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Facts
The assessee company acquired 100% shares of another company for Rs. 182 crores and subsequently, the two companies were amalgamated as per a High Court approved scheme. The land, originally a capital asset of the acquired company, was converted into stock-in-trade by the assessee at its fair market value, leading to an addition by the AO for revaluation.
Held
The Tribunal held that the Assessing Officer erred in questioning the scheme of amalgamation approved by the High Court and in disregarding the fair market valuation of the land. The Tribunal noted that the valuation was consistently accepted in prior assessment years and the issue of taxability would arise only upon sale of the asset.
Key Issues
Whether the AO can question the fair market valuation of an asset converted from capital asset to stock-in-trade, when such valuation is part of a High Court approved amalgamation scheme and has been consistently accepted in prior years?
Sections Cited
133A, 143(2), 143(3), 147, 45(2), 391, 394, 11, 12
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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI AMARJIT SINGH & MS. KAVITHA RAJAGOPAL
O R D E R
PER AMARJIT SINGH, ACCOUNTANT MEMBER:
This appeal of the revenue for the assessment year 2020-21 is directed against the order dated 12.06.2023 passed by the ld. Commissioner of Income-tax (Appeal), NFAC, Delhi. The revenue has raised the following grounds of appeal:
1. On the facts and circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs. 10.82 cr made on account of revaluation of cost of land without properly appreciating the facts of the case.
Fact in brief is that return of income declaring total income at Rs. 22,78,08,140/- was filed on 12.02.2021. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 29.06.2021. A survey u/s 133A of the Act was carried at assessee’s business premises on 22.09.2021. During the course of survey action, it was seen that assessee had purchases hundred percent shares of Somani and Co. Pvt. Ltd. for consideration of Rs. 182 crores vide share purchase agreement dated 04.01.2012. Subsequently, amalgamation of Somani and Co. Pvt. Ltd. into assessee company has been approved by the Hon’ble Bombay High Court vide order dated 12.12.2014 with effect from 01.01.2012 as per scheme of amalgamation. In the scheme of amalgamation, it was mentioned that all the assets and liabilities of the transferor company shall be recorded by the transferee company at their respective fair value as may be decided by the Board of Director of the transferee company. It was also mentioned that the difference between the excess of net asset value and investment would be recorded as capital reserve. Therefore, the assessee had recorded all the assets and liabilities at fair value. At the time of amalgamation, the land which was shown as investment in Somani and Company Pvt. Ltd. was converted into stock in trade and the same was added to the work in progress by the assessee. The assessing officer stated that subsequent to giving effect of the scheme of amalgamation the assessee showed capital reserves of Rs. 872 crores and corresponding to these reserves, it valued inventory of work in progress at Rs. 1054 crores and had written off investment in Somani & Co. Pvt. Ltd. of Rs. 182 crores. The assessing officer was of the view that by this way, the assessee company had increased its cost of WIP by Rs. 1054 crores though actual amount paid was only Rs. 182 crores. The assessing officer further stated that value of inventory as considered by the assessee does not represent the price actually paid by the assessee for acquiring the said inventory. The AO also mentioned that assessee had paid only for share purchase consideration and credited full ownership and interest in the said land which had higher fair market value then the share purchase consideration. Therefore, the AO concluded that under the amalgamation the assessee had deliberately adopted fair value to record assets in order to artificially increase the WIP with the intention of undermining its profit. Therefore, the AO observed that assessee had not offered tax on related amount of re-valuation reflected in the form of capital reserve. Accordingly, the AO has added an amount of Rs. 10.82 crore as impact of revaluation in cost as worked out at para 19 of the assessment order.
