ITAT upholds CIT(A)'s deletion of Rs. 149.29 Crores Addition, Confirming Amalgamation Exemption u/s 47(vi) of Income Tax Act [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) upheld the Commissioner of Income Tax (Appeals) [CIT(A)]’s decision to delete an addition of Rs. 149.29 crores made by the Assessing Officer (AO) for the assessment year(AY) 2018-19.

The  Deputy Commissioner of Income Tax [ Assessing Officer ( AO ) ] filed an appeal against the CIT(A) order dated 13.03.2023 for AY 2018-19, concerning Samagra Wealthmax Private Limited, the respondent-assessee.

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The assessee filed its return of income on September 29, 2018, reporting Rs. 19,09,730. The return underwent scrutiny under the e-assessment scheme 2019 due to amalgamation issues following the merger with M/s Celina Buildcon and Infra Private Ltd. The approved amalgamation scheme credited Rs. 1,49,29,00,000 to the capital reserve.

As the parent of M/s Orval Corporate Solution Private Limited, which fully owned Celina, the assessee did not issue shares to Celina’s shareholders, citing restrictions under section 19 of the Companies Act, 2013. Orval had invested Rs. 149.29 crores in Celina through a rights issue of equity shares.

The AO treated this amount as taxable income, arguing that the amalgamation did not qualify for tax exemptions under section 47(vi) of the Income Tax Act, as no shares were issued to Celina's shareholders, violating section 2(1B)(iii). The AO proposed that the amount be taxed under sections 56(2)(x) or 28(iv), classifying it as income from other sources or business income.

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The CIT(A) determined that the amalgamation met the criteria under section 2(1B), which required all assets and liabilities of the amalgamating company to transfer to the amalgamated company. He noted that, since Celina was wholly owned by Samagra, the amalgamation did not breach section 2(1B)(iii). The CIT(A) highlighted exceptions allowing for cases where shares were already owned by the amalgamated company or its subsidiary, concluding that section 47(vi) applied, exempting the transaction from taxation.

The CIT(A) also ruled that the capital reserve generated from the amalgamation was not taxable under sections 28(iv) or 56(2)(x) as it was capital in nature, created to balance the books post-merger.

Upon appeal, the ITAT upheld the CIT(A)’s findings, confirming that the amalgamation satisfied section 2(1B) and all necessary conditions. The appellate tribunal noted that the cancellation of Celina's shares and the absence of new shares issued did not breach section 2(1B)(iii), validating the amalgamation's legitimacy and its entitlement to exemptions under section 47(vi).

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Additionally, the bench determined that the capital reserve did not arise from any business activity, as required by section 28(iv), and concluded that the creation of the capital reserve did not generate any gain for the assessee.

The two member bench, comprising Sandeep Singh Karhail ( Judicial Member ) and Prashant Maharishi ( Accountant Member ), concluded that the capital reserve could not be classified as income, upheld the CIT(A)’s decision to delete the addition made by the AO, and dismissed the AO’s appeal, reaffirming that the amalgamation did not incur tax under the relevant sections.

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