TMI Blog1991 (5) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... ater on changed its name to Makers Development Services Ltd. A scheme of amalgamation was prepared and the interested parties petitioned to the High Court of Bombay on 28th April, 1980 for approval of the scheme. The scheme was approved by the High Court and certified copy of the Court's order sanctioning the scheme of amalgamation was received by the parties concerned on 25th July, 1980. The appointed date as far as Haribhai Estates Pvt. Ltd was concerned was 1st Jan., 1980 and in the case of M/s Paramount Premises it was 1st April, 1980. These two companies filed their returns of income for the asst. yr. 1980-81 alongwith the financial accounts upto the period ending 31st Dec., 1979 in the case of the former and 31st March, 1980 in the case of the latter. Assessments were also completed in the normal course by the Assessing Officer on the amalgamated company as the successor of these two companies. Thereafter, the Assessing Officer initiated action under s. 147 against these two amalgamating companies, as according to him, he had reasons to believe that income chargeable to tax, had escaped assessment. It will have to be recalled in this connection that the assets, mostly stock-i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enged by the assessee before the Tribunal. The Tribunal held that the order of the CIT was without jurisdiction and in that view cancelled the same. In the assessment of the amalgamated company for the asst. yr. 1985-86 the same addition was made. The asst. yr. 1985-86 was the year in which the project was substantially completed. Here again, the addition made in the case of the amalgamated company was deleted by the Tribunal. The Tribunal took the view that as far as the amalgamated company was concerned, the stocks were taken over on their realisable value in the year of amalgamation and, therefore, there would be no justification for taking the cost of the amalgamating companies as the cost of the amalgamated company. The Tribunal also adverted to the provisions of s. 43C of the Act which was inserted w.e.f. 1st April, 1988. In view of the fact that these provisions have no retrospective effect, additions, made by the Revenue authorities were held to be unsustainable. The issue raised before us, has to be judged in the light of this background facts. 5. A preliminary objection was raised by the learned Departmental Representative that the assessee should be barred from arguin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not have much to say. He merely relies on the Tribunal's order in the case of the amalgamated company and contends that the Department had no case for making the addition. The scheme of amalgamation, according to the learned counsel for the assessee, is the one that was approved by the High Court of Bombay and this is what has been pin pointed in the concurring order by the Judicial Member in the amalgamated company's case for the year 1985-86. Once the Court has approved the amalgamation, it would be futile to argue, as has been done by the Revenue, that the whole scheme was a device intended to frustrate the efforts of the Revenue to collect legitimate tax. The Court cannot be a party to such alleged dubious device. This is a finding of the Tribunal in the case of the amalgamated company. Reliance placed by the Department before the CIT on the decision of the Supreme Court in the case of McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) would be of little help. Apart from the fact that the said decision is being reviewed by the Supreme Court itself, that decision could be invoked only in a case where there was a clever device and not in the case of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. As a matter of fact by letter dt. 3rd March, 1981, assessee companies had informed the Assessing Officer that they had merged with M/s Maker Development Services Ltd. A copy of the scheme of amalgamation as approved by the High Court of Bombay was also furnished. In such circumstances for the Department to contend that the primary facts necessary for the assessment were not furnished would be totally unfair. As a matter of fact, the act of amalgamation was known to the Assessing Officer as even the original assessments were made on the amalgamated company as the successor of amalgamating companies. The assessee could not be held guilty of withholding the primary facts when such facts were within the knowledge of the Assessing Officer. The order, therefore, deserves to cancelled both on merit and also for assumption of jurisdiction without the sanction of law. 8. The learned Departmental Representative, on the other hand, contends that the reference to the order of the Tribunal, in the amalgamating Company's case for the asst. yrs. 1981-82 and 1985-86 is totally irrelevant. In amalgamation different consequences would follow in the case of the amalgamated company and the amal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the income-tax and of a substantial amount and, therefore, the fact that the scheme of amalgamation had been approved has to be ignored. Our attention is also invited to the decision of the Kerala High Court reported in Josna Bank Ltd. vs. CIT (1974) 97 ITR 72 (Ker) where, according to the Departmental Representative, the facts are identical. In the said case the scheme of amalgamation of the assessee, Josna Bank, with Lord Krishna Bank was sanctioned by the Central Govt. Under s. 45(7) of the Banking Regulations Act, 1949. Under the scheme, the Lord Krishna Bank was, inter alia, to take over the investments of the assessee bank inclusive of Government securities. Clause 4(2) of the scheme provided for the valuation of such investments at the market value prevailing on the day immediately preceding the prescribed date. The difference between the book value of the investments and the market value was found to be Rs. 55,544. Assessee claimed that this amount should be added to its loss. The claim was rejected by the Tribunal. On a reference, it was held that the assessee was entitled to the deduction. 