M/s Philips Electronics India Ltd., Kolkata V. D.C.I.T Cir - 11,kolkata, Kolkata

CO 52/KOL/2013

• Counselvise Citation: [2016] 123 COUNSELVISE.COM (IT) 1942 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 8 month(s) 13 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 22-01-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Assessment Year: 2003-2004
• Appeal Filed On: 09-05-2013
• Court: TRIBUNAL
• Department Lawyers: G MALLIKARJUNA
• Assessee Lawyers: D S DAMLE
• Keywords: Capital asset; Valuation report; Scheme of amalgamation; Reassessment proceedings
• Section: 143(3); 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KO LKATA [BEFORE SHRI MAHAVIR SINGH, JM & SHRI M. BALAGANES H, AM] I.T.A NO.755/KOL/2013 ASSESSMENT YEAR: 2003-04 DEPUTY COMMISSIONER OF INCOME-TAX, VS. M/S. PHILI PS ELECTRONICS INDIA LTD. CIRCLE-11, KOLKATA. (PAN:AABCP9487A) ( APPELLANT ) ( RESPONDENT ) & CO NO. 52/KOL/2013 IN I.T.A NO.755/KOL/2013 ASSESSMENT YEAR: 2003-04 M/S. PHILIPS ELECTRONICS INDIA LTD. VS. DEPUTY CO MMISSIONER OF INCOME-TAX, CIRCLE-11, KOLKATA (CROSS OBJECTOR) (RESPONDENT) DATE OF HEARING: 03.12.2015 DATE OF PRONOUNCEMENT: 22.01.2016 FOR THE REVENUE: SHRI G. MALLIKARJUNA, CIT, DR FOR THE ASSESSEE: SHRI D. S. DAMLE, FCA ORDER PER SHRI MAHAVIR SINGH, JM: THIS APPEAL BY REVENUE AND CROSS OBJECTION BY ASSES SEE ARE ARISING OUT OF ORDER OF CIT(A)-XII, KOLKATA VIDE APPEAL NO. 353/XII/CIR- 11/10-11 DATED 03.12.2012. ASSESSMENT WAS FRAMED BY DCIT, CIRCLE-11, KOLKATA U /S. 147/143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FO R ASSESSMENT YEAR 2003-04 VIDE HIS ORDER DATED 28.12.2010. 2. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SHRI D. S. DAMLE STATED THAT HE IS NOT INTERESTED IN PROSECUTING THE CROSS OBJECTION UNDER THE INSTRUCTION OF THE ASSESSEE. LD. CIT, DR HAS NOT OBJECTED TO THE SAME. HENCE, THE C ROSS OBJECTION OF THE ASSESSEE IS DISMISSED AS NOT PRESSED. 3. COMING TO REVENUES APPEAL. THE ONLY ISSUE IN T HIS APPEAL OF REVENUE IS AGAINST THE ORDER OF CIT(A) DELETING THE ADDITION MADE BY A O ON ACCOUNT OF AMALGAMATION RESERVE TREATING THE SAME AS INCOME U/S. 28(IV) REA D WITH SECTION 2(24)(VD) OF THE ACT. FOR THIS, REVENUE HAS RAISED FOLLOWING GROUND NO.1: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, LD. CIT(A0 WAS NOT JUSTIFIED IN DELETING THE ADDITION MADE ON ACCOUNT OF AMALGAMATI ON RESERVE OF RS.14,10,00,000/- WITHOUT APPRECIATING THE FINDINGS OF THE AO AS WELL AS FACTS OF THE CASE THAT THE SAID AMOUNT IS INCOME OF THE ASSESSEE AS PER SECTION 28( IV) READ WITH SECTION 2(24)(VD) OF THE I. T. ACT, 1961. 2 ITA NO.755/K/2013 PHILIPS ELECTRONICS INDIA LTD. AY 2003-04 4. