The Hyderabad Bench of Income Tax Appellate Tribunal (ITAT) has recently held that the provision of Section 56(2)(viia) of the Income Tax Act, 1961 shall apply to underlying investments received by amalgamated entities on account of merger.
Assessee is a public company engaged in the investment business. Assessee filed its return for the assessment year 2014-15 declaring income of Rs. 20,64,350/-. Thereafter the assessee case was selected for scrutiny.
After examination of the details so furnished by the assessee, the Assessing Officer had made an addition under section 56(2)(viia) of the Income Tax Act to the income of the assessee on protective basis as the assessee received unquoted shares during the year under consideration.
Aggrieved the assessment order revenue filed an appeal before CIT(A). But the CIT(A) allowed partial relief to the assessee and also held that provisions of Section 56(2)(viia) of the Income Tax Act is not applicable to shares received by the assessee company on account of amalgamation and deleted the addition made by the AO.
Against the order of CIT(A), revenue filed a second appeal before the tribunal.
Rajendra Kumar, counsel for the revenue submitted that definition of amalgamation provided under Section 2(IB) of the Income Tax Act could not be read into by reference in Section 56(2)(viia) of the Income Tax 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 Income Tax Act.
Further submitted that investment in such closely held companies for inadequate consideration and the same is taxable under Section 56(2)(viia) of the Income Tax Act.
Sriram Seshadri,counsel for the assessee submitted that there is no transfer on account of amalgamation and therefore, it will not attract the rigours of Section 56(2)(viia) of the Income Tax Act.
Thereafter the tribunal observed that the assessee received the property being the shares of the “amalgamating companies” along with the shares held by these amalgamating companies. The assessee company had received the property being the shares of amalgamating companies in which the public are not substantially interested, without consideration or consideration which is less than the fair market value of such shares. Hence, the conclusion made by CIT(A) has no base.
The two-member bench of RamaKanta Panda, Accountant Member and Laliet Kumar, Judicial Member allowed the appeal of the revenue and restored the order of AO invoking the provision of Section 56(2)(viia) of the Income Tax Act.
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