DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-3(3), MUMBAI vs. M/S. WELSPUN STEEL LTD, MUMBAI

From the facts on record, it is noted that the WEPL (which stood merged with the assessee) had claimed capital loss of Rs.423 crore on sale of shares of M/s. Welspun Energy Chhattisgarh Limited [ in short 'WECL'] to its related entity, M/s. Solarsys Infra Projects Pvt. Ltd. [ in short 'SIPPL']. It is noted that WEPL had sold the investment of Rs.686 crore held in WECL to SIPPL for total consideration of Rs.300 crore on 29.03.2017, which had yielded the impugned loss. The said loss inter alia comprised of long-term capital loss (after indexation) of Rs. 249 crore and short-term capital loss of Rs. 178 crores. Since WSL was the successor company to WEPL, the aggregate capital loss was claimed by assessee M/s WSL in the relevant AY 2017-18. 4. The details of the investment held by WEPL in WECL is noted to comprise of the following Optionally Convertible Preference Shares [in short ‘OCPS'] of Rs.686 crores. Instrument Date of Investment No. of shares Amount (Rs. in crore) OCPS 25.10.2014 37,50,00,000 375 OCPS 21.11.2016 30,52,00,000

20 OCPS 17.03.2017 54,50,000

40 Total 68,57,50,000 686

The genesis of the investment made in OCPS was that, WEPL had initially paid sum of Rs.375 crores to its wholly owned subsidiary, WECL on 16.10.2014, against which WECL issued OCPS. WECL, in turn, had paid Rs.375 crores to its wholly owned subsidiary, Welspun Energy Resources Pvt Ltd [in short ‘WERPL'] and a further sum of Rs. 3 crores on 21.10.2014. Out of the total sum of Rs.378 crores so received, WERPL had issued OCPS of Rs.300 crores to WECL. WERPL had thereafter advanced interest-free loan of Rs.375 crores back to WEPL. Later on, vide scheme of amalgamation approved by the Hon'ble Bombay High Court vide order dated 30.01.2015, WERPL stood merged with WEPL from the appointed date 01.01.2015. It is noted that, post the amalgamation, the value of investment held by WEPL in OCPS of WECL for Rs.375 crores continued to remain the same. However, as a consequence of the amalgamation, ordinarily shares of amalgamated company, WEPL was required to be issued to the shareholders of WERPL i.e., WECL. However, in view of the prohibition set out in section 19 of the Companies Act, 2013 which debars any holding company from allotting shares to its subsidiary, the OCPS held by WECL in WERPL stood cancelled resulting in creation of Capital Reserve of Rs.300.5 crores in the books of the amalgamated holding company i.e., WEPL. Correspondingly, WECL was required to account for loss of equivalent amount of Rs.300.5 crores arising upon extinguishment of the OCPS held by it in WERPL, as a consequence of the amalgamation. It is noted that, the said loss of Rs.300.5 crores were disallowed by WECL voluntarily in its return of income filed for AY 2015-16 and was not carried forward as well.

Subsequently, WEPL is noted to have again advanced loans aggregating to Rs.305.20 crores to WECL on different dates during the period from September 2014 to November 2016. It is noted that, majority of the loan viz., Rs.296.64 crores were advanced prior to 31st March, 2016. These loans received by WECL from its holding company was utilized for making downstream investments in three (3) project SPVs namely (i) M/s. Welspun Energy UP Pvt. Ltd. (ii) M/s. Welspun Energy MP Pvt. Ltd. and (iii) M/s. Welspun Energy Anuppur Pvt. Ltd. by combination of equity infusion and interest free loans. Later on, in the month of November 2016, these loans provided by WEPL to WECL for funding the project SPVs were converted into OCPS. WEPL also invested further sum of Rs.5.40 cr on 17.03.2017 in OCPS of WECL. Subsequently, vide Share Purchase Agreement [in short 'SPA'] dated 29.03.2017, WEPL sold the entire OCPS of Rs.686 crores (375 + 305.20 +5.40) held in WECL to SIPPL for an aggregate consideration of Rs.300 crores. It is noted that, the sale consideration agreed upon was based on the valuation report obtained from a merchant banker. Later on, in April/May 2019, WECL (which was now owned by SIPPL) had sold its stake in the three project SPVs to Adani Infra (India) Ltd [ in short 'Adani'] for an aggregate consideration of Rs.295 crores.

