M/S. VAMA SUNDARI INVESTMENT (DELHI) (P) LTD.,NEW DELHI vs. PRCIT-9, NEW DELHI

ORDER Per L.P. Sahu, A.M.: This appeal has been filed by the assessee against the revisionary order passed by the CIT-9, New Delhi dated 26.02.2018 u/s. 263 of the Income-tax Act, 1961. Following grounds have been raised by the assessee :

“1. That on the facts and circumstances of the case and in law, the impugned order dated 26.02.2018 passed by the Principal Commissioner of Income-tax (PCIT), under section 263 of the Income-tax Act, 1961 (‘the Act’) is without jurisdiction, illegal, bad in law and void-ab-initio.

2. That the PCIT erred on facts and in law in exercising revisionary powers under section 263 of the Act without satisfying the twin conditions of the assessment order being: (a) erroneous; and (b) prejudicial to the interests of Revenue and consequently, the impugned order is illegal and bad in law.

3. That the PCIT erred on facts and in law in failing to appreciate that the order passed under section 143(3) of the Act was neither “erroneous” nor prejudicial to the interests of the Revenue, to warrant exercise of revisionary jurisdiction under section 263 of the Act. 3.1 That the PCIT erred in alleging that the assessing officer failed to examine the tax implications of the scheme of amalgamation, particularly the issue of taxability of long- term capital gains on sale of shares in terms of proviso to section 10(38) for the purpose of computing ‘Book Profit’ under section 115JB of the Act. 3.2 That the PCIT failed to appreciate that the assessment order dated 02.01.2016 had been passed after due and adequate inquiries/ investigation and application of mind in respect of the aforesaid issue of taxability of gains on transfer of shares for the purpose of computation of ‘Book Profit’ under section 115JB of the Act. 3.3 That the PCIT erred in observing/ holding that there was no need/justification for amalgamation of the three companies (including the appellant) and the entire scheme was designed for the sole purpose of evading tax arising on sale of shares of M/s. HCL Technologies Limited (‘HCLT’) under MAT in terms of section 115JB of the Act. 3.4 That the PCIT erred in holding that the amount credited to securities premium account should be treated as “revaluation reserve” to be added to Book Profit under clause (j) of Explanation 1 to section 115JB of the Act, without appreciating that the accounting treatment was strictly in accordance with the binding directions of High Court and provisions of Accounting Standard (AS) -14. 3.5 That the PCIT erred in observing that the assessee had deliberately concealed crucial and material facts before the High Court at the time of sanction of scheme of amalgamation with the malafide intention of evading taxes. 3.6 That the PCIT erred in holding that the order of High Court approving the scheme of amalgamation was not binding on the Revenue and where amalgamation was used as a facade for tax evasion, the Revenue would probe into the transaction. 3.7 That the PCIT erred in holding that the assessee adopted ‘Purchase Method’ as against ‘Pooling of Interest’ method for the purpose of amalgamation, which was without any justification and solely for the purpose of revaluing shares of HCLT in its financial statements.

3.8 That the PCIT failed to appreciate the observations of the statutory auditor ad further that in the absence of any qualification by the statutory auditors, it was not permissible to rewrite the accounts of the assessee for the purpose of computing Book Profit under section 115JB of the Act by treating the amount of securities premium as revaluation reserve. 3.9 That the PCIT erred in holding that the assessing officer failed to make necessary enquiries and passed the order in casual/ hurried manner, which could be subjected to revisionary jurisdiction in terms of Explanation 2 to section 263 of the Act.

4. That the PCIT erred on facts and in law in holding that assessment order to be “erroneous” insofar as prejudicial to the interests of the Revenue, and in remitting the matter back to the assessing officer on the issue of taxability of gains arising on transfer of shares under the provisions of section 115 JB of the Act.”

2. The assessment in this case was made by the AO u/s. 143(3) of the Act on 02.01.2016, whereby the AO had accepted the income returned by the assessee. The assessment order so framed by the AO reads as under :

“Return declaring an income of Rs.47,31,20,060/- was filed electronically on 29-09-2013. The case was taken up in scrutiny through CASS and notice u/s 143(2) was issued on 03- 09-2014 and served upon the assessee. Thereafter, notices u/s 142(1) along with questionnaire was issued and duly served upon the assessee wherein certain specific details were called for.

During the year, the assessee company was engaged in the business of investments and to inter alia buy, invest, underwrite, acquire shares/other securities for long term. However/the assessee company has amalgamated with M/s Slocum Investments (Delhi) Pvt Ltd. and Shikiran Investment (Delhi) Pvt. Ltd. vide High Court Order dated 31s'January 2013.

In response to these notices, Mr. Nilesh Aggarwal, C.A./A.R. of the assessee attended from time to time and filed the necessary details which have been examined and placed on record. After discussion the returned income of the assessee is accepted.

Assessed at an income of Rs. 47,31,20,060/- Issue necessary forms. Charge interest u/s 234A;234B, 234C and 234D, if any, as per Act. Computation of tax and interest is as per ITNS 150 enclosed with the assessment order.” [ underline and highlight supplied by us] 3. The brief facts of the case, as brought out in para 2.1 to 3 of the impugned order by ld. CIT are as under : “2.1. From the perusal of the assessment records, it was seen that the assessee had sold 1 crore shares of M/s HCL Technologies Ltd ( hereinafter referred to as M/s HCL Tech.) on 04-05-2012 at the rate of Rs.500 per share approx. and the net value realized was Rs.498 crores approx.. The purchase cost of these shares is shown as Rs. 6.50 crores and the difference of Rs. 491.70 crores appx. is claimed/ treated as exempt u/s 10(38) of the Act. However, the assessee company has re-valued the shares of M/s HCL Technologies Ltd. on 01.04.2012 and on the basis of valuation reports from M/s ICICI Securities, M/s SBI Capital and M/s. SSPA Company, the share was re-valued at Rs.790 per share. In normal course the Long Term Capital Gain of Rs.491.68 crores as per the proviso to Section 10(38) of the Act should have been offered by the assessee for MAT u/s. 115JB of the Act. However, the assessee in the books of account changed the cost of these shares to Rs. 790 per share. The assessee stated that this was done in order to restate the book (fair value) of the shares at its fair market value and accordingly shown the Long Term Capital Loss of Rs. 291.82 crores. Thus the AO has failed to consider the applicability of proviso to Section 10(38) and Section 115JB of the Act and accordingly has not questioned/inquired about the assessee’s claim for not offering its LTCG for MAT purpose u/s 115JB of the Act. Further, the AO has failed to examine/verify the impact/repercussion of amalgamation scheme from the taxation angle.

2.1. From the assessment records, it is seen that the assessee has not paid any tax either at the time of amalgamation or at the time of disposal of 1 crore shares of M/s HCL Technologies Ltd., accordingly the assessment passed by the AO has become erroneous so far as it is prejudicial to the interest of revenue.

4. Thereafter, the learned CIT-9, New Delhi, exercising his powers u/s. 263, after considering detailed submissions of the assessee, assessment order passed by AO and all the material available on record, revised the above assessment order based on independent inquiries holding it erroneous in so far as prejudicial to the interest of revenue and directed the AO to frame the assessment order afresh in the light of observations made in the impugned order. The observations and findings reached by the ld. CIT in the impugned order read as under :

“9. From the assessee’s submissions, the following observations are relevant: (a) Details of filing ITRs by M/s Slocum and M/s Shivkiran for A.Y. 2013-14 - The assessee’s submission has been considered and the same is found factually correct except on the issue that the important business transactions falling between appointed-date and effective-date and its tax implications were never brought to the notice of the Hon’ble Court.

(b) It is true that some of the details regarding the book value and fair value of the assets acquired by the assessee on amalgamation were provided to the AO in the course of assessment; however the AO totally missed the issue of applicability of MAT provisions on LTCG arising on sale of shares. Further, the AO also did not examine the real intent/purpose and the effect of the “Scheme of Amalgamation”(SOA) particularly from the taxation angle.

(c) As Would be discussed later there was no need/ justification of the amalgamation of the three companies in this case and the entire scheme was designed by the assessee for the sole purpose of not paying the due tax on the LTCG which attracted MAT u/s. 115JB.

(d) Sections 391 to 394 of the Companies Act describe the procedure to be followed in reconstruction/amalgamation of companies. It nowhere discusses the “Purchase Method”. As would be discussed in detail later, the SOA was designed by the assessee and the facts and the circumstances of the three companies indicate that if there was any need of amalgamation then this amalgamation should fall in the category of “Pooling of Interest” method. However, the assessee deliberately and without justification, considered this amalgamation in the nature of purchase.

(e) It is true that the Para 12 of AS-14 permits the transferee company to record the assets and liabilities of the amalgamating companies at fair value, if the situation so requires.

(f) The SOA was drafted by assessee and the same(ditto) was approved by the Hon’ble Court. However, in the application before the Hon’ble Court, the important transactions between the “Appointed Date” and the “Effective Date” and its impact on taxation was not brought to the notice of the Hon’ble Court, and in fact can be said to have been deliberately concealed”

(g) The assessee has submitted that the Security Premium Account that has been credited is due to the recognition of the fair value of these assets & liabilities and not due to any revaluation of the assets. Here it is relevant to mention that the Auditor of the assessee company in the “Notes to the Financial Statement for the year ending March 31, 2013 observed that:

As per the Accounting Standard 14 (AS 14), accounting for amalgamation, prescribed under Company Rule, 2006 (Accounting Standard) has modified by the Central Government vide its notification dated 07-12-2006. As excess value of net assets over the amount of consideration paid should be credited to capital reserves and not to security premium.

Thus even the Statutory Auditor has pointed out the deviation deliberately adopted by the assessee which resulted in the creation of Security Premium Reserve instead of the Capital Reserve Account. Further, the Security Premium Reserve is created when someone subscribes to the equity shares of the assessee at premium, which is absolutely not the present case here.

(h) The assessee submitted that the Security Premium Account is not in the nature of Revaluation Reserve :

The assessee has recorded the fair value of various assets and liabilities of the amalgamating company as cost of the acquisition in accordance with SOA and in compliance of the Accounting Standard-14(AS 14). It is relevant to mention there that this procedure and its impact is more or less similar to the revaluation of assets and creation of Revaluation Reserve. As stated earlier, earlier M/s Slocum had all the assets and substantial share capital. Amongst Slocum’s assets the main/major portion comprised of shares of M/s HCL Tech. held as long term Investments. After amalgamation these shares became the property of the assessee company. However in the process, the assessee company conveniently changed the cost/ carrying amount of these shares and recorded the same at their fair market value so as to evade the payment of LTCG {its taxability under MAT provision) on the sale of these shares.

(i) The assessee further submitted that the revaluation is not permitted for the investment. It is relevant to mention here that on the one hand the assessee takes the plea that AS-13 does not permit the assessee company to re-state the value of its long term investment at a value higher than the cost and the assessee himself was following AS-13. On the other hand in the garb of amalgamation and following AS 14, the assessee himself has re-valued this long term investment (shares of M/s HCL Tech.) at their fair market value. However instead of using the word revaluation, the word restated book value is used. However the effect of both the transactions is same.

