Priapus Developers P.Ltd, New Delhi V. ACIT, Circle-20(1), New Delhi

ITA 170/DEL/2019

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 4185 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2015-2016
• Appeal Filed On: 10-01-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business expenditure; Earning of tax free income; Cost of acquisition; Fair market value; Scheme of amalgamation; Rule 8D
• Section: 154; 143(3); 14A; 115JB; 201; 48; 13; 22; 20

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH F, NEW DELHI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 170/DEL/2019 ASSESSMENT YEAR: 2015-16 PRIAPUS DEVELOPERS P. LTD., PLOT NO. 103-A, 1ST FLOOR, MAHIPALPUR EXTENSION, NEW DELHI. PAN- AAFCP 2747R (APPELLANT) VS. ACIT, CIRCLE 20(1), NEW DELHI (RESPONDENT) APPELLANT BY SH. S.K. TULSIYAN, ADVOCATE RESPONDENT BY SH. J.K. MISHRA, CIT/DR ORDER PER AMIT SHUKLA, JM: AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AG AINST THE IMPUGNED ORDER DATED 05.12.2018, PASSED BY THE LD. CIT(APPEALS)- 7, NEW DELHI FOR THE QUANTUM OF ASSESSMENT PASSED U/ S. 143(3) FOR THE ASSESSMENT YEAR 2015-16. 2. THE GROUNDS OF APPEAL AS RAISED BY THE ASSESSEE IN THE MEMO OF APPEAL READ AS UNDER:- DATE OF HEARING 9.02.2019 DATE OF PRONOUNCEMENT 1 2 .03.2019 ITA NO. 170/DEL/2019 2 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND IN FACTS IN PASSING AND UPHOLDING THE ASSESSMENT ORDER U/S 143(3)/ RECTIFIC ATION ORDER U/S 154 OF THE ACT WHEREIN THE INCOME UNDER THE NOR MAL PROVISIONS WAS ASSESSED AT RS.4,43,46,101/- AS AGAI NST THE RETURNED INCOME OF RS.3,28,09,280/-, AND THE BOOK P ROFIT U/S 115JB OF THE ACT FOR MAT PURPOSES WAS DETERMINED AT RS.65,47,56,587/- AS AGAINST THE DECLARED BOOK PROF IT U/S 115JB OF THE ACT AT RS.2,75,39,440/-. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND IN FACTS IN MAKING THE ADDITION OF RS.61,56,80,326/- TO THE BOOK PROFIT U/ S 115JB OF THE ACT HOLDING THE SAME TO BE THE AMOUNT STANDING IN THE REVALUATION RESERVE RELATING TO THE STOCK SOLD BY T HE APPELLANT. 2(A). THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND IN FACTS IN TREATING THE CAPITAL RESERVE AS A REVALUATION RESERVE. 2(B). THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND IN FACTS IN NOT APPRECIATING THE AMALGAMATION SCHEME DULY APPROVED BY THE HONBLE HIGH COURT WHICH CLEARLY LAID OUT THE MODUS OPERANDI OF THE SAID AMALGAMATION. 2(C). THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND IN FACTS IN APPLYING THE PROVISIONS OF THE CLAUSE (J) OF EXPLANATION 1 TO SE CTION 115JB OF THE ACT TO THE CAPITAL RESERVE CREATED BY THE APPEL LANT COMPANY PURSUANT TO THE SCHEME OF AMALGAMATION 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND IN FACTS IN PLACING RELIANCE ON THE DECISION OF THE HONBLE ITAT, AHMAD ABAD IN THE CASE OF INFIBEAM INCORPORATION LTD. US I TO. WARD 4 (3), AHMEDABAD IN ITA NO. 3391/AHD/20I5 FOR THE A.Y. 201 1-12 ITA NO. 170/DEL/2019 3 WHICH IS ON COMPLETELY DIFFERENT FACTS FROM THE CAS E OF THE APPELLANT. 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND IN FACTS IN APPLYING THE PROVISIONS OF SECTION 49(2) OF THE ACT TO THE CASE OF THE APPELLANT. 5. THAT, WITHOUT PREJUDICE TO THE ABOVE, ON THE FAC TS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS G ROSSLY ERRED IN LAW AND IN FACTS IN APPLYING THE PROVISO TO THE SECTION 10(38) OF THE ACT R.W. CLAUSE (II) TO THE EXPLANATION TO S ECTION 115JB OF THE ACT TO THE CASE OF THE APPELLANT. 5(A). THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND IN FACTS IN PLACING RELIANCE ON THE DECISION OF THE BANGALORE BENCH OF THE ITAT IN THE CASE OF KARNATAKA STATE INDUSTRIAL INFRASTRUCTU RE DEVELOPERS CO. LTD. VS DCIT (2016) 76 TAXMANN.COM 3 60 (BANG - ITAT) WHICH IS WHICH IS ON COMPLETELY DIFFERENT F ACTS FROM THE CASE OF THE APPELLANT. 