TMI Blog1980 (8) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and in the circumstances of the case, the Tribunal was justified in holding that the surplus of Rs. 2,01,445 and Rs. 33,397 in the assessment years 1960-61 and 1961-62, respectively, arising on account of remission of debts consequent on the amalgamation of Matru Bhumi Nirman Private Ltd. and Swadeshi Nirman Private Ltd. could not be taxed as revenue receipts on the ground that the said amalgamations were neither business transactions nor adventure in the nature of trade ? " In the case of M/s. Manav Sahyog Pvt. Ltd., the following two questions have been referred to us for decision: " 1. Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the amalgamation of four companies, namely, Rashtriya Agencies Pvt. Ltd., M/s. Rajasthan Udyog Pvt. Ltd., M/s. Pepsu Trading Co. Ltd. and M/s. Dadri Marketing Ltd. was neither a business transaction nor an adventure in the nature of trade ? 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the surplus of Rs. 4,10,415 was not taxable as revenue gain ? Though the questions are framed in a slightly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n over by it came to Rs. 6,51,260. Deducting these liabilities from the surplus of Rs. 10,61,675 he added as the net profit of the assessee as a result of the amalgamation a sum of Rs. 4.10,415. He, however, observed if the figure of liabilities needed modification in the light of appellate orders in respect of income-tax demand or otherwise in the light of evidence produced by the assessee, necessary rectification under s. 154 of the I.T. Act, 1961,would be made as and when necessary. The orders passed by the ITO were confirmed by the AAC on appeal. The appeals in the case of Bharat Development Pvt. Ltd. were heard by the AAC in the first instance. We shall refer a little later to the details of the figures regarding the taking over, which have been dealt with by the AAC in the appeal of Bharat Development Pvt. Ltd. for the assessment year 1960-61. For the present it is sufficient to say that the AAC in both the cases confirmed the findings of the ITO that there had been a profit realised by the assessee as a result of the takeover. It may also be mentioned that he came to a similar conclusion in the case of M/s. Manav Sahyog Pvt. Ltd. In the course of the hearing of this appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not help the department. It is no doubt true that one of the objects in the articles of association was amalgamation with other companies, but merely because an object is mentioned in the articles of association, it does not become a business by itself. As mentioned in Kanga and Palkhivala's Commentary, page 490, cited above, an amalgamation does not involve any exchange, transfer or sale and, therefore, in our view, cannot be said to have any ingredient of a business transaction." The appeal preferred by M/s. Manav Sahyog Pvt. Ltd. for the assessment year 1958-59 came up for hearing later. The Appellate Tribunal took note of the fact that the assessee had objected to the assessment of the surplus in each of these cases on the following grounds: 1. It is not the business of the company to take over the assets and liabilities of their concerns and make a profit by realising the assets and paying off the liabilities. The company not being a dealer in book debts, the amount of surplus cannot be brought to tax as a business profit. 2. Even assuming that any profit had arisen out of amalgamation arrangement, it was exempt from tax under section 4(3)(vii) of the Income-tax Act as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamation of the companies. In this view of the matter, we have no doubt in our mind that the assessee has not made any profit by the process, which may conveniently be described as amalgamation. This ground is, therefore, rejected." The Tribunal thus came to the conclusion that no profits accrued to the assessee at all, and so found it unnecessary to consider the other contentions, namely, contentions Nos. 1, 2 and 4 set out earlier which the assessee had put forward before the ITO. The Tribunal again distinguished the decision in the case of Surangmali Punamchand Surana v. CIT [1960] 40 ITR 360 (Assam) which had been relied upon for the department. It is in these circumstances that the questions set out earlier have been referred to us for our decision. I have given the matter a careful consideration and I am of opinion that the conclusion arrived at by the Tribunal was correct and does not call for any interference. Though the sums involved are very substantial and the matter is a little complicated by the amalgamation of several companies, I agree with the Tribunal that in the ultimate analysis the matter is a very simple one, of a trader being able to purchase a commo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en a large