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE COMPA NY IS ENGAGED IN MANUFACTURING OF SALE OF ELECTRICAL GOODS. THE ASSESSEE IN AUDITED ACCOUNTS CLAUSE 17A FOR THE YEAR ENDED 31.03.2003 FURNISHED DETAILS OF SCHEME OF AMALGAMAT ION APPROVED BY HONBLE CALCUTTA HIGH COURT DATED 28.03.2003, PURSUANT TO WHICH THRE E COMPANIES WERE AMALGAMATED WITH THE ASSESSEE DURING THE RELEVANT YEAR AND AMAL GAMATION RESERVE WAS CREATED IN THE ASSESSEES BOOKS FOR GIVING ACCOUNTING EFFECT THERE TO. THE AO DURING THE COURSE OF REASSESSMENT PROCEEDINGS U/S. 147 READ WITH SECTION 143(3) OF THE ACT DATED 28.12.2010 TREATED AMALGAMATION RESERVE AS INCOME U/S. 2(24)(V D) READ WITH SECTION 28(IV) OF THE ACT AT RS.14.10 CR. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A), WHO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DELETED THE ADDITION BY OBSERVING AS UNDER: I HAVE CONSIDERED THE FINDING OF THE A.O. ON THIS ISSUE AS DISCUSSED ABOVE. I HAVE ALSO CONSIDERED THE SUBMISSION FILED BY THE A.R. DURING THE APPELLATE PROCEEDING. I FIND THAT THIS CASE IS SQUARELY COVERED BY THE THIRD MEMBER D ECISION IN THE CASE OF M/S. SPENCER & COMPANY LTD. VS. ACIT, CIR-VI(4), CHENNAI IN ITA NO . 440(MDS)/2011 DT. 02-04-2012. IN HIS ORDER ON THE SAME ISSUE THE HON'BLE THIRD ME MBER HAS GIVEN HIS FINDING THAT THE AMOUNT OF RS. 2899.68 LAKHS TRANSFERRED BY THE ASSE SSEE TO ITS GENERAL RESERVE WAS NOT GENERATED OUT OF TRADING OPERATIONS. THE SURPLUS IN FACT AROSE OUT OF ACQUISITION OF CAPITAL ASSETS. IT WAS A TRANSACTION IN THE CAPITAL SEGMENT . IN FACT, THERE IS NO SURPLUS. IT WAS ONLY AN ACCOUNTING NOTION. IT WAS NECESSARILY TO BE REFL ECTED IN THE ACCOUNTS SO AS TO TALLY THE BALANCE SHEET. ON AMALGAMATION, SHARES CAN BE ALLOT TED ONLY ON ITS FACE VALUE. AT THE SAME TIME, THE MARKET VALUE OF THE SHARES IS VERY H IGH. THE ASSETS ARE TAKEN OVER BY THE ASSESSEE AND THE NUMBER OF SHARES TO BE ALLOTTED TO THE AMALGAMATED COMPANY WAS COMPUTED ON THE BASIS OF THE MARKET VALUE OF THE SH ARES EVALUATED ON THE BASIS OF VALUATION REPORT. THEREFORE, THE ACQUISITION TRANSA CTION HAS BEEN TAKEN ON THE BASIS OF THE MARKET VALUE OF THE SHARES OF THE SS COMPANY VIS-A- VIS NET WORTH OF THOSE ASSETS TAKEN OVER. THEREFORE, THE AMALGAMATION TRANSACTION HAS T AKEN PLACE ON THE BASIS OF COMPARABLE VARIABLES. IT WAS FAIR DEAL AND APPROVED BY THE HON'BLE HIGH COURT OF MADRAS. THERE IS NO COMPLAINT AGAINST THE METHOD OF VALUATION OR THE MARKET VALUE ASSIGNED, SHARES OF THE ASSESSEE COMPANY OR THE VAL UE ASSIGNED TO THE ASSETS TAKEN OVER. WHEN THE TRANSACTION BF AMALGAMATION IS PASSED THRO UGH A JUDICIAL PROCESS, THE ASSESSEE HAS TO RECORD THE VALUES IN ITS BOOKS OF ACCOUNTS. OBVIOUSLY, THE VALUE OF THE ASSETS WILL HAVE TO BE ACCOUNTED AT ITS NET WORTH VALUE AS TAKE N OVER BY THE ASSESSEE COMPANY. AS ALREADY STATED, THE ASSETS ARE COMPARED TO THE MARK ET VALUE OF THE SHARES OF THE ASSESSEE COMPANY. THE FACE VALUE IS OBVIOUSLY LESS. THEREFOR E, IN SUCH A TRANSACTION OF AMALGAMATION, THERE IS INHERENT POSSIBILITY OF THE ASSESSEE GAINING A 'BOOK