No Sec. 28(iv) Additions on Amount Credited to Capital Reserve on Account of Amalgamation | ITAT

Case Details: Dy. Commissioner of Income-tax vs. Samagra Wealthmax (P.) Ltd. - [2024] 168 taxmann.com 325 (Mumbai - Trib.)

Judiciary and Counsel Details

• Prashant Maharishi, Accountant member & Sandeep Singh Karhail, Judicial member
• Rakesh Joshi & Gaurav Kabra, ARs for the Appellant. 
• Dr. Kishor Dhule, CIT-DR for the Respondent.

Facts of the Case

The assessee-company was engaged in the business of real estate. During the year, intending to simplify the group structure, rationalise the administrative overhead, and achieve greater administrative efficiency, an organisation was amalgamated with the assessee as per the scheme of amalgamation. Following the scheme, a certain amount was credited to the capital reserve.

Examining the scheme of amalgamation and the consequent book entries, the Assessing Officer (AO) contended that the assessee had received assets without consideration and, therefore, the same was required to be added under section 28(iv). Accordingly, the assessment order under section 143(3) was passed, thereby increasing the amount of capital reserves.

On appeal, the CIT(A) deleted the additions made by the AO. Aggrieved by the order, an appeal was filed to the Mumbai Tribunal.

ITAT Held

The Tribunal held that in order to tax any amount under section 28(iv), there must be a benefit or perquisite arising to the Company; it must arise out of the business or profession carried on by the recipient, and it must be revenue in nature.

In the instant case, there is absolutely no benefit or perquisite arising out of the scheme of amalgamation. The assessee was the ultimate holding company, having the shares through its 100 per cent subsidiary along with its nominees, which, after the amalgamation, led to the direct ownership of the assets in the assessee’s name. In the whole process, the assessee has neither become richer nor poorer. Thus, the first condition of section 28(iv) , i.e., receipt of a benefit or perquisite, is completely absent in the present case as a sine qua non of the same is that the recipient has gained as a consequence of the transaction.

Further, recording a reserve in consequence of an amalgamation order is required to be passed for the limited purpose of balancing the accounts based on the double entry system employed. It thereby cannot give rise to any benefit or perquisite in the course of the business. The only relationship between the two companies was indirect holding. 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 be regarded as carried out during the business. Thus, the reserve created on amalgamation was contested as capital in nature and not created on account of business activity.

Therefore, the CIT(A) was correct in holding that capital reserve cannot be treated as an income under section 28(iv).

List of Cases Referred to

• ACIT v. Vertex Projects LLP (2023) 150 taxmann.com 109 (Hyd) (para 22).