Having regard to the above facts, the AO in the course of assessment vide show-cause notice dated 22.11.2019 had required the assessee to explain as to why the total capital loss claimed on sale of shares of WECL amounting to Rs. 423 crores should not be disallowed. According to the AO, the aforesaid loss was an artificial loss created on paper and thus should not be allowed to the assessee. In response, the assessee had furnished its detailed objections which has been extensively reproduced by the AO at Para 6.2 of the impugned assessment order. It is noted that, according to AO, the initial funds of Rs.375 crores were rotated from WEPL to WECL to WERPL and back to WEPL on the same date but the colour and nature of the funds changed at each layer. Referring to the statement of Shri Rajesh Verma, senior Vice President (Accounts) of WEPL recorded u/s 132(4) of the Act on 31.03.2017, the AO noted that he was unable to explain the business rationale for undertaking such circular movement of funds. According to AO, this circular movement of funds and thereafter, the amalgamation of WERPL into WEPL was pre-planned to create an imaginary loss based on accounting jugglery. The AO observed that there was no proper justification given for the scheme of merger between WERPL and WEPL and that the rationale mentioned in the scheme was not satisfactory. The AO was therefore of the view that the scheme of amalgamation undertaken by and between WEPL and WERPL in AY 2015-16 was not tax-neutral and that the notional loss created as result of this amalgamation was contrary to the taxation principles.

The AO further noted that WEPL had already entered into a MOU with Adani Group for sale of shares of WECL for which it had received interest-free advance of Rs.422 crores in October 2014 and therefore in his view, the intention to sell the stake in WECL was there from the beginning. However, as the transaction was not completed during the year, the shares of WECL was transferred to SIPPL by WEPL, all of which under same management, to create an artificial loss to reduce its capital gain liability. The AO was of the view that, the effective investment of WECL in three SPVs was only Rs.300 crores and that WECL ultimately sold the investment in three SPVs to Adani Infra (India) Limited in 2019 for Rs. 295 crores. In AO's view therefore, if the real transaction was seen, there was an overall loss of only Rs.5 crores whereas, the assessee claimed an higher artificial loss by taking refuge to the earlier investment of Rs.375 crores which, according to him, was only on paper. The AO accordingly held that there was enough direct and circumstantial evidence surrounding the transaction, which showed that it was a colorable device deployed by the assessee to create a notional loss. The AO thus disregarded the transaction and disallowed the loss. For doing so, the AO referred to the decisions of the Hon'ble Apex Court in the cases of Sumati Dayal Vs CIT (214 ITR 801), Durgaprasad More (82 ITR 540), McDowell & of Hon'ble Karnataka High Court in the case of Wipro Ltd (50 taxmann.com 421) for disallowing the impugned capital loss.

Being aggrieved by the above order of the AO, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to delete the disallowance of the impugned capital loss. Now, the Revenue is in appeal before us.

Assailing the action of the Ld. CIT(A), the Ld. DR vehemently supported the order of the AO. The Ld. DR narrated the entire timeline of events and submitted that the assessee had created this artificial loss through an elaborate scheme of rotation of funds and restructuring of group companies. Firstly, the Ld. DR disputed the veracity of the original investment of Rs.375 crores. He reiterated the observations of the AO and argued that the circular movement of funds and the scheme of amalgamation as implemented by the assessee in AY 2015- 16 was not tax-neutral and therefore the loss created because of the scheme of merger was notional. He also argued that this original cost of acquisition of the first tranche of OCPS of Rs.375 crores was only on paper and thus was to be ignored. On the aspect of the subsequent sale of investment in WECL to SIPPL, the Ld. DR laid much emphasis on the fact that, when Adani had already entered into an MOU to acquire WECL for Rs. 422 crores, then the sale of shares of WECL to SIPPL for Rs.300 crores was an eye-wash. He submitted that the transactions were conducted between related parties only to generate this loss. The Ld. DR further referred to the statement of Shri Rajesh Verma and argued that when the senior accounts head of the assessee was unable to substantiate the business rationale behind this transaction, it lends support to the AO's case that this entire scheme was undertaken with the sole intent to avoid tax. He accordingly urged that the order of Ld. CIT(A) be reversed and that of the AO be restored.

