb) or (vid) or (vii) of section 47 of the Act are excluded from the purview of section 56 of the Income Tax Act. In all these clauses of (via) or (vic) or (vicb) or (vid) or (vii) of section 47 of the Act, there is a transfer either by way of amalgamation or merger. However, the statute had only excluded these transfers and had retained the other transfers on account of amalgamation, within the purview of section 56(2)(viia) of the Act. In the present case, the scheme of amalgamation was approved by the Board of Directors of each transferor company and the transferee company in their meeting on 06.11.2012 and the said scheme of amalgamation was approved by the Hon ble High Court. Under the scheme of amalgamation, approved by the Hon ble High Court, the shares were received by the assessee company from the 11 transferor companies. From the perusal of the scheme of amalgamation, it is abundantly clear on account of the consideration as mentioned in clause 5 of the transfer scheme, that the transfer of shares took place from 11 amalgamating companies to the amalgamated company namely, M/s. Vertex Projects Limited and the amalgamated company in consideration of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act, 1956, it is provided for transfers and mergers of the 11 companies namely, M/s. Blue Streak Consultants Pvt. Ltd and others with M/s. Vertex Projects Limited. The Transferor Company has been defined in clause 1.17 of the Scheme of Amalgamation, which provides as under : 1.17 Transferor Companies means and include collectively Blue Streak , Caspian . Casuarina , GVK Energy , GVK Hyder , Marvel , Metro , Plateau , Trinity , Vertex Infra , Zinger . 31. The share capital of all the 11 companies as per the Scheme of Amalgamation is as under : The present Share Capital of blue Streak / 1st Transferor company is as under:- Particulars Amount in Rupees Authorized 10,000 Equity Shares of Rs. 10/- each 1,00,000 Issued, Subscribed and paid-up 10,000 Equity Shares of Rs. 10/- each fully paid-up 1,00,000 The present Share Capital of Casplan / 2nd Transferor company is as under:- Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is as under:- Particulars Amount in Rupees Authorized 20,00,000 Equity Shares of Rs. 10/- each 2,00,00,000 Issued, Subscribed and paid-up 10,000 Equity Shares of Rs. 10/- each fully paid-up 1,00,000 The present Share Capital of Plateau / 8th Transferor company is as under:- Particulars Amount in Rupees Authorized 1,00,000 Equity Shares of Rs. 10/- each 10,00,000 Issued, Subscribed and paid-up 10,000 Equity Shares of Rs. 10/- each fully paid-up 1,00,000 The present Share Capital of Trinity / 9th Transferor company is as under:- Particulars Amount in Rupees Authorized 1,00,000 Equity Shares of Rs. 10/- each 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferor Companies including all assets whether movable or immovable, tangible or intangible, real or personal, in possession or reversion, corporeal or incorporeal of whatsoever nature, wheresoever situated including buildings, offices, marketing offices liaison offices, furniture, fixtures, office equipment, appliances, accessories, inventories together with all present and future liabilities (including contingent liabilities) and all cash and bank balances appertaining or relatable to the Transferor Companies and all permits, rights, entitlements, registrations for carrying on business operations and activities and other licenses including approvals, permissions, consents from various authorities including municipal/statutory bodies(whether granted or pending), receivables, benefit of any deposits, assets, properties or other interests, financial assets including investments made by way of equity by the Transferor Transferee Companies in other body corporates which are not party to this scheme, all kinds of funds belonging to or utilized for the Transferor companies, bank accounts privileges, all other rights and benefits including any tax, direct or indirect including advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, liabilities, contingent liabilities, duties and obligations of the Transferee Company on the same terms and conditions as were applicable to the Transferor companies. 4.4 It is hereby clarified that all assets and liabilities of the Transferor companies shall be transferred at values appearing in the books of account of the Transferor Companies as on the Appointed Date which are set forth in the closing balance sheet of the Transferor Companies as of the close of business hours on the date immediately preceding the Appointed Date. 4.5 Part III of the Scheme has been drawn up to comply with the conditions relating to Amalgamation as specified under section 2(1B) of the Income-tax Act, 1961. If any terms or provisions of the Scheme is/are inconsistent with the provisions of section 2(1B) of the Income tax Act, 1961, the provisions of section 2(1B) of the Income-tax Act, 1961 shall prevail and the Scheme shall stand modified to the extent necessary to comply with Section 2(1B) of the Income-tax Act, 1961. Modifications will however, not affect the other parts of the Scheme. 32. As per clause 5 of the Scheme of Amalgamation, the transferee company namely, Vertex Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity/9th Transferor company Vertex Infra/10th Transferor company M/s. Vertex Projects Limited shall allot 1013500 equity shares of Rs.10/- each fully paid up in proportion to the shares held by the members in Vertex Infra/10th Transferor company Zinger/11th Transferor company M/s. Vertex Projects Limited shall allot 6280750 equity shares of Rs.10/- each fully paid up in proportion to the shares held by the members in Zinger/11th Transferor company 5.1 Every member of the transferor company shall surrender their share certificate to the transferee company and obtain new share certificate. 