Case Law Details
Hespera Realty Pvt. Ltd. Vs DCIT (ITAT Delhi)
The issue under consideration is whether upward adjustment to book profit under section 115JB of the Act, by treating the loss on purchase and redemption of mutual funds as expenditure relatable to earning exempt income is justified in law?
ITAT states that, straight reading of the provisions denotes that the loss on purchase and redemption of mutual funds cannot be treated as an expenditure relatable to earning of dividend. The provisions relating to dividends stripping and allowability of consequent loss u/s 94(7) are different from the Clause (f) of Explanation 1 to the Section 115JB. Expense is something which comes out of pocket. A loss is something different as it is not a thing which is spent or disbursed. It is a thing which comes upon him ab extra. {CIT Vs SC Kothari (82 ITR 792) (SC)}. There is a clear distinction between a business expenditure and business loss. The former is an indicative of a volition but a loss comes to as ab extra without the role of the assessee. While expenditure is voluntarily, business loss is fortuitous [CIT Vs New India Assurance Co. Ltd. (71 ITR 761. (Bom.)]. Hence, the loss cannot be equated with expenditure. The provisions u/s 115JB doesn’t envisage enhancement of taxable profits by adding the loss incurred in redemption of mutual fund for the purpose of Section 115JB. Reliance is placed on the judgment of Hon’ble High Court of Gujarat in the case of CIT Vs JK Paper Ltd. 206 Taxmann 124 wherein it was held that the loss incurred by the on account of dividend stripping dealt under sub-Section 7 of Section 97 cannot be applied for the purpose of computing business profit in terms of Section 115JB. Based on the conjoint reading of the provisions of the Act and the judgments of the Hon’ble Apex Court, the appeal of the assessee on this ground is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal has been filed by the assessee against the order of ld. CIT (A)-4, New Delhi dated 20.01.2020.
2. Following grounds have been raised by the assessee:
“1. That the Commissioner of Income-tax (Appeals) [‘CIT(A)’] erred on facts and in law in confirming the action of the assessing officer in determining book profit under section 115JB of the Income Tax Act, 1961 (‘the Act’) at Rs.275,16,44,730 as against book loss of Rs.90,74,679 declared by the appellant.
2. That the CIT(A) erred on facts and in law in upholding the action of the assessing officer in making upward adjustment of Rs.247,52,73,951 to book profit in terms of clause (j) of Explanation 1 to section 115 JB of the Act.
2.1 That the CIT(A) erred in not holding that the assessing officer had exceeded his jurisdiction in making the aforesaid upward adjustment, contrary to the mandate of section 115JB of the Act, since the appellant had computed ‘book profit’ strictly in accordance with the books of account as mandated by the said section.
2.2 That the CIT(A) erred in not appreciating that the accounting treatment in the books of accounts, being strictly in accordance with the binding scheme of amalgamation as approved by the Hon’ble High Court, the provisions of the Companies Act and duly approved by the shareholders/ directors/ ROC was sacrosanct for the purpose of computing book profit under section 115JB of the Act.
2.3 That the CIT(A) erred on facts and in law in confirming the action of assessing officer in treating capital reserve created under the scheme of amalgamation on account of vesting of assets in the appellant by purchase method, to be in the nature of “revaluation reserve” referred to in clause (j) of Explanation 1 to section 115JB of the Act.
2.4 That the CIT(A) erred in upholding the false/ baseless allegations made by the assessing officer to conclude that the scheme of amalgamation approved by the Hon’ble High Court was a colorable device to evade tax.
2.5 That the CIT(A) failed to appreciate that the genuineness of the scheme of amalgamation duly approved by the High Court could not be questioned /tinkered with by the Revenue.
3. That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in making upward adjustment of Rs.28,54,45,463 in terms of clause (f) of Explanation 1 to section 115JB of the Act on account of alleged expenditure relatable to earning of exempt income.
3. 2That the CIT(A) failed to appreciate that in the absence of any express provision in section 115JB of the Act for disallowance of short term capital loss on account of sale of mutual funds, the appellant was not required to add back the same to the declared profit as per Profit & Loss account, while computing ‘book profit’.
3.3 That the CIT(A) failed to appreciate that ‘loss’ arising on sale of units of mutual fund could not be regarded as ‘expenditure’ falling within the scope of clause (f) of Explanation 1 to section 115JB of the Act.
3.4. That the CIT(A) erred on facts and in law in not appreciating that the short term loss suffered by the appellant on account of sale of mutual funds, disallowed in terms of section 94(7), was, even otherwise, not exempt and consequently, clause (f) of Explanation 1 to section 115JB of the Act had no application at the very threshold.”
3. The brief background facts of the case are as under:
During the previous year relevant to assessment year 2015-16, pursuant to scheme of amalgamation duly approved by the Hon’ble High Court of Delhi vide order dated 08.05.2015, five companies viz., (i) Hespera Real Estate Private Limited, (ii) Hespera Infrastructure Private Limited, (Hi) Hespera Properties Private Limited, (iv) Hespera Realcon Private Limited and (v) Hespera Construction Private Limited (collectively in short ‘amalgamating companies’) amalgamated with the assessee company as under:
“Step 1: Wholly owned subsidiaries of the group merged into their respective parent companies
I – Merger of wholly owned subsidiaries into their respective parent companies as under:
– M/s. Hespera Real Estate Pvt. Ltd. amalgamated with Hespera Realcon Pvt. Ltd.
– M/s. Hespera Infrastructure Pvt. Ltd. & M/s. Hespera Properties Pvt. Ltd. amalgamated with the assessee company.
Step 2: Thereafter, M/s. Hespera Realcon Pvt. Ltd. and Hespera Constructions Pvt. Ltd amalgamated with the assessee-company.
The diagrammatic representation depicting the amalgamation of various companies with the assessee is as follows:
II — Merger of remaining companies
4. The salient features of the scheme of amalgamation were as follows:
a) In terms of the scheme, 01.08.2014 was the appointed date, as approved by the Hon’ble High Court;
b) Pursuant to the Scheme, all assets and properties of the five amalgamating companies, including various investments held, and all liabilities, stood transferred to and vested in the appellant with effect from the appointed date;
c) As per para 9 of the Scheme, all the assets and liabilities of the five amalgamating companies stood transferred to and vested in the appellant-company at their respective fair values (refer para 9.1).
5. Pursuant to the aforesaid scheme of amalgamation, various assets and investment(s) held by the five amalgamating companies, which inter-alia included 95,15,021 shares in M/s. Indiabulls Housing Finance Ltd. (hereinafter referred to as ‘Indiabulls’), stood transferred to and vested in the assessee company at its fair value on the appointed date, i.e., 01.08.2014, as part of the Scheme duly approved/sanctioned by the Hon’ble High Court of Delhi.
6. The amalgamation was recorded in the books of account, as per the assessee in accordance with purchase method of accounting, being one of the methods permitted by Accounting Standard-14 on “Accounting for Amalgamation” (AS-14) issued by the Institute of Chartered Accountants of India. Accordingly, difference between the fair value of assets acquired and the liabilities taken over, was recorded as “capital reserve” in the audited financial statements by the assessee.