number of transactions in the Dalmia group of concerns where some concerns belonging to the group appear to have been absorbed by other concerns in the group. In the case of M/s. Manav Sahyog Pvt. Ltd., we find the company absorbing four other companies belonging to the same group. In the case of Bharat Development Pvt. Ltd., there was an amalgamation of Swadeshi Nirman Private Ltd., in the accounting year which ended on October 31, 1960. In the immediately preceding year, Matru Bhumi Nirman Private Ltd. had been amalgamated with the same assessee-company and from the order of the AAC it is seen that some time earlier, i.e., on February 20, 1957, there had been a scheme of arrangement by which the company known as Vishwa Industries Pvt. Ltd. was amalgamated with Matru Bhumi Nirman Private Ltd. Further, from the order of the Tribunal it is seen that there had been a similar amalgamation of some company with South Asia Industries Pvt. Ltd. Other instances have been given by the AAC in his order for 1961-62. Thus, it would appear that there have been a number of companies belonging to this group which have entered into the schemes of amalgamation whereby their assets and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan due from South Asia Industries Ltd., and the liabilities were the payments made or to be made to the shareholders of the transferor-company. (b) In the case of the amalgamation of Matru Bhumi Nirman Pvt. Ltd. with Bharat Development Pvt. Ltd., in the previous year relevant to the assessment year 1960-61, the position is slightly more complicated. Out of the total surplus of Rs. 2,01,445 it was only a surplus of Rs. 1,09,556 which had resulted from the take-over of the Matru Bhumi Nirman Pvt. Ltd. by Bharat Development Pvt. Ltd., on August 13, 1959. The AAC has explained how this difference arose. On the credit side were the value of assets taken over from the transferor-company. These were Rs. 8,15,903, being the amount due to the appellant (sic) from Matru Bhumi Nirman Pvt. Ltd., Rs. 14 being the deposit with the Registrar of Companies, Rs. 1,829, being the bank balance and Rs. 290, being the cash balance. The total of assets thus came to Rs. 8,18,036. On the debit side there was an item of Rs. 3,06,685, being the amount due to the shareholders of South Asia Industries Pvt. Ltd. and interest thereon. The assessee-company had also paid to Shri R. Dalmia and certain other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amalgamation account. If we are correct on this then obviously the illustration given much earlier applies squarely to the facts of the case. All that has happened is that the assessee whose business includes, as we have assumed, the business of taking over of other concerns has been able to take over a concern of the value of Rs. 10,000 by paying only Rs. 8,000 therefor. In other words, this is no different from the case of a dealer in motor cars being able to acquire a motor car of the market value of Rs. 20,000 for Rs. 15,000. The fact of his having made a good bargain by way of purchase only means that he has saved a sum of Rs. 5,000 ; at this stage he has earned no income. The income will arise and the profit embedded in the bargain will be reflected when eventually the motor car is sold. That would be the stage of realisation of profits. The position is exactly similar here and we agree with the Tribunal that the assessee cannot be said to have made a profit by acquiring these concerns at a cheaper price than what they perhaps deserved. Two decisions have been referred to by the ITO on the one hand and the assessee on the other. The case of Surangmali Punamchand Surana v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties and in respect of these items the price allocated was Rs. 50,000. Thus, the total purchase price, as per these two agreements, came to Rs. 2 lakhs. On the other hand, according to the books of the vendor-company, the value of the assets purchased were much more. By a comparison between the book value and the value paid as per the agreements there was a surplus of Rs. 28,034 regarding the items covered by the first agreement and similarly by the second agreement there was a surplus of Rs. 21,057. The surplus of Rs. 49,081 was transferred by the assessee to the capital reserve account and was shown as such in the balance-sheet for the year July 31, 1954. The question that came up for consideration was whether this surplus was taxable or not. The question was reframed by the High Court in the following manner: " Whether, on the facts and in the circumstances of the case, the difference between the book value of the assets of the factory acquired by the assessee-company as a running concern and the price paid for the same was assessable in whole or in part as revenue profits derived by it during the previous year relevant to the assessment year 1955-56 ? " The answer to