9. It is then printed out that amalgamation can in certain ways be compared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltd. with the paid-up capital of only Rs. 2,000. If this is not a tax saving device it would be difficult to conceive what could indeed be a tax saving device. It is then submitted that this is a case where the decision of the Supreme Court reported in (1985) 47 CTR (SC) 126:(1985) 154 ITR 148 (SC) would clearly be applicable. There was no compelling need for amalgamation. Two established companies with a sound equity base were made to merge with a company which was newly floated and that too with a very meagre share capital. This is nothing but an arrangement to deprive the Revenue of its legitimate taxes. Our attention in this connection is invited to the decision of the Supreme Court in Workmen of Associated Rubber Ltd. vs. Associated Rubber Industries Ltd.(1985) 48 CTR (SC) 355:(1986) 157 ITR 77(SC). In the said case the Court had clearly held that it was the duty of the Court in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs. The Court is not to be satisfied with the form and leave well alone the substance of a transaction. A plea was also raised that there in fact was no c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are withheld or if they are not fully disclosed it would not be open for an assessee to contend that the ITO with due diligence could have discovered the primary facts and, therefore, there would be no justification for initiating proceedings under s. 147(a). It is only the inferential facts, which the assessee is not liable to disclose. In this connection it is submitted that assessee had withheld from the Assessing Officer the valuation report of K.G. Kiapadia Co., and also the contents of the letter from Haribhakti Co., C.As. The letter dt. 3rd March, 1981 was not filed in the course of the assessment proceedings for the year under consideration. The scheme of the amalgamation does not indicate the amounts for which the stocks of the amalgamating companies were taken over by the amalgamated company. The Assessing Officer, if he had properly investigated could get at the truth of the matter is no defence. In this connection our attention is drawn to the decisions Malegaon Elect Co. Pvt. Ltd. vs. CIT (1970) 78 ITR 466 (SC) and CIT vs. A.I. Rahimtulla (1986) 56 CTR (Bom) 322 : (1986) 160 ITR 784 (Bom). In the latter case, the question was about the applicability of s. 2(6A)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1977) 109 ITR 177 (Guj), in fact supports the case of the assessee. The Court in that case had refused to pass an order approving amalgamation. The Court no doubt held that it would not countenance a scheme with the avowed object of defeating tax. But the Court also observed that it was charged with a duty, before it finally permitted dissolution of the transferor-company, to ascertain whether its affairs had been carried on, not only in a manner not prejudicial to its members but in public interest. The 'public interest' has been explained as an expression which should take its colour and content from the context in which it was used. This enabled the Court to find out why the transferor-company came into existence, for what purpose it was set up, who were its promoters, who were controlling it, what object was sought to be achieved through creation of the transferor-company and why it was being dissolved by merging it with another company. The Court also held that it was not merely to act as a rubber stamp. If this test is applied, it would appear that the Department had absolutely no case. The scheme of amalgamation was moved before the High Court of Bombay. The Court examined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamation was in public interest. In such circumstances, reference to an extract from Palmer's Company Law 23rd Edn. by the Departmental Representative would be of no avail. It is then submitted that the decision of the Josna Bank Ltd. vs. CIT, will not in any way help the case of the Department. In that case, the assessee was a bank and a scheme for amalgamation of the assessee bank with another Bank Lord Krishna Bank Ltd. was sanctioned by the Central Government under sub-s. (7) of s.45 of the Banking Regulation Act, 1949. Under the scheme, the Lord Krishna Bank Ltd. Was, inter alia, to take over the investments of the assessee-bank inclusive of Govt. securities. Cl. 4(2) of the scheme provided for the valuation of such investments at the market value prevailing on the day immediately preceding the prescribed date. The difference between the book value of the investments and the market value was found to be Rs. 55,544.05. The assessee claimed that this amount should be added to its loss. The claim though rejected by the Department, was allowed in reference. A plain reading of the judgment of the High Court would make it very clear that the controversy resolved to by the Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng company and also in the