7. As mandated by the scheme of amalgamation, in order to determine the fair value’ of various shares including shares in Indiabulls, the closing market price of shares on the National Stock Exchange (NSE) as on 31.07.2014 (i.e., the closing price of the shares on the day prior to the appointed date for the amalgamation) was considered. Taking into consideration the closing value of shares on NSE as on 31.07.2014, shares in Indiabulls were treated as having been transferred to and vested in the assessee pursuant to the scheme of amalgamation at their fair value determined at Rs.410.10 per share and was thus recorded as such in the books of the assessee.
8. In a nutshell, as per the mandate of the scheme of amalgamation as approved by the Hon’ble High Court, shares in Indiabulls were transferred by the amalgamating company(ies) to the assessee at their fair value, which was determined at Rs.410.10 per share being the closing price of the shares on the day prior to the effective date. Accordingly shares in Indiabulls were recorded in the books of the assessed company as received pursuant to transfer under the Scheme at Rs.410.10 per share.
9. During the relevant previous year; out of the aforesaid shares of Indiabulls, 95,15,021 shares were sold on a recognized stock exchange for total consideration of Rs.423,30,90,600, after payment of securities transaction tax (in short “STT”) thereon.
10. The gains/ loss arising on transfer of 95,15,021 shares in Indiabulls, both, while computing income under the normal provisions as well as while computing deemed income under section 115JB was computed by the assessee and shown as such in the return of income.
11. Thus, the assessee declared long-term capital gains of Rs.280,62,54,440 (being the difference between sale consideration of Rs.423,30,90,600 and original purchase cost of Rs.142,68,36,160 in the hands of the amalgamating companies) and claimed it as exempt from tax under section 10(38) of the Act since the shares were transferred on a recognized stock exchange and STT was paid thereon, thereby satisfying the conditions prescribed in the said section.
12. In the books of account, since shares were transferred to and stood vested in the assessee at their fair value pursuant to the Scheme, (which was determined at Rs.410.10 per share), the resultant gain of Rs.33,09,80,489, was credited as part of “Other income – profit on sale of equity shares” in the profit and loss account.
13. For the purpose of computing deemed income under section 115JB of the Act, net profit/ loss as per audited profit and loss account, which included the aforesaid gain on sale of equity shares was considered, and the specified upward/ downward adjustments, as prescribed in Explanation 1 thereto were made.
Order of the Assessing Officer:
14. The Assessing Officer has disregarded the aforesaid treatment adopted by the assessee and proceeded to make upward adjustment of Rs.247,52,73,951 to the book profit of the assessee, holding as under:
(a) The scheme of amalgamation was conceived and implemented by the assessee with the intent of evading payment of tax on ‘book profit’ and crucial facts were concealed before the Court with malafide intention;
(b) The assessee had, under the garb of amalgamation, deliberately adopted ‘Purchase method’ in order to artificially jack up the value of assets/investments with the intent of undermining its book profit for the purpose of section 115JB of the Act and the difference arising on account of revaluation should have been transferred to ‘revaluation reserve’ as against ‘capital reserve’.
(c) Since the amount transferred to ‘capital reserve’ actually qualified as ‘revaluation reserve’, upward adjustment to the book profit in terms of clause (j) of Explanation 1 to Section 115JB of the Act was warranted.
15. The Assessing Officer has further observed that there was no commercial purpose at all for applying purchase method because all the entities were actually owned up by a single entity i.e. ultimate parent entity namely, Maritime India Trust. The observation of the Hon’ble Delhi High Court that the “applicant companies have not placed on record the valuation report for determining the share exchange ratio as the proposed scheme of amalgamation is of closely held companies and as a result of the same, the share-holding of the ultimate parent entity (i.e. Maritime India Trust) does not get affected”, clearly shows that application of this method, was just for revaluing the assets in the disguise, without having any commercial purpose. As stated in preceding paragraphs it is very clear that when the High Court order approving the amalgamation scheme was passed on 08.05.2015 the majority investment by the group companies which was in the form of investment into the shares of IBHFL was already offloaded. It all the more shows that the entire amalgamation process was orchestrated has treated a mere sham to reduce the tax liability. It may be said that the Hon’ble Delhi High Court was kept in dark as the actual motive of amalgamation was never brought to the notice of the Hon’ble Court. Even while validating the genuine tax planning the Hon’ble Supreme Court in the case of Vodafone International Holdings has observed that it should be bonafide and the series of transactions in form also should have some commercial purpose. The assessee has failed to show any commercial purpose of amalgamation.
16. The AO held that the entire scheme of transaction was colourable device only, it is to note that the cost of acquisition of the said shares was only Rs. 142,68,36,160/- and post amalgamation (as the amalgamation was account by purchase method) the said book value was calculated at Rs. 390,21,10,112/-. The difference on account of market value and cost of acquisition of these shares was credited to the capital reserve account in the new entity along with fair market value of other assets re-valued (not sold during the year).
17. Having said so, the AO held that although, it is called as Capital Reserve, through the scheme of amalgamation presented, in effect and in essence it is only a Revaluation Reserve. For the purposes of book profit, the profit on sale of investment was recorded as sales consideration minus book value post-merger as is exactly the case in case of revaluation reserve. The book value effectively was a sum of cost of acquisition plus capital reserve (the same effectively as is in the case of Revaluation reserve). The profit on sale of investment was thus reduced to the extent of this capital reserve created post merger. Thus, AO concludes that in view of provision of clause (j) to Explanation 1 of section 115JB, the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, needs to be increased in computation of the book profit u/s 115JB. Therefore as the shares in question have been disposed of during the year, the amount relating to these re-valued assets have to be added. Thus, the AO added the amount relating to these shares being Rs. 247,52,73,952/- [Rs. 390,21,10,112 (after revaluation, applying purchase method) minus Rs. 142,68,36,160/- (actual cost to the book profit of the appellant)].
18. In this regard, AO placed reliance on the following judicial pronouncements:
(i) SREI Infrastructure Finance Ltd. vs. Income Tax Settlement Commission [2012] 20 taxrnann.com 476 (Delhi), wherein the jurisdictional Delhi High Court has held that –
“The Act i.e. Income-tax Act was enacted to tax the income or gains made by an assessee. The Companies Act 1956, on the other hand serves, and is intended to serve a different purpose and, therefore, when a scheme under section 391 to 394 of the Companies Act 1956 is sanctioned by the Court, it is treated as a binding statutory scheme because the scheme has to be implemented and enforced. This cannot, or is not, a ground to escape tax on transfer of a Capital Asset under and as per provisions of the Act.”
(ii) McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 wherein it has been held clearly that the taxpayer cannot be allowed to get away with any colourable device or artificial sham transaction. The Hon’ble Supreme Court, while applying the doctrine, had observed-
“Tax planning is legitimate provided it is within the frame work of law. Colourable devices cannot be part of tax planning, and it is wrong to encourage or entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. “Therefore, it becomes an important function of the income tax authorities to look into the devices and natures of transactions used by the assessee, and decide upon the character and nature of such devices and transactions.”