Per contra, the Ld. AR appearing for the assessee, supported the findings of the Ld. CIT(A). He pointed out that all the relevant details relating to the impugned transactions was furnished before the AO which showed that they were legitimate business transactions carried out in the regular course of business and supported by material evidence. Taking us through the order of the Ld. CIT(A), the Ld. AR showed us that the assessee had explained the business rationale behind the infusion of funds into WERPL through WECL and the subsequent merger of WERPL with WEPL. He further contended that, the reliance placed by the Revenue on the statement of Shri Rajesh Verma was misplaced for twin reasons, viz.; (a) he was only a senior accounts staff and a non-managerial person and thus he could not be expected to explain the business rationale behind the decision which is taken in closed doors after much deliberation by the management and (b) he had only averred that he is unable to answer these questions and that nowhere he had stated anything adverse or admitted to any wrong doing. He further emphasized on the fact that, the Revenue was under mistaken assumption of fact that the loss arising because of the merger of WERPL with WEPL was claimed by the assessee. He particularly invited our attention to Para 10.21 of the Ld. CIT(A)'s order wherein it was noted that the loss of Rs.300.5 crores debited by WECL as a consequence of this merger had been disallowed voluntarily and also not carried forward. The Ld. AR further contended that, the income- tax assessment of WEPL for AY 2015-16, was simultaneously completed by the same AO u/s 153A/143(3) of the Act and he showed us that no adverse inference was drawn either in respect of these transactions between WEPL, WECL and WERPL or in relation to this merger. The AO had neither held the scheme of amalgamation to be sham or not tax-neutral in the income-tax assessment completed for AY 2015-16. The Ld. AR accordingly submitted that, the AO was completely unjustified in disputing the transactions and scheme of amalgamation undertaken in AY 2015-16 in the income-tax assessment for the relevant AY 2017-18. 12. The Ld. AR further submitted that, indeed WEPL had entered into an MOU with Adani for sale of shares of WECL in October 2014 but the transaction was never completed. He narrated the entire market dynamics, which occurred between 2014 to 2019, to show that the MOU was signed when the business prospects were bright but later on, the business prospects became weak. Also, the assessee had suffered set back due to the order of the National Green Tribunal passed in December 2016 which had set aside the environmental clearances earlier granted to the subsidiaries of WECL. As a consequence, the valuation of WECL was adversely affected. The Ld. AR supported the sale consideration agreed between the related parties i.e., WEPL and SIPPL with reference to the report obtained from an independent merchant banker. He also showed us that ultimately, the investment in WECL had not been sold to Adani, as initially agreed. Instead, the investment in the three SPVs were sold to Adani in April 2019 for Rs.295 crores which was significantly different from the initial MOU value and rather it supported the valuation of Rs.300 crores which was agreed between WEPL and SIPPL. The Ld. AR accordingly submitted that the Ld. CIT(A) had rightly held the impugned capital loss to be genuine and thus his order does not call for any interference.