(j) The assessee has further submitted that the High Court order is binding and Security Premium Account has been rightly credited :

The assessee’s submission is not correct as Section 391(2) of the Companies Act states that the approved amalgamation would be binding on all the creditors, all the members(shareholders), and also on the company. Thus this section nowhere suggests that the approved amalgamation is binding on all the Government Authorities. Further, the proviso to Section 391(2) of the Companies Act states that no order sanctioning any compromise/arrangements shall be made by the Tribunal unless the Tribunal is satisfied that the company or the applicant has disclosed to the Tribunal by Affidavit all material facts relating to the Company such as the latest financial position of the company, the latest Auditor report on the accounts of the Company.

(k) It is very much relevant to mention here that the application in the Hon’ble High Court was submitted by the assessee on 19-09-2012. However, only provisional unaudited accounts for FY 2011-12 were submitted before the Hon’ble Court. It is apparent that the assessee deliberately did not submit provisional accounts of the period beginning 01-04-2012 to 30th June’ 2012 or upto 15th September’ 2012 and in the process hid the very crucial/material fact of having sold 1 crores shares of M/s HCL Tech. for Rs. 500 crores on 04- 05-2012 itself from the Hon’ble Court. Thus it is apparent that as per this proviso the assessee was supposed to place all material facts before the Hon’ble High Court.

Further, as stated earlier, the difference arising from recording the acquired assets at fair value in the Balance Sheet of the assessee was wrongly credited by the assessee to Security Premium Account and this fact was duly highlighted by the Auditor of the assessee in notes to the account.

(I) The following facts are observed about the reasons submitted by the assessee for crediting the difference in the values of assets arising of amalgamation to Security Premium Account and not Capital Reserves :- i. As stated earlier also, the scheme was drafted by the assessee and was tailor made for the purpose of avoiding the due payment of fair taxes only. ii. As discussed separately, the assessee company has strong financials and is supporting its associate concerns on its own and there is no need for the company to take any loan from the bankers and in fact no such loans have been taken by the assessee company, so the discussion of net worth is irrelevant here. iii. The assessee has tried to mislead the department by crediting the difference to Security Premium as Security Premium Reserve is created only when assessee’s equity shares are issued on premium. iv. The issue of leveraging the balance sheet in the eyes of bankers and financial institution is just an eyewash as the assessee company has strong financial and infact it is supporting the other associate concerns and no loans are taken from the banks.

(m) The assessee has repeatedly emphasized the fact of due disclosure in the financial statements as required by AS 14. As stated earlier, the auditor has made dissenting comment and has highlighted the deviation from AS-14 done by the assessee as by crediting Security Premium Reserves instead of Capital Reserves. But the disclosure of wrong doing does not take away the natural consequences of attempt of the assessee to evade taxes by deviating from the mandatory AS-14.

(n) The assessee has repeatedly submitted that accounting treatment approved by the Court is binding and it has complied with the accounting treatment as prescribed by ICAI/Govt. As discussed earlier, approved amalgamation scheme is binding on creditors and shareholders and it is not binding on department.

Further, on the proposed SOA, no comments were either sought or received from the Department. It is again submitted that certain very important facts were hidden from the Hon’ble Court. In brief the approved SOA is not binding on the Income Tax Department as the taxation angle has to be examined by the department in its proper perspective.

(o) Regarding the company’s submission about auditor having not highlighted the fact of deviation from AS-14 in thick Italian type, it is noted that there was no need for the Auditor to highlight the deviation in thick type and in italics as the same is required in the case where the deviation adversely affects the functioning of the company. Here it is relevant to mention that there are only three common shareholders in the three companies and the deviation from AS~ 14did not adversely affect the functioning of these companies in normal sense but only the fair taxation of the Capital Gains was avoided.

(p) As discussed earlier, the assessee in the garb of approved clauses of SOA and following AS-14 has in fact done the revaluation of the shares of M/s HCL Tech.(held as Long Term Investment) in its financial statements. However, the assessee has very cleverly instead of using term “Revaluation", has used the term Restated Value/FMV for changing the carrying cost of these shares. Thus, applicability of clause (j) in Explanation 1 to Section 115JB needs to be considered in the assessee’s case.

(q). As discussed earlier also, the SOA has been cleverly drafted by the assessee with a malafide intent of evading fair taxes on LTCG and the same scheme (without any modification) has been approved by the Hon’ble High Court. When we dig deep then the assessee’s whole scheme and its mala-fide intention for non- payment/evasion of due fair taxes becomes very much apparent.

(r) As stated earlier, there are only three common shareholders in all the three companies, the ROC usually does not examine the SOA from the angle of its impact on taxability and also considering the fact that the deliberate hiding of transaction of sale of 1 cr. shares of M/s HCL Tech. which took place on 04- 05- 2012 from the Hon’ble Court as well as from the ROC, the accounts cannot be treated as sacrosanct for the purpose of computing Book Profit u/s 115JB.

(s) As far as the case of “Apollo Tyres” is concerned, the same has been considered in various decisions of Hon’ble Courts and ITATs whereby it has been held that AO can modify the hook profit’ in the case of deviation from basic accounting conventions. Further, the judgement in the case of “Apollo Tyres” has been delivered with reference to Section 115JA and not for Section 115JB.

(t) As discussed earlier, the assessee has wrongly treated the difference in the value of shares as “Security Premium” while infact it is in the nature of “Revaluation Reserve”.

(u). It is true that the Clause (j) was inserted with the intention to plug the cases where on disposal/retirement of re-valued assets, the corresponding untaxed increase in the value credited to Revaluation Reserves escaped MAT. In this case also, the assessee has first credited the difference in value to “Security Premium Account” instead of “Capital Reserves/Revaluation Reserve” and then has not offered the amount pertaining to sold shares for calculation of Book Profit.

(v) The argument of the assessee claiming that amalgamation was not made with the purpose of evading MAT :

The submissions of the assessee claiming that amalgamation was not made/done with the purpose of evading taxes/MAT on Capital Gains on the sale of shares are not acceptable due to following reasons : i. It is a fact that the statutory Auditor has clearly and unambiguously pointed out the assessee’s deviation from ASM in the treatment of increase in the value of acquired assets due to valuation at Fair Value. So the assessee’s submission that the Auditor has not qualified the Audit report or has not made any adverse remarks has no significance. ii. The assessee’s excuse/explanation of treating the increase in valuation as Security Premium Reserves instead of Capital Reserves to leverage the balance sheet is again an eyewash only, as there was no need or justification of the leveraging of the Balance Sheet as the company had strong financials, was supporting its associate concerns and there was no need of taking any loan from the banks and no such loan was actually taken from the banks. iii. Several motives/purposes were cited by the assessee at the time of submission of proposed SOA before the Hon’ble High Court. However, from the submissions of the assessee as discussed in detail separately in this order, it is apparent/clear that none of the stated objectives were fulfilled as a result of the amalgamation and actually there was no need at all for the amalgamation of the three companies.

(w) Statutory Recognition of SOA approved by the High Court:

The assessee further submitted that the scheme has been approved by the Hon’ble High Court and therefore cannot be regarded as a tax evasion exercise. As discussed earlier, the scheme was drafted by the assessee company and the same was (in ditto) approved by the Hon High Court(without any modification).

The C LB /ROC gave its report in the routine manner that the affairs of the company have not been conducted in the manner prejudicial to the interest of the members. The fact is that certain very crucial & material facts were hidden from the Hon’ble Court as well as from the ROC and as discussed earlier the scheme was drafted with the only motive of not paying/evading the due taxes. As stated earlier, the scheme is binding on creditors and shareholders and it does not bar the Department from examining the scheme from the Income Tax Angle.

10. A few points about the Scheme Of Amalgamation and the context would help in better appreciation of the facts. Further, the relevance of the Hon’ble Apex Court’s path breaking decision in the case of McDowells in the present case can also be appreciated. i. In the present case, chronological events leading to amalgamation are as under :-

a 01-04-2012 Appointed date for Amalgamation (this date was proposed by the amalgamating/ amalgamated companies in the SOA submitted to High Court on 19-09-2012) b. 04-05-2012 1 crore shares of HCL Tech. sold by M/s Slocum for Rs.500 crores, resulting into LTCG of Rs. 491.70 crores. At this juncture, there was no whisper of amalgamation.' However, the MAT liability on account of LTCG of Rs. 491.70 cr had already crystallized/arisen at this very juncture. c. 30-08-2012 The meeting of Board of Directors of the three companies was held. The resolutions for amalgamation of three companies passed. d. 19.09.2012 Application of amalgamation of three companies submitted in Punjab & Haryana High Court. e. 31.01.2013 SOA approved by Hon’ble Punjab & Haryana High Court f. 12.02.2013 Letter of engagement issued for the valuation of HCL Technology share as on 01-04.2012 g. 20.03.2013 Report submitted by M/s. ICICI Capital,valuing the HCL Tech. shares at Rs.791 per share (for valuation purpose financial statements of December” 2012 considered ). h. 22.03.2013 Effective Date of Amalgamation ii. Common 3 Promoter Shareholders in amalgamating/amalgamated companies : M/s Slocum Investments (Delhi) Pvt Ltd, M/s Shiv kiran Investment (Delhi) Pvt Ltd and M/s Vama Sundari are associate/group companies of HCL Group. There are only three shareholders (Mr Shiv Nadar, Mrs Kiran Nadar and Ms Rashmi Nadar Malohotra) in the above three companies. Thus, public is not interested in the affairs of these companies. iii. No need for amalgamation : There was no need of amalgamation in this case. Earlier, before amalgamation M/s Slocum was holding all the major assets/ investments and was engaged in the purchase/sale of shares/MFs etc, (Long Term Investments). There were no major assets/ investments in M/s Shivkiran or in M/s Vama Sundari. Even the share capital of these two companies was a meager Rs.1.00 lac each. After amalgamation, all assets and liabilities have been transferred to M/s Vama Sundari (resultant/amalgamated company) and now M/s Vama Sundari is engaged/doing the same business, as was being done earlier by M/s Slocum. iv. It was only after 4 months (or so) from the date on which the HCL Tech shares were sold (04-05-2012) (and the tax liability arose), that this Scheme Of Amalgamation (SOA) was envisaged and proposed, for which there was absolutely no need/justification. v. All material facts such as latest financial position of the companies not disclosed to the Hon’ble Court & ROC : While submitting the SOA before the Hon’ble High Court on 19-09-2012, the Appointed Date was proposed as 01.04.2012. However, with the Amalgamation Application, only audited financial statements for the year ending 31.03.2011(FY 2010-11) and unaudited provisional accounts for year ending on 31.03.2012{FY 2011-12) were submitted to the court.

It is really significant to highlight here that the applicant conveniently/deliberately did not submit the provisional accounts of these companies for the period 01-04-2012 to 30-08-2012. The applicant could and should have informed the Hon’ble Court about the important financial transactions having taken place in the interim period and its tax implications. The sale of 1 cr. shares of for Rs.500 crores appx. was definitely an important financial transaction carrying significant tax implication which should have been brought in the knowledge of the Hon’ble Court considering the SOA proposed by the assessee company. vi. The sale of shares on 04-05-2012 not brought to the knowledge of Hon’ble High Court and therefore not considered by the Hon’ble High Court : As detailed above, the sale of shares took place on 04-05-2012 and SOA was submitted to the Court on 19-09-2012 and Appointed Date was then proposed as for 01-04-2012. The event of sale of shares and its enormous tax implication was not submitted before the Hon’ble Court, so this issue was would/could not be considered by the Hon'ble Court. Further, the scheme might have been published in the newspapers, but in those days, comments of the Income Tax Deptt. were not required to be sought by the Hon’ble Court, unlike the present day scenario, when the comments of the Department are sought by the Courts before the approval of SOAs.