(iii) A similar observation was made in the Supreme Court’s decision in the case of Workmen v. Associated Rubber Industry [1986] 157 ITR 77 wherein the Hon’ble Court had observed-
“It is true that in law the Associated Rubber Industry Ltd. and its subsidiary were two independent companies with separate legal existence and, therefore, the profits made by the subsidiary could not be treated as profits made by the parent. But in our view that was not an end of the matter. It is 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 courts is not satisfied with form and leave alone the substance of the transaction.”
(iv) In the context of above, the AO fount it essential to refer to the case of Commissioner of Income-tax v. Durga Prasad More [1971] 082 ITR 0540-SC, wherein the Hon’ble Supreme Court had once again reiterated the vital role of ‘surrounding circumstances” while deciding on merits of documents submitted by the assessee. The Hon’ble Court has held as under:
“It is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be leftwide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents.”
(v) In the case of Sumati Dayal v. CIT [1995] 214 ITR 801, the Hon’ble Supreme Court observed the supreme importance of the test of human probabilities-
“This, in our opinion, is a superficial approach to the problem. The matter has to be considered in the light of human probabilities. We are, therefore, unable to agree with the view of the Chairman in his dissenting opinion. In our opinion, the majority opinion after considering the surrounding circumstances and applying the test of human probabilities has rightly concluded that the appellant’s claim about the amount being her winnings from races is not genuine.”
(vi) In the case of CIT v. Wipro Limited (Karnataka High Court)[2014] 50 taxmann.com 421 (Karnataka),while deciding a case of alleged sham transaction, the Hon’ble High Court has held as under:
“The question whether a transaction is sham or colorable and entered into with the sole intention of evading payment of tax is purely a question of fact. On appreciation of the material on record and thereafter keeping in mind the statutory provisions in particular, the charging section and the section under which the tax is exempted, the Court has to record the finding of fact. Unless the statutory provisions provide for exemption from payment of tax, the question of an assessee trying to take advantage of the said provision would not arise. Therefore, in each case, the question is, the way the assessee has avoided to pay tax relying on the statutory provisions is legitimate or not is to be considered by the Court. The Court has to bear in mind that it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. An obligation is cast on every citizen to pay the taxes without resorting to subterfuges. When the statute provides certain rights, which if properly applied would reduce the tax burden on the assessee or exempts him from the payment of tax, the assessee is entitled to the said benefit. However, if he is invoking the said provisions with the intention of evading payment of tax, then it would be a colorable device to avoid payment of tax, which cannot be entertained by the Court. It is in this context, Court has to find out whether the transaction is real or unreal and then record a finding whether it is a colorable device or sham transaction.”
Order of the ld. CIT (A):
19. The ld. CIT (A) mainly relied on the assessment order and also derived support from the fact that Sh. Saurabh Mittal has already relinquished his control in India Bulls Group and in the amalgamating companies have been held controlled by The Maritime India Trust. The relevant part of the order of the ld. CIT (A) is as under:
“It has been brought out by the AO in the assessment order that as on 9th July 2014, a statement was filed by India Bulls Housing Finance Ltd. (IBHFL) before the National Stock Exchange India Ltd.(NSE) regarding the restructuring of promoters’ inter-se roles in India Bulls Group Company. As per the said statement Sh. Saurabh Mittal shall have no control, management and supervision rights in India Bulls group companies on or before 31.12.2014. In this context, it is important to note that Sh. Saurabh Mittal before that, directly or indirectly wholly owned the five amalgamating companies and the assessee company before these were apparently transferred to a newly made private trust i.e. Maritime India Trust (for the benefit of his family members ). AO also finds that as per the statement filed before NSE, the said six companies were also declassified as promoters. The Hon’ble Delhi High Court in its interim order dated 22.12.2014 passed in CA (M) 173/2014 has observed that the applicant companies have not placed on record the valuation report for determining the share exchange ratio as the proposed scheme of amalgamation is of closely held companies and as a result of the same, the share-holding of the ultimate parent entity i.e. Maritime India Trust does not get affected. This thus means that the merger of the five companies into the assessee did not effectively impact the management, control and supervision of the said companies/the amalgamated company.
…It also emanates from the assessment order that as on the appointed date of merger i.e. 01.08.2014, the investment in shares of India Bulls Housing Finance Ltd. (IBHFL)of the merging companies was as under:-
| S. No. Name of the company | Number of shares of IBHFL | |
| 1 | Hespera Real Estate | 33,50,000 |
| 2 | Hespera Properties | 25,60,909 |
| 3 | Hespera Infrastructure | 36,04,112 |
| Total | 95,15,021 | |
..In pursuance to the restructuring of the India Bulls group, the above mentioned shares of IBHFL were sold by Hespera Real Estate Pvt. Ltd from 06- 08- 2014 to 31.10.2014, by Hespera Properties Pvt. Ltd from 05.11.2014 to 03.12.2014 and by Hespera Infrastructure Pvt. Ltd. from 02.12.2014 to 16.01.2015.
… However, during the course of amalgamation proceedings and hearing before the Hon’ble Delhi High Court which went upto passing of the order i.e. 8.5.2015, this fact of restructuring of India Bulls group and sale of shares of India Bulls Group by the amalgamating companies was never admitted before the Hon’ble Court. Neither was this a part of the preamble of amalgamation nor was such a crucial fact brought to the notice of the Hon’ble Court at that point of time. From this, concludes the AO, the purpose of amalgamation was not the same as what was stated on oath before the Hon’ble High Court. Then, he goes on to discuss the subsequent events as under:
“6.3.1 As a result of the amalgamation order of the Hon’ble Delhi High Court with retrospective effect from 01.08.2014, the sale of shares of India Bulls Housing Finance Ltd. originally made by Hespera Real Estate Pvt. Ltd., Hespera Properties Pvt. Ltd. and Infrastructure Pvt. Ltd. as per para 6.2. above have been shown to be sold by the appellant. AO also gives the details of the sale and purchase ‘”) transaction of shares of IBHFL, which are reproduced as under:-
| S. No | Name of the Company | Number of shares of IBHFL | Book Value of investment in shares of IBHFL as on 31.07.2014 (in Rs.] | Book Value of Shares of IBHFL as on 01.08.2014 shown in the books of the Hespera Realty Pvt. Ltd. (amalgamated company] in Rs.) | Sale price of shares of IBHFL (in Rs.] |
| 4. | Hespera Real Estate | 33,50,000 | 66,55,77,435 | 137,38,35,000 | 132,67,44,413 |
| 5. | Hespera Properties | 25,60,909 | 27,28,84,691 | 105,02,28,781 | 174,26,50,982 |
| 6. | Hespera Infrastructure | 36,04,112 | 48,83,74,034 | 147,80,46,331 | 116,36,95,205 |
| Total | 95,15,021 | 142,68,36,160 | 390,21,10,112 | 423,30,90,600 |
6.3.2 It has been brought out in the assessment order that the appellant for the purpose of computation of long term capital gain u/s 10(38) has taken the difference of sale value and the book value of shares of IBHFL as on 31.07.2014 and claimed exempt income of Rs. 280,62,54,440/-. However, for the computation of book profit u/s 115JB, the assessee has taken the difference of sale value and the book value of shares in the hands of the amalgamated company as on 01.08.2014 at Rs. 33,09,80,488/-. The difference amount of Rs.247,52,73,952/- [(390,21,10,112 shown at fair market value of 25,15,021 shares @ Rs 410.10) minus 142,68,36,160 (historical cost of such shares)] has been taken to Capital Reserve and the book profits have been reduced to the said extent.
