ASSISTANT COMMISSIONER OF INCOME TAX, CHENNAI vs. BUHARI HOLDINGS PRIVAE LIMITED, CHENNAI

3. Brief case of the case are that the assessee Company filed its Return of Income on 14.10.2010 for the A.Y.2010-11 disclosing an income of Rs.99,73,917/-. The assessment u/s 143(3) of the Act was completed on 11.2.2013. The assessment for A.Y.2010-11 was reopened u/s 147 of the Act as there was a reason to believe that income to the extent of Rs.1,75,00,000/- had escaped assessment. After issuing the statutory notices the assessment was completed by making the additions on two counts (i) Rs.1,75,27,500 u/s 28(iv) and (ii) disallowance u/s 14A of Rs.48,26,216/-. The AO while making the disallowances made the following observations: "It is seen from the schedule 19 notes on accounts forming part of accounts, vide sl.no.6(B) it is stated that due to amalgamation of M/S. Transcar India Private Limited with M/s.Kemcos Developers Private Limited, 1,75,275 equity shares of Rs.100/- each amounted to Rs. 1,75,27,500/- was credited to capital of the assessee company. This credit is due to additional allotment of shares worth of Rs. 1,75,27,500/-.

‘’5. We have heard rival contentions and gone through facts and circumstances of the case. The admitted facts are that the assessee being a Public Limited Company has amalgamated with the abovementioned nine companies. The purpose of amalgamation was to bolster the capability of the assessee to conduct business in dynamic way and more to earn profits. The block of asset received from the amalgamating companies enhanced the image and goodwill of the assessee-company by increasing reserves and surplus. Whether the reserve and surplus of the amalgamated company can be treated as benefits accruing from business of the assessee in term of provisions of Section 28(iv) of the Act or not? 6. Now, we have to go through the clause (iv) of Section 28 which lays down as under: "Section 28 sets out the incomes which are chargeable to income-tax under the head 'Profit and Gains of Business and Profession', and clause (iv) thereto refers to "the value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of a profession". It is clear from the above provision that besides the profits and gains from business and profession carried on by the assessee at any time during the previous year or any other benefit or perquisite, whether convertible into money or not, is also chargeable to tax under this head of income. A plain reading of this provision shows two conditions precedents for such taxability i.e. (i) that there should be benefits or perquisites and, (ii) that such benefits or perquisites should arise from the business or exercise of the profession. The expression 'arising from the business' essentially implies that the benefit or perquisite must be in the nature of a business receipt or revenue receipt. No matter how wide be the scope of Section 28(iv) of the Act, the difference between a capital receipt and revenue receipt cannot be overlooked. In the case of Mahindra & Mahindra Limited Vs. CIT (261 ITR 501), Hon'ble Bombay High Court has, in the context of this significant distinction between revenue and capital receipts, held that waiver of principal amount in respect of imports of plant and machinery could, by no stretch of logic, be treated as 'business income', and, therefore, as an income taxable under section 28(iv) of the Act. One must bear in mind the fact that section 28 of the Act only refers to the term "income" which can be charged to income tax under the head "profits and gains from business or profession", and, therefore, when a particular advantage, perquisite or receipt is not in the nature of income, there cannot be any occasion to bring the same to tax under section 28(iv) of the Act.

9. In the present case there is o material whatsoever before us to indicate that the benefit, even if accruing to the assessee, on account of amalgamation by way of merger as not in revenue field, and not of an income nature. Accordingly, there was no occasion to invoke Section 28(iv) of the Act. According to us, CIT(A) was quite justified in his observations that "the amalgamation is not an adventure in the nature of trade" and that "this transaction is clearly a capital account transaction" and he was justified in deleting the addition. We uphold his order and dismiss the appeal of revenue.