5(B). THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW IN INTERPRETING SECTION 10(38) OF THE ACT R.W.S 115JB OF THE ACT. 6. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND IN FACTS IN ALLEGING THAT THE APPELLANT HAS VIOLATED THE AS-13 RELATING TO TH E ACCOUNTING FOR INVESTMENTS 7. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND IN FACTS IN PLACING RELIANCE ON THE CASE OF M/S SUMMER BUILDERS PVT. LT D. VS DOT CENTRAL CIRCLE -36, MUMBAI (ITA NOS. 2512, 13 & 14/MUM/2009) WHICH IS COMPLETELY ON DIFFERENT FACTS FROM THE CASE OF THE APPELLANT. ITA NO. 170/DEL/2019 4 8. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND IN FACTS IN MAKING DISALLOWANCE OF RS.1,15,36,821/- U/S 14A OF THE ACT EVEN THOUGH NO EXPENDITURE WAS INCURRED TO MAKE SUCH INV ESTMENT OR EARN DIVIDEND. 9. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN DISALLOWANCE OF RS. 1,15,36,821/- MADE U/S 14A OF THE ACT TO THE PROFIT FOR PURPOSES OF SECTION 115JB OF THE ACT. 10. THAT, AS THE ORDER OF LD. CIT(A) SUFFERS FROM I LLEGALITY AND IS DEVOID OF ANY MERIT, THE SAME SHOULD BE QUASHED AND YOUR APPELLANT BE GIVEN SUCH RELIEF(S) AS PRAYED FOR. 11. THAT THE APPELLANT CRAVES LEAVE TO AMEND, ALTER , MODIFY, SUBSTITUTE, ADD TO, ABRIDGE AND/ OR RESCIND ANY OR ALL OF THE ABOVE GROUNDS. 3. THE CORE ISSUE INVOLVED IN THIS CASE RELATES TO ADDITION OF RS.61,56,80,326/- ON ACCOUNT OF ADJUSTMENT MADE IN THE BOOK PROFIT U/S 115JB MADE BY THE ASSESSING OFFICER, WHIC H HAS BEEN CONFIRMED BY THE LD. CIT(A). 4. THE FACTS, IN BRIEF, QUA THE ADJUSTMENT MADE IN THE BOOK PROFIT ARE THAT, THE ASSESSEE COMPANY IS ENGAGED IN THE BU SINESS OF DEVELOPMENT OF INFRASTRUCTURE AND REALESTATE. FOR T HE RELEVANT ASSESSMENT YEAR, THE ASSESSEE HAD FILED ITS RETURN OF INCOME BY WAY OF E-FILING ON 06.07.2017, DECLARING INCOME OF RS.3 ,28,09,280/- UNDER THE NORMAL PROVISIONS OF THE ACT; AND BOOK PR OFIT U/S. 115JB WAS DECLARED AT RS.2,75,39,440/-. DURING THE RELEVAN T FINANCIAL YEAR 2014-15, TWO WHOLLY SUBSIDIARIES OF THE ASSESSE E COMPANY, I.E., ITA NO. 170/DEL/2019 5 M/S. PRIAPUS REAL ESTATE PVT. LTD. (PREPL) AND M/S. PRIAPUS PROPERTIES PVT. LTD. (PPPL), WERE AMALGAMATED WITH T HEIR HOLDING COMPANY, I.E., M/S. PRIAPUS DEVELOPMENT PVT. LTD. ( ASSESSEE). THE MERGER SCHEME WAS APPROVED BY THE HONBLE DELHI HIG H COURT U/S 391 TO 394 OF THE COMPANIES ACT, 1956 READ WITH RULE S 67 TO 87 OF THE COMPANIES ACT, VIDE JUDGMENT AND ORDER DATED 0 6.10.2016, THE APPOINTED DATE WAS TREATED AS 15.11.2014. AS PE R THE SCHEME OF AMALGAMATION PLACED BEFORE THE HONBLE HIGH COUR T, THE ACCOUNTING PRINCIPLES AND PURCHASE METHOD AS PRES CRIBED IN 'AS- 14 WAS ADOPTED. UNDER THE SCHEME OF AMALGAMATION, TH E SHARES OF M/S. INDIA BULLS HOUSING FINANCE LTD. (IHFL) HELD B Y THE AMALGAMATING COMPANIES WERE TRANSFERRED TO THE ASSE SSEE COMPANY. AS PER THE SAID SCHEME, SUCH SHARES WERE R EVALUED AT THE TIME OF AMALGAMATION AT THE RATE OF RS. 456.47 PER SHARE; AND THE DIFFERENCE ARISING BETWEEN THE BOOK VALUE SHOWN IN T HE BOOKS OF AMALGAMATING COMPANIES AND THE FAIR VALUE OF RS.456 .47 PER SHARE WAS TO FORM PART OF THE CAPITAL RESERVES OF THE ASSE SSEE COMPANY FOR LONG TERM CAPITAL INVESTMENT PROJECTS OR OTHER FUTU RE EXPENDITURE. THUS, CONSEQUENT TO THE ORDER OF HONBLE HIGH COURT , THE VALUE OF IHFL SHARES ACQUIRED BY THE ASSESSEE COMPANY, IN TH E BOOKS WERE SHOWN @ RS.456.47 PER SHARE. FURTHER, IN TERMS OF SE CTION 47(VI) OF THE INCOME TAX ACT, SUCH TRANSFER OF CAPITAL ASSET WAS NOT RECORDED AS TRANSFER WHICH CAN BE SUBJECT TO CAPITAL GAIN TAX . SUBSEQUENTLY, DURING THE ASSESSMENT YEAR 2015-16, THE ASSESSEE CO MPANY SOLD 2,02,053 SHARES OF IHFL AT RECOGNIZED STOCK EXCHANG E AT A LOSS OF ITA NO. 170/DEL/2019 6 RS.52,59,843/, ON WHICH STT WAS PAID. IT WAS STATED B Y THE ASSESSEE THAT IT HAD PREPARED ITS BALANCE