We have heard both the parties and perused the material placed before us. The details of the capital loss claimed by the assessee is noted to be as follows :- Instrument Date of Investment No. of shares Amount (Rs. in Cr) Short Term/ Long Term Capital Loss Indexed COA (Rs. in Cr) Sale Consid- eration Gain/ (Loss) (Rs. in Cr) OCPS 25.10.2014 37,50,00,000 375 Long Term 412 164 (248) OCPS 21.11.2016 30,52,00,000

20 Long Term 305 134 (172) OCPS 17.03.2017 54,50,000

40 Short Term 5 2 (3) Total 68,57,50,000 686 723 300 (423)

The above computation comprises of three material components viz., (i) cost of acquisition of first tranche of OCPS for Rs.375 crores, (ii) cost of acquisition of second tranche of OCPS for Rs.310.60 crores [Rs.305.20 crores + Rs.5.40 crores], and (iii) sale consideration of Rs.300 crores, which after indexation resulted in the impugned aggregate capital loss of Rs.423 crores. It is noted that, the AO has held that this entire transaction of issuing OCPS, scheme of merger and subsequent sale of OCPS was a pre-arranged colorable device undertaken with the sole intent to create an artificial loss and avoid tax.

For arriving at the above finding, the AO is noted to have primarily doubted the initial investment of Rs.375 crores made in OCPS of WECL by WEPL, holding it to be merely on paper. The AO as well as the Ld. DR has heavily stressed on the fact that, the investment so made was routed through wholly owned subsidiaries and received back by WEPL on the same date, which, according to them, showed that the transaction was not genuine. Although at first blush, this circular movement of funds did appear to be unnatural but later on upon being apprised of the rationale behind the same, it is noted that neither did this transfer of funds result in creation of any loss and that there was indeed commercial rationale behind doing so, which we have discussed in the succeeding paragraph. Although the funds were routed amongst the group entities but the character and color of funds changed in each leg creating different rights and obligations inter-se the parties and hence, it was not a simple circular movement of funds as was alleged by the AO.

From the facts placed before us, it is noted that WEPL was engaged in the business of engineering, procurement and construction business commonly known as EPC business. The said company was carrying on thermal energy business and renewable energy business through its subsidiaries, WECL and Welspun Renewables Energy Private Limited [in short ‘WREPL'] respectively. It is therefore observed that WECL was the vehicle through which WEPL was carrying on coal based thermal energy business. The Ld. AR explained that, thermal energy business is commonly project based and therefore separate and independent SPVs are floated to bid and procure tenders for setting up of thermal energy plants at different locations across different states. The rationale for doing so is that, separate SPVs would enable clear demarcation of financial transactions relating to each project. Further, the assessee group would be able to easily identify and bring in investor / partner er in relation to any specific project, for which it seeks so and this would ensure that all parties involved have visibility into the project's financial activities. It is accordingly noted that, apart from WERPL, WECL had also floated three other SPVs namely; (i) M/s. Welspun Energy UP Pvt. Ltd. (ii) M/s. Welspun Energy MP Pvt. Ltd. and (iii) M/s. Welspun Energy Anuppur Pvt. Ltd. and each of these entities were meant to pursue and bid for separate tenders / thermal power projects. The Ld. AR also explained that, while submitting the bids, the concerned SPV is required to demonstrate its financial capability for undertaking the said project. Since the size of these projects are generally in excess of several hundred crores, the SPVs are accordingly funded suitably by the holding company to demonstrate their financial abilities and meet the net worth criteria, if any, set out in the bidding documents. It was in this background that, WEPL had first paid sum of Rs.375 crores to WECL by subscribing to their OCPS, which in turn, had funded a SPV, WERPL again by way of OCPS. These acts of issuing OCPS is therefore noted to have created legal rights and obligations between the parties, which cannot be arbitrarily disregarded. The primary business rationale for the capital infusion in WERPL through WECL was to form an SPV to undertake specific project and ensure that the said SPV would meet the expected net-worth criteria as a part of performance qualifications. The Ld. AR further pointed out that, until the project was obtained and undertaken, there was no purpose for this SPV to keep the funds lying idle and therefore the same was advanced back by way of interest free loan to WEPL. The rationale for giving interest free loan was that, once any project was awarded to WERPL, then WEPL would repay the monies back to WERPL for undertaking the said project. Until then, the monies would be purposefully deployed within the group.