SURPLUS' BEING THE DIFFERENCE BETWEEN THE MARKET VALUE AND T HE FACT VALUE OF THE SHARES. THIS IS NOT IN THE REVENUE SEGMENT AND NOT IN THE NATURE OF ANY BENEFIT OR PERQUISITE. THEREFORE, SECTION 28(IV) DOES NOT APPLY TO THE CASE EVEN REMO TELY.' IN THIS CASE ALSO I FIND THAT THE ASSESSEE HAS GAIN ED A BOOK SURPLUS BEING THE DIFFERENCE BETWEEN THE MARKET VALUE AND THE FACE VA LUE OF THE SHARES. IT CANNOT BE SAID TO BE THE REVENUE GAIN NOR IT IS IN THE NATURE OF ANY BENEFIT OR PERQUISITE. I FIND THAT THE DIFFERENCE AMOUNT BETWEEN THE FACE VALUE OF SHARES AND THE PREMIUM OF SHARE TO THE TUNE OF RS. 14,10,00,000/- IS NOTIONAL AMOUNT ENTERED IN TO THE BOOKS OF ACCOUNTS IN ORDER TO GET THE BALANCE SHEET TALLIED. IN THIS CASE ALSO THE AM ALGAMATION TRANSACTION AND ITS DEAL HAS BEEN APPROVED BY THE HON'BLE CALCUTTA HIGH COURT. T HERE IS NO COMPLAIN AGAINST THE METHOD OF VALUATION OR THE MARKET VALUE ASSIGNED. T HE A.O. HAS NOT GIVEN ANY ADVERSE FINDING REGARDING THE VALUE OF THE SHARES OF THE AS SESSEE COMPANY OR THE VALUE ASSIGNED TO THE ASSETS TAKEN OVER. HERE IN THIS CASE ALSO TH E VALUE OF THE ASSETS HAS TO BE ACCOUNTED 3 ITA NO.755/K/2013 PHILIPS ELECTRONICS INDIA LTD. AY 2003-04 AT ITS NET WORTH VALUE AS TAKEN OVER BY THE ASSESSE E COMPANY. THEREFORE, THE ASSETS ARE COMPARED TO THE MARKET VALUE OF THE SHARES OF THE A SSESSEE COMPANY. THE FACE VALUE WILL OBVIOUSLY BE LESS. THUS, IN SUCH A TRANSACTION OF A MALGAMATION, THERE IS ALWAYS A POSSIBILITY OF THE ASSESSEE GAINING A BOOK SURPLUS BEING THE DIFFERENCE BETWEEN THE MARKET VALUE AND THE FACE VALUE OF THE SHARES. IN MY OPINI ON, IT IS NOT A REVENUE GAIN NOR IT IS IN THE NATURE OF ANY BENEFIT OR PERQUISITE TO THE ASSE SSEE COMPANY. THEREFORE, RESPECTFULLY FOLLOWING THE RATIO DECIDED BY THE HON'BLE THIRD ME MBER IN THE CASE OF SPENCER & CO LTD. (SUPRA), ASSESSEE'S APPEAL ON GROUND NO. 2.1 T O 2.4 ARE ALLOWED. AGGRIEVED, NOW REVENUE IS IN SECOND APPEAL BEFORE T RIBUNAL. 5. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. THE ASSESSEE BEFORE US CONTESTED THAT THE AM ALGAMATION RESERVE CREATED DID NOT CONSTITUTE ANY BENEFIT OR PERQUISITE ARISING FROM B USINESS OF THE ASSESSEE. ACCORDING TO HIM, THE AO COMPLETELY OVERLOOKED THE PROVISION OF SECTION 28(IV) OF THE ACT. LD. COUNSEL FOR THE ASSESSEE TOOK US TO NOTES ON ACCOUN TS AND ARGUED THAT IT WOULD BE NOTED THAT PURSUANT TO SANCTION SCHEME OF AMALGAMATION AS SESSEE TOOK OVER UNDERTAKINGS OF THE MANUFACTURING COMPANIES ON GOING CONCERN BASIS. CONSEQUENT TO AMALGAMATION APPROVED BY HONBLE CALCUTTA HIGH COURT, THE ASSETS AND LIABILITIES OF THE AMALGAMATING COMPANIES WERE ACCOUNTED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. IN CONSIDERATION OF SUCH TAKE OVER, THE ASSESSEE ISSUED ITS OWN EQUITY SHARES TO THE SHAREHOLDERS OF THE AMALGAMATING COMPANIES AND THIS FACT IS CLEARLY MEN TIONED IN THE