SHEET AND PROFIT & LOSS ACCOUNT IN ACCORDANCE WITH THE PROVISIONS OF COMPANI ES ACT AND THE SAME WERE DULY AUDITED AND APPROVED BY THE STAT UTORY AUDITORS AND ALSO ACCEPTED/ADOPTED BY MEMBERS IN THE AGM AS WELL FILED AND DISCLOSED BEFORE THE ROC. THUS, THE LOSS ARISIN G OUT OF SALE OF SHARES WAS DISCLOSED IN THE FINANCIAL STATEMENT AS P ER THE REQUIREMENT UNDER THE COMPANIES ACT. HOWEVER, WHILE FILING THE RETURN, THE ASSESSEE HAS SUO MOTTO DISALLOWED THE L OSS OF RS.52,59,843/- FOR THE PURPOSE OF COMPUTING ITS PRO FIT FROM BUSINESS AND PROFESSION. ACCORDINGLY, IT WAS SUBMITT ED THAT SINCE NET RESULT IN THE PROFIT AND LOSS ACCOUNT DRAWN IN A CCORDANCE WITH THE PROVISIONS OF THE COMPANIES ACT HAD RESULTED IN TO LOSS AND THEREFORE, THE ASSESSEE WAS NOT LIABLE FOR MAT LIAB ILITY U/S. 115JB. 5. THE LEARNED ASSESSING OFFICER REQUIRED THE ASSES SEE TO FURNISH THE DETAILS ABOUT THE NATURE OF CAPITAL RESERVES AN D ALSO ASKED THE ASSESSEE AS TO WHY THE AMOUNT CREDITED TO THE CAPIT AL RESERVES FOR 20,42,053 SHARES SOLD BY THE ASSESSEE SHOULD NOT BE CONSIDERED FOR THE PURPOSE OF CALCULATION OF BOOK PROFIT U/S. 115J B AND ADJUSTMENT BE MADE IN THE BOOK PROFIT. IN RESPONSE, THE ASSESSEE SUBMITTED DETAILED REPLY, WHICH HAS BEEN INCORPORATE D IN THE ASSESSMENT ORDER. THE WORKING OF THE CAPITAL RESERVE IN THE BOOKS OF ACCOUNT AND IN THE FINANCIAL STATEMENT SHOWN BY THE ASSESSEE IN TERMS OF THE SCHEME OF AMALGAMATION WAS DISCLOSED IN THE FOLLOWING MANNER:- ITA NO. 170/DEL/2019 7 PARTICULARS PRIAPUS PROPERTIES PVT LTD. PRIAPUS REAL ESTATE PVT LTD. PRIAPUS DEVELOPERS PVT LTD. TOTAL ON REVALUATION OF SHARES 232,19,92,283 85,84,92,000 318,04,84,283 ON REVALUATION OF LAND 3,27,760 3,27,760 3,27,760 9,83,280 ON PURCHASE CONSIDERATION 62,80,58,323 14,95,05,680 77,75,64,003 IT WAS FURTHER SUBMITTED THAT, NEITHER THE BOOKS OF ACCOUNT NOR AUDITED STATEMENT OF ACCOUNTS HAVE BEEN DISQUALIFIE D BY THE AUDITORS NOR ROC HAS TAKEN ANY OBJECTION AND THEREF ORE, THE BOOK PROFIT SHOWN BY THE ASSESSEE CANNOT BE TINKERED WITH. IT WAS FURTHER STATED THAT, AS PER SCHEME OF AMALGAMATION, ASSESSE E HAD NO OPTION BUT TO TAKE THE DIFFERENTIAL VALUE OF SHARES TO CAPITAL RESERVES. IN SUPPORT, STRONG RELIANCE WAS PLACED ON THE DECISI ON OF ITAT MUMBAI BENCH IN THE CASE OF UNITED ESTATE PVT. LTD. THE ASSESSING OFFICER THEN ASKED THE ASSESSEE, WHY NO ADJUSTMENT S HOULD BE MADE IN THE BOOK PROFIT WITH RESPECT TO VALUATION OF SHARES, WHICH IS NOTHING BUT REVALUATION OF RESERVE. THE ASSESSEE IN RESPONSE HAD RELIED UPON AS-14 AND SUBMITTED THAT IN CASE OF PU RCHASE METHOD THE ASSETS AND LIABILITIES ARE TO BE RECORDED AT FA IR MARKET VALUE AT THE TIME OF AMALGAMATION AND AS PER THE SCHEME OF A MALGAMATION PURCHASE METHOD WAS ADOPTED. THE LD. ASSESSING OFF ICER OBSERVED THAT RESERVE CREATED ON ACCOUNT OF REVALUATION OF S HARES WAS NOT CREDITED TO THE PROFIT & LOSS ACCOUNT AND THEREFORE , HE WAS OF THE ITA NO. 170/DEL/2019 8 OPINION THAT THE SAME HAS TO BE CONSIDERED FOR DETE RMINATION OF BOOK PROFIT. THE ASSESSEE, HOWEVER, SQUARELY RELIED UPON THE AMALGAMATION SCHEME AND THE ORDER OF HONBLE HIGH C OURT ON ACCOUNT OF TREATMENT GIVEN IN THE BOOKS OF ACCOUNT. THE DETAIL SUBMISSIONS OF THE ASSESSEE IN THIS REGARD ARE INCO RPORATED ON PAGE 4 TO 6 OF THE ASSESSMENT ORDER. THE LD. ASSESSING O FFICER HELD THAT IN TERMS OF CLAUSE (V) TO EXPLANATION 1 OF SECTION 115JB, SUCH REVALUATION OF SHARES HAS TO BE TAKEN INTO ACCOUNT WHILE COMPUTING THE BOOK PROFIT. FINALLY, LD. ASSESSING OFFICER MAD E THE ADDITION OF RS.61,04,10,483/- IN THE HANDS OF THE ASSESSEE MAIN LY ON FOLLOWING GROUNDS: FIRSTLY, THE RESERVE CREATED OUT OF REVALUATION OF SHARES HELD BY M/S. PREPL AND PPPL IN THEIR BOOKS OF ACCOUNTS, WHIC H HAS BEEN CREDITED IN THE BALANCE SHEET AS CAPITAL RESER VES IS NOTHING BUT REVALUATION