The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench ruled that the Shares at ‘face value’ by the amalgamated company to shareholders in pursuance of scheme of amalgamation not covered under clause (viib) of Section 56(2) of the Income Tax Act.
The assessee, M/s. Ozone India Ltd. filed the return of income for Assessment Year 2013-14 in question which was subjected to scrutiny assessment. In the course of assessment proceedings, it was gathered by the AO that one M/s. Kalavir Estate Pvt. Ltd. (KEPL) amalgamated with the assessee company under the scheme of amalgamation.
The object of amalgamation was stated to achieve better utilization of resources, higher return on capital, economy of scale, optimum utilization of available resources and effective control for better profitability. The scheme of amalgamation of KEPL with assessee company was approved by the Gujarat High Court whereby all the assets and liabilities of M/s. KEPL were vested with the assessee company as per scheme placed before the Court.
Hence, on coming into effect of the scheme all the assets except land and all the liabilities of KEPL were taken in the books of assessee at book value and land parcels were taken at revalued price.
As stated, the transaction of amalgamation has been accounted under the ‘pooling of interest’ method as prescribed by the Accounting Statndard-AS-14 issued by the Institute of Chartered Accountants of India (ICAI) consequent upon which the difference between net assets of KEPL vested with assessee company and value of shares of assessee company correspondingly issued was accounted for as capital receipts and treated as capital reserve.
The excess value of net assets vis-à-vis corresponding value of shares issued towards consideration for amalgamation was thus credited in the books of assessee company as ‘capital reserve’. The assessee company has accounted for the land so acquired as ‘trading asset’ of the assessee company.
The AO noted that on the date of amalgamation, the issued and paid-up capital of the assessee company stood at Rs.21,00,000/- divided into 2,10,000 equity shares of Rs.10/- each, and that of KEPL stood at Rs.5,00,000/- divided into 50,000 equity-shares of Rs.10/- each. Pursuant to the scheme of amalgamation, shareholders of KEPL got 300 equity shares of the assessee company for each share of KEPL towards consideration for transfer of its assets and liabilities. The AO observed that the amalgamated company i.e. assessee received assets worth Rs.60,26,55,864/- and liabilities worth Rs.6,05,39,708 of the amalgamating company i.e. KEPL. Thus, the assessee received net assets worth Rs.54,21,16,156/- against the corresponding issue of shares having a face value of Rs.15,00,00,000/- to the shareholders of KEPL. The AO thus observed that the assessee has received excess net asset worth Rs.39,21,16,156/- on account of amalgamation which was credited by it as a capital reserve of the amalgamated company.
The CIT(A) in the course of the appellate proceedings before him, took note of the observations made by the AO as well as the explanations and legal contentions made on behalf of the assessee for the inapplicability of Section 56(2)(viib) of the Act in the facts of the case. The CIT(A) found himself in agreement with the detailed submissions made by the assessee on the inapplicability of s.56(2)(viib) of the Act in the facts of the case. Consequently, the CIT(A) reversed the action of AO and deleted the impugned additions.
The coram headed by the Vice President, Rajpal Yadav said that the issue of shares at ‘face value’ by the amalgamated company (assessee) to the shareholders of amalgamating company in pursuance of the scheme of amalgamation legally recognized in the Court of Law neither falls with scope & ambit of clause (viib) to S. 56(2), when tested on the touchstone of objects and purpose of such insertion i.e. to deem unjustified premiums charged on the issue of shares as taxable income; nor does it fall in its sweep when such deeming clause is subjected to interpretative process having regard to the scheme of the Act.
“We see no error in the conclusion drawn by the CIT(A) in this regard. The CIT(A) in our view, has rightly found the inapplicability of S. 56(viib) in the facts of the present case. We thus decline to interfere with the conclusion so drawn by the CIT(A) whose order is under challenge by the revenue. Similarly, the cross objection filed by the Assessee which merely seeks to support the action of CIT(A) also does not call for separate adjudication and is infructuous,” the ITAT said.
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