NOTES ON ACCOUNTS THAT THE AMALGAMATION OF THE THREE COMPANIES WAS AC COUNTED IN THE ASSESSEES BOOKS UNDER THE PULLING OF AN INTEREST METHOD AS PRESCR IBED BY ACCOUNTING STANDARD 14 ISSUED BY ICAI. ACCORDING TO HIM, THE NOTES STATE THAT ALL THE ASSETS AND LIABILITIES AND RESERVES OF THE AMALGAMATING COMPANIES WERE TAKEN O VER AND ACCOUNTED FOR IN THE BOOKS OF THE ASSESSEE BEING THE AMALGAMATED COMPANIES AT THEIR RESPECTIVE BOOK VALUES. THE CONSIDERATION FOR TAKING OVER THE ASSETS AND LIABIL ITIES OF THE AMALGAMATING COMPANIES WAS PAID IN THE FORM OF ALLOTMENT OF SHARES OF THE AMALGAMATED COMPANY TO THE SHAREHOLDERS OF THE AMALGAMATING COMPANIES. HE REFE RRED TO THE SCHEME OF ARRANGEMENT WHICH WAS SANCTIONED BY THE HONBLE CALCUTTA HIGH C OURT THAT THE SHARE EXCHANGE RATIO WAS ALSO APPROVED BY HONBLE CALCUTTA HIGH COURT, W HICH WAS BASED ON INTRINSIC FAIR VALUE OF SHARES OF THE AMALGAMATING COMPANIES AND T HE AMALGAMATED COMPANY. HE STATED THE FACT THAT THE SHARES WERE ALLOTTED BY TH E ASSESSEE HAVING FACE VALUE OF RS. 10/- EACH, YET IF DETERMINED THE EXCHANGE RATIO CALCUTTA HIGH COURT HAS TAKEN INTO CONSIDERATION THE INTRINSIC FAIR VALUE OF THE SHARE S ISSUED BY THE ASSESSEE. SINCE THE INTRINSIC FAIR VALUE OF ASSESSEES SHARES WERE HIGH ER THAN THE FACE VALUE OF THE SHARES 4 ITA NO.755/K/2013 PHILIPS ELECTRONICS INDIA LTD. AY 2003-04 ALLOTTED AND WHILE EXCHANGING THE SHARES ON FAIR VA LUATION BASIS ACCOUNTING DIFFERENCE BETWEEN THE FACE VALUE AND THE INTRINSIC FAIR VALUE OF THE SHARES ALLOTTED WERE ACCOUNTED THROUGH THE AMALGAMATION RESERVE ACCOUNT IN THE BOO KS OF ACCOUNT OF THE ASSESSEE COMPANY. ACCORDING TO HIM, WHEN THE EXCHANGES OF S HARES WERE BASED ON FAIR VALUATION BASIS, THERE WAS NO QUESTION OF ANY BENEFIT OR PERQ UISITE IN TERM OF SECTION 28(IV) OF THE ACT. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATT ENTION TO THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. BHARAT DEVE LOPMENT P. LTD., (1982) 135 ITR 456 (DEL.) THAT AN ACCOUNTING RESERVE WHICH IS CREA TED IN THE BOOKS OF THE AMALGAMATED COMPANY TO GIVE ACCOUNTING EFFECT TO THE AMALGAMATI ON IS NOTHING BUT AN ENTRY PASSED WITH THE SOLE OBJECT TO BALANCE THE BOOKS OF ACCOUN T WHICH ARE MAINTAINED ON THE PRINCIPLE OF DOUBLE ENTRY SYSTEM OF BOOK KEEPING. THE RELEVANT FINDING IS AS UNDER: LEARNED COUNSEL FOR THE DEPARTMENT URGES THAT IT SHOULD ALSO BE CONSIDERED THAT THE BUSINESS OF THE ASSESSEE-COMPANY INCLUDED AMALGAMAT ION WITH OTHER COMPANIES. IT IS, THEREFORE, CONTENDED THAT THE AMOUNTS APPEARING AS SURPLUS ARE REVENUE RECEIPTS RECEIVED IN THE COURSE OF BUSINESS BY THE ASSESSEE-COMPANY I N THESE CASES. I CANNOT ACCEPT THIS CONTENTION FOR THE SIMPLE REASON THAT IN A CASE OF AMALGAMATION, THE ASSETS OF THE AMALGAMATING COMPANY COME TO THE AMALGAMATED COMPAN Y. THE AMALGAMATED COMPANY, I. E., THE ASSESSEES IN THESE CASES, DO