The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant extract of the decision of ld. CIT(A) is reproduced as under:
“10.2 In the instant case, the entire basis of addition revolves primarily on the valuation of land acquired during the course of amalgamation and its conversion from being a capital asset to stock in trade. It is noted that the appellant had purchased 100% shares of M/s Somani and Co. Private Limited vide a Share Purchase Agreement dated 4th January 2012. Thereafter, Hon'ble Bombay High Court vide order dated 17th August 2012 approved the scheme of amalgamation between the appellant and M/s Somani and Company Private Limited as per section 391 to 394 of the Companies Act, 1956. 10.3 The appellant had recorded fair value of all assets and liabilities as per the scheme approved by the Hon'ble Bombay High court on the date of amalgamation. Also, the appellant company converted the said land of Somani and Co. Pvt Ltd from being a capital asset to stock in trade. However, the AO while arriving at the value of work in progress (WIP) has not considered the fair value of land recorded by the appellant as per the scheme of amalgamation and considered the value of land as the amount which was paid by the appellant for purchase of the shares of Somani & Co Pvt. Ltd. 10.4 The appellant through the submissions stated that the Hon'ble High Court provides verdict only after ensuring that the scheme is not prejudicial to the interests of the stakeholders and against the interest of public. The appellant further submitted that once the High Court has approved the scheme of amalgamation and no objection was raised by the Income Tax Authorities against the proposed scheme, then post the approval of the scheme, no statutory authority has any power to question the validity of the said order. Appellant also relied upon following judicial pronouncements:
ITO vs. Purbanchal Power Co. Limited (ITA No. 201/KOL/2010 dated 17.07.2014) (Kolkata ITAT)
Electrocast Sales India Limited -vs- DCIT (2018) 170 ITD 507 (KO. ITAT); Keva Fragrance Pvt. Limited -vs. - DCIT (ITA No. 334/M/2020 dated 02.08.2021) (Mum. ITAT); CIT-vs.- M/s Long View Tea Co. Ltd. (ITAT No. 169 of 2015 order dated 22.06.2018) (Calcutta HC).
10.5 I have gone through the assessment order and also the submissions of the appellant carefully. I find that the AO has erred in questioning the scheme which was approved by the Hon'ble High Court. It is well settled principle that once the scheme of amalgamation is approved by the Hon'ble High Court the same is binding on the on the members, creditors and all the statutory authorities, including the revenue authorities. The same was also held by the Hon'ble bench of Kolkata ITAT in case of JCT Limited vs. DCIT (I.T.A. No. 2389/Kol/2018). Hence the AO's act of questioning the scheme of amalgamation as approved by the Hon'ble Bombay High Court at this stage is not proper.
10.6 Further while rejecting the fair value of land, which was based on the order of the Hon'ble Bombay High Court and was as per the valuation report of an independent valuer, the AO has not given cogent reasons for rejecting such valuation which was done by an independent valuer. It is pertinent to note that the value adopted for the said land being at "fair market value" (FMV) was as per order of the Hon'ble Bombay High Court and the same was considered in the valuation report by the independent valuer.
Further in my opinion, all the transactions effected in the books of accounts consequent to the said merger were originating out of orders of the Hon'ble Bombay High Court. The merger scheme approved by Hon'ble Bombay High court is binding on all the statutory authorities.
10.7 Given the underlying facts, I am also not convinced with the arguments of the AO on considering the cost of acquisition of shares as cost of land. The appellant, during the course of hearing, placed on record the assessment order for AY 2012-13 wherein the event of amalgamation and the effect of recording the capital asset at fair market value consequent to its conversion to stock-in-trade was placed before the AO. The effect of recording the capital asset at fair market value at the time of conversion of the same from investment to stock in trade was given in the AY 2012-13. The said assessment year was assessed by the then AOs twice. Once vide assessment order dated 31.03.2015 passed u/s 143(3) of the Income Tax Act, 1961 and the second time vide assessment order dated 28.09.2019 passed u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961. Further in case of AY 2018-19 also, the opening figure of the WIP brought forward from previous years was also examined and accepted by the AO. Thus, once the valuation of land at fair value has been consistently accepted by the revenue in the earlier years, there is merit in the contention of the appellant that the basis of the valuation cannot be challenged in the latter years I.e. in AY 2020-21.