11. SOA approved by the Hon’ble High Court not binding on the department: The assessee company, to avoid the payment of due taxes, then submitted the SOA before the Punjab & Haryana High Court and got it approved from the Court. Then, the assessee has taken the plea that the SOA has been approved by the Hon’ble High Court and is binding on the Department; the scheme was approved by the shareholders of the three companies; the accounts for FY 2012-13 have been got audited; the shareholders have approved the accounts in AGM and that finally the accounts were also approved by the ROC. The company has argued that as per the Apex Court’s decision in the case of “Apollo Tyres”, the AO had no authority to question/modify the hook profit’. Further, they had followed the “Purchase” method of accounting for Amalgamation, as they had to follow AS-14, accordingly to which they restated the value of investments at their FMV and in the process, there was “Long Term Capital Loss”, so there was no question of including LTCG for calculating the hook profit’.

The submissions of the assessee are not acceptable due to following reasons 11a. The SOA is binding on creditors and shareholders’ but it can not be said to be binding on the Income Tax Department as the issue of taxability of LTCG on the sale of shares was not brought to the knowledge of the Honhle Court which neither considered nor issued any direction on the taxation angle related to the amalgamation.

11b. Though the SOA was approved by the shareholders, yet it is an important fact that all the three companies are closely held Private Companies and there are only 3 common family member shareholders in these companies who happen to be promoters, so their approval was a mere formality.

11c. The accounts of the companies are always audited and even then the Assessing Officers always examine the accounts of the companies from taxation angle.

11d.As far as ROC is concerned, it routinely considers the accounts of the companies and they are not expected to examine the taxability part of a particular transaction. [Sumer Builders Pvt. Ltd. Vs. DCIT, Central Circle - XXXVI (Mumbai) (ITA No. 2512, 2513 and 2514/Mum/2009} 11e. The Apex Court’s decision in ‘Apollo Tyres’ case has been considered by Honble Courts and ITATs and in many cases and it has been held that AO can examine the books of accounts and can modify/alter the ‘Book Profit’ in cases of deviation from the standard accounting practices. Some of these judgments are mentioned below: i) DCIT Vs. Bombay Diamond Co, (1TAT Mumbai) 2009/TIOL/ 760/ITAT-MUM ii) CIT Vs. Veekay Lal Investments 249 ITR 597 (Bom.) iii) Rain Commodities Vs. DCIT (Special Bench - “B” ITAT Hyderabad) iii) (2016) 76 Taxman, com 360 (Bangalore - Tribunal)

11f. The judgment of Hon Tie Apex Court in ‘Apollo Tyres’ case was passed in the context of Section 115 JA and not in respect of Section 115JB

12. Analysis of the method of the Amalgamation adopted by the assessee :

12a. The amalgamations are of two types :

One type is “Amalgamation in the Nature Of Merger”, in which all the assets & liabilities of Transferor Company become the assets and liabilities of the transferee company after amalgamation. The shareholders holding > 90% of the face value of the Equity Shares of the Transferor Company become equity shareholders of the Transferee Company by virtue of amalgamation. The consideration for amalgamation receivable by those equity shareholders of the transferor company is discharged by the transferee company wholly by the issue of equity shares in the transferee company. The business of the transferor company is intended to be carried on by the transferee company. No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company, when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

12b. The amalgamation in the nature of purchase is one Which does not satisfy the conditions related with the amalgamation in the nature of merger.

First of all (as would be discussed in detail later in this order), there was no need of amalgamation in the present case. Secondly, in normal course, the present case fits into the category of “Amalgamation In The Nature Of Merger”, as the assets & liabilities of M/s Slocum became assets & liabilities of M/s Vama Sundari {the assessee) and after amalgamation, the business of M/s Slocum is being carried on by M/s Vama Sundari. As per AS 14, in such cases, no adjustment in the book value of assets & liabilities is done.

12c. In the “Amalgamation In The Nature Of Purchase”, generally one company acquires another company. In such cases, the shareholders of the acquired company normally do not continue to have a proportionate share in the equity of the combined company and/or the business of the acquired company is not intended to the continued. Further, generally in real business scenario, a large company acquires a small company or a listed company acquires/may acquire a big Private Limited Company. Thus, in a normal business scenario, even if amalgamation (for the sake of the argument) was needed in this ease, then it would squarely fall in the category of “Amalgamation In The Nature Of Merger” and accordingly as per AS 14, there was no need/justification, for restating the book value of the investment(shares) of the transferor company.

12d. In the “Pooling Of Interest Method”(in the nature of merger), the assets, liabilities and reserves of the transferor company are recorded by the transferor company at their existing carrying amounts. Even in purchase method, Transferee Company has the option to do accounting for the amalgamation either by taking the assets & 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”. Thus the assessee’s contention that it was obligatory {as per AS'14) on their part to restate the value of assets(Investments) at their FMV is far from truth.

13. Objectives of amalgamation quoted by the assessee :

While submitting the SOA to the Court, the assessee submitted the following as objectives of amalgamation :

• Streamline the treasury operations by consolidating the investment companies. • Reduce number of multiple entries in the group. • Reduce administrative cost and regulatory compliance. • Getting leverage (getting better deal) in loans to be taken.

13a. The details in respect of achievement of above objectives after amalgamation were sought from the assessee vide office letter dated 12- 01-2018. In response, the assessee submitted a detailed reply vide letter dated 29-01-2018 13b. The assessee submitted that it is not open to the revenue to question the commercial wisdom of the assessee to undertake any restructuring exercise in accordance with the regulatory mechanism. The assessee’s submission is not acceptable, as the assessee is supposed to state that how and how far the objectives of amalgamation have been achieved by them. Here the department has not questioned the business model of the assessee or the expenditure incurred by the assessee. It is being tried to find out, whether there was any need/ justification for carrying the exercise of amalgamation other than the motive of not paying the due fair taxes on the huge LTCG, which arose on 04- 05- 2012 itself. In this context, the case laws submitted by the assessee lose much of their relevance.

13c. The assessee in its reply in Para (x) of its letter dated 29-01-2018 has conceded that “there need not always be direct correlation behind particular transaction and the immediate gains that may follow as a result of undertaking a transaction. Further there are and can be no set guidelines/ parameters, leave apart requirement, so as to compare/evaluate the milestones achieved by the amalgamated company vis-a-vis the objects of amalgamation.”

13d.Similarly in Para (xi) of its letter also the assessee’s reply echoes the similar sentiment/admission. Then in Para (xii), the assessee submits that the explanation with respect to the objectives for amalgamation of amalgamating companies with the assessee company should be examined from the point of view of various stakeholders and not from the narrow prism of tax saving. Here, there are two important stakeholders, on the one hand there are three common shareholders (family member promoters of HCL Group) in these companies and on the other hand, there is Income Tax Department. It is the prime duty of the department to examine any business transaction/scheme from the taxation angle and if needed, to examine/investigate the matter to its logical end for arriving at the truth.

13e. The assessee has stated that the tax authorities cannot examine the assessee’s case as the amalgamation has been approved by the Hon’ble Court. Such a view of the assessee is narrow. If amalgamation is used as a tool of tax evasion, then the tax authorities can look into the evasion. In this particular case, as is evident, the amalgamation was used as a facade for tax evasion. The moment amalgamation becomes a tool of tax evasion, the assessee cannot take shelter behind judiciary and prohibit the revenue from examining the evasion.

Reference is invited to the decision of Hon’ble Gujarat High Court in Wood Polymers Ltd (1977) 109 ITR 77 wherein it has been stated : “It must be confessed that it is open to a party to so arrange its affairs so as to reduce its tax liability. The assessee or party can arrange its affairs so that he or it may not incur any tax liability. But it must be within the power of the party to arrange its affairs. If the party seeks assistance of the court only to reduce tax liability, the court should be the last instrument to grant such assistance or judicial process to defeat this liability, or even to avoid tax liability…”

Thus the courts have made up its mind that it would not sanction any scheme whose only aim is to avoid/minimize tax liability. It is to be noted that the power of amalgamation is the administrative power of the Hon’ble High Court. This power has been granted by the Companies Act to ensure that the interest of the creditors and share holders (minority share holders) are protected. The amalgamation order of the judiciary is therefore not in the nature of judicial order of the High Court. The judicial orders are binding on the executive within the jurisdiction of the High Court. 13f. The assessee has also submitted a few case laws to emphasize that “the assessee can manage his affairs in a manner so as to avoid payment of tax, It has been further submitted that “the fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides”. It is relevant to mention here that no court or any government Statute advises non- payment of due fair taxes, once the taxable income under the provisions of Income Tax arises or crystalises. In this particular case, the assessee has tried to evade payment of taxes by revaluing its assets cost. The law does not allow the assessee in any manner whatsoever to avoid paying the taxes just because amalgamation was ordered by the Hon'ble Court. In subsequent paragraphs it will be clear that the assessee has not disclosed the material facts before the Court. No interest of the share holder was sought to be protected in the amalgamation scheme. The only gain of the assessee in the entire amalgamation was tax evasion, and by avoiding due taxes the public interest was certainly harmed.

13g. Actual/real facts about advantages resulting from the amalgamation as per the assessee company : i. The assessee, in the last portion of its letter dated 29-01-2018 detailed the advantages resulting from the amalgamation. The assessee submitted that due to amalgamation, 3 entities were reduced to one. Here the assessee also submitted that there are 11 associate concerns but did not tell about the group companies of HCL Group. It is noted that there were no employees in these 3 companies and the consultancy/legal expenses related to SOA would definitely outweigh the reduction in Administrative Cost and Regulatory Compliances. The assessee also failed to specify or quantify the concrete monetary advantage like saving in expenditure/expenses due to the amalgamation. ii. The assessee has further stated that after amalgamation, there is centralized and common treasury operations for all the 3 entities. It is relevant to mention here that prior to amalgamation, the treasury operations were carried by M/s Slocum only and after amalgamation the same functions/ operations were carried on by M/s Vama Sundari. iii. It has also been submitted by the assessee that the amalgamation enables the assessee, if required, to raise Finance at better terms. The assessee’s reply is very vague and evasive. As discussed earlier, due to amalgamation, there was no marked change in assessee’s capital or asset structure. The assessee itself has admitted that, considering sufficient availability of working capital, there was no such business requirement of borrowing funds from the market. iv. Lastly the assessee submitted that it has availed credit of Rs. 11.25 crores from Noida authority at 11% interest. Here the assessee did not submit how this transaction was related with the amalgamation and whether it could avail concessional/preferred credit from the Noida Authority due to amalgamation. The assessee also admitted that there were/is no employees on the payroll of the said three companies.

14. Considering the above discussed facts, it is crystal clear that the real and only motive for the whole exercise of amalgamation was to avoid the payment of due taxes on huge LTCG arising on the sale of 1 cr. Shares of M/s HCL Tech, shares.