NOT HAVE TO PAY ANYTHING TO ANY ONE. THEY HAVE ONLY TO REPLACE THE SHAREHOLDING OF THE AMALGAMATING COM PANY BY THEIR OWN SHARES. THIS IS THE ONLY FORM IN WHICH THE AMALGAMATED COMPANIES PA Y FOR THE ASSETS OF THE AMALGAMATING COMPANIES. THESE SHARES MAY BE ISSUED AT ANY CONVENIENT VALUE. THE SHAREHOLDERS OF THE PREVIOUS COMPANY, I. E., THE TR ANSFERRING-COMPANY, MAY BE GIVEN MORE SHARES THAN THEY PREVIOUSLY HAD OR THEY MAY BE GIVE N LESS SHARES. THIS DEPENDS ON THE SCHEME OF AMALGAMATION ENTERED INTO BETWEEN THE TWO SETS OF SHAREHOLDERS WHICH IS AGAIN SUBJECT TO THE APPROVAL OF THE COURT. IF LESS SHARE S ARE ISSUED, I.E., FOR LESSER THAN PAR VALUE, THEN A SURPLUS APPEARS IN THE ACCOUNT. IF MO RE SHARES OF GREATER THAN PAR VALUE ARE ISSUED, THEN A DEFICIT WILL APPEAR IN THE AMALGAMAT ED ACCOUNT. IN NO EVENT WILL THIS SURPLUS OR DEFICIT BE A CAPITAL OR REVENUE RECEIPT OR PAYMENT. THEY ARE MERELY BOOK ENTRIES INTRODUCED FOR THE PURPOSE OF ACCOUNTANCY, I.E., FOR BALANCING THE BALANCE-SHEET. ON THE OTHER HAND, LD. CIT, DR RELIED ON THE ORDER OF AO. 6. AFTER HEARING BOTH THE SIDES AND GOING THROUGH T HE FACTS OF THE CASE, WE FIND THAT THIS IS A SIMPLE CASE OF ACCOUNTING RESERVE WHICH I S CREATED IN THE BOOKS OF THE AMALGAMATED COMPANY TO GIVE ACCOUNTING EFFECT TO TH E AMALGAMATION. ACCORDING TO US, THIS IS NOTHING BUT AN ENTRY PASSED IN THE BALANCE SHEET WITH A SOLE OBJECT TO BALANCE THE ACCOUNTS WHICH ARE MAINTAINED ON DOUBLE ENTRY SYSTE M OF ACCOUNTING. THIS VIEW OF OURS IS SUPPORTED BY THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF BHARAT DEVELOPMENT P. LTD., SUPRA. AS SUCH, WHEN THE EXCHA NGE OF SHARES WAS BASED ON FAIR VALUATION BASIS, THERE WAS NO QUESTION OF ANY BENEF IT OR PERQUISITE BEING EARNED BY THE ASSESSEE OR BY THE AMALGAMATING COMPANIES. IN OUR V IEW SECTION 28(IV) OF THE ACT 5 ITA NO.755/K/2013 PHILIPS ELECTRONICS INDIA LTD. AY 2003-04 THEREFORE HAD NO APPLICATION IN THE ASSESSEES CASE . THE AO WAS NOT JUSTIFIED IN ASSESSING THIS AMOUNT AS INCOME OF THE ASSESSEE U/S 28(IV) OF THE ACT BECAUSE SUCH RESERVE DID NOT REPRESENT REAL INCOME AND SECONDLY IT DID NOT CONSTITUTE ANY BENEFIT OR PERQUISITE ARISING FROM THE BUSINESS ACTIVITY OF TH E ASSESSEE. HENCE WE CONFIRM THE ORDER OF CIT(A) AND THIS ISSUE OF REVENUES APPEAL IS DIS MISSED. 7. IN THE RESULT, APPEAL OF REVENUE IS DISMISSED AN D THE CO OF THE ASSESSEE IS DISMISSED AS NOT PRESSED. 8. ORDER IS PRONOUNCED IN THE OPEN COURT ON 22.01.2 016 SD/- SD/- (M. BALAGANESH) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 22ND JANUARY, 2016 JD.(SR.P.S.) COPY OF THE ORDER FORWARDED TO: 1 . APPELLANT DCIT, CIR-11, KOLKATA. 2 RESPONDENT M/S. PHILIPS ELECTRONICS INDIA LTD., 7, JUSTICE CHANDRA MADHAB ROAD, KOLKATA-700020 3 . THE CIT(A), KOLKATA 4. 5. CIT , KOLKATA DR, KOLKATA BENCHES, KOLKATA / TRUE COPY, BY ORDER, ASSTT. REGISTRAR .