Capital reserve arising from
FLASH ALERT
amalgamation is not taxable
27 NOV 2024 | DIRECT TAX
under Section 28(iv)
BRIEF FACTS OF THE CASE1
• Samagra Wealthmax Private Limited ('Samagra' or ‘assessee’) owned the
entire share capital of Orval Corporate Solutions Private Limited ('Orval'),
which, in turn, wholly owned Celina Buildcon and Infra Private Limited
('Celina').
• With an intent to simplify the group structure, Celina was amalgamated with
the assessee-company under a scheme of amalgamation.
• Since, the assessee was the ultimate holding company of Celina, no shares
were issued to the shareholders of Celina as consideration for the merger in
line with Section 19 of the Companies Act, 2013, which prohibits a holding
company from allotting or transferring its shares to a subsidiary.
• Accordingly, all the assets and liabilities of Celina stood transferred to the
assessee and Rs. 149.29 crores were credited to the capital reserve.
• The Assessing Officer held that the assessee had received assets worth Rs.
149.29 crores without consideration and, therefore, the same was required to
be added under section 28(iv) of the Income Tax Act, 1961 (the ‘Act’).
• On appeal, the Commissioner (Appeals) held that the manner in which the
Assessing Officer had treated this amount was not in consonance with section
28 (iv) and other relevant provisions. Accordingly, the addition made by the
Assessing Officer was deleted.
• Aggrieved by same, the Revenue preferred further appeal before ITAT.
KEY OBSERVATIONS OF ITAT
• One of the conditions for a merger to qualify as an 'amalgamation' as per
section 2(1B) of the Act, is that shareholders holding not less than three-
fourths in value of the shares in the amalgamating company should become
shareholders of the amalgamated company by virtue of the amalgamation.
However, the sub-clause (iii) provides an exception in case the shares of the
amalgamating company are already held by the amalgamated company or its
subsidiary. Thus, the merger of Celina into the assessee qualifies as an
'amalgamation' u/s 2(1B) and consequently all the exemptions provided in the
Act should be available to the said merger.
1DCIT v. Samagra Wealthmax (P.) Ltd. [2024] 168 [Link] 325 (Mumbai - Trib.)
KEY OBSERVATIONS OF ITAT
• In order to tax any amount u/s. 28(iv) of the Act, the following prerequisites
need to be satisfied:
a. there must be benefit or perquisite arising to the company.
b. it must arise out of the business or profession carried on by the recipient;
and
c. it must be revenue in nature.
• ITAT observed that there was no benefit or perquisite arising out of the
scheme of amalgamation. The assessee, as the ultimate holding company,
indirectly owned Celina through its wholly-owned subsidiary, and following
the amalgamation, directly owned Celina's assets.
• In the whole process, the assessee has neither become richer nor poorer.
Thus, the essential condition under Section 28(iv) of the Act—receipt of a
benefit or perquisite—was completely absent, as the transaction did not result
in any gain to the assessee.
• Recording a reserve in consequence to amalgamation order is required to be
passed for the limited purpose of balancing the accounts based on the double
entry system employed and thereby cannot give rise to any benefit or
perquisite in the course of the business.
• The only relationship between two companies was that of indirect holding
between them. In this factual background, it cannot be said that the
amalgamation reserve arose was out of any business activity of the assessee.
Scheme of Amalgamation cannot be regarded to be the one carried into
during the course of carrying on the business. Thus, the reserve created on
account of amalgamation was contested as capital in nature and not created
on account of business activity.
• The ld. CIT (A) considered several decisions2 wherein it was held that reserve
arising out of amalgamation is capital in nature and cannot be treated as
revenue under the ambit of section 28(iv) of the Act.
• Therefore, considering the aforesaid provisions, ld. CIT (A) was correct in
holding that capital reserve cannot be treated as an Income u/s 28(iv) of the
Act. Therefore, provision of section 28(iv) of the Act is not applicable to the
present case.
2ITO v. Kyal Developers (P.) Ltd [2014] 42 [Link] 70/63SOT 93 (Kolkata - Trib.); and
Aamby Valley Ltd. v. ACIT [2019] 102 [Link] 385 (Delhi -Trib.)
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