DCIT Vs Ozone India Ltd. (ITAT Ahmedabad)
In the instant case, pursuant to amalgamation, all assets, liabilities, undertaking of the amalgamating company (KEPL) are agreed to be vested in the amalgamated company( the Assessee) as a going concern. The amalgamated company has issued 300 equity shares of its company at face value for each shares of amalgamating company in consideration of such vesting of assets, liabilities etc. as per the scheme of amalgamation duly approved by the Jurisdictional High Court. As a result, shares worth Rs. 15 crore of the amalgamated co. (assessee co.) were issued against the vesting of assets etc. The assessing officer observed that the value of net assets (assets less liabilities) vested in the amalgamated company under the scheme stands at Rs. 54,21,16,156 against which shares worth Rs. 15 crore were issued by it for such acquisition. The difference between the value of assets and corresponding shares issued amounting to Rs.39,21,16,156/- credited by the assessee co.( amalgamated co.) to its capital reserve without any payment of taxes triggered the cause of action for the AO. In the course of assessment, the AO further found on a incisive verification that the intrinsic value of share of amalgamated co. issued at face value of Rs. 10 stands at Rs. 6.81 per shares only. The AO accordingly noted that the share of amalgamated co. so issued carries worth Rs. 10.22 crores only( 1,50,00,000 *6.81= 10,21,50,000) as against the net assets acquired Rs. 54.21 crore. The AO after making reference to Addl. CIT under S. 144A has brought the difference of Rs. 43.99 crore within the ambit of taxable income with the aid of deeming provision of S. 56(2)(viib) of the Act and increased the assessed income to that extent.
In the backdrop of facts capsuled above, it is the contention of the assessee that impugned transaction of vesting of assets of amalgamated co. in exchange of issue of shares of assessee co. at face value neither matches the essential ingredients of S. 56(viib) of the Act nor is the transaction carried out pursuant to approved scheme, in conformity of the objects and purposes of insertion of section 56(viib) of the Act. It is further contended that applicability of deeming clause is unfounded on giving schematic interpretation to the language employed. The revenue on the other hand seeks to support the action of AO and essentially contends that newly inserted S. 56(2)(viib) was introduced with an object to inter alia plug the present situation where consideration received in kind (by way of vesting of assets of amalgamated co.) is far higher than the face value of corresponding shares issued in lieu of such excess value of assets vested.
The interpretation of S. 56(viib) qua the facts of the present case is in controversy. S. 56(2) deems certain income chargeable to income tax under the head ‘income from other sources’. Finance Act 2012 has, understandably, inserted clause (viib) with effect from 1-4-2013(assessment year 2013-14) to include consideration received in excess of face value of shares issued i.e. ‘share premium’ received by an issuing company as it exceeds the fair market value of shares as its income chargeable under the head ‘income from other sources’. On a plain reading, two things immediately emerges from the newly inserted provision (i) consideration which is taxable is the one which exceeds face value of shares issued (ii) in the event of shares issued at consideration above face value, the same need to be compared with fair market value to be determined as per sub-clause(a) appended thereto. The Assessee in the present case, is not found to have issued shares at value more than face value at the first instance as repeatedly exhorted on behalf of the assessee.
When the clause in Section 56(2)(viib) of the Act is read in tandem with elucidations provided in CBDT Circular; Finance Ministers’ speech in Parliament disclosing his intentions behind such insertion and also Memorandum explaining Finance Bill, it appears that whole thrust for such insertion is to bring measures to tax hefty or excessive share premium received unjustifiably by private companies on issue of shares without carrying underlying value to support such uncalled for premium and thereby enriching itself without paying taxes legitimately due to them. It also seems that subscription to the shares issued by a company at a substantial premium (not necessarily backed by a valuation justifying the premium) was supposedly resorted to convert unaccounted money. The extant framework of law were not found sufficient by the legislature to curb such practices. Earlier attempts to tax such excessive receipts in the garb of share premium by private cos. did not arguably fructify. The provision was inserted to change the landscape for charging premium to tax of capital nature.
Section 56(2)(viib) creates a deeming fiction to imagine and fictionally convert a capital receipt into revenue income. It is well entrenched by the body of case laws that while giving effect to such legal fictions, all facts and circumstances thereto and inevitable corollaries thereof have to be assumed. In CIT vs. Mother India Refrigeration (P) Ltd. (1985) 155 ITR 711, the Hon’ble Supreme Court has held that the legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond the legitimate field. Thus, a deeming fiction cannot be stretched beyond its purpose and import another fiction in it.
