THE issues before the Bench are - Whether any benefit derived by the assessee on account of amalgamation can be construed as an income taxable u/s 28(iv) and Whether the expression 'arising from the business' means that the benefit or perquisite must be in the nature of revenue receipt. And the verdict goes in favour of the assessee.
Facts of the case
Assessee is a registered company. The return of income filed by the assessee, which disclosed a loss of Rs 1,26,760, was selected for scrutiny assessment under the Computer Aided Scrutiny Selection (CASS) scheme. In the course of the scrutiny, the Assessing Officer noticed that the
company had increased its share capital, and that an amount of Rs 2,06,87,692, which was shown as ‘Capital Reserve (other than profit and loss account)', was to shown in the current year's balance sheet, whereas no such amount was reflected in the immediately preceding year's balance sheet. In response to the Assessing Officer's requisition to explain these facts, it was submitted by the assessee that the assessee company was part to an amalgamation scheme, duly approved by Calcutta High Court, wherein one Vidya Vincon Private Limited (VVPL, in short), i.e. amalgamating company, amalgamated in the assessee company with effect from 1st April 2007. It was also explained that the capital reserve of Rs 2,06,87,692 came into existence in the books of the assessee, on account of amalgamation with VVPL. The Assessing Officer, on these facts, called upon the assessee to show cause as to why the amount of Rs 2,06,87,692, being the capital reserve credited by the company on amalgamation, not be treated as income of the assessee under section 28 (iv) of the Income Tax Act, 1961. The assessee's explanation was that the said amount was neither a benefit, nor a perquisite, nor even advantage of any kind, but simply a result of merger of accounts of amalgamating and amalgamated company. This explanation did not satisfy the Assessing Officer. He rejected the submissions of the assessee. On appeal, the CIT(A) deleted the impugned addition.
On appeal, the Tribunal held that,
++ it is a case of amalgamation of companies, and it is as a result of this scheme of amalgamation, duly approved by the jurisdictional High Court, that the capital reserve of the amalgamating company, i.e. VVPL, was shown in the books of accounts of the assessee. The short question that we really need to answer is whether on these facts, the transfer of capital reserve to the assessee company can indeed be considered to be an income of the assessee under section 28 (iv) as a ‘business income'. As we deal with this issue, we may also mention that given these facts, as far as CIT(A)'s reliance on this Tribunal's decision in the case of DCIT Vs M L Dalmiya & Co Ltd (2006-TIOL-02-ITAT-KOL) is concerned, it is really out of place inasmuch as the question before the Tribunal in the said case whether an addition, in respect of entries pertaining to inter alia share amalgamation reserve, can be made to the ‘undisclosed income' under section 158BB - particularly when all the relevant details were furnished at the time of regular assessment proceedings. Answering this question, the co-ordinate bench observed that, "Coming to the merits of the case, we find that the learned CIT(A) ha s deleted the addition observing that the addition made by the Assessing Officer on account of undisclosed income was not justified at all as all the transactions pertaining to the share amalgamation reserve and share application money were duly recorded in the books of accounts and were filed before the date of search in the form of account and were filed before the income tax department before the date of search and in the form of audited statement, and, therefore, the same cannot be taxed as undisclosed income of the assessee" [ emphasis by underlining supplied by us now];
++ under Sec 28, besides the profits and gains from business and profession carried on by the assessee at any time during the previous year, 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 that (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), the difference between a capital receipt and revenue receipt cannot be overlooked. One must bear in mind the fact that section 28 only refers to the "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);
++ it is the settled law, that a capital receipt, in principle, is outside the scope of income chargeable to tax. Of course, there are specific provisions under the Income Tax Act which provide that certain capital receipts can also be considered as income, such as under section 2 (24)(vi) which covers "any capital gains chargeable under section 45", but right now we are confined to normal connotations of the expression ‘income'. Howsoever liberal or narrow be the interpretation of expression ‘income', it cannot alter character of a receipt, i.e. convert a capital receipt into revenue receipt or vice versa. The crucial distinction between capital and revenue cannot be blurred or nullified by even the most liberal interpretation of expression ‘income'. It is also important to bear in mind that, as held by Supreme Court in the case of Dr K George Thomas Vs CIT (2002-TIOL-726-SC-IT), "the burden is on the revenue to establish that the receipt is of a revenue nature" though "once a receipt is found to be of revenue character, whether it comes under exemption or not, it is for the revenue to establish". It is thus clear that capital receipts are inherently outside the scope of an income which can be taxed under section 28(iv). When a receipt is referable to fixed capital, it is not taxable, and it is taxable as a revenue receipt when it is referable to circulating capital or stock in trade". To sum up, unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi)], and unless it is in nature of income, it cannot be considered for taxation under section 28(iv). The reference to benefits which can be brought to tax under section 28 (iv) for benefits ‘arising from the business' also indicates that such benefit must be a business receipt, or revenue receipt, in nature;