20. The ld. CIT (A) considered that the arguments of the assessee placed before him containing the following contentions:
i) that the amalgamation is as per the Scheme approved by the Hon’ble Delhi High Court. Therefore, there is no illegality in it.
ii) The capital reserve accounted by the appellant is as per the scheme approved by the Hon’ble High Court and is in accordance with Accounting Standered-14.
iii) No adjustment is warranted under clause (b) to Explanation 1 to section 115JB of the Act, since unlike revenue reserve a capital reserve is not an appropriation of profit and is not created by way of debit entry through the P&L account and is hence out of the purview of section 115JB of the Act.
21. The ld. CIT (A) having considered these contentions of the assessee and the observation of the AO in the assessment order reiterated the deliberations of the Assessing Officer in the assessment order wherein the AO observed as under:
i) The purpose of amalgamation as stated on oath before the Hon’ble High Court was not the actual intent behind the amalgamation. On one hand the assessee’s group companies (which were proposed to be merged with the assessee) were selling the shares of IBHFL and on the other hand they were submitting superfluous reasons far away from reality as the reason for amalgamation. The group companies pleaded amalgamation so as to streamline the holding structure of the companies, ensure focused management in a single combined entity, derive synergies, achieve economies of scale etc. A perusal of the balance sheets of the six companies clearly indicates that the said companies were never into active business in the pre-merger period. It is important to note that the final amalgamated company (the assessee company) in the post-merger period was also not into active business of any kind. Though the object of the assessee company as stated by it is to undertake infrastructure projects, and to purchase, sell, develop, construct, hire or otherwise acquire and deal in all real or personal estate/properties, no such activity is visible in the post-merger period also up to 31.03.2017. Hence at the very outset, the facts have not been put up before the Hon’ble Delhi High Court in its true sense.
ii) Sh. Saurabh Mittal who directly or indirectly owned the said six companies had entered into an agreement with the India Bulls Group and filed a statement before NSE on 9th July 2014 that he shall have no control, management and supervision rights in India Bulls group companies and accordingly he along with his six companies was to be declassified as promoters of India Bulls Group. It is in pursuance to the restructuring of the India Bulls group, that these shares of India Bulls Housing Finance ltd. were required to be offloaded by the Hespera Group. This offloading was done immediately after filing the amalgamation application before the Hon’ble High Court but was never brought in the knowledge of the Court. The assessee and the group companies thus misled the High Court by suppressing the crucial facts.
iii) The historical cost of the 95,15,021 shares offloaded by Hespera Real Estate Pvt. Ltd. Hespera Properties Pvt. Ltd. and Hespera Infrastructure Pvt. Ltd. during the financial year under consideration was Rs. 142,68,36,160 and were sold at Rs.423,30,90,600. However, on amalgamation scheme being approved by the Hon’ble High Court with retrospective effect from 01.08.2014 these shares were shown to be transferred to the assessee company at fair market value of the shares of IBHFL @ Rs.410.10 per share which comes to total of Rs. 390,21,10,112. Accordingly, the book profit on sale of these shares was reduced by the assessee’s group companies to the tune of Rs. 247,52,73,952/-.
iv) It is worthwhile to note that ultimate control over the assessee and the other group companies was of the parent entity Maritime India Trust. This, thus, indicates that the merger of the five companies into the assessee did no effectively impact the management, control and supervision of the said companies/ the amalgamated company.
… In the order dated 08.05.2015 approving the amalgamation scheme, the Hon’ble Delhi High Court has categorically observed in para 6 as under:-
“it is clarified that this order will not be construed as an order granting exemption p from payment of stamp duty, taxes or any other charges, if payable in accordance with law; or permission/ compliance with any other requirement which may he specifically required under any law.”
…. It is clear from the observations of the Hon’ble High Court that the amalgamation scheme should not be used as a device to evade payment of Government dues including taxes. In this light, the AO finds that the intention of the assessee and its group companies right: from the beginning is focused and pointed towards avoidance of tax arising as a result of gain from sale of shares of IBFHL.
22. The ld. CIT (A) has also supported the judgments relied upon by the Assessing Officer which have been duly mentioned as the part of the assessment order in this order.
23. The ld. CIT (A) held that in view of the comments of the AO, he was inclined to agree with the observations made by the AO that the amalgamation scheme was planned and undertaken by the assessee and its group companies as an attempt to reduce liability for payment of minimum alternate tax (MAT) under section 115JB arising due to offloading/sale of shares of IBHFL.
24. In view of the foregoing, the ld. CIT (A) held that the entire amalgamation scheme and choice of purchase method for accounting of assets were employed by the assessee to evade payment tax u/s 115JB by artificial jacking up of cost price of the shares sold, by way of applying purchase method for revaluation of assets.
25. The ld. CIT (A) held that having considered the submission and arguments made by the appellant assessment order and the documents on record, he was entirely in agreement with the AO with regard to the observations that the assessee has orchestrated the amalgamation process in order to defraud revenue and in the process has artificially jacked up the cost price and reduced the book profit and found no reason to interfere with the action of the AO in this regard. To conclude the entire action taken by the AO is upheld by the ld. CIT (A).
26. From the entire events, the following facts are derived:
a. The long term capital gain earned by the assessee is computed by taking the difference of sale value and book value of the shares of IBHFL on 31.07.2014 (pre-amalgamation) i.e. Rs.423,30,90,600 – Rs.142,68,36,160 = Rs.280,62,54,440/-claimed as exempt u/s 10(38).
b. For computation of book profit, the sale value and book value of the shares as on 01.08.2014 was considered (Post-amalgamation) i.e. Rs.423, 30,90,600 – Rs.390,21,10,112 = Rs.33,09,80,488/-
c. Capital Reserve created taking into consideration FMV of shares of IBHFL and historical cost of the shares i.e. Rs.390,21,10,112 – Rs.142,68,36,160 = Rs.247,52,72,952/-
27. We find that the ld. CIT (A) confirmed the addition basically on the following grounds:
a. This amalgamation scheme was planned and undertaken by the assessee in its group companies as an attempt to reduce liability for payment of MAT u/s 115JB arising due to sale of shares of IBHFL.
b. There was no commercial purpose for applying purchase method as all entities are ultimately owned by Maritime India Trust.
c. The real motive of amalgamation was never brought to the notice of the Hon’ble High Court.
d. The Capital Reserve created to the scheme of amalgamation is in reality, a Revaluation Reserve as the valuation is as per the valuation of Revaluation Reserve.