OF SHARES CREATED OUT OF EX CESS OF REVALUATION OF ASSETS AND THEREFORE, THE CONTENTION OF THE ASSESSEE THAT IT IS NOT REVALUATION OF RESERVES DOE S NOT HAVE ANY MERIT; SECONDLY, THE HONBLE HIGH COURT HAS MERELY APPROVE D THE AMALGAMATION BUT HAS NOT COMMENT UPON ACCOUNTING TREATMENT GIVEN IN PURSUANCE TO THE AMALGAMATION OF THE COMPANIES. HONBLE HIGH COURT HAS NOT DISCUSSED AT ALL THE MERITS OF ACCOUNTING TREATMENT IN ITS ORDER; THIRDLY, HE REJECTED VARIOUS CASE LAWS RELIED BY THE ASSESSEE THAT CAPITAL RESERVE CREATED OUT OF AMALGAMATION ITA NO. 170/DEL/2019 9 SCHEMECANNOT BE ADDED TO THE BOOK PROFIT ON THE GRO UND THAT WHAT IS PROPOSED IS NOT ADDITION OF ENTIRE CAPITAL R ESERVE BUT THAT OF THE AMOUNT WHICH IS PRESENT IN THE RESERVE C REATED ON REVALUATION OF ASSETS WHILE THOSE ASSETS WERE DISPOS ED OF DURING THE YEAR. LASTLY, RESERVE CREATED DUE TO REVALUATION OF ASSET S DOES NOT ROUTE THROUGH PROFIT ACCOUNTS DIRECTLY, WHICH IS NOT CORRECT AND THEREFORE, IN TERMS OF CLAUSE (V) OF EXPLANATIO N 1 MAKES IT CLEAR THAT FOR THE PURPOSE OF BOOK PROFIT, SUCH REV ALUATION OF RESERVE RELATING TO REVALUED ASSETS HAS TO BE INCRE ASED. 6. FINALLY, THE ADDITION WAS MADE BY THE ASSESSI NG OFFICER IN THE FOLLOWING MANNER: - I. IN CONSEQUENCE OF AMALGAMATION OF M/S. PPPL AND M/S PREPL WITH THE ASSESSEE COMPANY, THE SHARES OF IHFL HELD BY THE TWO COMPANIES WERE REVALUED ON MARKET P RICE AS ON THE DATE OF AMALGAMATION. A RESERVE WAS CREAT ED OUT OF SUCH REVALUATION AND RS.318,04,84,283/- WERE CREDITED TO THE BALANCE SHEET DIRECTLY AND THE SAME WAS NOT ROUTED THROUGH PROFIT AND LOSS ACCOUNT. II. OF THE 1,06,39,926/- SHARES WHICH WERE RECEIVED BY THE ASSESSEE COMPANY IN CONSEQUENCE TO AMALGAMATION, ASSESSEE COMPANY HAS SOLD 20,42,053/- SHARES DURING THE YEAR. HOWEVER, OF THE SHARES WHICH WERE SOLD DU RING THE YEAR, THE CONSEQUENT AMOUNT WHICH WAS CREDITED TO ITA NO. 170/DEL/2019 10 THE RESERVE WAS NOT REDUCED FROM THE VALUE OF RESER VE AND ROUTED THROUGH PROFIT AND LOSS ACCOUNT. III. ASSESSEE IN ITS PROFIT AND LOSS ACCOUNT HAS CLAIMED LOSS ON SALE OF THESE SHARES OF IHFL AMOUNTING TO RS.52,69, 843/- HOWEVER, CORRESPONDING EFFECT OF THE SAME WAS NOT G IVEN TO THE REVALUATION RESERVE. 8.6. IN VIEW OF THE ABOVE FACTS, IT CAN BE STATED T HAT THE PROVISIONS OF CLAUSE (I) OF EXPLANATION 1 TO SECTIO N 115JB SQUARELY APPLIES TO THE CASE OF THE ASSESSEE. QUANTUM OF ADJ USTMENT NEEDS TO BE WORKED OUT IN THIS REGARD WHICH IS AS F OLLOWS: PARTICULARS NO. OF SHARES VALUE SHARE PRICE ON 14.11.2014 REVALUED SHARE VALUE ORIGINAL PRICE TOTAL PPPL 70,39,926 456.47 3213515021.22 891522739 232,19,92,282 PREPL 36,00,000 456.47 1643292000 78,48,00,000 85,84,92,000 TOTAL 318,04,84,282 8.7. ON THE DATE OF AMALGAMATION, ASSESSEE COMPANY THUS RECEIVED, TOTAL OF RS.1,06,39,926/- SHARES FROM M/S . PPPL AND M/S. PREPL. FURTHER, FOR 10639926 SHARES OF IHFL, RS.318,04,84,282/- WAS TAKEN TO THE RESERVE IN CONS EQUENCE OF THE REVALUATION OF THE SHARES. THUS, FOR EVERY SING LE SHARE OF IHFL THAT WAS REVALUED AT THE TIME OF AMALGAMATION, RS.298.92 WERE CREDITED TO THE RESERVE. NOW ASSESSEE COMPANY DURING THE YEAR UNDER CONSIDERATION HAS DISPOSED 20,42,053 SHA RES OF ITA NO. 170/DEL/2019 11 IHFL. FURTHER, FOR THESE SHARES SOLD, ASSESSEE HAS DEBITED IN ITS STATEMENT OF PROFIT AND LOSS ACCOUNT A SUM OF RS.52 ,69,843/- TOWARDS LOSS ON SALE OF SHARES. THE WORKING OF CALC ULATION OF THE AMOUNT AS PER CLAUSE (I) OF EXPLANATION 1 TO SECTIO N 115JB OF THE IT ACT, 1961 IS AS FOLLOWS: NO. OF SHARES SOLD BY THE ASSESSEE :20,42,053 AMOUNT CREDITED TO THE RESERVE FOR EACH SHARE :298 .92 TOTAL AMOUNT IN THE RESERVE FOR THE DISPOSED SHARE S: 61,04,10,482.76 LESS: AMOUNT CREDITED TO PROFIT & LOSS ACCOUNT ON SALE OF SHARES : 52,69,843/- TOTAL ADJUSTMENT TO BE MADE TO THE BOOK PROFIT U/S. 115JB :61,56,80,325.76 IN VIEW OF THE ABOVE DISCUSSION, ADJUSTMENT TO THE BOOK PROFIT IS BEING MADE INTO CLAUSE (J) OF EXPLANATION 1 OF SECT ION 115JB OF THE IT ACT, 1961 IS BEING MADE BY RS.61,56,80,325.7 6. 