this q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y immediately on the take-over. The liabilities of the shareholders of M.B.N. were discharged fully by cash payment. The only liabilities which remained outstanding were in respect of deposit receipts of the amount of Rs. 1,86,900 issued to the shareholders of South Asia Industries Pvt. Ltd., under a scheme of arrangement u/s. 208C of the Indian Companies Act, 1913, by V.I. which were taken over by M.B.N. and then in turn by the appellant, and the interest thereon and a further sum of Rs. 435 due to the shareholder of V.I. " It is, however, not clear, how the AAC arrived at this conclusion. A little earlier he has pointed out that the assets taken over by the assessee-company were of the value of Rs. 8,17,955. Leaving out the cash deposit with the Registrar, the cash balance in hand and the bank balance, there was an asset of Rs. 8,15,903. The AAC has observed that this was " the amount due to the appellant from Matru Bhumi Nirman Pvt. Ltd." There seems to be some mistake here as the amount due to the appellant from the Matru Bhumi Nirman Pvt. Ltd. could not be an asset in the hands of Matru Bhumi Nirman Pvt. Ltd. But even assuming that so far as the asset position was concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J.-As the narration of facts brought out by my learned brother shows, the memorandum of associations of the assessee-companies provided for the taking over of going concerns with all assets and liabilities of such concerns. This was not a mere empowering clause, as, for that purpose, the companies need not have introduced articles in their memoranda of associations. Recourse to the provisions contained in the Companies Act or otherwise could in any case have been available in that direction. In fact I agree with the findings of the ITO that it was one of the objects of the incorporation of the assessee-companies to make a trade in the taking over of going concerns with their assets and liabilities. Their conduct covering a number of years has amply brought out the same. In my opinion, this was a significant circumstance to be taken into account for determining whether in the process of amalgamations which the present assessees engineered, any income accrued or resulted in their favour. My learned brother has taken note of a large number of transactions in the Dalmia group of concerns, to which the present assessees also belonged, where several concerns were absorbed by other conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resulted in the accrual of profit and gain. One such instance can be where the demonetization of high denomination currency notes takes place. Not unoften, deals in them at a far lower valuation than their face value are effected simply because the purchasers are situated in circumstances that they can get them encashed at their right value. Such purchase of demonetized currency notes itself results in profit and gain. There need not be a further sale. There have been instances where displaced persons' verified claims were purchased at far lower amounts than their face values. The ITO has aptly narrated the case of a person who purchased fixed deposits of a bank (which had suspended operation) at a lower value than their face value in order to wipe off his overdraft account and in the deal stood to gain a considerable amount. He was held to have enjoyed income assessable to tax: [Surangmali Punamchand Surana v. CIT [1960] 40 ITR 360 (Assam)]. Where a money aspect is apparent from its very nature or is inherent in the circumstances, it can be taken that a transaction of purchase itself can result in profit and gain. In the present cases, the acquisition, amalgamation and taking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Value of 104 acres retained by the appellant at Rs. 2,000 per acre 2,08,000 ------------------ 7,26,500 Less cost 6,00,000 ------------------ Total 1,26,500 ------------------ The amount of Rs. 1,26,500 in round figures representing the profit enjoyed during the entire transaction was treated as the assessee's income accruing from business and taxed accordingly. This was upheld by the Supreme Court. It was observed that the ITO had correctly treated the land as stock-in-trade and estimated it according to the normal accountancy practice. It was also observed that it was not correct to say that the profits of the adventures could be determined only at the time of completion of the sale of the entire estate. Each year was a self-contained unit and in the case of a trading adventure for computing the true profits of the year, the value of the stock-in-trade at the beginning and at the end of the accounting year had to be taken into account. The following observations made in Whimster Co. v. IRC [1925] 12 TC 813 were cited with approval at p. 823: " In computing the balance of profits and gains for the