28. On this issue, during the hearing before us, the ld. AR argued that the case of the assessee there was no ambiguity as to the amalgamation undertaken by the assessee and its legal and economic effect. While doing so, the assessee followed the prescribed procedure. Everything that the assessee did was permitted by law and was perfectly legal in the eyes of law. There was no device, subterfuge or dubious method adopted by the assessee in the aforesaid transaction to hoodwink the Revenue. Further the legal effect of each of the aforesaid transactions undertaken by the assessee was achieved. It thus, cannot, be alleged by the assessing officer that the assessee had employed any colorable device.
29. It was argued that the amalgamating Companies had been originally incorporated with the objective of developing different real estate/infrastructure projects. However, it was proposed to consolidate the businesses of all the companies into one single entity, for improved synergies and management focus. Further, the Scheme, as stated above, aimed at deriving synergies and achieve economies of scale arising out of consolidation of businesses of companies in order to efficiently and optimally utilize resources of all businesses under a single combined entity.
30. Regarding the accounting treatment, it was argued that the accounting treatment in the books of accounts of the assessee was strictly in accordance with the binding scheme of amalgamation as approved by the Hon’ble High Court, the provisions of the Companies Act and mandatory accounting standards and duly approved by the shareholders/ directors/ ROC and was, therefore, correct while computing book profit under section 115JB of the Act.
31. Regarding the colourable device embarked by the assessee, it was argued that the assessee and its group companies were originally incorporated with the objective of developing different real estate/infrastructure projects. However, the group intended that all the companies be consolidated into one single entity, for improving synergies and management focus. Thus, the key objective for entering into the scheme of amalgamation was to create a single business entity, which would in turn help to:
(i) Streamline the holding structure of the Companies and ensure focused management in a single combined entity;
(ii) Derive synergies and achieve economies of scale arising out of consolidation of businesses of the Companies;
(iii) Efficiently and optimally utilize resources of all the businesses under a single combined entity;
(iv) Facilitate administrative and compliance convenience and reduce overhead, operating and administrative costs and consequently improve profitability; and
(v) Increase the net worth by consolidating the net worth of all the Companies, which could facilitate attracting funds from strategic investors.
32. It was reiterated that the amalgamation was purely a business and a strategic decision and the allegation of the assessing officer that it was a sham transaction for the purpose of evading tax is completely false, baseless and without any evidence.
33. It was further argued that the amalgamating companies had been originally incorporated with the objective of developing different real estate/infrastructure projects. However, it was proposed to consolidate the businesses of all the companies into one single entity, for improved synergies and management focus. Further, the scheme, as stated above is aimed at deriving synergies and to achieve economy of scale arising out of consolidation of businesses of companies in order to efficiently and optimally utilize resources of all businesses under a single combined entity. It was argued that it is a fact on record that the assessee proposed to set up a hospitality project envisaging a 4-Star full service resort project with need based food and beverage outlets and recreational facilities with focus on health & spa related activities at Dev Nagar, Tehsil Bilara, Jaipur-Jodhpur Highway in Rajasthan.
34. The ld. DR supported the order of the Assessing Officer and the ld. CIT (A) which have been duly mentioned in this order. The crux of the argument is that though the scheme of amalgamation was approved by the Hon’ble High Court, the revenue has the right to look into the taxability of the revenues arise out of such amalgamation. It was reiterated that the entire amalgamation scheme was a surruptious action on the part of the assessee to evade taxes payable. Though the reserve created is treated as Capital Reserve in effect and truly it is a Revaluation Reserve liable for upward revision for computation of profits u/s 115JB.
35. Heard the arguments of both the parties and perused the material available on record.
36. The main allegation of the revenue as seen from the order of the Assessing Officer page no. 18 and the order of the ld. CIT (A) page no. 54, 55 is that the entire scheme of the assessee is a Sham transaction. The revenue relied on the judgments of SREI Infrastructure Finance Ltd. Vs ITSC, McDowell & Co. Ltd., Workmen Vs Associated Rubber Industries, CIT Vs Durga Prasad More, Sumati Dayal Vs CIT and held that the amalgamation scheme was planned and undertaken by the assessee and its group companies as an attempt to reduce the liability for payment of tax under MAT/115JB.
37. The group companies held various parcels of land as
| S. No | Khasra No | Area | Owner of Land |
| 1 | khasra No. 2734/1 | 1 Bigha 10 Biswa | Hespera Realty Private Limited |
| khasra No. 2726 | 9 Biswa | ||
| 2 | khasra No. 2726. | 1 Bigha 05 Biswa | Hespera Properties Private Limited |
| 3 | khasra No. 2726. | 1 Bigha 05 Biswa | Hespera Constructions Private Limited |
| 4 | khasra No. 2726. | 1 Bigha 05 Biswa | Hespera Realcon Private Limited |
| 5 | khasra No. 2726 | 1 Bigha 05 Biswa | Hespera Infrastructure Private Limited |
| 6 | khasra No. 2726 | 1 Bigha 05 Biswa | Hespera Real Estate Private Limited |
| TOTAL | 8 Bigha 04 Biswa |
38. On amalgamation, the land has been consolidated to suit the business requirements. The case laws relied by the Assessing Officer deal with the real intent vis-à-vis rising of the corporate veil and the structured scheme on record. We find the ratio of cases have no applicability to the instant case. The revenue went in a rhetoric but could not bring anything tangible on record to prove the surruptious nature of the assessee to treat the scheme of amalgamation as Sham. The motive of the tax evasion or the scheme being a colourable device has not been proven by the revenue. The land being in existence different group companies, consolidation of the only way to get into the construction of any major project. Hence, the allegations of the revenue are hereby dispensed with.
39. Having said so, the next tangible issue is whether the reserve created by the scheme of amalgamation on account of investing of assets is in the nature of “Revaluation Reserve” or “Capital Reserve” and the upward adjustment in terms of Clause (j) and Clause (f) of the Explanation 1 to Section 115JB by the revenue is correct or not.
40. The Assessing Officer has held that that the assessee had, under the garb of amalgamation, adopted ‘Purchase Method’ and transferred the same to ‘Capital Reserve’, which in essence represented ‘Revaluation Reserve’, in order to undermine its book profit for the purposes of section 115JB of the Act. The revenue held that although it is called as Capital Reserve, through the scheme of amalgamation presented in effect and in essence it is only a Revaluation Reserve. For the purposes of book profit, the profit on sale of investment was recorded as sales consideration minus book value post-merger as is exactly the case in case of revaluation reserve. The book value effectively was a sum of cost of acquisition plus capital reserve (the same effectively as is in the case of Revaluation Reserve). The profit on sale of investment was thus reduced to the extent of this capital reserve created post merger. Thus, AO concludes that in view of provision of clause (j) to Explanation 1 of Section 115JB, the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, needs to be increased in computation of the book profit u/s 115JB. Therefore, as the shares in question have been disposed of during the year, the amount relating to these re-valued assets have to be added. Thus, the AO added the amount relating to these shares being Rs.247,52,73,952/-[Rs.390,21,10,112 (after revaluation, applying purchase method) minus Rs.142,68,36,160/- (actual cost to the book profit of the assessee)].