Having regard to the foregoing, we find merit in the submission of the Ld. AR that the acts involving issuance of OCPS by WECL and WERPL and thereafter the loan given by WERPL to WEPL was based on business prudence to create specific rights and obligations amongst the entities in the regular course of business. Moreover, as rightly pointed out by Ld. AR that, the movement of funds amongst the entities did not result in any creation of tax loss or tax claim and therefore there was no reason to dispute the same. In our view therefore, this sequence of transactions cannot be simply stated as sham.

The Revenue is further noted to have linked the above movement of funds with the subsequent action involving merger of WERPL with WEPL, which according to them, resulted in creation of artificial loss rendering the scheme of amalgamation to be non-tax neutral. The Revenue questioned the timing of issuance of OCPS and the subsequent merger. According to the Ld. CIT, DR, only because the Hon'ble High Court sanctioned the scheme would not ipso facto render the amalgamation to be tax-neutral and enable the assessee to avail the artificial loss so created. For this, the Ld. CIT, DR invited our attention to the order of the Hon'ble Bombay High Court dated 30.01.2015 approving the scheme of amalgamation wherein the Court had inter-alia observed that, all the tax issues arising out of the scheme of amalgamation will have to be met and answered in accordance with law. The Revenue has also questioned the rationale for amalgamating WERPL with WEPL. According to AO, WERPL could have been easily merged with WECL rather than merging it with WEPL. The AO is noted to have observed that, there was various other alternatives to wind up WERPL which would not have resulted in this notional loss and that the assessee could have chosen to avoid this scheme of amalgamation altogether. The AO is therefore noted to have alleged that the scheme of merger was a colorable device meant solely for avoidance of tax.

Countering the above, the Ld. AR firstly pointed out that, the foundational premise of this allegation of the Revenue is based on incorrect assumption of fact. The Ld. AR took us through the scheme of arrangement and explained the entries passed in the books of accounts to give effect to the terms sanctioned by the Hon'ble High Court. The Ld. AR showed us that, the only loss, which was provided for, pursuant to the amalgamation, was the loss arising upon extinguishment of OCPS held by WECL in WERPL. He explained that, by operation of law i.e. Section 19 of the Companies Act, 2013, WECL could not be issued shares of its holding company i.e. WEPL in lieu of the OCPS held in WERPL and hence the entire investment value was provided for as a loss, as a consequence of the merger. The loss of Rs.300.50 crores, which was debited in the Profit & Loss Account of WECL, was shown to have been disallowed voluntarily and the said capital loss was not even carried forward by WECL. The relevant findings of the Ld. CIT(A) in this regard are noted to be as under: - "10.21 Also, on perusal of the submissions made by the assessee, it is also noticed that due to merger of WERPL with WEPL, the loss suffered by WECL during the FY 2014-15 was not claimed or carried forward by WECL while filing its return of income for the FY 2014-15. It is seen that WECL, while debiting an expense of Rs. 300,05,00,000/- as “loss on cancellation of OCPS on merger', has re-cognized this loss as capital loss and the same has not been claimed as a deduction. This loss has also not been carried forward. The AO has completely ignored this fact."

Before us, the Ld. CIT, DR was unable to controvert the above finding nor was he able to show that this loss had been set-off or claimed by WECL in any subsequent year. Apart from the foregoing, the Revenue was unable to point out any other purported loss created in this scheme of amalgamation, which according to AO, rendered the merger to be non-tax neutral. We therefore note that there was no artificial loss created or claimed or carried forward pursuant to this scheme of amalgamation and hence the genesis of dispute raised by the AO doubting the scheme of merger and suspecting it to be done only to create artificial loss is noted to be non-existent and hence factually unfounded.

