The Chennai Tribunal in the case of Quintegra Solutions Pvt. Ltd., had considered the applicability of Section 28(iv) of the Act in the case of amalgamation. In that case the CIT(A) held that differential amount between share issued and net assets taken over, being balancing figure, did not represent income assessable under Section 28(iv) of the Act. The view of CIT(A) had been upheld by the Tribunal.
The decision of Aries Advertising Co. Pvt Ltd., relied on by the Judicial Member, involved transfer of trading receipts. In case of amalgamation, there is inherent possibility of the taxpayer gaining a ‘book surplus’ being the difference between the market value and the face value of the shares which is not in the revenue segment and not in the nature of any benefit or perquisite. Thus, the facts in the case of taxpayer are diametrically opposite and did not involve result of trading operations. Therefore above decision was not applicable to the present case.
Agreeing with the Accounting Member, the Tribunal held that INR 289.968 millions was not in the nature of any benefit or perquisite and thus, not taxable under Section 28(iv) of the Act.
Thus, in view of the majority decision, the appeal of the taxpayer on this ground was allowed.
The decision of the Chennai Tribunal re-confirms the common understanding about tax neutrality in case of amalgamation process. It has been usual practice to record the amalgamations on fair value basis which may result in possible accounting surplus.
The Tribunal has correctly observed that general reserve being difference between paid up value of shares allotted on amalgamation and the net assets taken over from the transferor company is merely an accounting entry. Since no actual benefit or perquisite arises from conduct of business carried on by the assessee, the surplus arising on amalgamation cannot be treated as taxable income.
Spencer and Company Ltd. v. ACIT (ITAT Chennai) ITA No. 440 of 2011
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