41. The ld. CIT (A) consented to the argument of the Assessing Officer. Thus, the short and long question is whether the increase in the value of investment is capital reserve or revaluation reserve.
42. Before us, during the argument, the ld. AR argued that as per AS-14. Paragraph 12 of AS-14, which is to be mandatorily followed, permits the transferee company to record the assets and liabilities of the amalgamating companies, acquired under the scheme of amalgamation, at fair values as on the date of amalgamation.
43. The clause 9 of the scheme of amalgamation provides that all assets/ properties and liabilities of the amalgamating companies, including investments held in shares of indiabulls, which stood transferred to and vested in the assessee with effect from the appointed date, shall be recorded at fair values, by following “Purchase Method”.
44.Regarding the argument of the revenue that the “Capital Reserve” treated as the “Revaluation Reserve” for computation of the profit u/s 115JB, the ld. AR argued that the assets and liabilities of the amalgamating companies (including shares of Indiabulls) pursuant to the scheme of amalgamation becoming effective, stood vested and recorded in the audited financial statements of the assessee at their fair value. In that view of the matter, the difference arising on account of acquisition of net assets of the amalgamating companies at fair value and the shares issued, is credited to “Capital Reserves”, which, by no stretch of argument, could be regarded as “Revaluation Reserve”. It was further argued that under the scheme of amalgamation in the nature of purchase, the fair values of various assets and liabilities acquired by the amalgamated entity through the scheme of amalgamation are the “cost” of those assets in the hands of the amalgamated company, as against any revalued amounts. The “Capital Reserves” account that has been created is due to recognition of the fair values of these assets and liabilities as assessee’s cost and not due to any revaluation of the assets.
45. The ld. DR’s reiterated the arguments as taken by the Assessing Officer mentioned at page no. 16 to 17 of the assessment order have been duly perused.
46. Heard the arguments of both the parties and perused the material available on record on this issue.
47. We find that the Assessing Officer failed to appreciate that a “Revaluation Reserve” is created when an enterprise revalues its own assets, already acquired and recorded in its books at certain values. In other words, when an entity makes reinstatement of the book value of its existing assets, it amounts to revaluation of assets. In the instant case, the assessee has not revalued its existing asset but as only recorded the fair values of various assets and liabilities “acquired” by the assessee from the transferor/ “amalgamating companies” pursuant to the scheme of amalgamation as its “cost of acquisition” in accordance with the terms of the court-approved scheme of amalgamation and the provisions of AS14. As per the accounting standard, upward revaluation of assets is permitted only in terms of AS 10 on “Accounting for Fixed Assets”. AS 13 which deals with “Accounting for Investments”, does not permit a company to revalue of its long-term investments at a value higher than the cost.
48. In case of merger in the nature of purchase, the difference arising on account of acquisition of net assets of the amalgamating companies at fair value, and valuation of investments held in the assessee, which stood recorded under the head “Capital Reserve”, cannot, by any stretch of argument, be regarded as “Revaluation Reserve”.
49. In this background of the accounting methodology of “Capital Reserve” and “Revaluation Reserve”, the provisions of the Act pertaining to computation of book profits as per Section 115JB are examined.
50. What Section 115JB provides for !!!
51. Section 115JB provides for
“115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent.
(2) Every assessee,—
(a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956): or
(b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company:
Provided that while preparing the annual accounts including profit and loss account,—
(i) the accounting policies:
(ii) the accounting standards adopted for preparing such accounts including profit and loss account:
(iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act. 1956 (1 of 1956):”
52. For computing book profit, sub-section (2) of section 115JB of the Act mandates that every company shall prepare its Profit & Loss Account in accordance with the provisions of Parts I and II of Schedule III of the Companies Act, 2013 (corresponding to Parts II and III of the erstwhile Companies Act further provides that for computing book profit under the said section, the same accounting policy and Accounting Standards as are adopted for preparing the accounts laid before the shareholders at the Annual General Meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (corresponding to section 210 of the Companies Act; 1956) shall be adopted.
53. Then what Section 129 of the Companies Act, 2013 provides for !!!
54. Section 129 of the Companies Act, provides that the financial statements of the company shall be prepared to give a true and fair view of the state of affairs and the profit or loss of the company and shall comply with the Accounting Standards as prescribed by the Central Government. The said Section reads as under:
“129. (1) The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III.”
55. Then what are the accounting standards notified for amalgamation !!!
56. As per, the above provisions of Sections, the accounting for amalgamation AS 14 is applicable. As per AS 14 of pooling of interest method and purchase method are recognized. As per Sections 391 to 394 of Companies Act, amalgamation was regarded as amalgamation in nature of purchases and hence purchase method of the AS 14 is applicable to the assessee.
57. Then what accounting standard AS 14 prescribes !!!
58. AS 14 prescribes Methods of Accounting for Amalgamations:
“7. There are two main methods of accounting for amalgamations.
(a) the pooling of interests method
(b) the purchase method.
8. The use of the pooling of interests method is confined to circumstances which meet the criteria referred to in paragraph 3(e) for an amalgamation in the nature of merger.
9. The object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. This method is used in accounting for amalgamations in the nature of purchase.
The Pooling of Interests Method
10. Under the pooling of interests method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts (after making the adjustments required in paragraph 11).
11. If, at the time of the amalgamation, the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation. The effects on the financial statements of any changes in accounting policies are reported in accordance with Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.
The Purchase Method
12. Under the purchase method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company.
13. Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company. For example, the transferee company may have a specialised use for an asset, which is not available to other potential buyers. The transferee company may intend to effect changes in the activities of the transferor company which necessitate the creation of specific provisions for the expected costs, e.g. planned employee termination and plant relocation costs.
Treatment of Reserves on Amalgamation
16. If the amalgamation is an ‘amalgamation in the nature of merger’, the identity of the reserves is preserved and they appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company. Thus, for example, the General Reserve of the transferor company becomes the General Reserve of the transferee company, the Capital Reserve of the transferor company becomes the Capital Reserve of the transferee company and the Revaluation Reserve of the transferor company becomes the Revaluation Reserve of the transferee company. As a result of preserving the identity, reserves which are available for distribution as dividend before the amalgamation would also be available for distribution as dividend after the amalgamation. The difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company is adjusted.
17. If the amalgamation is an ‘amalgamation in the nature of purchase’, the identity of the reserves, other than the statutory reserves dealt with in paragraph 18, is not preserved. The amount of the consideration is deducted from the value of the net assets of the transferor company acquired by the transferee company. If the result of the computation is negative, the difference is debited to goodwill arising on amalgamation and dealt with in the manner stated in paragraphs 19-20. If the result of the computation is positive, the difference is credited to Capital Reserve.”
59. Hence, the observation of the AO and ld. CIT (A) that the reserve created is in the nature of “Revaluation Reserve” cannot be acceded to as it is in fact “Capital Reserve”.
60. Clause (j) to Section 115JB provides for upward adjustment of revaluation reserve while computing profits u/s 115JB. The verbatim of the Clause is as under:
“Section 115JB…………………..