"8.5. Applying these propositions to the case on hand, the purchase of shares at a particular price which is below the market price as an investment is not income by any stretch of imagination. It cannot also be deemed as income under s. 28(iv) as it is neither benefit nor perquisite that has arisen to the assessee from the business or in the exercise of a profession. The Hon'ble Gujarat High Court in the case of CIT vs. Bhavnagar Bone & Fertiliser Co. Ltd. (1987) 59 CTR (Guj) 116 : (1987) 166 ITR 316 (Guj) has upheld the Tribunal's finding that there must be a nexus between the business of the assessee and the benefit which the assessee has derived for the purpose of attracting provisions of s. 28(iv). At p. 320 it has observed as follows: "After referring to various decisions, the Tribunal observed, these decisions make it abundantly clear that the benefit received or receivable by a person must be one which has intimate connection with business and even if such benefit is derived by way of bounty, nevertheless it would be taxable, if accrues to it or if received by it in the course of business or employment of office." In this case the Revenue has not demonstrated what is the business connection or the business done between the seller and the purchaser of the shares. No case has been made out that privilege or benefit or concession has been passed on by the seller to the buyer as part and parcel of a business transaction. A benefit has been assessed by the CIT(A). Mere purchase of shares by way of investment cannot be considered as business of the company though the objects of the company enable it to invest as well as deal in shares. As already stated there is no event which can be said to have resulted in accrual of income to the assessee. Thus on this factual matrix, mere purchase of shares, as an investment, with the lock-in-period of holding, for a consideration which is less than the market value, cannot be brought to tax, as a benefit or perquisite under s. 28(iv) of the Act. The assessee has not in this case, secured any benefit or perquisite in consideration of a business transaction undertaken with the sellers of the shares. Thus, this issue is decided in favour of the Revenue and against the assessee." The contention of the Ld. D.R, thus, cannot be accepted that for applicability of provisions of Section 28(iv), it is not necessary that the benefit or perquisite must arise from the business or the exercise of profession carried on by the recipient. The ITAT, Kolkata Bench in the case of ITO vs Shreyans Investments Private Limited 141 ITD 672 (Kolkata-Tribunal) relying on the decision of the Honorable Bombay High Court in the case of Mahindra and Mahindra 261 ITR 501 (Bom.) had taken a view that reserve arising out of amalgamation cannot be treated as income under section 28(iv) of the Income-Tax Act, 1961. The decision of the Honourable Bombay High Court in the case of Mahindra and Mahindra (supra), has been upheld by the Honorable Supreme Court reported in 404 ITR 1. Learned Counsel for the Assessee also relied upon decision of the Chennai Bench of the Tribunal in the case of Spencers and Company Limited vs., ACIT 137 ITD 141 (T.M.) (Madras-Tribunal). In this case, the surplus arising out of the amalgamation was transferred to a general reserve which were treated by the Assessing officer as an income chargeable to tax under section 28(iv) of the Income Tax Act, 1961. When the matter went to Third Member, the Third Member agreed with the view of the Accountant Member that "there were no benefit arising in the course of business and, therefore, no such amount can be charged to tax under section 28(iv) of the Income Tax Act, 1961. The Tribunal while holding so also distinguished the decision of the Honourable Madras High Court in the case of Arise Advertising Private Limited 265 ITR 510 mentioning that the said decision pertains to the remission of unclaimed balance of trading liability." It is well settled Law that decision of the Third Member is as good as the decision of the Special Bench as is held by the Special Bench of the Tribunal in the case of DCIT vs., Oman International Bank (2006) 286 ITR (AT) 8 (SB). Similar view has been taken by the ITAT, Kolkata Bench in the case of ITO vs., Kyal Developers Private Limited 63 SOT 93 (URO). Reliance is also placed upon the decision of Calcutta High Court in the case of Shaw Wallace & Company Ltd. v. CIT (119 ITR 399, 411). This is also a case of amalgamation where there was transfer of asset from amalgamating company to the amalgamated company. The Hon'ble High Court has observed that there was no transfer involved to another person or any consideration passing on as a result thereof. It was held that the dissolution of the amalgamating company took place by operation of the scheme sanctioned by law and as a result the rights in the shares of the amalgamating companies came to an end. Secondly, it was held that the amalgamated company was owner of all the assets of the amalgamating company as it was a 100% holding company. Once, all the assets are transferred to the amalgamated company, there was no element of gain or loss when the assessee re-arranged its capital base. In his concurring judgment, Justice C. K. Banerji observed as under: "The shares held by the assessee in the transferor-companies represented the capital invested by the assessee in the said companies and by the said amalgamations the assessee became the sole owner of the entire capital of the transferor-companies. By virtue of the said amalgamations the assessee as the transferee-company became the sole repository of all the rights which flowed from or were imbedded in the shares held by the assessee in the transferor-companies."

7. In the case of CIT Vs. NALWA INVESTMENTS LTD (Delhi High Court) [2020] 118 taxmann.com 278 (Delhi) / (2020) 427 ITR 229 (Del), the Hon’ble Court in sum & substance opined that: ‘’Receipt of shares of amalgamated company by the shareholders of amalgamating company in lieu of their shareholding in amalgamating company is transfer within the meaning of section 2(47) and 45 of Income Tax Act,1961. If on the date of amalgamation, the shareholders of amalgamating company held those shares as capital asset, such transfer would be exempt from capital gains tax under section 47(vii). If on the other hand such shares were held as stock-in-trade, such transaction would be taxable as normal business income under section 28’’.

In the present case, Nalwa case is not applicable as in that case shares were held as stock-in-trade and nature was investment. In this case it is capital reserve.