In many cases, the Apex Court (particularly in the Case of McDowell) has held that in appropriate cases, the department can lift the Corporate Veil and examine the real design/ - implications of the scheme submitted/ effected by the assessee.

15. Now coming to the legal and factual matrix of the transaction in the light of the relevant laws under the Income Tax Act. 1961 :- i. Sub-section 5 of Section 115 JB ; Sub-section. 5 of Section 115 JB provides that “save as otherwise provided in this section or other provision of this Act shall apply to every assessee, being assessee company mentioned in this section", thus clearly proviso to Section 10(38) of the Act is also applicable while calculating the Book Profit of a company. The provisions of section 115JB are status specific. If the LTCG on sale of STT paid share transactions accrues to any company, in that case though as per the normal provisions of the Act, the tax liability is NIL owing to the provisions of section 10(38), but the company has to pay MAT on the gain. The law does not exempt any company from not paying tax under MAT on LTCG u/s. 10(38). The situation like amalgamation and demerger has not found a place in exceptions to section 115JB. Thus, the MAT liability cannot be extinguished for a company under any scheme of amalgamation. ii. Income by way of LTCG of a company has to be taken into account in computing the Book Profit and tax payable u/s 115JB :

Section 10(38) of the Income Tax Act. 1961 which provides for exemption of LTCG is as under :-

(38) any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund [or a unit of a business trust] where- (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2] Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax vider that Chapter:

Provided that the income by way of long term capital gain of a company shall be taken into account in computing the Book Profit and income -tax payable under section 115JB From the above proviso it is clear that the income by way of LTCG of a company shall be taken into account in computing the Book Profit and tax payable under section 115JB. The word “income by way of long term capital gain” as used in the above section is of quite significance. Such income can only be as computed in accordance with the provisions of Section 48 of the Act. This aspect has been considered by the Banglore Bench of ITAT in the case of Karnataka State Industrial Infrastructure Developers Co. Ltd. v DCIT (2016) 76 taxmann.com 360{Bang-Trib) where it has been held that amount of profit eligible u/s 10(38) should alone be considered for the purpose of tax liability u/s 115JB of the Act. iii. Accounting Standard AS-13 for Accounting for Investments and its violation by the assessee :

Para 17 of AS-13 (Accounting for investments) provides as under 17. Long-term investments are usually carried at cost. However, when there is a decline, other than temporary, in the value of a long term investment, the carrying amount is reduced to recognise the decline. Indicators of the value of an investment are obtained by reference to its market value, the investee's assets and results and the expected cash flows from the investment. The type and extent of the investor's stake in the investee are also taken into account. Restrictions on distributions by the investee or on disposal by the investor may affect the value attributed to the investment.

From the above, it is apparent that investments are to be carried at cost. If there is decline in value, the same needs to be provided. However, if the fair value/market price is higher, such higher value cannot be accounted for. The principal of conservative accountancy is followed.

Fair value is different from “Cost”. Fair Value as defined in para 3.5 of AS-13 is as under 3.5 Fair value is the amount for which an asset could be exchanged between a knowledgeable, witting buyer and a knowledgeable, witting seller in an arm's length transaction. Under appropriate circumstances, market value or net realisable value provides an evidence of fair value.

From the above, it is evident that “Cost” and “Fair Value” are different things and as per the Accounting Standard Investments are to be carried, at “Cost” and not at “Fair Value” (unless there is decline in value as compared to cost). The fact that the assessee is carrying the investments at “Pair Value” and not at “Cost” is undisputed and has been admitted by the assessee company itself.

However, the aforesaid treatment of stating the investment at Fair Market Value is contrary to assessee company’s own accounting policy stated in Para C of Note No.1 of its Financial Statements wherein it has been stated that :- “Long Term Investments are carried at cost and provision is made to recognize any decline other than temporary… Further as per Para 21 of AS-13, on disposal of investments, the different between the carrying amount and the disposal proceeds, net of expenses, is recognized in the profit and loss statement. Thus, the combined effect of Paras 17 and 21 of AS-13 is that difference of ‘sale proceeds of investment” and “cost” thereof has to be recognized in the P & L A/e, Thus, the assessee has not even followed the accounting treatment required to be followed as per AS-13. If the assessee had correctly followed the accounting treatment as per AS-13, then difference of 'Sale Proceeds Of Investment’ and “Cost” thereof (and not the Fair Market Value) would have been recognized in the Profit & Loss A/c. iv. Adoption of different “Costs of Acquisition” by the assessee for the purpose of computing Capital Gains u/s 10(38) and “Book Profit” u/s 115JB : In terms of provision of sub-section(e) of clause (iii) of Sub-section (1) of Section 49 of the Act, the cost of Investment (Share) which is to be considered as cost to the previous owner i.e. amalgamating company. The “cost” of any asset cannot be different for different purpose.

While computing “Book Profit” and Capital Gain u/s 10(38), the assessee is adopting different “Costs Of Acquisition”. The claim of assessee appears to be that cost of acquisition in terms of provision of Section 49(3) (i.e. cost to the previous owner) is applicable only for the purpose of “Computation Of Capital Gain”. If we go by this logic, the exemption from definition of the word “transfer” as provided in sub-section (vi) of section 47 will also apply only in respect of computation of Capital Gain and not for the purpose of computation of “Book Profit”. As per this argument, the entire appreciation recorded in the books of accounts as on April 1’ 2012 post amalgamation, would become taxable for the purpose of computation of “Book Profit* u/ s 115JB. v. Clause (j) of Explanation 1 to Section 115JB not applied by the assessee while computing “Book Profit” :

As per Clause (j) of Explanation 1 to Section 115JB, the following is to be added to Book Profit. (j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset.

The adoption of Fair Market Value of the Investments as on April V 2012 is nothing but revaluation of the investments. Merely, the credit of increase in value to “Securities Premium Account* and not to the “Revaluation Reserve” (as prescribed by AS-14) would not alter the true character and substance of the event. The “revaluation* is not confined to only “Land 8s Buildings” but can be in respect of any asset and investment in shares is one of them.

The similar issue was considered by the ITAT, Mumbai in the case of “M/s Sumer Builders Pvt. Ltd. vs. DOT Central Circle-36, Mumbai (ITA Nos. 2512, 13 & 14/ Mum/2009)". In this case, the assessee had sold shares at a profit of Rs,30.80 lacs. The AO noticed that assessee has not routed these transactions through P 8s L account and had directly credited the profit to Capital Reserve Account. The assessee argued that this amount does not represent regular receipt and as per the accounting method followed by them such receipt on sale of investments were directly carried to the balance sheet, that his books were subject to Statutory Audit and Profit & Loss A/c were duly certified by the Auditors and so the AO had no jurisdiction to go behind the net profit shown in the Profit 8s Loss A/c except to the extent provided under Explanation 2 Sub-section (2) of Section 115JB. The assessee had further submitted that its accounts were approved in the AGM, The Profit & Loss A/c and Balance Sheet were filed before the ROC.

The ITAT in this case of “M/s Sumer Builders Pvt Ltd. vs. DCIT Central Circle- 36” duly considered the judgements in the cases of “Apollo Tyres”, “Akshay Textile” and “NJ Joss and Co. ” And held that: Now, who is going to check this aspect? Obviously, the Registrar of Companies is not concerned with these aspects whether accounts adopted for the previous year are same or not because the Registrar of Companies at best is concerned whether the accounts adopted and laid before the annual general meeting are in accordance with the requirements of Part II and Part III of Schedule VI of the Companies Act, 1956. Therefore, In view of these enlarged requirements, we are of the view that AO has powers to go behind the accounts and see whether same have been prepared in accordance with the requirements of Part IT and Part III of Schedule VI of the Companies Act, 1956.

In the case of “CIT VS. Vee Kay Lai Co. Put. Ltd" it was observed that the important thing is to be noted that while calculating the total income under the Act, the assessee is required to take into account income by way of capital gains u/s 45 of the I.T. Act. In the circumstances, one fails to understand as to how in computing the Book Profit under the company Act, the assessee company cannot consider capital gains for the purpose of computing Book Profit u/s 115J of the Act. vii. The clause 2 of Part II of Schedule VI of the Companies Act makes it clear that profit from investments were required to be credited to the revenue account apart from above even as per accounting standards 13 which deals with accounting for investment recommended while para-34 reproduced as under :

34, Disposal of Investments On disposal of an investment, the difference between the carrying amount and net disposal proceeds should be charged or credited to the profit and loss statement.’’ Thus Para 34 of the AS-13 makes it clear that profits from investment have to be credited to the profit and loss account. As observed earlier Section 115JB mandate that annual accounts must be prepared in accordance with the Accounting Policies and Accounting Standards which have been followed for preparing accounts which were laid before the company for annual general meeting. viii. In the last, it was observed by the Hon’ble ITAT Mumbai in the case of “Sumer Builders that in this case the assessee had earned certain profit on sale of shares and on some industrial units which have not been credited to the P&L account, which is contrary to the significant accounting policy of the assessee itself as well as against the requirements of AS 13 and requirements of part 28g part 3 of schedule 6 of the Company’s Act. Therefore the AO has rightly brought these items to taxation under the MAT provision of section 115JB.

16. Assessment Order dated 02-01-2016 passed by the A.O. is erroneous so far as it is prejudicial to the interest of the revenue : a. The order passed by the AO is erroneous so far as it is prejudicial to the interest of revenue. The A.O has passed the order in a casual and hurried manner. The assessment order passed is of less than half a page. In the assessment order, no issue is discussed and the returned income of the assessee is accepted. Though the fact of amalgamation is mentioned in the assessment order, yet several issues particularly the tax implication of amalgamation is not at all discussed. Further, the issue of applicability of Section 10(38)’s proviso relating to the inclusion of Capital Gain in the hook profit’s u/s 115JB is not examined at all. Though various details were indeed called by the AO, yet the core issue of tax implication of the amalgamation, particularly the treatment to the LTCG is not at all touched/ examined by the AO. Thus the assessment order dated 02-01-2016 passed by the AO is definitely erroneous. b. Further, the assessment order passed by the AO is simultaneously prejudicial to the interest of revenue. As discussed separately, 1 crore shares of HCL Technology Ltd(herein after referred to as HCL Tech.) are sold on 04-05- 2012 and resultant LTCG of Rs.491.70 crores approx. arose which were claimed as exempt under Section 10(38) of the Act. However, while calculating the LTCG for MAT purpose, the assessee changed the historical cost of HCL Tech. shares from Rs.6.50 to Rs.790.00 per share each in the garb of restating the value of investment (of shares) at Fair Market Value. In this manner, the assessee instead of showing the LTCG at Rs.491.70 cr, showed Rs.292 cr. Long Term Capital Loss and consequently did not pay MAT on LTCG of Rs.491.70 cr. Accordingly there was huge loss to the revenue on account of non-payment of MAT on LTCG of Rs.491.70 crores. Thus, the assessment order passed by the AO is prejudicial to the interest of revenue. Further, as per Explanation 2 to Section 263(1) (w.e.f. 01- 06-2015), an order passed by the AO shall be deemed to be erroneous in so far as it is prejudicial to the interest of revenue, if in the opinion of the CIT/Pr. CIT, the assessment order is passed by the AO : (i) without making enquiries or verification, which should have been made; (ii) allowing any relief without inquiring into the claim; c. Thus, w.e.f. 01-06-2015, the opinion of the CIT/Pr.CIT who is usually the Reviewing Officer of the work done by the AOs, has become more relevant/important. However, the opinion at this stage should be prima-facie reasonable and logical. If an order passed by the AO is set aside and the AO is directed to do the order afresh, then normally no prejudice /injustice is caused to the assessee, as during the fresh assessment proceedings, due opportunity of being heard and representing the case is allowed to the assessee. Further, if the order is set aside, theft the demand raised vide the original assessment order also no longer remains enforceable on the issue, which is set-aside by CIT/PCIT. d. Considering the facts discussed above, it is clearly a fit case for invoking Section 263 proceedings.