purposes of Income Tax .... two general and fundamental com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 122 (SC) observed at p. 133 as follows: " These observations do not affect the true character of the profits of a business. Adjustments may have to be made in the principle having regard to the special character of the assets, the nature of the business and the appropriate allowances permitted, in order to arrive at the taxable profits. They do not support the proposition that, in the case of a trading venture, you can arrive at the true profits of a year by ignoring altogether the valuation of the stock-in-trade at the end of the year, while debiting its value at the commencement of the year as an outgoing; for determination of the profits by ignoring the valuation of the stock at the end of the year and debiting the value of the assets at the commencement of the year would not give a true picture of the profit for the year of account." In my considered opinion, the decision of the Supreme Court in the case of P. M. Mohammed Meerakhan [1969] 73 ITR 735 has a significant bearing on the present case in order to show that profit need not essentially arise to a person when he effects sale of his stock-in-hand. Its retention by him and its computation of value at the close of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in the case of Surangmali Punamchand Surana v. CIT [1960] 40 ITR 360. In that case, the assessee who had an overdraft account with the bank found that the bank has suspended operation. The assessee in the circumstances purchased from several persons who held deposits, at values less than the face value of those deposits and got them adjusted against his overdraft account with the bank. In that process he stood to gain Rs. 16,995. It was held that the purchase of deposits with a view to derive the full benefit of the sums which the depositors held in the bank and deriving that benefit from the bank by adjustment amounted to " business " and the profit derived therefrom came within the scope of " profits or gains of business" within the meaning of s. 10 of the I.T. Act. From the side of the assessee considerable reliance has been placed upon the observations of the Gujarat High Court in CIT v. Spunpipe and Construction Co. Ltd. [1965] 55 ITR 68. It was held in that case that if a going concern including fixed assets and stock-in-trade was purchased, the difference between the book value of any part of the assets acquired by the assessee and the price paid by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the same group were shown in the balance-sheet. These liabilities could be taken at best on their face value and a straight gain resulted. Thus I do not find any merit also in the contention of the appellant's counsel that a gain would not result merely on the purchase of assets. This was not a case merely of purchase of assets and holding them as such. The assets were actually realised and a gain resulted which was duly shown in the account." I am, therefore, of opinion that when the money aspect and gain thereof are by themselves plainly discernible and are not dependent on the sale that may or may not take place, and the surplus enjoyed is clearly visible and stands accordingly credited in the books, as in the present case, it will not be correct to say that profit has still not accrued. The conduct of the present assessees in crediting the gains and surplus enjoyed in the amalgamation accounts of their books, of its own, reflected how the assessees took them to be. They had, in a way, tacitly acknowledged of having enjoyed a surplus in the process of amalgamations. There, this part of the trading activity of acquiring companies in the form of amalgamations was complete. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the surplus of Rs. 4,01,415 was not taxable as revenue gain ? " In both these cases, the Tribunal had come to the conclusion that the surpluses were not taxable as revenue gains. The facts of the two cases are not at all in dispute. In the case of M/s. Bharat Development Private Ltd., another company called Matru Bhumi Nirman Private Ltd. was amalgamated with the assessee-company and there was a surplus of Rs. 2 01,445 in the assessment year 1960-61, and in the assessment year 1961-62, another company known as Swadeshi Nirman Private Ltd. was amalgamated with the assessee-company and a surplus of Rs. 33,397 arose. This amount was placed by the assessee in the capital reserve account. The ITO treated this amount as profit on amalgamation and brought the amount to tax. In appeal, the assessee contended that the surplus was in the nature of a capital receipt or casual receipt and did not arise from any business transaction. The AAC found that there was a conscious and planned effort involved in the amalgamation for the purpose of making a