5.2 The issue and said allotment of equity shares by the transferee company to the members of the transferor companies shall be done after cancellation of cross holding of investments made amongst the Transferor and Transferee Companies and further such issue of shares shall be carried out in accordance with the provisions of the Act. 5.3 Such equity shares to be issued and allotted by the transferee company to all the members of the respective transferor companies in term of clause 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X(PV) Equity shares= (PE) Where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L= book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (i)the paid-up capital in respect of equity shares: (ii)the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation (iv)any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21.44 18,22,548 6 Bonanza Real Estates(P) Ltd 23.02 84,000 10,79,400 12.85 10.17 8,54,517 7 Classic Land Holdings(P) Ltd. 42.97 85,000 10,92,250 12.85 30.12 25,60,176 8 Consolidated Real Estates(P) Ltd. 67.00 40,000 5,10,000 12.75 54.25 21,70,104 9 Eagle Land Holdings(P) Ltd. 31.57 68,000 8,67,000 12.75 18.82 12,79,450 10 Fair Value Holdings(P) Ltd. 55.83 35,000 4,37,500 12.50 43.33 15,16,716 11 Fortu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vulcon Constructions (P) Ltd. 45.22 74,000 8,88,000 12.00 33.22 24,58,296 Total 399,83,664 3.11 The fair market value of un-quoted shares held by Metro Architects Contractors(P) Ltd, is as under:- Name of the company Vertex Infratech (P) Ltd. As on 31-03-2013 Book Value of assets in the balance sheet reduced by TDS/tax paid(A) 13247,55,484 1324766909-11425 Book value of liabilities excl capital/reserves/provision/contingent liabilities(L) 9979,97,227 1324766909- (304000000+22769682) Total amount of paid up equity shares(PE) 3040,00,000 Paid up value of shares(PV) 10.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22,750 3.13 The fair market value of un-quoted shares held by Vertex Infratech(P) Ltd., is as under:- Name of the company GVK Energy Holdings Ltd. As on 31-03-2013 Book Value of assets in the balance sheet reduced by TDS/tax paid(A) 5138,43,899 5138,43,899 Book value of liabilities excl capital/reserves/provision/contingent liabilities(L) 5070,78,075 513843899-(5000000+1765824) Total amount of paid up equity shares(PE) 50,00,000 Paid up value of shares(PV) 10.00 FMV of shares=(A+L/PE X PV 135.32 Share price fixed No. 2,55,000 Amount 22,18,499 Value 8.70 Difference in value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore amalgamating the companies, the separate valuation of the amalgamating companies has not been taken place or carried out by the assessee and if there was any such valuation, the same was not brought to our notice. The shareholders of the amalgamating companies are holding the individual shares in the said companies at face value Rs.10/- each and the shareholders of the said amalgamating companies, were allotted shares of the amalgamated company at face value of ₹ 10. The shares of the amalgamating companies along with the underlying assets (including quoted and unquoted shares, preferential shares etc.,) have been received as per the transfer scheme by the amalgamated company. The amalgamated company had not paid any fair market value of the assets received by it in the form of shares to the amalgamating companies. 35. In the present case, due to the scheme of amalgamation, the assessee received the shares of 11 amalgamating companies along with underline properties including the shares of various companies and in consideration thereof, had allotted the number of shares at face value of Rs.10/- to various shareholders of the said 11 amalgamating companies. In this way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1). In fact, before introduction of section 56(2)(viia), the provisions were only applicable to the instances mentioned in section 56(2)(vii). By amendment, section 56(2)(viia) was introduced by the legislature thereby expanding the scope of statute and bringing the chargeability of any property being the shares, without in adequate consideration or consideration which is less than the fair market value within its purview. The intention of the legislature was manifest when it had only excluded clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47 of the Act. The legislature had deliberately not excluded section 47(vi) from the applicability of section 56(2)(viia) of the Act. 41. The ld.CIT(A) without applying his mind had come to the conclusion that the shareholding and shareholders were identical and even post amalgamation, the holders were the same and the shareholding was in the same ratio. The ld.CIT(A) has lost his sight to the provision of section 56(2)(vii) which contemplates that the receipt of any property being shares of an unlisted company in which public are not substantially interested by a company in which public are not subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra) is of no use to the assessee. 42.1 The assessee had also relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Ozone India Limited reported 121 taxmann 192 which in our opinion is distinguishable and is not applicable to the facts of the present case. Firstly, the said decision is not on the issue before us and issue therein was covered on account of transaction excluded from the purview of section 56(2)(viia) by virtue of explanation and proviso to it. Lastly, the decision in the case of Marshall and Company (supra) is also not applicable as it was not rendered in the context of section 56(2)(viia) of the Act. In view of the above the finding of the ld.CIT(A) are set aside and the order of Assessing Officer invoking the provision of section 56(2)(viia) of the Act is restored. Thus, ground No.2 of Revenue s appeal is allowed. GROUND NOS.3 AND 4 43. Having held that the Assessing Officer was right in invoking the provision of Section 56(2)(viia), we have to determine whether the amount charged by the Assessing Officer on account of receive of shares, was in accordance with law or not ? In this regard, the ld.DR had submitted that the ld.C ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