Clause (j): the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset.”
61. Since, the capital reserve is out of purview of Section 115JB, and the “Revaluation Reserve” only is considered for upward adjustment of the profit as per the Act, the AO tried to being the capital reserve to the fold of Clause (j) [which rightly deals with revaluation reserve]. Such an action of the AO cannot be sustained.
62. Reliance is also placed on the order of the Co-ordinate Bench of Tribunal in the case of Priapus Developers Pvt. Ltd. 176 ITD 223 dated 12.03.2019. The relevant part is as under:
“5. The learned Assessing Officer required the assessee to furnish the details about the nature of capital reserves and also asked the assessee as to why the amount credited to the capital reserves for 20,42,053 shares sold by the assessee should not be considered for the purpose of calculation of book profit u/s. 115JB and adjustment be made in the book profit. In response, the assessee submitted detailed reply, which has been incorporated in the assessment order. The working of the capital reserve in the books of account and in the financial statement shown by the assessee in terms of the scheme of amalgamation was disclosed in the following manner:
| Particulars | Priapus Properties Pvt. Ltd. | Priapus Real Estate Pvt. Ltd. | Priapus Developers Pvt. Ltd. | Total |
| On revaluation of shares | 232,19,92,283 | 85,84,92,000 | 318,04,84,283 | |
| On revaluation of Land | 3,27,760 | 3,27,760 | 3,27,760 | 9,83,280 |
| On Purchase consideration | 62,80,58,323 | 14,95,05,680 | 77,75,64,003 |
It was further submitted that, neither the books of account nor audited statement of accounts have been disqualified by the auditors nor ROC has taken any objection and therefore, the book profit shown by the assessee cannot be tinkered with. It was further stated that, as per Scheme of Amalgamation, assessee had no option but to take the differential value of shares to capital reserves. In support, strong reliance was placed on the decision of ITAT Mumbai Bench in the case of United Estate Pvt. Ltd. The Assessing Officer then asked the assessee, why no adjustment should be made in the book profit with respect to valuation of shares, which is nothing but revaluation of reserve. The assessee in response had relied upon AS-14 and submitted that in case of ‘purchase method’ the assets and liabilities are to be recorded at fair market value at the time of amalgamation and as per the scheme of amalgamation ‘purchase method’ was adopted. The ld. Assessing Officer observed that reserve created on account of revaluation of shares was not credited to the profit & loss account and therefore, he was of the opinion that the same has to be considered for determination of book profit. The assessee, however, squarely relied upon the Amalgamation Scheme and the order of Hon’ble High Court on account of treatment given in the books of account. The detail submissions of the assessee in this regard are incorporated on page 4 to 6 of the assessment order. The ld. Assessing Officer held that in terms of clause (v) to Explanation 1 of section 115JB, such revaluation of shares has to be taken into account while computing the book profit. Finally, ld. Assessing Officer made the addition of Rs.61,04,10,483/- in the hands of the assessee mainly on following grounds:
- Firstly, the reserve created out of revaluation of shares held by M/s. PREPL and PPPL in their books of accounts, which has been credited in the balance sheet as capital reserves is nothing but revaluation of shares created out of excess of revaluation of assets and therefore, the contention of the assessee that it is not revaluation of reserves does not have any merit;
- Secondly, the Hon’ble High Court has merely approved the Amalgamation but has not comment upon accounting treatment given in pursuance to the amalgamation of the companies. Hon’ble High court has not discussed at all the merits of accounting treatment in its order;
- Thirdly, he rejected various case laws relied by the assessee that capital reserve created out of amalgamation schemecannot be added to the book profit on the ground that what is proposed is not addition of entire capital reserve but that of the amount which is present in the reserve created on revaluation of assets while those assets were disposed of during the year.
- Lastly, reserve created due to revaluation of assets does not route through profit accounts directly, which is not correct and therefore, in terms of clause (v) of Explanation 1 makes it clear that for the purpose of book profit, such revaluation of reserve relating to revalued assets has to be increased.
6. Finally, the addition was made by the Assessing Officer in the following manner: –
i. In consequence of amalgamation of M/s. PPPL and M/s PREPL with the assessee company, the shares of IHFL held by the two companies were revalued on market price as on the date of amalgamation. A reserve was created out of such revaluation and Rs.318,04,84,283/- were credited to the balance sheet directly and the same was not routed through profit and loss account.
ii. Of the 1,06,39,926/- shares which were received by the assessee company in consequence to amalgamation, assessee company has sold 20,42,053/- shares during the year. However, of the shares which were sold during the year, the consequent amount which was credited to the reserve was not reduced from the value of reserve and routed through profit and loss account.
iii. Assessee in its profit and loss account has claimed loss on sale of these shares of IHFL amounting to Rs.52,69,843/- however, corresponding effect of the same was not given to the revaluation reserve.
8.6. In view of the above facts, it can be stated that the provisions of clause (i) of explanation 1 to section 115JB squarely applies to the case of the assessee. Quantum of adjustment needs to be worked out in this regard which is as follows:
| Particulars | No.of shares | Value share Price on 14.11.2014 | Revalued share value | Original Price | Total |
| PPPL | 70,39,926 | 456.47 | 3213515021.22 | 891522739 | 232,19,92,282 |
| PREPL | 36,00,000 | 456.47 | 1643292000 | 78,48,00,000 | 85,84,92,000 |
| Total | 318,04,84,282 |
8.7. On the date of amalgamation, assessee company thus received, total of Rs.1,06,39,926/- shares from M/s. PPPL and M/s. PREPL. Further, for 10639926 shares of IHFL, Rs.318,04,84,282/-was taken to the reserve in consequence of the revaluation of the shares. Thus, for every single share of IHFL that was revalued at the time of amalgamation, Rs.298.92 were credited to the reserve. Now assessee company during the year under consideration has disposed 20,42,053 shares of IHFL. Further, for these shares sold, assessee has debited in its statement of profit and loss account a sum of Rs.52,69,843/- towards loss on sale of shares. The working of calculation of the amount as per clause (i) of explanation 1 to section 115JB of the IT Act, 1961 is as follows:
| No. of shares sold by the assessee | : 20,42,053 |
| Amount credited to the reserve for each share | : 298.92 |
| Total amount in the reserve for the disposed Shares: | 61,04,10,482.76 |
| Less: Amount credited to Profit & loss account on | |
| Sale of shares | : 52,69,843/- |
| Total adjustment to be made to the book profit | |
| u/s. 115JB | :61,56,80,325.76 |
In view of the above discussion, adjustment to the book profit is being made into clause (j) of explanation 1 of section 115JB of the IT Act, 1961 is being made by Rs.61,56,80,325.76.”