7. THE LD. CIT(A) TOO HAS CONFIRMED THE SAID A DDITION AFTER DETAILED REASONING AND ALSO STRONGLY RELIED UPON TH E JUDGMENT OF ITAT AHMEDABAD BENCH IN THE CASE OF INFIBEAM INCORP ORATION LTD. VS. ITO IN ITA NO. 3391/AHD/2015. THE SUM AND SUBST ANCE OF HIS REASONING FOR REJECTING THE ASSESSEES CONTENTION A ND UPHOLDING THE ACTION OF THE ASSESSING OFFICER CAN BE SUMMARIZED I N THE FOLLOWING MANNER:- ITA NO. 170/DEL/2019 12 A. AMALGAMATION HAS BEEN USED BY THE ASSESSEE AS A TOOL FOR TAX EVASION. THE ASSESSEE CANNOT TAKE SHELTER B EHIND JUDICIARY AND PROHIBIT THE REVENUE FROM EXAMINING T HE EVASION. HE HELD THAT THE POWER OF AMALGAMATION IS THE ADMINISTRATIVE POWER OF THE HONBLE HIGH COURT. THE POWER HAS BEEN GRANTED BY THE COMPANIES ACT TO ENSURE THA T THE INTEREST OF THE CREDITORS AND SHARE-HOLDERS ARE PRO TECTED. THE AMALGAMATION ORDER OF THE JUDICIARY IS THEREFORE NO T IN THE NATURE OF JUDICIAL ORDER OF THE HIGH COURT. B. SUB-SECTION 5 OF SECTION 115JB PROVIDES THAT S AVE AS OTHER-WISE PROVIDED IN THIS SECTION OR OTHER PROVISI ONS OF THIS ACT SHALL APPLY TO EVERY ASSESSEE, BEING ASSESSEE C OMPANY MENTIONED IN THIS SECTION. THUS, CLEARLY PROVISO TO SECTION 10(38) OF THE ACT IS ALSO APPLICABLE WHILE CALCULATI NG BOOK PROFIT OF THE COMPANY. THE PROVISIONS OF SECTION 11 5 JB ARE STATUS SPECIFIC. IF THE LTCG ON SALE OF STT PAID SH ARE TRANSACTIONS ACCRUE TO ANY COMPANY, IN THAT CASE TH OUGH AS PER THE NORMAL PROVISIONS OF THE ACT, THE TAX LIABI LITY IS NIL OWING TO THE PROVISIONS OF SECTION 10(38), BUT THE C OMPANY HAS TO PAY MAT ON GAIN. THE LAW DOES NOT EXEMPT ANY COMP ANY FROM NOT PAYING TAX UNDER MAT ON LTCG U/S 10(38).TH E SITUATION LIKE AMALGAMATION AND DEMERGER HAS NOT FO UND A PLACE IN EXCEPTIONS TO SECTION 115JB. THUS, MAT LIA BILITY CANNOT BE EXTINGUISHED FOR A COMPANY UNDER ANY SCHE ME OF AMALGAMATION. ITA NO. 170/DEL/2019 13 C. INCOME BY WAY OF LTCG OF A COMPANY HAS TO BE TA KEN INTO ACCOUNT IN COMPUTINGTHE BOOK PROFIT AND TAX PA YABLE U/S 115JB. THE WORD INCOME BY WAY OF CAPITAL GAIN AS US ED IN SECTION 10(38) OF IT ACT, 1961 IS OF QUITE SIGNIFIC ANCE. SUCH INCOME CAN ONLY BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 48 OF THE ACT. THIS ASPECT HA S BEEN CONSIDERED BY THE BANGALORE BENCH OF ITAT IN THE CA SE OF KARNATAKA STATE INDUSTRIAL DEVELOPERS CO. LTD., VS DCIT' (2016) 76TAXMANN.COM 360 WHERE IT HAS BEEN HELD THAT AMOUNT OF PROFIT ELIGIBLE U/S 10(38) SHOULD ALONE B E CONSIDERED FOR THE PURPOSE OF TAX LIABILITY U/S 115JB OF THE A CT. D. AS PER AS-13 FOR ACCOUNTING FOR INVESTMENTS, INV ESTMENTS ARE TO BE CARRIED AT COST AND NOT FAIR MARKET VALUE . HOWEVER, THE APPELLANT COMPANY BY ITS OWN ADMISSION IS CARRY ING THE INVESTMENTS AT FAIR MARKET VALUE. FURTHER AS-13 ALS O CLARIFIES THAT DIFFERENCE BETWEEN CARRYING AMOUNT AND DISPOSA L PROCEEDS NET OF EXPENSES, HAS TO BE RECOGNISED IN T HE P/L A/C. THUS, THE ASSESSEE HAS NOT EVEN FOLLOWED THE ACCOUN TING TREATMENT REQUIRED TO BE FOLLOWED AS PER AS-13. IF THE ASSESSEE HAD CORRECTLY FOLLOWED THE ACCOUNTING TREATMENT AS PER AS-13, THEN DIFFERENCE OF SALE PROCEEDS OF INVESTMENT AND COST THEREOF (AND NOT FAIR MARKET VALUE) WOULD HAVE BEEN RECOGNI SED IN THE PROFIT & LOSS A/C. FURTHER, THE AFORE-SAID TREATMEN T OF STATING THE INVESTMENT AT FAIR MARKET VALUE IS CONTRARY TO ASSESSEE ITA NO. 170/DEL/2019 14 COMPANYS OWN ACCOUNTING POLICY STATED IN ITS FINANC IAL STATEMENTS. E. WHILE COMPUTING BOOK PROFIT AND CAPITAL GAIN U /S 10(38), THE ASSESSEE IS ADOPTING DIFFERENT COSTS O F ACQUISITION. THE CLAIM OF ASSESSEE APPEARS TO BE THAT COST OF AC QUISITION IN TERMS OF PROVISIONS