If non-payment of tax due under MAT provisions is allowed, as has been done attempted by the assessee company and allowed in the assessment order, then most of the companies in such situations would follow this questionable route to avoid taxes and will not pay taxes. Then, every such company would amalgamate in one of its sister concerns, will revalue/ restate its assets including Investments at Fair Market Value (FMV) and in the process would avoid payment of due taxes. In such situation, the proviso to Section 10(38) would become infructuous/ineffective.

However, presently in the cases of amalgamation, the comments of the Income Tax Department are also sought, and the department opposes such fraudulent schemes, which are designed to avoid payment of due taxes. Further, with the proposed introduction of GAAR provisions, such fraudulent schemes could be tackled.

18. Further the following points are also relevant in the present case : a) Sale of shares : As discussed earlier, the assessee on 04-05-2012 sold 1 crore shares of M/s HCL Tech. for Rs.500 cr appx. and in this way, part of its Long Term Investment is converted into cash on 04-05-2012, Further, the tax liability also arises on account of this transaction on 04-05-2012 itself whereas the SOA was submitted before the Hon’ble High Court as late as on 19-09- 2012. Even the first action towards amalgamation was started as late as on 30-08-2012 by taking approval the scheme by the shareholders of the three companies. As sated earlier, all these material facts were deliberately hidden from the Hon’ble Court as well as from the ROC, Thus the assessee has violated the proviso to Section 391(2) of the Companies Act. b) If such type of ingeniously designed courses of actions/ transactions/stands taken by the assessee are accepted & allowed then the proviso to Section 10(38) of the Act would lose its relevance as in most of such cases, the company would draft similar amalgamation schemes to avoid payments of due tax under MAT provision c) As discussed earlier, the statutory Auditor has pointed out the deviation by the assessee from AS 14 in respect of creation of Security Premium Reserve by the assessee instead of creation of Capital Reserve. The Capital Reserves are the reserves created out of the profit earned not in the normal course of business and in the process capital employed in the business is increased permanently. The Capital Reserves are not available for the payment of dividends, however liabilities and losses of capital nature can be met from these. The present case also falls in the category of creation of Capital Reserves. Thus the Capital Reserves are those reserves which are not created out of operating profit. In other words, these reserves are created out of Capital Profits. For example profit on sale of Capital Asset or revaluation of fixed assets is Capital Profits which are generally not available for distribution among the shareholders of the company. The Security Premium Reserves and Revaluation Reserves are also type of Capital Reserves only. Security Premium Reserve is only created when the shares are issued on premium. In broad terms the assets also include investments and the assessee’s case in a real sense may broadly fall in the category of Revaluation Reserve.

d) Further, logically speaking, historical cost cannot be changed in the garb of following some scheme or accounting standards. The acquisition cost remains the same and it cannot be changed for different purposes. Here it is a incontrovertible fact that the shares of M/s HCL Tech. were acquired/held by M/s Slocum at the cost of Rs.6.50 per share. The assessee himself has calculated the LTCG for Income Tax purpose on this basis only. However, for calculating the hook profit’, the assessee has conveniently changed this cost of Rs.6.50 to Rs.79Q.00 per share in the garb of following SOA/AS14, But curiously, it has not followed AS 14 in toto and not credited the difference to Capital Reserve as mandated by AS 14. This is a blatant attempt to evade Income Tax. e) Let us consider a scenario wherein no amalgamation was done. If that be so, then the amalgamating companies were liable to pay tax (Minimum Alternate Tax u/s 115JB of the Income Tax Act. 1961). In computing the Book Profit u/s 115JB, the LTCG u/s 10(38) is to be added to the Book Profit. If the assessee chooses to not route the transaction through the P&L account, even in that case the assessee is liable to pay minimum alternate tax (Veekaylal vs. DCIT- Bombay High Court). f) As per accountancy, the difference in historical cost and the sale price is the amount of profit accruing on account of sale of investment. This is the amount which is to be credited to the P&L account of the assessee. Normally all assessee’s follow this basic rule of accountancy. But in the present case, the assessee has increased the cost of acquisition in an artificial manner. The difference between historical cost and the market cost (due to revaluation) has not been credited to the P&L account of the assessee or of any amalgamating company. In this way, the assessee has evaded tax. The assessee has only credited the amount of difference between the sale price and the revalued price of the investment(shares of M/s HCL Tech.). g) It is an established principle that in case of conflict between accounting standard/ accounting policy and the provision of law, the later would prevail over the former. The accountancy cannot extinguish the tax liability of any assessee. At the most the liability to pay taxes either gets preponed or postponed but it never gets extinguished. h) Let us consider a situation wherein the assessee had adopted the accounting as per the pooling of interest method. In that case, the investments would have been stated at the historical cost in the books of the amalgamated entity. By that method the assessee was liable to pay MAT u/s. 115JB on the total amount of Long Term Capital Gain of Rs.491.70 crores.

By revaluing(restating) the historical cost and taking the revalued cost as the cost of acquisition by the amalgamated entity, the assessee has sought to extinguish the entire tax liability u/s 115JB. Neither the amalgamating entities nor the amalgamated entity has paid any tax on the amount of actual gain (difference between the historical cost and the sale price). No method of accounting can allow the non payment of taxes. Law is equitable and applies to different entities. In the present case, the assessee claims a differential treatment than the others on account of amalgamation and on account of choosing of Purchase Price Method (for amalgamation).

(i) The assessee did not submit a report, which it was required to submit u/s 115JB(4) of the Act.

19. Fit case for invoking the provisions of Section 263 of the Income Tax Act. 1961: a. Considering the facts discussed above in detail, it is found to be a fit case for invoking the provisions of Section 263 of the Act. As discussed earlier, the AO while passing the original assessment order dated 02-01-2016 has failed to examine the amalgamation scheme from the taxation angle and particularly the issue of taxing/taxation of LTCG earned by the assessee on sale of shares of HCL Tech. for MAT purposes. Further, in the process of the computation of tax due on the LTCG of Rs.491.70 crores which should have been considered for “Book Profit” while calculating the MAT liability has not been done in this case. Thus the assessment order passed by the AO on 12-01-2016 is simultaneously erroneous in so far as it is prejudicial to the interest of revenue. Further as per the Explanation 2 to Section 263(1), effective from 1st June, 2015, an order passed by the AO is deemed to be erroneous in so far as it is prejudicial to the interests of revenue if in the opinion of the Pr. CIT/CIT(A) the order is passed without making inquiries/verification which should have been made (b) the order is passed allowing any relief without inquiring into the claim. b. Thus, in the opinion of the undersigned, the assessment order dated 02-01- 2016 was passed by the AO allowing the relief from the MAT provision without inquiring into the claim of LTCG of the assessee. Accordingly, the undersigned has no choice but to set-aside the assessment order dated 02-01-2016 passed by the AO on the issue discussed above. c. Reliance is also placed upon the following decisions with regard to validity of proceedings u/s 263 of the Act: i) Hon’ble Supreme Court in the case of Deniel Merchants Pvt. Ltd. vs. ITO (Appeal No. 2396/20171 dated 29.11.2017. In this group of cases, Hon’ble Supreme Court has dismissed SLPs in cases where AO did not make any proper inquiry while making the assessment and accepting the explanation of the assessee(s) insofar as receipt of share application money is concerned. On that basis the Commissioner of Income Tax had, after setting aside the order of the Assessing Officer, simply directed the Assessing Officer to carry thorough and detailed inquiry. ii) Malabar Industrial Co. Ltd. Vs C1T f20001 109 Taxman 66 1SC17120001 243 ITR 83 (SC)/r20001 159 CTR 1 (SC) (Copy Enclosed) Where Hon'ble Supreme Court held that where Assessing Officer had accepted entry in statement of account filed by assessee, in absence of any supporting material without making any enquiry, exercise of jurisdiction by Commissioner under section 263(1) was justified.

iii) Raimandir Estates (P) Ltd Vs PCIT [20171 77 taxmann.com 285 (SC)/(2017) 245 Taxman 127 (SC) Hon’ble Supreme Court has dismissed SLP against High Court's ruling that where assessee with a small amount of authorised share capital, raised huge sum on account of premium, exercise of revisionary powers by Commissioner opining that this could be a case of money laundering was justified.

20. In view of the facts discussed above, the undersigned sets aside the assessment order dated 02-01-2016 passed by the AO on the issues discussed above and directs the AO to pass the assessment order afresh after allowing the opportunity of being heard to the assessee.”

6. During the course of hearing, the ld. AR of the assessee, apart from making oral arguments, also filed a detailed written synopsis, which reads as under :

“ 2. M/s. Slocum Investments (Delhi) Private Limited and M/s. Shiv Kiran Investments (Delhi) Private Limited (in short “amalgamating companies”) stood merged/ amalgamated with the assessee-company, pursuant to scheme of amalgamation under sections 391-394 of the Companies Act, 1956 (“Companies Act”), w.e.f. the appointed date of 1.4.2012 by way of purchase, which was approved by the Hon’ble Punjab and Haryana High Court vide order dated 31st January 2013 and filed with the Registrar of Companies (“ROC”) on 22nd March, 2013, being the effective date. [Refer pages 60 to 101 of the paper book], 3. In terms of the scheme, the business of the amalgamating companies carried on by the amalgamating companies for and on behalf of appellant (the amalgamated company) stood legally vested in the appellant, w.e.f. 1st April, 2012. The main objective of amalgamation was to consolidate three investment companies, reduce number of entities in the group, and reduce administrative costs and regulatory compliances, centralized treasury operations and improved capital structure.

Effect of Amalgamation 4. As per the mandate of the Scheme of Amalgamation duly approved/ sanctioned by the Hon'ble Punjab & Haryana High Court and Accounting Standard -14 (' AS-14') issued by the Institute of Chartered Accountants of India (‘ICAT): (a) the assets, including investments in HCL Tech were recorded at fair values (which was determined by the three independent valuers), by following purchase method, as part of the scheme of amalgamation [refer para 6.1]; (b) the difference between the fair value of the net assets of the amalgamating companies acquired pursuant to merger, was credited to “securities premium account” [refer para 6.4], 5. During the relevant previous year, 1 crore shares of HCL Tech were sold at recognized stock exchange for total consideration of Rs.498,17,63,996 after payment of securities transaction tax (in short “STT”) thereon.