13. We have heard the rival submissions and also perused the relevant findings given in the impugned order as well as material referred to before us at the time of hearing. The sole issue involved in this case is, whether the addition of Rs.61,56,80,326/- can be made in the book profit u/s. 115 JB on account of shares sold by the assessee, which was held as ‘capital reserve’, which the Assessing Officer and CIT(A) have treated on account of amount standing in revalued reserve relating to revaluation of assets in terms of clause (j) of Explanation 1 of section 115JB. As discussed in the foregoing paragraphs, two subsidiary companies of the assessee, PREPL and PPPL were amalgamated with the assessee company being holding company, vide judgment and order dated 18.02.2016 of Hon’ble Delhi High court, wherein the Hon’ble Court has sanctioned the scheme of Amalgamation. First of all it would be quite pertinent to note the relevant clauses of Scheme of Amalgamation which are important for the purpose of adjudication of present controversy. The relevant clauses dealing with accounting standard and purchase method adopted for valuing the assets and liabilities at a fair market value and how any excess on such transfer of assets and liabilities has to be treated as part of the capital reserve, reads as under:
9.1. On the scheme becoming effective and with effect from the appointed date, Transferee company shall account for amalgamation of Transferor Company No. 1 and transferor Company No. 2 in its books of accounts as per the “purchase Method” specified under the Accounting Standard 14 – “Accounting for Amalgamation”.
9.2 All the assets and liabilities of Transferor Company No. 1 and Transferor Company No. 2 shall be transferred to and vested in Transferee Company pursuant to this Scheme and shall be recorded at their respective fair values.
9.3. Any excess arising on transfer of assets and liabilities of Transferor Company No. 1 and transferor company No. 2 after giving effect to clause 9.4 below would be considered to form part of the “Capital Reserve” of Transferee Company. Such Capital Reserve shall be a reserve which arises pursuant to this Scheme and shall not be, for any purpose, be considered to be a reserve created by Transferee Company. Any deficit shall be considered to form part of Goodwill.”
16. Here in this case, by transferring the excess fair market value of the assets/shares to capital reserve could not be treated as a tax evasion practice. The difference between the fair market value of assets and liabilities taken over as per the book values, which has resulted in ‘capital reserve’, was recorded in the books in the following manner:
| Particulars | Priapus Properties Pvt Ltd. | Priapus Real Estate Pvt. Ltd. | Priapus Developers Pvt. Ltd. | Total |
| On revaluation of shares | 232,19,92,283 | 85,84,92,000 | 318,04,84,283 | |
| On revaluation of Land | 3,27,760 | 3,27,760 | 3,27,760 | 9,83,280 |
| On Purchase consideration | 62,80,58,323 | 14,95,05,680 | 77,75,64,003 |
Therefore, there could not be any question of invoking clause (J) of Explanation to section 115JB for calculation of book profit u/s. 115JB. Here in this case, nowhere it has been disputed that the profit and loss account has not been prepared in compliance of requirement of Part-I and Part-II of the Companies Act, 2013 and as per accounting standard.”
63. To conclude, based on the reading of Clause (j) of Explanation to section 115JB for calculation of book profit u/s. 115JB, provisions of Section 129 of the Companies Act, AS 14 of the recognized accounting standard, keeping in view the fact that the revenue has not brought any tangible material to prove that the scheme is a colourable device to avoid taxes, keeping in view the land holding which has been consolidated owing to the amalgamation of the companies and keeping view the accounting resorted by the group companies regarding the book value of investments in shares pre & post amalgamation, we hereby hold that, the appeal of the assessee on this ground is allowed.
64. Apropos, the ground dealing with upward adjustment in terms of Clause (f) of Explanation 1 of Section 115JB on account of expenditure relatable to earning of exempt income, the facts of the case are as under:
The assessee gained a loss of short term capital loss to the extent of Rs.28,54,45,463 on purchase and redemption of mutual funds. The assessee in the return of income, suo-moto disallowed the short term capital loss incurred, in terms of provisions of section 94(7) of the Act.
In the impugned assessment order, the Assessing Officer has made an upward adjustment of Rs.28,54,45,463 in terms of clause (f) of Explanation 1 to section 115JB of the Act, by treating the said loss as expenditure relatable to earning exempt income. The ld. CIT (A) confirmed the addition on the grounds that as per the provisions of clause (f) of Explanation 1 to section 115JB of the Act the book profit is to be reduced by the amount of income to which any provisions of section 10 apply and increased by the amount of expenditure relatable to any income to which section 10 applies. Therefore, not only the dividend income has to be removed for the book profit but the loss or any other expenditure incurred for earning the dividend income has to be removed from the computation of book profit.
65. Before us, the ld. AR argued that there was no provision u/s 115JB for the upward adjustment on loss on account of dividends striping, the assessee was not required add back the same for computing ‘book profit’ under the said section. The assessing officer failed to appreciate that ‘loss’ arising on sale of units of mutual fund could not be regarded as ‘expenditure’ in terms of clause (f) of Explanation 1 to section 115JB of the Act and thereby no adjustment was called for.
66. The ld. CIT (DR) supported the rationale of ld. CIT (A) which has been mentioned above.
67. Heard the arguments of both the parties and perused the material available on record. The provisions of the Sections as per the Act are perused.
68. Section 94(7) of the Act reads as under:
“Section 94(7)……..
(a) Any person buys or acquires any securities or unit within a period of three months prior to the record date;
(b) Such person sells or transfers-
(i) Such securities within a period of three months after such date; or
(ii) Such unit within a period of nine months after such date;
(c) The dividend or income on such securities or unit received or receivable by such person is exempt.”
69. Clause (f) of Explanation 1 to Section 115JB reads as under:
“Clause (f): the amount or amounts of expenditure relatable to any income to which [section 10 (other than the provisions contained in clause (38) thereof) or [***] section 11 or section 12 apply; or]”
70. Section 10 deals with incomes not included in the total income.
71. Section 11 deals with income from property held for charitable or religious purposes.
72. Section 12 deals with income of trusts or institutions from contribution.
73. Straight reading of the provisions denotes that the loss on purchase and redemption of mutual funds cannot be treated as an expenditure relatable to earning of dividend. The provisions relating to dividends stripping and allowability of consequent loss u/s 94(7) are different from the Clause (f) of Explanation 1 to the Section 115JB. Expense is something which comes out of pocket. A loss is something different as it is not a thing which is spent or disbursed. It is a thing which comes upon him ab extra. {CIT Vs SC Kothari (82 ITR 792) (SC)}. There is a clear distinction between a business expenditure and business loss. The former is an indicative of a volition but a loss comes to as ab extra without the role of the assessee. While expenditure is voluntarily, business loss is fortuitous [CIT Vs New India Assurance Co. Ltd. (71 ITR 761. (Bom.)]. Hence, the loss cannot be equated with expenditure. The provisions u/s 115JB doesn’t envisage enhancement of taxable profits by adding the loss incurred in redemption of mutual fund for the purpose of Section 115JB. Reliance is placed on the judgment of Hon’ble High Court of Gujarat in the case of CIT Vs JK Paper Ltd. 206 Taxmann 124 wherein it was held that the loss incurred by the on account of dividend stripping dealt under sub-Section 7 of Section 97 cannot be applied for the purpose of computing business profit in terms of Section 115JB. Based on the conjoint reading of the provisions of the Act and the judgments of the Hon’ble Apex Court, the appeal of the assessee on this ground is allowed.
74. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 28/07/2020.