gain. He, therefore, held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Khanna J., it has been held that the fact that the assessee has got something cheaper is part of its business dealings and, therefore, that saving is a revenue receipt. In my view, these decisions have made an assumption which has to be more carefully and critically examined regarding the nature of the receipts involved in those cases. In order to understand the true nature of the transactions, it is important to note that the Companies Act provides a method by which two or more companies can amalgamate and the assets and liabilities of what may be called the transferor-company can pass and belong to the transferee-company. As far as the balance-sheet of the companies is concerned, their very nature requires and pre-supposes that they must balance. If company " A " amalgamates and becomes part of company " B ", then the assets of company " B " will consist of its assets plus the assets of the transferor-company. Similarly, the liabilities are amalgamated so that the liabilities of the transferee-company will be the sum total of the liabilities of the two companies. As both the sides are equal, it would follow that the assets and liabilities when joined together should also be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33A, 35, 35A, 43, 47 and 49. The object of these provisions was to give the transferee-company the same rights regarding depreciation, development rebate, etc., which were available to the transferor-company. As the case now before me relates to the earlier years, these provisions are referred to only per curiam. The noteworthy feature of an amalgamation of two companies is the fact that the assets are transferred, by what is described as the amalgamating company in s.2(1A) to the amalgamated company, without any payment to the said amalgamating company. In actual fact, the assets belong to the shareholders of the amalgamating company. The effect of the amalgamation is that the assets come to the amalgamated company, which, in turn, issues a fresh share capital to the shareholders of the amalgamating company. No actual cash payment is involved in the amalgamation as far as the amalgamated company is concerned. Applying this analysis to the present case, it would appear that when Matru Bhumi Nirman Private Ltd. amalgamated with M/s. Bharat Development Private Ltd., the assets of the amalgamating company came into the hands of the assessee, but no payment as such was made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. If this is not the same amount, then a surplus appears. As it happens, the balance-sheet of the other assessee, Manav Sahyog Private Ltd., has been produced in the paper book and that will serve as a proper example of the procedure in making the amalgamation. I reproduce the relevant part of that balance-sheet : LIABILITIES Rs. Rs. SHARE CAPITAL Subscribed, called paid up : 30 Equity shares of Rs. 100 3,000.00 each issued for cash 1,010 Equity shares of Rs. 100 1,01,000.00 1,04,000.00 each issued in full pursuant to scheme of arrangement u/s. 208C of the Indian Companies Act, 1913. Reserves Surplus: Net profit transferred from 1,580.90 Profit Loss A/c. Unsecured loans (bank over- 5.12 drafting temporarily overdrawn). Current liabilities provisions: Outstanding liabilities 450.75 Sundry creditor a/c. Dadri 132.47 Marketing Pvt. Ltd. Deposit receipts a/c. Dissenting 25,125.62 shareholders of Patiala Biscuit Mfrs. Pvt. Ltd. Interest accrued and accruing 2,358.11 on above deposits Deposit Receipt 47.50 Shareholders' Pepsu Trading 1,035.50 Co. Pvt. Ltd. Amalgamation a/c. 10,61,675.42 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies have got shares in the assessee-company which they have accepted. There is neither a receipt nor any payment by the assessee-company. To illustrate the point even further, an artificial example of an amalgamation between two companies "A " and " B " can be conveniently framed. Suppose, there is a company " A " whose balance-sheet is as follows : LIABILITIES ASSETS Rs. Rs. Share capital 1,00,000 Cash in Bank 1,00,000 and there is a company " B " whose balance-sheet is as follows: LIABILITIES ASSETS Rs. Rs. Share capital 10,00,000 Outstanding loans 12,00,000 Reserves 2,00,000 considered good If these two balance-sheets are combined and company " B " becomes a part of company " A ", the resultant balance-sheet would be: LIABILITIES ASSETS Rs. Rs. Share capital 11,00,000 Cash in bank 1,00,000 Reserves 2,00,000 Outstanding monies 12,00,000 considered good Total ----------------- ------------------ 13,00,000 13,00,000 ----------------- ------------------ This would be the result if the shareholders of company " B " are given a one-to-one shareholding in company " A ". But if the shareholding to be given to " B " is less, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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