amalgamated company. This certainly could not be the intention of the law makers. Provisions of s. 43C would apply only to those assets transferred on or after the 29th Feb., 1988 and therefore, there would be no justification for holding that on a transfer of stock-in-trade by the amalgamating company, to amalgamated the difference between the book value of the stock-in-trade and its market value would be exigible to tax. It is then argued that the decision of the Supreme Court in the case of McDowell Co. vs. CTO and also (1986) 157 ITR 77 (SC) will have no role to play. The decision in the case of McDowell would apply only to those cases where the assessee by a device has sought to avoid taxes and the decision in the case reported in (1985) 48 CTR (SC) 355: (1985) 157 ITR 77 (SC) refers to a scheme which has been used as a device for defeating a welfare legislation. The amalgamation approved by the Court can never be considered as a device employed to defeat the law relating to taxes on corporate bodies. The tax benefit, if any, to the amalgamated company was indeed in the nature of a fall-out which even if it was intended, could not in any way damag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the original assessment in this case was made on the amalgamated company as a successor of the assessees. A letter dt. 3rd March, 1981 was filed by which the assessee had informed the Assessing Officer that there was an amalgamation; a scheme of amalgamation was also enclosed. The scheme also indicated that the assets were taken over at their revalued cost. In such circumstances to contend that the assessee had not disclosed all primary facts necessary for its assessments would be totally unjustified. Our attention in this connection is invited to the decision reported in Indian Oil Corporation vs. ITO (1986) 58 CTR (SC) 83: (1986) 159 ITR 956 (SC). The assessee has claimed deduction of certain expenses incurred by the Burmah Oil Co. of London for management and secretarial work carried on behalf of the assessee in London. The claim was admitted by the ITO. Later, for asst. yr. 1963-64, the assessee had furnished a certificate from its London auditors which revealed that reasonable charges inrelation to the total administrative expenses were about 10 per cent. The ITO required the assessee to produce similar. certificates for the asst. yrs. 1957-58, 1958-59 and 1959-60 and on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice under s. 17(1)(b) of WT Act corresponding to s. 147(a) of the IT Act. On a writ petition filed by the assessee, the Court quashed the notices issued to the assessee. The assessee further relies on the decision reported in Khan Bahadur Hormasji Maneckji Dossabhoy Hormasji Bhiwandiwalla Co. vs. B.K. Sahu, IAC (1990) 86 CTR(Bom) 94: (1991) 188 ITR 203 (Bom). In that case, the assessee had disclosed long-term capital gains on the sale of shares and the shares included bonus shares. On the plea that the assessee had not filed complete particulars as regards computation of the valuation of the bonus shares, the ITO assumed that income chargeable to tax must have escaped assessment and issued notice under s. 147(a). The Court held that the reassessment was not valid and was liable to be quashed. In this case, the issue of notice is merely on the belief that income chargeable to tax had escaped assessment as the assessee had not filed the valuation report and letter from the auditor. The assessee further relies on the decisions reported in 166 ITR 22, 120 ITR and 159 ITR 331. All the above 3 cases, according to the assessee, support its contention that the reopening of this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te by the Court. The decision in the case of A.L.A. Firm therefore would not be of any help in deciding the issue before us. Whether the amalgamating company could be taxed or not is a matter which has been considered by the CBDT and in this connection one does not have to go further than the CBDT Circular No. 528 dt. 16th Dec., 1988. In the said Circular, the apex body of the Revenue Department has clearly stated as under: "22.3 Another device resorted to by the taxpayers is to revalue the stock-in-trade taken over by an amalgamated company at the time of amalgamation......... By this devise, the amalgamating company or transferor, as the case may be, is not liable to tax on the difference arising on account of revaluation of the stock-in-trade at a higher value. The amalgamated company also reduces its tax liability on the profit accruing to it in the subsequent sale of the stock-in-trade." It would be evident from the above that the perception of the apex body of the Revenue Department accords with the unstated law on amalgamation that the difference between the value of the closing stock as per the books and its market value is not liable to be taxed in the hands of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he law as laid down by the Supreme Court in the case of McDowell Co. will have no role to play. As observed earlier, the amalgamation has the stamp of approval of the Bombay High Court and once such an approval has been granted, it can no longer be treated as a device. Such is the refrain of the Courts in the decisions reported in (1977) 109 ITR 177 (Guj), (1984) 147 ITR 294 (Guj) and (1991) 93 CTR (Raj) 25: (1990) 185 ITR 38 (Raj). In these decisions the Courts have held that a duty is cast on the Courts sanctioning amalgamations to go into the scheme in detail and satisfy themselves that the conditions mentioned in s. 391 r/w s. 394 of the Companies