The Ld. AR further showed us that, the linkage of the circular transactions with the scheme of amalgamation was also of no relevance. He explained that, even if hypothetically, had WERPL not given back the loan to WEPL and rather retained the monies received from WECL with it or used it to set-up any power project, still the entries passed pursuant to the merger, would have been the same. Still, the OCPS held by WECL in WERPL would have been extinguished because of operation of law i.e. Section 19 of Companies Act, 2013 and that the value of investments held by WEPL in WECL of Rs.375 crores would have continued to remain the same. Having regard to the foregoing explanation, we find force in the Ld. AR's contention that the sequence of transactions between WEPL, WECL and WERPL had no linkage with the scheme of amalgamation because of which any undue tax advantage was obtained by any of these three entities.

We also find merit in the Ld. AR's submissions that, the AO Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. v. Union of India (17 taxmann.com 202), the object of tax planning, obviously, is to save tax. Broadly speaking, it may be defined as an exercise, which a taxpayer undertakes, with a view to meet his tax obligations in an orderly, systematic, disciplined and scientific manner. The means which he adopts for reducing his tax burdens have to be legitimate and lawful and the transactions which he enters into have to be bona fide genuine. In this context, the following observations of the Hon'ble Supreme Court in CIT v. B.M. Kharwar [1969] 72 ITR 603(SC) can aptly be quoted, which are as follows: "It is now well-settled that taxing authorities are not entitled to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as the substance of the matter. The taxing authority is entitled to and indeed is bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device and legal relationship it is open to the taxing authorities to unravel the device and determine the true character of the relationship. But the legal effect of the transaction cannot be displaced by probing into the substance of the transaction".

Having regard to the above legal principle, in the case before us, WERPL had merged with WEPL. Since the shareholder of WERPL i.e. WECL was a subsidiary of WEPL, Section 19 of Companies Act, 2013 prohibited the holding company to issue its shares to its subsidiary company. Accordingly, the OCPS held by WECL in WERPL was extinguished resulting in provision of loss in the books of WECL. Similarly, since WEPL could not issue shares in lieu of the OCPS held by WECL in WERPL, it correspondingly resulted in creation of equivalent capital reserve. This effect to the scheme of merger and entries passed in the books of accounts is noted to be a consequence of operation of law i.e., Section 19 of Companies Act, 2013 and hence it cannot be viewed adversely. Only because the consequence following from this scheme of merger and operation of law resulted in a benefit to the entities involved cannot be straitjacketed as a colorable device.

We now proceed to consider the aspect of lack of commercial rationale behind the scheme of amalgamation raised by the Revenue. In the facts before us, WEPL was the flagship company engaged in EPC business and it was also involved in thermal energy business through its subsidiary WECL, which in turn held several project SPVs, with WERPL being one of them. Admittedly WEPL is noted to have funded WERPL through WECL. However, since the project which it intended to bid through WERPL did not go through, it was decided to wind up WERPL and merging it with WEPL was considered to be more prudent in their view amongst the other alternatives available. The Ld. AR has explained the commercial rationale for merging WERPL with WEPL and not WECL, as suggested by AO. The Ld. AR pointed out that, WEPL did not intend to involve WECL in this scheme of amalgamation for the primary reason that WECL was already a subject matter of interest for an intended buyer i.e. Adani for which WEPL had already entered into an MOU. Hence involving WECL in the scheme would have complicated the deal with Adani, particularly when WERPL was unable to obtain any intended thermal project, for which it was formed. Also, although in income-tax laws, the merger of WERPL into WEPL or WECL was tax neutral, but the scheme of merger with WEPL resulted in better restructuring and enhancement of overall net worth of the ultimate parent entity which further assisted in meeting performance qualifications to bid for power projects. Having regard to the foregoing explanation, it is noted that the scheme of merger cannot be alleged to lack commercial rationale.