In the light of understanding developed on object and purpose of the deeming clause, as discussed above, the provisions of Section 56(viib), would not come to motion where the Assessee company as admittedly not charged any premium at all and the shares were issued at face value.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed at the instance of the Revenue. The assessee has filed cross objection in the appeal of the Revenue against the order of the Commissioner of Income Tax (Appeals)-9, Ahmedabad (‘CIT(A)’ in short) dated 18.07.2018 arising in the assessment order dated 30.03.2016 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2013-14.
2. The appeal of Revenue and cross objection of assessee emanates from common issue and thus disposed off together.
3. To begin with, we shall take up Revenue appeal for adjudication purposes.
ITA No.2081/Ahd/2018 – Revenue’s appeal- AY 2013-14
4. Grounds of appeal raised by the Revenue read as under:
“(a) The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs 43,99,66,156/- made by the assessing officer u/s 56(2)(viib) of the Act on account of difference of net asset value of Rs.54,21,16,156/- credited in the books without appreciating the factual backdrop of the case in which the addition was made by the Assessing Officer.
(b) The Ld.CIT(A) has erred in law and on facts in not appreciating the fair market value of shares of assessee company @ Rs.6.81/- per share based on which addition was correctly made by the assessing officer.
(c) The Ld CIT(A) has erred in law and on facts in deleting the addition of Rs 1,49,137/- made by assessing officer on account of disallowance of Architect fees attributable to the unsold inventory.”
5. Briefly stated, the assessee company filed its return of income for AY 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 Hon’ble Gujarat High Court vide order dated 07.09.2012 effective from 01.04.2012 whereby all the assets and liabilities of M/s. KEPL were vested with the assessee company as per scheme placed before the Hon’ble Court. Hence, on coming into effect of the scheme on 01.04.2012, 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.
5.1 In this backdrop, the AO noted that on the date of amalgamation, the issued and paid up capital of 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 scheme of amalgamation, shareholders of KEPL got 300 equity shares of 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, assessee received net assets worth Rs.54,21,16,156/- against corresponding issue of shares having face value of Rs.15,00,00,000/- to the shareholders of KEPL. The AO thus observed that assessee has received excess net asset worth Rs.39,21,16,156/- on account of amalgamation which was credited by it as capital reserve of the amalgamated company.
5.2 In the opinion of the AO, the excess value of assets so received by assessee company was liable for taxation in the hands of the assessee being excess consideration for issue of its share. A show cause was accordingly issued and reply thereon filed by the assessee was also recorded. However, the AO did not find merit in the defense propagated by the assessee in its reply. The AO observed that the accounting treatment given by the assessee is in departure with AS-14 issued by the ICAI. The AO simultaneously observed that the assessee is liable to tax on excess consideration received qua face value of shares issued under the head ‘income from other sources’ in terms of s.56(2)(viib) of the Act. It was thus essentially observed that the aggregate consideration in the form of net assets (i.e. total assets minus total liabilities acquired) received by the assessee company for issue of its shares which exceeds its fair value is liable to tax in terms of Section 56(2)(viib) of the Act. For determination of fair value of shares of issuing company i.e. assessee, the AO resorted to Rule 1 1UA of the Income Tax Rules. The fair value was computed at Rs.6.81 per share as against the face value of Rs.10/- per share issued to KEPL on amalgamation as noted above. The total fair market value of shares issued to shareholders of KEPL was consequently worked out at Rs.10,21,50,000/-(1,50,00,000 x 6.81). The AO thus concluded that on amalgamation, the assessee is benefitted by receiving net consideration worth Rs.54,21,16,156/- in the form of excess value of assets of KEPL against which shares carrying intrinsic value Rs.10,21,50,000/-(face value of Rs.15Crore) were issued to the shareholders of KEPL i.e. amalgamating company. Consequently, the AO was of the opinion that assessee is benefitted by surplus money worth numerically worked out at Rs.43,99,66,156/- on such amalgamation for which the assessee is susceptible to taxation under s.56(2)(viib) of the Act.
5.3 A reference under s.144A of the Act was made to the superior authority i.e. Addl. CIT for issuing suitable directions in this regard. On reference so made, the Addl. Commissioner of Income Tax commenced proceedings under s.144A of the Act and ultimately held that Section 56(2)(viib) of the Act is triggered in the facts of the case on the excess consideration/asset worth received by the assessee company in lieu of corresponding issue of shares. The Addl. CIT consequently directed the AO to cover the excess consideration so received as income in the ambit of taxation on the touchstone of Section 56(2)(viib) of the Act. The taxable income of the assessee was consequently increased to the extent of Rs.43,99,66,156/- towards alleged excess consideration.