OF SECTION 49(3) (I.E., COST TO THE PREVIOUS OWNER) IS APPLICABLE ONLY FOR THE PURPOSE OF COMPUT ATION OF CAPITAL GAIN. IF WE GO BY THIS LOGIC, THE EXEMPTION FROM DEFINITION OF THE WORD TRANSFER AS PROVIDED IN SUB -SECTION (VI) OF SECTION 47 WILL ALSO APPLY ONLY IN RESPECT OF COM PUTATION OF BOOK PROFIT. AS PER THIS ARGUMENT, THE ENTIRE APP RECIATION RECORDED IN THE BOOKS OF ACCOUNTS POST AMALGAMATION , WOULD BECOME TAXABLE FOR THE PURPOSE OF COMPUTATION OF B OOK PROFIT U/S 115JB. F. CLAUSE (J) OF EXPLANATION 1 TO SECTION 115JB, ST ATES THAT THE AMOUNT STANDING IN REVALUATION RESERVE RELATIN G TO REVALUED ASSET ON THE RETIREMENT OR DISPOSAL OF SUC H ASSET NEEDS TO BE ADDED TO BOOK PROFIT. THE ADOPTION OF FAIR MARKET VALUE OF THE INVESTMENTS IS NOTHING BUT REVALUATION . MERELY, THE CREDIT OF INCREASE IN VALUE TO CAPITAL RESERVE WOULD NOT ALTER THE TRUE CHARACTER AND SUBSTANCE OF THE EVENT . REVALUATION IS NOT CONFINED TO ONLY LAND & BUILDIN G BUT CAN BE IN RESPECT OF ANY ASSET AND INVESTMENT IN SHARES IS ONE OF THEM. IN THIS REGARD, RELIANCE WAS PLACED ON THE DEC ISION OF ITA NO. 170/DEL/2019 15 HONBLE ITAT, MUMBAI BENCH IN THE CASE OF M/S SUMER BUILDERS PVT LTD., VS DCIT CENTRAL CIRCLE-36, MUMBA I. G. AS-13 MANDATES THAT PROFIT FROM SALE OF INVESTME NTS WERE REQUIRED TO BE CREDITEDTO THE REVENUE ACCOUNT. FURT HER, SECTION 115JB MANDATES THAT ANNUAL ACCOUNTS MUST BE PREPARE D IN ACCORDANCE WITH THE ACCOUNTING STANDARDS WHICH HAVE B EEN FOLLOWED FOR PREPARING ACCOUNTS WHICH WERE LAID BEFO RE COMPANY FOR ANNUAL GENERAL MEETING. 8. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE AFTER NARRATING THE ENTIRE FACTS AND BACKGROUND OF THECASE, FIRST OF AL L DREW OUR ATTENTION TO THE SCHEME OF AMALGAMATION APPEARING I N THE PAPER BOOK FROM PAGES 27 TO 66 AND ESPECIALLY DREW OUR ATT ENTION TO CLAUSE 9 TO CLAUSE 9.4, WHERE IT HAS BEEN CLEARLY ST IPULATED THAT THE TRANSFEREE COMPANY SHALL ACCOUNT FOR AMALGAMATION O F TRANSFEROR COMPANY IN ITS BOOKS OF ACCOUNT AS PER PURCHASE ME THOD SPECIFIED IN ACCOUNTING STANDARD 14. IT WAS CLEARLY PROVIDED THAT ALL THE ASSETS AND LIABILITIES OF THE TRANSFEROR COMPANY WHI CH IS TRANSFERRED AND VISITED IN THE TRANSFEREE COMPANY PURSUANT TO T HE SCHEME SHALL BE RECORDED AT THEIR RESPECTIVE FAIR VALUES. LASTLY AND MOST IMPORTANTLY, IT WAS PROVIDED THAT ANY EXCESS ARISIN G ON TRANSFER OF ASSETS AND LIABILITIES OF TRANSFEROR COMPANIES WOULD BE CONSIDERED TO BE THE PART OF CAPITAL RESERVE OF THE TRANSFEREE COMPANY AND SUCH CAPITAL RESERVE SHALL NOT BE FOR ANY PURPOSE CONSID ERED TO BE A RESERVE CREATED BY TRANSFEREE COMPANY AND ANY DEFIC IT SHALL BE ITA NO. 170/DEL/2019 16 CONSIDERED TO FORM PART OF THE GOODWILL. THEREAFTER, HE DREW OUR ATTENTION TO THE ORDER OF THE HONBLE HIGH COURT, WH ICH HAS APPROVED AND SANCTIONED THE SAID SCHEME OF AMALGAMA TION VIDE JUDGMENT AND ORDER DATED 18.02.2016, COPY OF WHICH H AS BEEN PLACED IN THE PAPER BOOK FROM PAGES 21 TO 26. HE AL SO POINTED OUT THAT DURING THE PENDENCY OF AMALGAMATION SCHEME, MI NISTRY OF CORPORATE AFFAIRS HAD ISSUED NOTICE TO ALL THE STAK E HOLDERS INCLUDING THE INCOME TAX DEPARTMENT AND IT WAS SPECI FICALLY STATED THAT THE REGIONAL DIRECTOR SHALL INVITE SPECIFIC CO MMENTS FROM INCOME-TAX DEPARTMENT WITHIN 15 DAYS OF RECEIPT OF N OTICE BEFORE FILING ITS RESPONSE TO THE COURT AND IN CASE NO RES PONSE IS RECEIVED FROM IT DEPARTMENT, THEN THE SAME MAY PRESUMED THAT THE INCOME- TAX DEPARTMENT HAS NO OBJECTION TO THE ACTION PROPO SED U/S. 391 394 OF THE COMPANIES ACT. THEREAFTER, NOTICE WAS ALS O SENT FROM THE HONBLE HIGH COURT OF DELHI TO THE ASSESSING OFFICE R AND THEREIN IT WAS SPECIFICALLY REQUIRED THAT ANY OBSERVATION OR CO MMENT IN THIS REGARD SHOULD BE SENT TO THE REGIONAL DIRECTOR, NOR THERN REGION, MINISTRY OF CORPORATE AFFAIRS. THE NOTICES SENT