ACIT, CHENNAI vs. NNL NETWORKS PVT. LTD., CHENNAI

आदेश / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

ITA No.2474/Mds/2014 :- 2 -:

The Department has raised the followings grounds:- 2.

’2.1. The Learned CIT(A) erred in deleting the addition on STCG of ₹32.30 lakhs/- made u/s. 2(1B) read with Explanation 7 below section 43(1) of the Act.

2.2 The Learned CIT(A) failed to appreciate the categorical finding of the A.O that the value of the product as fixed originally was only ₹5.80 lakhs and merely on revaluation of the product, its value had been re fixed at ₹38.10 lakhs.

2.3. The Learned CIT(A) ought to have appreciated the fact that as the assessee had revalued the asset, it cannot claim the benefit u/s.47 in respect of transfer of the above product and consequently the excess amount worked out on revaluation has to be taxed as short term capital gains.

2.4. The Learned CIT(A) ought to have appreciated the language employed in Explanation 7 to Sec.43(1) which reads thus: Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating' company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business’’.

The facts of the case are that the assessee is in the 3. business of software development, and it has developed a product called Cygnet" which deals with network management systems and in order to develop and market the product, the company was merged with NMS Works Software Limited, on 19-

ITA No.2474/Mds/2014 :- 3 -:

01-2002. The product 'Cygnet' was held as a capital asset by the assessee company. But the AO contended that in the notes to account filed with the return, it has been stated that the Board had revalued the value of the product Developed on the basis of valuation carried out by the professions from �5.80 lakhs to � 38.10 lakhs. This is considered to arrive at consideration payable to the shareholders of this company". It has been further stated by the AO that the Board of Directors had revalued 'the product' on the basis of valuation carried out by the professionals to � 38.10 lakhs and that it was transferred to the amalgamated company at a re-fixed value of � 38.10 lakhs and the amalgamated company took into account the said value to arrive at consideration payable to shareholders of the assessee company. The AO has further noted that as per Section 2(1B) read with Explanation(7) to Section 43(1) of the Act, in the case of amalgamation, the actual cost of the transferred capital asset shall be taken to be the same in the case of the amalgamated company. The AO has contended that, since the assessee had revalued the asset, it could not claim the benefit u/s 47 in respect of the transfer of the same and consequently the excess amount worked out on revaluation had to be taxed as short term capital gains. Consequently, the AO has treated this excess amount of ITA No.2474/Mds/2014 :- 4 -:

�38.10 lakhs as liable to be taxed as short term capital gain and completed the assessment u/s 143(3) determining income at �38,73,015/- demanding total tax of �.20,96,621/-. Aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

Court of Madras as per which the assessee company amalgamated with M/s Nilgiris Networks Private Limited and their scheme is well within the definition of Section 2(1B) of the Act and therefore capital gains, if any, on the transfer on amalgamation is exempt from tax u/s 47(vi). As per the Act, nothing contained in Sec. 45 of the Act is applicable to transactions as described under Sec. 47(vi). As such there is no question of any capital gain arising out of its transfer even if there was a revaluation, as contended by the Assessing Officer. A plain reading of the section suggests that revaluation per se would not deny the assessee the exemption provided u/s 47(vi) when it is clearly laid out that for the limited purpose of Section 45, nothing contained in that section (i.e., Sec. 45) is applicable to such transfer and therefore if such 'transfer' does not result in ITA No.2474/Mds/2014 :- 5 -: any capital gains as per Sec. 47(vi), under which the instant transaction is not even regarded as transfer in the first place. It appears that the Assessing Officer has confused the cost as per the provisions of Sec. 43(1) r.w. Explanation 7 thereto which is applicable for calculating cost for the purposes of profits and gains of business or profession and not for the purposes of capital gains. Therefore, the AO's action in treating the difference in the cost of the transferred capital asset on revaluation, as short term capital gain is quite clearly an erroneous interpretation of Sec. 47(vi) and is therefore legally not tenable and the Commissioner of Income Tax (Appeals) deleted the addition.

Against this, the Revenue is in appeal before us.

None appeared on behalf of the assessee. Therefore, we 5. proceed to decide the case on merits after hearing the ld. Departmental Representative. As observed by the Commissioner of Income Tax (Appeals), this is a case of amalgamation within the definition of Section 2(1B) of the Act and therefore capital gains, if any, on the transfer on amalgamation is exempt u/s.47(vi) of the Act.

Being so, the Commissioner of Income Tax (Appeals) findings is correct and the same is confirmed. The ground of the appeal of the Revenue is rejected.

ITA No.2474/Mds/2014 :- 6 -:

In the result, the appeal of the Revenue in ITA 6. No.2474/Mds/2014 is dismissed.

Order pronounced on Friday, the 9th day of October,2015, at Chennai.