++ this was a case of amalgamation in the nature of merger, and an amalgamation in the nature of merger, in corporate parlance, is the process of blending of two or more companies into one of these blending companies, the shareholders of each blending company becoming substantially the shareholder of the company which holds the blended undertaking. The expression ‘amalgamating company' is used for the ‘blending company' which loses its existence into the other company and the expression ‘amalgamated company' is used for blended undertaking, which holds existence of those two or more companies. In essence thus, the whole exercise of amalgamation in the nature of merger is an exercise in that of pooling of resources, as also pooling of assets, into the company in which two or more companies are blended. It is a process of corporate reconstruction and it is only with the approval of jurisdictional High Court that this exercise is carried out. In the present case also, as stated to Calcutta High Court's order dated 9th April 2008, "for the purpose of better, efficient and economical management, control and running of the business and to withstand the recessionary trend in the economy of the business undertaking concerned and for administrative convenience and to obtain advantage of economies of large scale, the present scheme is proposed to amalgamate the transferor company (i.e. VVPL) with the transferee company (i.e. the assessee)". As a result of amalgamation, the assessee, being the transferee company, will increase its assets and liabilities, and, even if there be any benefit in the process, such a benefit can only be in the capital field because it is relatable to the non-trading assets and capital. What it affects is the capital structure of the assessee company and the manner in which business is consolidated. As the Assessing Officer himself observes, "……this exercise of amalgamation is also aimed at bolstering the capability of the assessee to conduct business more dynamically and earn more profit. So, the enhancement of its capital reserve, as a result of this amalgamation can only be construed as a benefit accrued to the assessee…", but then it is not even the case of the Assessing Officer that the benefit is in the revenue field, and unless the Assessing Officer is to discharge the onus of demonstrating that the benefit is in the revenue field, there cannot be any occasion to invoke Section 28(iv). We find that the benefit is referable to the capital, and is thus not of an income nature. Even if, as the Assessing Officer observes, "it can be surmised that the assessee is benefited in a myriad ways by way of amalgamation", it does not lead to the conclusion that the benefit is in revenue field which alone can be treated as income and thus be considered for taxability under section 28(iv) of the Act. The onus is on the Assessing Officer to demonstrate that the receipt is of the revenue nature;
++ we have noted that the Assessing Officer's observations to the effect that ‘business' under section 28 has a very broad meaning and may be used in different connotations" and that it includes adventure in the nature of trade. Whatever be the scope of expression ‘business', an advantage has to be of income nature first, and when it is not of income nature, it cannot be brought to tax under the head profits and gains from business or profession. As regards the transactions in the nature of ‘adventure in the nature of trade' in a situation in which shares are purchased with an intention of selling the same, right now we are dealing with a case of amalgamation by way of merger and not by way of purchase of shares, and, therefore, there cannot be any question of selling of the shares, nor does this judicial precedent deal with the issue before us in any other manner. There is no material whatsoever before us to indicate that the benefit, even if accruing to the assessee, was in revenue field, in the course of assessee' s business dealings or of trading nature. In view of these discussions, we are of the considered view that the benefit, if any, derived by the assessee on account of amalgamation by way of merger was not in revenue field, and not of an income nature. Accordingly, there was no occasion to invoke Section 28(iv) of the Act. The 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". The CIT(A) was quite justified in deleting the impugned addition, we uphold his conclusions, and we decline to interfere in the matter.
++ as we have decided the appeal on the fundamental issue that the benefit, even if any, was not in the revenue field, and could not have been brought to tax under section 28(iv) for this short reason, we see no need to deal with other peripheral legal issues raised by the parties, as also assessee's contention to the effect that there was no benefit at all to the assessee. These issues are rendered academic and call for no adjudication.
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