BY HONBLE HIGH COURT ARE APPEARING AT PAGE 103 TO 105 OF THE PAPER BOOK. HE SUBMITTED THAT, ONCE THERE WAS CLEAR CUT SCHEME WHICH HAS BEEN APPROVED BY HONBLE HIGH COURT, IT HAS STATUTORY FO RCE AND BINDING UPON ALL. LD. COUNSEL ALSO RELIED UPON CATENA OF JU DGMENTS WHEREIN SCOPE OF HIGH COURT ORDER IN REGARD TO AMALGAMATION HAS BEEN EXPLAINED AND THAT THE HIGH COURT JUDGMENT HAS TO B E GIVEN FULL EFFECT TO. THE KEY JUDGMENTS RELIED UPON BY HIM, FI RST OF ALL WAS ON ITA NO. 170/DEL/2019 17 THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE C ASE OF WOOD PLOYMER LTD., REPORTED IN 109 ITR 177 ; AND THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF J.K. (BOMBAY) PVT. LTD. VS. NEW KESAR-E-HIND SPINNING AND WEAVING CO. REPORTED IN 1971 AIR 1041. LD. COUNSEL THUS SUBMITTED THAT, ONCE THE HONBLE HIGH COURT AFTER DUE DILIGENCE AND CONDUCTING DETAI LED ENQUIRY BEFORE SANCTIONING THE SCHEME AND AFTER EXAMINING T HE ENTIRE PUBLIC INTEREST HAS PASSED THE ORDER, THEN SAME HAS TO BE ACCEPTED AND IF ANY SCHEME IS FORMULATED FOR THE PURPOSE OF TAX EVASION, THEN SAME COULD NOT HAVE BEEN SANCTIONED BY THE HIG H COURT UNDER THE COMPANIES ACT. ONCE, HONBLE DELHI HIGH COURT H AS ACCORDED SANCTION TO THE AMALGAMATION SCHEME, IT IMPLIES THA T SAME HAS BEEN DONE AFTER CONSIDERING THE SCHEME WITH TAX EVAS ION POINT FOR INCOME-TAX PURPOSE. HE ALSO RELIED ON THE DECISION OF ITAT, KOLKATA BENCH IN THE CASE OF ITO VS. PURBANCHAL POWER CO. LTD. IN ITA NO. 201/KOL/2010 , WHEREIN IT HAS BEEN HELD THAT AS A MATTER OF PUBLIC POLICY, ONCE THE SCHEME OF AMALGAMATION IS A PPROVED BY HONBLE HIGH COURT, NO AUTHORITY SHOULD BE ALLOWED TO TINKER WITH THE SCHEME. HE HAS ALSO RELIED UPON VARIOUS OTHER J UDGMENTS FILED BEFORE US, WHICH ARE BY AND LARGE UPHOLDING THE SAME PROPOSITION 9 LD. COUNSEL FURTHER SUBMITTED THAT ENTIRE ADDITIO N MADE BY THE ASSESSING OFFICER HAS BEEN MADE ON FLAWED PREMI SE THAT THE RESERVE HAS BEEN CREATED ON REVALUATION OF SHARES WH ICH IS NOT CORRECT, BECAUSE THE RESERVE HAS NOT BEEN CREATED O N REVALUATION OF ASSETS ALBEIT HERE IN THIS CASE, THE SHARES BELONGING TO ITA NO. 170/DEL/2019 18 AMALGAMATING COMPANIES WHICH ON AMALGAMATION HAS ENT ERED INTO BOOKS OF ASSESSEE COMPANY AT FAIR MARKET VALUE AS S ANCTIONED BY HONBLE HIGH COURT. HENCE, THERE IS NO REVALUATION OF ASSETS. ONCE, THERE IS NO REVALUATION OF ANY ASSET, THEN THERE IS NO QUESTION OF MAKING ANY ADDITION TO THE BOOK PROFIT U/S. 115JB U NDER CLAUSE (J) TO EXPLANATION . APART FROM THAT, THE PROFIT AND LOSS ACCOUNT OF T HE ASSESSEE HAS BEEN PREPARED STRICTLY IN COMPLIANCE WI TH PART-I AND PART-II OF THE COMPANIES ACT, 2013, CORRESPONDING T O PART II & III OF THE SCHEDULE OF COMPANIES ACT, 1956 AND ALSO ACCOUN TING STANDARD ISSUED BY ICAI HAS BEEN STRICTLY FOLLOWED. RELYING UPON THE DECISION OF HONBLE SUPREME COURT IN APPOLLO TYRES LTD VS. CIT REPORTED IN 255 ITR 273 , HE SUBMITTED THAT ONCE THE ACCOUNTS HAVE BEEN PREPARED IN ACCORDANCE WITH COMPA NIES ACT, WHICH HAVE BEEN SCRUTINIZED AND CERTIFIED BY STATUTO RY AUDITORS AND APPROVED BY COMPANYS AGM, THE ASSESSING OFFICER IS BOUND BY THE SAME. 10. LD. COUNSEL ALSO DISTINGUISHED THE JUDGMENT OF ITAT AHMEDABAD BENCH IN THE CASE OF INFIBEAM (SUPRA) AS RELIED UPON BY THE LD. CIT(A) AND POINTED OUT THAT SAME DO NOT APP LY FACTUALLY AND LEGALLY IN THE CASE OF ASSESSEE FOR THE FOLLOWING RE ASONS: IN THE CASE OF INFIBEAN THE ASSESSEE HAD REVALUED I TS ASSETS AND CREATED A REVALUATION RESERVE WHEREAS IN THE CAS E OF THE APPELLANT THERE IS NO REVALUATION OF ASSETS AS BROU GHT OUT IN EARLIER PARAGRAPHS. REVALUATION OF ASSETS CAN ONLY OCCUR IF THE ITA NO. 170/DEL/2019 19 ASSETS EXISTING IN BALANCE SHEET ARE REVISED WHICH I S NOT TRUE IN THE CASE OF THE APPELLANT ASSESSEE. IN THE CASE OF INFIBEAM THE AUDITORS HAD CLEARLY QU ALIFIED THE