Capital Reserve Created On Amalgamation Is Not Taxable As Perquisite U/S 28(iv) Of IT Act: Mumbai ITAT
The Mumbai ITAT held that capital reserve arising on account of amalgamation is a capital receipt and hence cannot be taxed as a benefit or perquisite arising from business u/s 28(iv). Section 28(iv) of Income tax Act provides that any value of benefit or perquisite, whether convertible in money or not, arising from business or exercise of a profession would be considered as income...
The Mumbai ITAT held that capital reserve arising on account of amalgamation is a capital receipt and hence cannot be taxed as a benefit or perquisite arising from business u/s 28(iv).
Section 28(iv) of Income tax Act provides that any value of benefit or perquisite, whether convertible in money or not, arising from business or exercise of a profession would be considered as income and shall be chargeable to income tax as business income
Pointing that the assessee was the ultimate holding company of the merged entity and in the whole process, does not gain or lose anything, the Bench of Prashant Maharishi (Accountant Member) and Sandeep Singh Karhail (Judicial Member) observed that there is absolutely no benefit or perquisite arising out of the scheme of amalgamation.
The facts which led to formation of such observation, were that the assessee, an Indian company indirectly owning shares of Celina Buildcon Pvt Ltd, through its wholly owned subsidiary Orval Corporate Solutions Pvt Ltd, had entered into a merger agreement duly approved by MCA on May 09, 2018 with effect from Apr 01, 2017 with Celina (merged entity). Thus, all the assets and liabilities stood transferred to the assessee without any consideration, including non-issuance of shares, in view of Sec 19 of the Companies Act, 2013 which prohibits a holding company from allotting or transferring its shares to its subsidiary (merged entity). Resultantly, capital reserve amounting to Rs. 149 crore was created. The AO treated this capital reserve, which was created out of amalgamation, as revenue in nature, and hence, taxable u/s 28(iv).
The Bench observed that for invoking the provisions of Section 28(iv), there must be a benefit or perquisite arising to the company, and such benefit must arise out of business or profession carried on by the recipient and must be revenue in nature.
The Bench further observed that one of the conditions for a merger to qualify as 'amalgamation' in terms of Section 233 of the Companies Act, 2013 involves that shareholder of amalgamating company holding not less than three-fourth of the value of shares becomes shareholders of the amalgamated company by virtue of the amalgamation.
At the same time, sub-clause (iii) of Sec 233 provides an exception in case the shares of amalgamating company are already held by the amalgamated company or its subsidiary, added the Bench.
The Bench noted that reserve was created in consequence of the amalgamation order for a limited purpose of including balancing of accounts based on double entry system and it does not in any manner give rise to any benefit or perquisite in the course of business.
The only relationship between assessee and the merged entity was that there is an indirect holding and the amalgamation reserve cannot be said to have been created due to business activity.
Thus, the ITAT concluded that reserve arising out of amalgamation cannot be treated as revenue receipts u/s 28(iv) and dismissed Revenue's appeal.
Counsel for Appellant/ Revenue: Dr. Kishor Dhule
Counsel for Respondent/ Assessee: Rakesh Joshi and Gaurav Kabra
Case Title: DCIT versus Samagra Wealthmax Private Limited
Case Number: ITA No. 2165/MUM/2023