We also note that the scheme of merger placed before the Hon'ble High Court contained the business rationale, which was never disputed by any statutory authorities, at the material time when the scheme was sanctioned. Also, no such adverse finding was rendered by the AO in the income-tax assessment completed u/s 153A/143(3) for AY 2015-16 i.e. the year of amalgamation, copy of which is found placed at Pages 84 to 93 of Paper-book. Hence, according to us, the allegation now being levelled that the scheme undertaken in AY 2015- 16 was a colorable device, that too in the income-tax assessment for AY 2017-18, cannot be entertained. Further, as noted above, there was no undue tax benefit availed by this scheme as the purported loss being referred to by the AO had already been disallowed by WECL and therefore the allegation of tax avoidance is noted to have no legs to stand on. The Ld. CIT(A) is also noted to have analyzed the scheme of amalgamation from all angles and held that there was no adverse tax implication or undue tax benefit arising therefrom. The relevant findings of Ld. CIT(A), as noted by us, are as follows: - "10.15 For this we need to further analyse the merger and amalgamation which took place between WEPL and WERPL. It is seen that a result of the merger, the assets and liabilities of WERPL became the assets and liabilities of WEPL. As per section 47(vi) of the Act, such transaction is not regarded as a transfer and hence not liable for tax. The said section is reproduced below: Clause (vi) of section provides' as follows: "(vi) any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company," According to the AO, as per Para 6.1.4 of his order, the asset of WERPL was the loan of Rs. 375 crore which it had advanced to WEPL. Also, as per Para 6.1.6 of the assessment order, the liability of WERPL was Rs. 78.87 crore which was transferred to WEPL. Further, since WEPL could not issue shares to WECL, as a consequence of the merger, in view of section 19 of the Companies Act, a Capital Reserve of Rs. 300.05 crore was created by WEPL for AY 2015-16. Moreover, it is also seen that assessment of WEPL for AY 2015-16 u/s 153A r.w.s 143(3) was completed on 30.12.2019 and no adverse inference in respect of these transactions has been drawn.

16 It is clear that the Capital Reserve had to be created as the assessee was the ultimate holding company of WERPL and no shares were issued by the assessee to the shareholders of WERPL i.e WECL as consideration for the merger in view of section 19 of the Companies Act 2013 which prohibits any holding company from allotting any shares to its subsidiary company. The said reserve was a reserve of capital nature and not a benefit or a perquisite or advantage of any kind accruing to the assessee and thus is not taxable in hands of the assessee.

17 As a next step, one would like to examine the applicability of section 28(iv) of the Act to this capital reserve. 10.17.1 In this regard, the provisions of section 28(iv) of the Act, are reproduced herein below: "28 The following income shall be chargeable to income-tax under the head ‘Profit and gains of business or profession,- (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of profession." 10.17.2 Section 28(iv) of the Act specifies the following conditions which need to be satisfied before making any addition which are as under: (i) there must be benefit or perquisite; (ii) it must arise out of the business or profession carried on by the recipient, and (iii) it must be revenue in nature seen 10.17.3 In the instant case, it is noticed that no benefit or perquisite is arising out of the scheme of amalgamation. The assessee was indirectly holding or in other words was the ultimate holding company having the shares of WERPL through its 100% subsidiary which after the amalgamation ted to the direct ownership of the assets in the assessee's name. In the whole process, the assessee has neither become richer nor poorer. If any benefit or perquisite does not arise from the business or profession carried on by the assessee, the provisions of Section 28(iv) in any case cannot be applied. it is evident that the intention of the Legislature is not to apply the provisions of Section 28(iv) to a case where there is increase in the general reserves arising due to recording of the shares in the balance sheet of the assessee at their market value. 10.17.4 Further, it is also observed that a book entry recording a reserve is a consequence of the amalgamation, which is required to be passed for the limited purpose of balancing the accounts based on the double entry system employed and cannot give rise to any benefit or perquisite in the course of the business. The only relationship between the two companies i.e WEPL and WERPL was that of indirect holding between them. In this factual background, it cannot be said that the amalgamation reserve arose out of any business activity of the assessee. Scheme of Amalgamation cannot also be regarded as an adventure in the nature of trade. Thus; the reserve created on account of amalgamation is capital in nature and cannot be said to be created on account of regular business activity; Similar view has been taken by the Hon'ble Madras High Court in the in para 11 it was held as under: - "A plain reading of the above said provision makes it clear that the amount reflected in the balance sheet of the assessee under the head ‘reserves and surplus