Act were duly satisfied. The Courts were not to act as a mere rubber stamp and that if the intention behind the scheme was avoidance of tax only, the Courts are duty bound to disapprove of such scheme. In such circumstances, to hold that the amalgamation in this case in the nature of a device would be totally wrong. We may in this connection refer to the decision reported (1988) 72 CTR (SC) 94: (1988) 173 ITR 479 (SC). In the said decision, the Supreme Court has held that where the true effect on the construction of the deeds is cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in this connection to file before the ITO a copy of the Valuation Report and in this connection reliance can be placed on the decision reported in (1986) 58 CTR (SC) 83:(1986) 159 ITR 956 (SC). That was a decision of the Supreme Court and in that case, the Supreme Court has clearly held that before assumption of jurisdiction under s. 147, there must be material before the ITO to come to the conclusion that there was omission or failure to disclose full and true material facts necessary for the assessment for the year and that those facts should be material and further the disclosure must be full and true. In this case, the assessee had clearly disclosed that there was an amalgamation and the Assessing Officer cannot claim having no knowledge about the same. If the position of the law is, as contended by the learned Department Representative, that the amalgamating company is to be charged on the difference between the value of the stocks as per the books and its market price, it was for him to find out the same. He cannot expect the assessee to come forward and furnish the Assessing Officer with a valuation report indicating the market price. Thus not furnishing to the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of G. R. Ramachari. The supreme Court held that this could be sufficient material for sustaining the reopening under s. 147 (b) of the IT Act. However, the Supreme Court observed that all the material particulars were there in the records, and clearly action under s. 148 r/w s. 147(a) could not be initiated. The assessment was sustained only because the reassessment proceedings were under cl. (b) of s. 147. It is undisputed fact in this case that the reopening was under sub-cl. (a) of s. 147 and not under sub-cl. (b). Since the fact that there was amalgamation was known to the ITO, it could be futile to argue at this stage that the material facts necessary for assessment were withheld or not disclosed. To a poser what the Departmental stand would have been if the stock-in-trade were transferred by the amalgamating company to the amalgamated company, the Departmental representative was evasive and replied that probably since in that case the amalgamated company would have borne the taxes, there could have been no action in the case of amalgamating company. Provisions of s.147 are intended to bring to tax the income that had escaped assessment. The revenue that has so esc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o discontinuance of business as alleged. The business was carried on as usual and as per the Court order the amalgamation took place on the appointed date which was a day later than the last day of the previous year and therefore the difference on account of valuation of work-in-progress, if taxable at all, could be taxed only in the subsequent assessment year. (2) On amalgamation, when the amalgamating company transferred all the assets and the amalgamated company took up the ownership of the assets, continuation of the business is guaranteed and the process of amalgamation is complete by issue of shares of the amalgamated company to shareholders of the amalgamating company. In such circumstances, there is no consideration flowing from the amalgamated company to the amalgamating company as the same ceases to exist no sooner the amalgamation takes place. Such is the view expressed by the CBDT in their Circular No. 528 dt. 16th Dec., 1988. The escapement of revenue as a result of this legal position is sought to be plugged by insertion of s. 43C of the IT Act but this section comes into operation only w.e.f. 1st April, 1988. (3) There was no device as a result of formulating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such notice having been issued on an assessee which no longer existed. It was claimed, that the was assessment initio void and was liable to be quashed. The matter was discussed at length by the CIT(A) in para 5.3 of his order. After elaborate discussion and after referring to the case law cited for and against assessee, the CIT(A) took the view that it was an imperative requirement of the law that the notice under s. 148 ought to have been issued in the name of the amalgamated company as the successor of the amalgamating companies. Since, a proper notice was not issued, the CIT(A) quashed the order of the Assessing Officer. The Department is in appeal. 19. We have heard the parties to the dispute and in our view the order passed by the CIT(A) is not open to any serious challenge. The Assessing Officer issued a notice in the name of an assessee who did not exist at the relevant time. The business of that assessee had been taken over in the scheme of amalgamation by a successor company. It was, therefore, necessary for the Assessing Officer to issue the notice on the amalgamated company as the successor of amalgamating companies. The order passed by the Assessing Officer, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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