10.8 Thus, it is observed that the Department has been consistently accepting the assessee's WIP figures since AY 2012- 13 and so the rule of consistency needs to be followed in the current assessment year as well. This is as per the judgment of the Hon'ble Supreme Court in Radhasoami Satsang v. CIT 193 ITR 321 (SC) wherein the Hon'ble Supreme Court held as follows:
"9. We are aware of the fact that, strictly speaking, res judicata does not apply to IT proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter-and, if there was no change, it was in support of the assessee we do not think the question should have been reopened and contrary to what had been decided by the CIT/in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under ss. 11 and 12 of the IT Act of 1961.
10.9 Moreover, it is seen that the Fair Market Value (FMV) of the said land was taken at Rs. 1054.90 crore at the time the said land was converted from capital asset to stock in trade and so in any case was liable for capital gains tax as per section 45(2) of the Act. The assessee, both at the time of the assessment proceedings and during the appellate proceedings, has submitted that capital gains tax would be paid on such FMV when the actual sale is made. This has been so stated on page 16 of the assessment order and Para 39 of the submissions made during the course of the appellate proceedings. Thus, there is also merit in the argument of the assessee when it says that there is no tax arbitrage involved in the transaction and by claiming a higher value of the WIP, it would also be liable to pay a higher capital gains tax on a higher FMV as per the provisions of section 45(2) of the Act. The provisions of the law are clear that the issue of taxability of such land acquired as a result of a scheme of amalgamation and then converted from being a capital asset to stock in trade would arise in the year in which such asset is sold/transferred.
10.10 Thus, I am of the view that the action of the AO in the instant year of reducing the cost of WIP and reducing the cost of remaining land does not hold good. In view of the above, the addition made Rs. 10,82,00,000/- is hereby deleted and therefore, these grounds of appeal are allowed.”
Heard both the sides and perused the material on record on the issue of addition of Rs. 10.82 crores made on account of re-valuation in the coast of the land. The assessee company had purchased hundred per cent shares of Somani & Co. Pvt. Ltd. for consideration of Rs. 182 crores vide share purchase agreement dated 04.01.2012. Thereafter, the said company was amalgamated with the assessee company as per the scheme of amalgamation vide Hon’ble Bombay High Court order dated 17.08.2021 with effect from 01.01.2012. In accordance with the scheme of amalgamation, the assessee had recorded all the assets of the transferor company at fair value and the excess of assets over liability was treated as capital reserve in the books of the assessee company. Accordingly, the assessee company had shown capital reserve of Rs. 872 crores and corresponding to this reserve it valued inventory work in progress at Rs. 1054 crores and had written off investment made in Somani & Co. Pvt. Ltd. of Rs. 182 crores. Thereafter, the assessee company converted the said land of Somani & Co. Pvt. Ltd. into stock in trade. The assessing officer was of the view that assessee company had paid only Rs. 182 crores to acquire a company having land as the only valuable asset but it had increased its cost of WIP by Rs. 1054 crores by considering land was worth of Rs. 1054 crores. Therefore, the AO computed such revaluation effect of Rs. 10.82 crores income of the assessee. However, we find the AO failed to consider that all the transasctions in the books of accounts were effected consequent to the merger scheme approved by the Hon’ble Bombay High Court as discussed in the finding of the ld. CIT(A) reproduced supra in this order. Under the above facts and circumstances, the fair market value of land reflected as asset in the acquired company was taken at Rs. 1054.90 crores when the said land was converted from actual asset to stock in trade which was liable for capital gain tax as per section 45(2) of the Act. As per provision of section 45(2), the capital gain tax to be paid on such fair market value when the actual sale is made. Therefore, considering the aforesaid provision of law the issue of taxability of such land acquired as a result of scheme of amalgamation and then converted from capital asset to stock in trade would arise in the year in which the asset is sold. Therefore, looking to the above facts and findings, we do not find any reason to interfere in the decision of ld. CIT(A). Accordingly, ground of appeal filed by the revenue is dismissed.
In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 15.01.2025.