6. Aggrieved by the additions made by the AO under the shelter of Section 56(2)(viib) of the Act on account of alleged excess consideration received by the assessee in the form of assets and liabilities of amalgamating company over fair market value of shares issued to KEPL, the assessee preferred appeal before the CIT(A). 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 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 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 relevant operative para of the order of the CIT(A) is reproduced hereunder:
“4.7. I have considered the assessment order and arguments of the appellant. The appellant company has issued 1.5 lac shares to the shareholders of M/s. Kalavir Estate Pvt. Ltd. as per the amalgamation scheme approved by Honourable High Court. The shares have been issued at the face value of Rs. 107- per share in the ratio of 1 to 300 shares held by the shareholders in the amalgamating company. The relevant clause of scheme of amalgamation as approved by Honourable Gujarat High Court vide order dated 07/09/2012 in company petition No. 89 of 2012 is as under:-
“Clause – 9
Upon the transfer of undertaking of KEPL to OIL and the vesting of the said assets and liabilities and the amalgamation becoming effective in terms of this Scheme, then, in consideration of the amalgamation and subject to the provisions of this Scheme, OIL, shall, without any further act, application and deed, issue and allot to the, equity shareholders of KEPL 300 equity shares in OIL of Rs. 10/- each, credited as fully paid-up in the capital of OIL, for every equity shares of the face value of Rs. 10/- each held by the shareholders in KEPL”
4.8. The Clause – 10 of the scheme of amalgamation for accounting of assets and liabilities of M/s. Kalavir Estate Pvt. Ltd. (KEPL) in the appellant company (OIL) has been mentioned as under: –
“10.1. Upon the coming into effect of the scheme, OIL shall record all assets (except land) and liabilities vested in OIL pursuant to the scheme at their book values. The OIL shall record in its books the fair market value of the land with resultant corresponding accounting effects as per GAAP and Accounting Standard (AS)-14.
10.2. OIL shall credit to its Share Capital Account in its books of account the aggregate face value of the new shares issued by it to the members of KEPL pursuant to this Scheme”.
The appellant company has discharged the consideration of amalgamation by issuing 1.5 lac equity shares of face value of Rs. 10/- each as per the amalgamation scheme. The AO and Addl. CIT have invoked the provisions of section 56(2) (viib) on the issue of share without appreciating the intent and letter of section 56(2)(viib). Section 56(2)(viib) has been introduced by the Finance Act, 2012 w.e.f. 01/04/2013 to deter the generation and use of unaccounted money and taxing the share premium in excess of market value which is evident from Honourable Finance Minister’s budget speech at the time of introduction of section 56(2)(viib). The explanatory memorandum to the provisions of Finance Bill 2012 and Finance Act, 2012 has explained the provisions as under :-
“SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE TO BE TAKEN AS INCOME :
Section 56(2) provides specific category of income that shall be chargeable to income tax under the head income from other sources. It is proposed to insert a new clause in Section 56(2). The new clause will apply where a company not being a company in its public are substantially interested receives in any previous year from any person being a resident any consideration for issue of shares, in such a case, if the consideration received for the issue of shares exceeds the face value of such shares, the aggregate consideration received for such share as exceeds the fair market value of the share shall be chargeable to income tax under the head income from other sources….”
It is therefore, legislative intent to cover the cases of closely held company who receives disproportionate amount while issuing shares over and above the face value of share by way of share premium, in the instant case, shares have been issued at the face value and there is no share premium received, therefore, there is no question of applicability of section 56(2)(viib). In fact, in the scheme of amalgamation, consideration is paid by the amalgamated company in the form of issue of share capita! rather than consideration being received by the appellant company as understood by the AO / Addl. CIT. The persons to whom shares have been allotted have not paid anything for allotment of shares. The shares have been allotted in consideration of their shareholding in. the amalgamating company.
4.9. Section 2(1B) of Income Tax Act, 1961 defines the meaning of amalgamation as merger of one or more company with another company or merger of two or more company to form one company in such a manner that –
1) All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation.
(2) All the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of the amalgamated company by virtue of the amalgamation.
(3) Shareholders holding at least three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamated company or its nominee) becomes the shareholders of the amalgamated company by virtue of the amalgamation.
4.10. The Accounting Standard – 14 specifically deals with the accounting for amalgamation and treatment of any result in difference arising on account of amalgamation in the books of transferre company. Based on the proprietary of the transaction, the standard classifies the amalgamation as under:-