Revisionary order of Pr.CIT 8. In the impugned order, the Pr.CIT has revised the assessment order dated 02.01.2016 passed by the assessing officer under section 143(3) on the alleged ground that the same was erroneous in so far as prejudicial to the interests of the Revenue, inasmuch as the assessing officer had allowed relief under the provisions of section 115JB of the Act in respect of long-term capital gains earned on sale of shares of HCL Technologies Ltd (in short “HCL Tech”) held by the appellant without making necessary/proper enquiry.

9. In the impugned order, the Pr.CIT has alleged that: i) the appellant had, in pursuance of the merger, incorrectly credited the securities premium account as against revaluation reserve for computing ’Book Profit under section 115JB of the Act. This fact has also been highlighted by the statutory auditor in the audited financial statements; ii) the scheme of amalgamation was implemented by the appellant with the primary intent of evading payment of tax on ‘Book Profit’ and that the scheme of amalgamation sanctioned by the High Court is not binding on the income tax authorities and accordingly, books of account of the appellant are to be re-drawn for the purposes of computing Book Profit under section 115JB of the Act; iii) applicability of proviso to section 10(38) of the Act in the case of the appellant, has not been considered.

10. The Pr.CIT has, accordingly, set-aside the assessment order dated 02.01.2016, passed under section 143(3) to examine the issue of taxability of long term capital gains on sale of shares of HCL Tech under the provisions of section 115JB read with proviso to section 10(38) of the Act.

Twin conditions to invoke jurisdiction under section 263 of the Act not satisfied 11. The aforesaid order of the Pr.CIT exercising revisionary jurisdiction under section 263 of the Act is illegal and bad in law since the pre-requisite twin conditions for invoking jurisdiction under the said section have not been fulfilled in as much as the assessment order dated 02.01.2016, is: (a) neither erroneous; nor (b) prejudicial to the interests of the Revenue, as briefly set out hereunder: 12. Reliance, in this regard, is placed on the following decisions: - Malabar Industrial Co. Ltd. v. CIT: 243 ITR 83 -CIT vs. Max India Limited: 268 ITR 128 (P&H) [afformed in 295 ITR 282 (SC)] - CIT v Kwality Steel Suppliers Complex: 395 ITR 1 (SC) - CIT vs. Amitabh Bachchan: 384 ITR 200 (SC) - CIT v. Hindustan Lever Ltd: 343 ITR 161 (Bom.) - CIT v. Vikas Polymers: 341 ITR 537 (Del.) - CIT v. Sunbeam Auto Ltd.: 332 ITR 167 (Del) -CIT vs. Development Credit Bank Ltd: 323 ITR 206 (Bom.) - Vimgi Investment (P) Limited: 290 ITR 505 (Del) - Hari Iron Trading Co. vs. CIT: 263 ITR 437 (P&H) - CIT vs. Gabriel India Limited: 203 ITR 108 (Bom).

Re (a): Assessment u/s 143(3) after extensive enquiries 14. During the assessment proceedings under section 143(3) of the Act, the assessing officer, after taking note of various disclosures, conducted necessary enquiries on the issue of sale of 1 crore shares in HCL Tech at recognized stock exchange for total consideration of Rs.498,17,63,996 after payment of STT.

17.2 In response to the aforesaid questionnaire and further enquiries/ information sought by the assessing officer from time to time during the course of assessment proceedings, the appellant submitted the following details/ information:- a) Vide letter dated 26.05.2015, the appellant submitted copy of return of income and also the computation of income for the relevant year - [Refer page 242 of paperbook]; b) Vide letter dated 30.06.2015, the appellant submitted the details of amalgamation and furnished copies of the scheme along with copy of the order of the High Court sanctioning the scheme - [Refer pages 243 to 244 of paperbook]; c) Vide letter dated 27.07.2015, the appellant submitted details of investments in equity shares, which contained, inter alia, the details of equity shares in HCL Tech acquired as part of amalgamation and also the details of loss of Rs.291.82 crores on sale of investments during the relevant year - [Refer pages 245 to 248 of paperbook]; d) Vide letter dated 04.08.2015, the appellant further submitted details of loss on disposal of investments of Rs.283.48 crores along with details of purchase and sale of investments. The details so filed included details of long term capital gains as per normal provisions and also details of loss on sale of shares as per books of account - [Refer pages 249 to 251 of paperbook]; e) Vide letter dated 20.11.2015, the appellant again furnished copy of the order of the High Court approving the amalgamation and also the balance sheet of the amalgamating entities, as was directed to be filed by the assessing officer during the course of last hearing - [Refer pages 252 to 299 of paperbook], f) Vide letter dated 26.11.2015 [Refer pages 300 to 302 of paperbook], the appellant, as directed by the assessing officer, furnished the following: Book value of assets transferred on merger vide Annexure A thereto; Fair market value of the above assets recorded in the books on amalgamation vide Annexure B thereto; g) Vide letter dated 02.12.2015 [Refer pages 303 to 377 of paperbook], with reference to the last hearing and the specific direction given by the assessing officer, the appellant submitted as under: “1. Actual cost per share of HCL Technologies Limited: Rs.6.5 per share.

3. Market price as on 01.04.2012 (appointed date of merger): We would like to inform your honour that stock market was closed on 1.4.2012. Therefore the price as on 2.4.2012 was Rs. 501.25 per share.

Therefore, the assessee company has appointed three reputed, competent, qualified valuers and who are expert in this field and has obtained the valuation report from the following: i) ICICI Securities Limited ii) SBI Capital Markets Limited iii) SSPA & Co. Chartered Accountants"

- CIT v. Sunbeam Auto Ltd.: 332 ITR 167 (Del) - CIT v. Vikas Polymers: 341 ITR 537 (Del.) - CIT vs. Vodafone Essar: 212 Taxman 184 (Del.) - CIT vs. Development Credit Bank Ltd: 323 ITR 206 (Bom.) - CIT v. Hindustan Lever Ltd: 343 ITR 161 (Bom.) 22. For this reason alone, and without anything more, the impugned order passed by the CIT under section 263 of the Act is, it is submitted, without jurisdiction, illegal and bad in law. Re (b): Order not erroneous much less prejudicial to the interests of Revenue.

“Budget Speech of the Finance Minister: “……….

pay tax on at least 30% of its Book Profit. In other words, a domestic videly held company will pay tax of at least 15% of its Book Profit. This measure will yield a revenue gain of approximately Rs. 75 crores. ”

Memorandum explaining provisions of the Finance Bill, 1987: “New provision to levy minimum tax on “Book Profits” of certain companies 37. Under the existing provisions of the Income-tax Act, certain deductions are allowed in the computation of profits and gains of business or profession. Various deductions are also allowed under Chapter VI-A of the Income-tax Act in computing total income. As a result of these concessions, certain companies making huge profits, are managing their affairs in such a way as to avoid payment of Income-tax. With a view to making the tax system more progressive, a new Chapter XIIB is proposed to be inserted in the Income-tax Act. Under the proposed amendment, in the case o f any company whose total income as computed under the other provisions of the Income-tax Act in respect of any previous year is less than 30 per cent of its Book Profit, the total income of such taxpayer chargeable to tax shall be deemed to be the amount equal to 30 per cent of such Book Profit. ” (emphasis supplied) c) It is settled law that the profit and loss account prepared in compliance with the requirements of Parts II & III of Schedule VI to the Companies Act, 1956 and also the accounting standards issued by the ICAI. as laid before the members in the annual general meeting, is regarded as sacrosanct for computing deemed income under section 1 15JB of the Act and can only be subjected to the upward and downward adjustments specified in Explanation 1 to that section. The assessing officer was bound therefore to accept the Book Profit, as computed in accordance with the self-contained scheme as contained in section 115JB of the Act. Reliance in this regard is placed on the following decisions: - Apollo Tyres Ltd. vs. CIT: 255 ITR 273 (SC) - Malayala Manorama Co. Ltd. vs. CIT: 216 CTR 102 (SC) - CIT vs. HCL Comnet Systems & Services Ltd: 305 ITR 409 (SC) - CIT vs. Sona Woollen Mills P. Ltd.: 300 ITR 202 (P&H) - Kinetic Motor Co. Ltd: 262 ITR 340 (Bom) - CIT vs. Rubamin (P) Ltd: 218 CTR 162 (Guj) - DCIT vs. Farmson Pharmaceuticals Gujarat Ltd: 241 CTR 568 (Guj)

Rebuttal to findings of Pr.CIT 26. The specific allegations/ findings of the Pr.CIT in the impugned order are rebutted as under:

Re (i): Securities Premium is not Revaluation reserve 26.1 With regard to the allegation that in pursuance of the merger, the appellant incorrectly credited the securities premium account as against revaluation reserve for the purpose of computing Book Profit under section 115.1 B of the Act. it is briefly submitted as under: a) First and foremost, the appellant had not, as a matter of fact, revalued any of its existing assets. Revaluation refers to revaluation of existing asset already held by the assessee. Pertinently, revaluation reserve can never be created in respect of investments already held by the assessee as the same would be violative mandatory accounting standards [refer: AS-13 on Accounting for Investments]. b) The appellant only recorded the fair values of various assets and liabilities of the transferor/ amalgamating companies in accordance with the specific directions of Court- approved scheme of amalgamation (under clause 6.4 of the scheme of amalgamation) and the provisions of AS-14, which resulted in creation of securities premium in the books of account of the assessee upon the scheme becoming effective; c) The scheme of amalgamation specifically provided for crediting the difference to securities premium account in order to leverage the financial position of the assessee, which is treated as part of net-worth of the company, unlike capital reserve, which is discounted by bankers/ financial institutions; d) Vide Note 17 of the notes to audited financial statement for the year ended March 31, 2013 the statutory auditor only disclosed the relevant detail/ deviation of the accounting treatment approved by the Court vis-a-vis AS-14 and has neither qualified nor provided any adverse remarks in relation thereto. Had the intention of the auditor been to highlight the same as qualification or an adverse remark, the same would have been reported in thick type and in italics, as per the mandatory requirement of section 227(3)(e) of the Companies Act; e) Securities premium is akin to capital reserve so much so that both of them are not freely available for distribution as dividend, unlike general reserve. However, clear and unambiguous guidance is provided in section 78 of the Companies Act for utilization of “securities premium”, as compared to “capital reserve” in respect whereof there is no specific guidance; f) It is well settled that where a Court/ Tribunal makes an order sanctioning an accounting treatment in terms of any scheme filed under the Companies Act, then, the said accounting treatment is not only binding but would also be regarded as in accordance with the provisions of the Companies Act. The position is well settled and duly recognized by ICAI. [refer: Hindalco Industries Limited: 151 Comp Cases 446 (Bom) and Western Alliance Power Limited: Company Petition No. 12 of 2011 passed vide order dated 22nd March, 2011 (Guj)]; g) Even if the difference arising on amalgamation was, without prejudice to the above, credited by the assessee to capital reserve instead of securities premium account, there would not have been any change in MAT liability under section 115JB of the Act since “Securities Premium Reserves” and “Capital Reserves”, being balance sheet items, are of similar nature and are fall within the classes of reserves under the Companies Act. requiring no adjustment to section 115JB of the Act, leave apart under clause (j) thereto; h) Even otherwise, for the purpose of section 115JB of the Act, treatment accorded in the books in accordance with the terms of the scheme sanctioned by the High Court and the provisions of sections 210/211 of the Companies Act read with applicable mandatory accounting Standard issued by ICAI, and also certified by the statutory auditors, the members in the Annual General Meeting and the ROC, is binding [refer: Apollo Tyres Ltd. V. CIT: 255 ITR 273 (SC)|; i) Moreover, since securities premium was not created by debit to the profit and loss account, even provisions of Explanation 1(b) to section 115JB of the Act, requiring upward adjustment is, per se, not attracted [refer Bisleri Sales Ltd [2016] 66 taxmann.com 364 (Bombay), National Hydroelectric Power Corpn. Ltd. v. CIT: [2010] 320 ITR 374 (SC) ] ; j) Reliance in this regard is placed on the decision of the Mumbai Tribunal in ITO v. United Estate Pvt. Ltd.:51 SOT 61 wherein it is held that where under the Court approved scheme, the assessee has recorded the assets at fair value and transferred the increase in value of assets to general reserve, the amount would not be subject to MAT. k) Reference can also be made to the decisions wherein the difference arising on amalgamation has been held to be capital receipt not liable to tax, notwithstanding the nomenclature provided to the same in the scheme of amalgamation: - CIT vs. Stads Ltd.: 61 taxmann.com 33 (Mad) - ITO vs Shreyans Investments (P.) Ltd. : 31 taxmann.com 11 (Kol Trib) - ITO vs. Kyal Developers (P.) Ltd. : 42 taxmann.com 70 (Kol Tri) - Richvik Enterprises Private vs. DIT : l.T.A. No. 389/KOL/ 2012 (Kol). It will thus kindly be appreciated that looked from whatever angle, crediting the difference arising on amalgamation to capital reserve, instead of securities premium, was neither contrary to any provision nor would have had any impact on the “Book Profit” of the appellant.

Re (ii): Amalgamation with the purpose of evading MAT and Scheme not binding 26.2 The allegation of the Pr.CIT that the entire exercise should be regarded as being undertaken for the purpose of evading MAT, is presumptive and erroneous. It is submitted that: a) it has not been appreciated that amalgamation by way of purchase, which permits recognition of assets/ liabilities of amalgamating companies at fair value, is a well- recognized accounting principle, which cannot simply be presumed to be tax avoidance measure; b) the entire accounting, it is reiterated, was fully in accordance with the terms of the scheme of amalgamation approved by High Court and is in compliance with the relevant provisions of the Companies Act and applicable accounting standards; c) once the scheme of amalgamation is approved by the Court after following due process of law, it cannot be said that the sole purpose of the scheme of arrangement was only to avoid tax. Indeed, it is a settled law that the arrangement, once approved by the Company Court, gets statutory recognition. Reliance in this regard is placed on following decisions: - Sadanand S. Varde v. State of Maharashtra: 247 ITR 609 (Bom)

- Wood Polymer Ltd., in re: 109 ITR 177 (Guj HC) - Vodafone Essar Gujarat Ltd. v. DIT: 35 taxmann.com 397 (Guj HC)- afformed by SC in 66 taxmann.com 374 - ACIT v. TVS Motors Co. Ltd.: 8 taxmann.com 288 (Chn) - Purbanchal Power Co. Ltd. vs. DIT in l.T.A No.201/Kol/20100 (Kol 1TAT) d) the scheme of amalgamation was undertaken by the appellant for achieving the objectives of leveraging the balance sheet, consolidation of its investment companies so as to streamline its treasury operations and avoid multiple entities; in the process, if any tax advantage has arisen, it cannot be said that the entire arrangement was for tax evasion; e) even otherwise, the Courts have time and again accepted that an assessee is free to undertake transactions in a manner most conducive / advantageous to the assessee. It is settled law that the Revenue cannot step into the shoes of the businessman and determine as to how the business ought to have been carried on by the businessman. Equally, there is no bar under the Act prohibiting an assessee to undertake transactions more efficiently and effectively [refer: Eastern Investment Ltd. vs. ITO 20 ITR 1 (SC); Union of India and Another vs. Azadi Bachao Andolan and Another: 263 ITR 706 (SC); f) It may further be pertinent to note that pursuant to the scheme of amalgamation and the mandate of the Court, all assets and liabilities (which included assets/investment other than shares oj HCL Tech) of the amalgamating companies were valued at fair value. In the impugned order, the Pr.CIT has accepted the fair values of all other assets/investments of the amalgamating companies, but has merely cherry picked and drawn adverse inference against the valuation of shares of HCL Tech alone. It may be appreciated that in the relevant previous year, the appellant had also, transferred/sold other investments (viz., mutual funds etc), other than shares of HCL Tech, which, too was claimed as exempt under the normal provisions of the Act in terms of section 10(38) of the Act and the treatment on sale of such investments in the 'books of account’ of the appellant was akin to that of shares of HCL Tech, which has clearly been accepted by the Pr.CIT. [Refer page 250-251 and 301-302 of the paperbook] g) Further, donation of 8,385 shares of HCL Tech to SSN Trust during the relevant year, debited to the profit and loss account, computed by adopting fair value of Rs.790 per share, which has been taken into account while computing the profit for the year (the starting point for computation of Book Profit) has also not been disputed by the Pr.CIT. [Refer page 45 and 48 of the paperbook] h) Thus, the action of the Pr.CIT in considering the transactions undertaken pursuant to the scheme on piecemeal basis and drawing adverse inference only against transaction(s) in respect of shares of HCL Tech is legally flawed.

Re (iii): Applicability of Proviso to section 10(38) of the Act 26.3 Insofar as reliance placed by the Pr.CIT on the proviso contained in section 10(38) of the Act, it is respectfully submitted as under: (a) Computation of 'Book Profits’ has to be strictly in terms of section 115JB of the Act which is a complete code in itself and no variation can be made from the said provisions; (b) Proviso to section 10(38) only carves out an exception to the effect that gains, if any, as per books of account on transfer of shares which are otherwise exempt under that section, shall be considered for the purposes of section 115JB of the Act; (c) Specific reliance in this regard is placed on the decision of the Mumbai Bench of the Tribunal in the case of Dharmayug Investments Ltd v ACIT: 69 SOT 433, wherein it has been held that while computing Book Profit, income credited to the profit & loss account which is otherwise exempt under section 10(38) of the Act will not be reduced. (d) In the instant case, it may be appreciated that there was book loss of Rs.291.82 crores on sale of shares of HCL Tech, which was rightly considered for the purpose of determining the ‘Book Profit’; (e) The provisions of section 115JB have an overriding effect upon other provisions of the Act and consequently, method of computation of Book Profit provided in the Explanation is mandatory and overrides normal provisions of computation of profit/ gain/ loss under any head of the income.

Re: Explanation 2 to section 263 relied upon by Pr.CIT 27. Reliance placed by the Pr.CIT upon Explanation 2 to section 263 of the Act to hold that non conduct of proper enquiry by the assessing officer renders the order erroneous and prejudicial to the interest of the Revenue, is, it is submitted, totally misplaced since: (a) extensive enquiries were, as a matter of fact, conducted by the assessing officer; (b) even otherwise, without prejudice to aforesaid, the amended provisions of section 263 (inserted w.e.f. 1-6-2015) cannot be read to provide unfettered powers to the CIT to set aside an assessment order, on a paltry ground of insufficient enquiry being conducted by the assessing officer, at his whims and fancies. Even after insertion of the aforesaid Explanation, the CIT, would need to point out: - specific failure on the part of the assessing officer in not conducting relevant enquiries; - how such specific query was critical for decision on an issue; - how enquiries or verification conducted by the assessing officer were not enquiries or verification that would have been carried out by a prudent officer. Reliance in this regard is placed is placed on the following decisions: - Pr. CIT vs. Indian Farmers & Fertilizers Co-operative Ltd.: (Del HC) - Narayan Tatu Rane v. ITO: 70 taxmann.com 227 (Mum Trib) - Amira Enterprises Ltd vs PCIT in ITA No 3206/Del/2017 (Del. Trib) - Torrent Pharmaceuticals Ltd vs. DCIT: ITA No.164 of 2018 (Ahd. Trib) - Shri Narasimha Reddy Peechu v. ITO: ITA No. 932 of 2017 (Hyd. Trib) 28. Even otherwise, in the case of the appellant, the transaction in question was, as elaborated supra, analyzed by the assessing officer during assessment proceedings and after such extensive verification of records the assessing officer had accepted the returned income of the appellant.

7. Apart from the above submissions, the ld. AR also relied on the decision of Delhi Tribunal in the case of Cairn India Ltd. v. DCIT (2017) 87 taxmann.com 28 (Delhi-Trib).

Approximately and the net value realized was Rs. 498.00 crores. The shares were originally purchased by M/s Slocum Investments (Delhi) Private Ltd at the purchase cost of the shares in Rs. 65,000,000. Subsequently, on amalgamation the shares held by M/s Slocum Investments Delhi Pvt. Ltd. were transferred in the books of accounts of the assessee as per the scheme of the amalgamation at the fair market value. The fair market value of those shares was determined by the assessee at Rs. 790/- per share. Accordingly, the shares were recorded in the books of the assessee company at fair market value as investment at Rs. 790.00 crores. The fair market value of the investment based on the valuation report obtained by the assessee from three different valuers was Rs. 798/- per share. As the shares were sold by the assessee at Rs. 4981763996/–, the assessee incurred resultant book loss of Rs. 2918236004/– and same was shown as loss on disposal of investment in the profit and loss account for the year ended on 31st of March 2013. Such disclosure was also made in note number 25 of the audited accounts. For the purpose of the computation of the Book Profit the assessee claimed the loss on the sale of shares is considered under section 115 JB of the Income Tax Act, 1961.

13. We are of the opinion that there is no infirmity in the order of the learned Commissioner of income tax in holding that the assessment order passed by the learned assessing officer is erroneous and prejudicial to the interests of the revenue as:- a) During the course of assessment proceedings, form No 29B ( See Rule 40B) for computing Book Profits of the company U/s 115JB of the Income Tax Act. 1961 was not filed by the assessee before the assessing officer. No such form was filed by the assessee before the Commissioner also. According to Rule 40B of the Income Tax Rules 1962, Form No. 29B is the report of an accountant, which is required to be furnished by the assessee along with the return of income under sub-section (4) of section 115JB of the Income Tax Act. 1961. According to that Form, the accountant is required to certify that the Book Profit has been computed in accordance with the provisions of that section. The tax payable under section 115JB of the Income Tax Act, 1961 in respect of the assessment year is also required to be certified which is required to be determined on the basis of the details provided in annexure appended to that form. The accountant is also required to certify that such statement and the particulars given in the annexure are true and correct. Undisputedly no such form was filed by the assessee before the assessing officer during the course of assessment proceedings. On perusal of the assessment order also it was found that the learned assessing officer has assessed income of Rs. 47,31,20,060/–, according to the normal computation of income and in fact, it is the returned income of the assessee only. There is no reference of any computation made by the learned assessing officer under section 115JB of the Income Tax Act. 1961. Therefore, it is apparent that the learned assessing officer has not applied his mind to the provisions of section 115JB of the Income Tax Act. 1961 for computation of the Book Profit. b) This is also evident from the fact that the learned assessing officer has not raised any query to the assessee on the aspect of taxability of the Book Profit under section 115JB of the Income Tax Act, 1961. Though assessee has claimed that during the course of assessment proceedings, the assessing officer conducted extensive and necessary enquiries on the aforesaid issue of the sale of shares in HCL technology. Now we would examine whether any examination has been made by the learned assessing officer with respect to the computation of Book Profit under section 115JB of the Income Tax Act, 1961 with respect to the profits or loss arising on sale of shares of this company. The 1st contention raised by the assessee is that vide questionnaire dated 24/06/2015, the assessing officer, especially directed the appellant to furnish the information with respect to details of amalgamation or demerger carried out during the year and vide question No. 11, the appellant was directed to provide details of investment in equity shares as shown in note No. 8 to the audited financial statements, which referred to investment in equity shares of HCL technologies. Vide questionnaire No. 12, the appellant was directed to provide details of loss on disposal of investment of Rs. 283.48 crores particularly with reference to note No. 25 of the notes to the audited financial statements. This claim of the assessee, on being examined, we find that vide letter dated 26/5/2015 assessee had submitted the copy of return of income along with the computation of the total income for the relevant year. Admittedly along with this return, the assessee has not submitted form No. 29B of the Income Tax Act, 1961, for the purpose of the computation of the Book Profit. Therefore, there was no occasion with respect to this reply to verify with the computation of the Book Profit with the assessing officer. The 2nd submission was made by the assessee on 30/6/2015 when the details of the amalgamation and the copies of the scheme along with the copy of the order of the High Court sanctioning the scheme was furnished. Even in these details, there was no reference of computation of the Book Profit under section 115 JB of the Income Tax Act, 1961. Therefore, the submission also does not deal with any of the issue covered with the capital gain or loss on account of the shares. The assessee vide letter dated 27/7/2015, submitted the details of investment in equity shares which, inter alia contained the details of equity shares in HCL technology acquired as part of amalgamation and also the details of loss of Rs. 291.82 crores on sale of investment during the relevant year. On careful examination of this letter, it was found that there is no reference of the computation of the Book Profit under section 115 JB of the Income Tax Act, 1961 or resultant impact on such computation of the profit or loss on sale of the shares. Further, vide letter dated 04/08/2015, the assessee contends that it has submitted the details of loss on disposal of investment of Rs. 283.48 crores along with the details of purchase and sale of the investments. The details so filed included details of long term capital gains as per the normal provision and also the details of loss on sale of shares as per books of accounts. Such letter was found at page No. 249 to 251 of the paper book submitted by the assessee. At serial number 21 of the paper book index it is stated “Copy of reply dated 04.08.2015 filed before the Assessing Officer providing details of profit/loss on investments sold as per normal provisions of the Act and in terms of section 115 JB of the Act”. On careful perusal of the page number 249 – 251 of the paper book, it is found that the assessee has made the part compliance vide serial number 12 of the notice under section 142 (1) dated 8th May 2015 and submitted the details of loss on disposal of investment of Rs. 2834863000/– along with the proof of purchase and the sale of investment. The assessee further submitted that the loss of Rs. 2834863000 appearing in the profit and loss account has been reversed in the computation of income and no tax benefit has been claimed by the assessee company. The details of loss on disposal of the investment is enclosed as per annexure A . Therefore, it is apparent that assessee has not submitted anything with respect to the computation of Book Profit with respect to the profit or gain or loss arising on sale of those shares. In fact, assessee has stated that no tax benefit has been claimed by the assessee company though in the Book Profit, it has reduced the loss of Rs. 2834863000/– from the Book Profit. Therefore, to that extent the assessee has definitely claimed the tax benefit. We rest that issue their only but however, we state that there is no reference of any computation of Book Profit under section 115 JB of the Income Tax Act, 1961. The next claim of the assessee is that vide letter dated 20/11/2015, the appellant has furnished the copy of the order of the High Court approving the amalgamation and also the balance sheet of amalgamating entities. On careful perusal of the letter placed at page No. 252 to 299 of the paper book, we find that there is no reference in these documents with respect to the computation of the Book Profit for the year. The next claim of the assessee is that vide letter dated 26/11/2015, it has submitted the book value of assets transferred on merger vide annexure ‘A’ and the fair market value of the above assets recorded in the books on amalgamation vide annexure ‘B’ there to. Admittedly these details have been submitted and placed at page number 300 to 302 of the paper book. Vide page number 301, the assessee has shown the investment in HCL Tech Ltd of Rs. 114,30,05,45,285/– which is the book value of the assets. Vide page number 302, the assessee has shown the various investments where the fair market value of investment in HCL technologies Ltd has been shown at Rs. 254,35,89,59,930/–. But the question before us is whether the assessee has disclosed the capital gain or capital loss during the year which has been examined by the learned assessing officer for the purpose of computation of the Book Profit or not. Both the statement submitted by the assessee does not clarify about any capital gain or capital loss arising in the hands of the assessee on sale of one crore shares of HCL technologies Ltd. The next letter, which has been stated to be submitted by the assessee is dated 02/12/2015 where assessee submitted that the actual cost of the shares of HCL technologies Ltd is Rs. 6.5 per share on the date of acquisition, which is from 1995 to 1999. As on the appointed date i.e. 1/4/2012, this is the date on which the fair market value of the one crore shares of HCL Ltd were to be determined. It was stated that the stock market was closed. Therefore, the market value (quoted price) on the recognized stock exchange as on 02/04/2012 was Rs. 501.25 per share. The assessee further submitted that as on the appointed date as per the scheme of the merger, all the assets of transferor company shall be recorded by the transferee company at their respective fair value and the fair value of the share was determined at Rs. 798/- per share (though its quoted price at stock exchange was only Rs. 501.25 per share) by three different agencies, namely ICICI securities Ltd, SBI Capital Markets Ltd and SSPA & company, chartered accountants. Undoubtedly, these documents are placed at page number 303- 377 of the paper book. However none of these documents show that how it has impacted the computation of the Book Profit under section 115 JB of the Income Tax Act. 1961. Even otherwise surprisingly, the assessing officer has not raised the query as to how the market value at recognised stock exchange of the shares of the company is quoted at Rs. 501.25 per share and how the value is determined by these valuers at Rs. 798 per shares as the fair market value. Based on the above finding it is apparent that the learned assessing officer has not looked at the computation of the Book Profit under section 115 JB of the Income Tax Act. 1961. Therefore according to us, it is not the case of inadequate enquiry but absence of enquiry with respect to the computation of Book Profit under section 115 JB of the Income Tax Act. 1961. In view of this we reject the argument of the learned authorised representative that there is an extensive inquiries made by the learned assessing officer under section 143 (3) of the Income Tax Act. 1961. According to us the learned assessing officer has not made any enquiry with respect to the computation of the Book Profit during the course of assessment proceedings. It is a clear case of Lack of enquiry. c) An interesting argument has also been raised by the learned authorised representative that the revaluation of assets/investment is in the shares of HCL technologies Ltd which had no tax implication under the normal provisions of the Act and the extensive inquiries undertaken by the assessing officer was purely to examine the impact of such three statements at fair value for the purpose of determining the Book Profit in terms of section 115 JB of the Act. This argument though looks attractive but straightway requires to be rejected in absence of form No. 29B submitted by the assessee before any of the lower authorities. Unless such form duly certified by the accountant about its correctness is submitted before the assessing officer, it is very difficult to say whether there is any tax implication on the Book Profit or not. However, we would like to show that there is an impact on the tax liability of the assessee. The shares of the company has been valued as on 01/04/2012 by the 3 valuers at Rs. 798 per share by following different methods, whereas the quoted price of the share on the exchanges was only Rs. 501.25 per share. The valuers have rejected the fair market value of the share as traded price holding that the assessee is holding a controlling interest in the company. Therefore, there has to be a premium over the market value of the share. Consequently, the shares have been valued at Rs. 798 per share, compared to the traded price of RS. 501.25 per share in the stock exchange. The shares have been sold during the year itself at the market rate on the recognized stock exchange and the company did not get any premium of that controlling interest. By enhancing the value of the controlling interest of the shares as on 01/04/2012 at Rs. 798 per share instead of Rs. 501.25 per share, the sales of the shares and the fair market value of the shares would have been almost equal. Thereby the book loss shown by the assessee would have been the Book Profit under section 115 JB of the Act. Even otherwise we are not on the computation of the income but we are on the issue whether the learned assessing officer has at all looked into the computation of the Book Profit under section 115 JB of the Act or not. The answer is clear cut no.

d) The next contention of the learned authorised representative is that that order is not erroneous much less prejudicial to the interest of the revenue. It was stated that the accounting treatment of recording the shares of the company are at its fair market value accepted by the assessing officer, which is strictly in accordance with the law. It was further stated that the object of minimum alternate tax provision is to bring out the real profits of the companies which is available for distribution as dividend based on the profits declared by such companies and its books of account. It was further stated that the profit and loss account prepared in compliance with the requirements of the Companies Act, 1956 and in accordance with the accounting standard issued by the ICAI, as laid down before the members in the annual general meeting that normal profit should be regarded as sacrosanct for computing the deemed income under section 115 JB of the Act and can only be subjected to the upward and downward adjustment specified in that section. There is no quarrel on this issue because these are the issues of the principles of taxation. The simple issue involved in this appeal is whether the computation of the Book Profit has been verified by the learned assessing officer or not. Whether the assessee has submitted any detail which shows that learned assessing officer has applied his mind to the computation of the Book Profit or not. For both the questions the answer is in negative. e) Though the learned principal CIT has also looked into the computation aspect of the capital gain and crediting of the excess of the fair market value of the asset over the liabilities of the amalgamated company credited to securities premium account or against the revaluation reserve for the purpose of the computation of the Book Profit under section 115 JB of the Act as well, as has also been stated that amalgamation is with the purpose of evading minimum alternate tax and the scheme is not binding on the revenue. These aspects are required to be verified at the time of computation of the Book Profit under section 115 JB of the Income Tax Act, 1961. Therefore same are not required to be dealt with at the moment of finding out whether the order is erroneous and prejudicial to the interest of the revenue, which are not so relevant. f) The principal CIT has also relied upon the explanation 2 of section 263 inserted with effect from 1/6/2015 to say that the learned assessing officer has not made enquiries, which should have been made by him during the course of assessment proceedings. The learned authorised representative has strongly objected and stated that when extensive inquiries were conducted by the assessing officer, the explanation 2 does not apply to the facts of the case. In the present case, the learned assessing officer has not even examined the computation of the Book Profit under section 115 JB of the Income Tax Act, 1961. No Form No. 29B has been filed by the assessee before the assessing officer or before the principal Commissioner of income tax, which itself speaks that the learned assessing officer has not conducted any enquiry with respect to the computation of Book Profit under section 115 JB of the Income Tax Act, 1961. Even otherwise before us, the learned authorised representative could not show what is the extensive enquiry the learned assessing officer has conducted with respect to the computation of the Book Profit under section 115 JB of the Act. Even before us form No. 29B was not filed. In presence of these peculiar facts and circumstances of the case in hand, the decisions relied by the assessee do not render any help to it and the same are distinguishable on facts. Therefore, we concur with the views of the learned principal Commissioner of income tax that according to the explanation (2) of section 263 of the Income Tax Act, 1961, the order passed by the learned assessing officer is erroneous so far as it is prejudicial to the interest of the revenue.