ACCOUNTS BY STATING THAT AS-11 WAS NOT PROPERLY FOL LOWED. THIS IS BROUGHT OUT AT PARA 5.11 OF THE JUDGMENT WHI CH STATES THAT IN THE INSTANT CASE, THE AUDITORS HAVE CLEARL Y QUALIFIED THE REPORT ON SUCH ACCOUNTS, STATING THAT UPWARD REV ALUATION OF INVESTMENT IN SUBSIDIARY COMPANY IS NOT IN LINE WITH THE AS 13 ISSUED BY THE ICAI. THUS, IT CANNOT BE SAID THAT WHEN THE ACCOUNTING STANDARD REQUIRED TO BECOMPLIED WITH BY T HE APPELLANT COMPANY IS NOT COMPLIED, THEN THE PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT IS NOT IN ACCORDANCE WITH THE COMPANIES ACT, WHEREAS IN THE CASE OF THE APPELLANT THE AUDITORS HAVE EXPRESSED THEIR SATISFACTION REGARDIN G THE COMPLIANCE OF PROVISIONS OF COMPANIES ACT AND ACCOU NTING STANDARDS. IN FACT, THE CASE OF INFIBEAM BRINGS OUT WHAT THE AP PELLANT HAS BEEN TRYING TO SAY ALL ALONG. IN THIS REGARD, ATTEN TION WAS SOUGHT TO PARA 5.13 OF THE JUDGMENT OF INFIBEAM, WH EREIN IT IS CLEARLY HELD THAT, REGARDING JUDGMENT OF THE SUPRE ME COURT IN THE CASE OF APOLLO TYRES LTD VS CIT 255 ITR 273, WAS ON DIFFERENT FACTS AS IN THE SAID CASE, THE PROFIT AND LOSS ACCOUNT WAS PREPARED IN ACCORDANCE WITH THE REQUIREMENTS OF T HE COMPANIES ACT, 1956 READ WITH ACCOUNTING STANDARDS A ND THERE WAS NO QUESTION OF ISSUANCE OF BONUS SHARES.. ... HENCE ITA NO. 170/DEL/2019 20 THE MEMBERS HAVE DISTINGUISHED THE JUDGMENT OF APOL LO STATING THAT IN THE CASE OF APOLLO TYRES THE ACCOUN TS WERE IN LINE WITH THE REQUIREMENTS OF THE COMPANIES ACT AND ACCOUNTING STANDARDS, WHEREAS IN THE CASE OF INFIBEA M AS STATED BY THE AUDITORS ACCOUNTS WERE NOT IN KEEPING WITH THE REQUIREMENTS OF COMPANIES ACT AND ACCOUNTING STANDA RDS. IN THE CASE OF THE APPELLANT THE AUDITORS HAVE EXPRESS ED THEIR SATISFACTION REGARDING ACCOUNTS HAVING BEEN PREPARE D IN KEEPING WITH THE REQUIREMENTS OF THE COMPANIES ACT A ND ACCOUNTING STANDARDS HAVING BEEN FOLLOWED THE CASE CLEARLY IS DIFFERENT FROM INFIBEAM AND HENCE THE RELIANCE PLAC ED ON THE SAID JUDGMENT OF INFIBEAM BY THE DEPARTMENT IS CLEA RLY ILLEGAL. 11. LD. COUNSEL, FURTHER HIGHLIGHTED THE DISCREPA NCIES IN THE ORDER OF THE ASSESSING OFFICER IN HIS WRITTEN SUBMIS SIONS IN THE FOLLOWING MANNER: OUT OF 1,06,39,926/- SHARES OF INDIABULLS HOUSING FINANCE LTD., RECEIVED BY THE APPELLANT ON AMALGAMATION WIT H M/S PREPL & M/S PPPL, 20,42,053/- SHARES WERE SOLD BY T HE APPELLANT COMPANY AT A RECOGNISED STOCK EXCHANGE ON WHICH SECURITIES TRANSACTION TAX WAS PAID. THESE SHARES W ERE SOLD @ RS.453.88 PER SHARE RESULTING IN A SHORT TERM CAPIT AL LOSS OF RS.52,69,843/- [DIFFERENCE BETWEEN VALUE AT WHICH S HARES ACQUIRED ON AMALGAMATION BEING RS.456.47 AND SALE V ALUE OF RS.453.88 PER SHARE]. THIS LOSS WAS INCLUDED IN ITS PROFIT AND LOSS ACCOUNT PREPARED AND ACCEPTED BY THE AUDITORS AND SHARE- HOLDERS. ITA NO. 170/DEL/2019 21 8.11 FURTHER LONG-TERM CAPITAL GAIN OF RS.70.90 CRO RESWAS CLAIMED EXEMPT U/S 10(38) OF THE ACT. THE SAME WAS COMPUTED BY DEDUCTING FROM THE SALES PROCEEDS OF RS.92.68 CR ORES COST TO THE PREVIOUS OWNER BEING RS.21.79 CRORES. 8.12 IT IS THE CASE OF THE DEPARTMENT THAT :- A. SUCH INCOME FROM LONG TERM CAPITAL GAIN SHOULD BE TAKEN INTO CONSIDERATION WHILE COMPUTING BOOK PROFIT U/S 115JB. IN THIS REGARD, RELIANCE HAS BEEN PLACED ON THE DECISI ON OF THE HONBLE BANGALORE BENCH OF THE ITAT IN THE CASE OF KARNATAKA STATE INDUSTRIAL INFRASTRUCTURE DEVELOPER S CO. LTD., VS DCIT 76 TAXMANN.COM 360. B. AS-13 DEMANDS THAT INVESTMENTS BE CARRIED AT TH EIR COST. HOWEVER, THE APPELLANT HAS CARRIED THE SAME AT FAIR MARKET VALUE. FURTHER AS-13 REQUIRES THAT DIFFERENCE BETWE EN COST AND SALE VALUE NET OF EXPENSES SHOULD BE RECOGNISED IN THE PROFIT AND LOSS ACCOUNT. THE APPELLANT ASSESSEE HAS THUS FAILED TO FOLLOW AS-13 C. APPELLANT ASSESSEE HAS TAKEN DIFFERENT COSTS FO R THE PURPOSE OF BOOK PROFIT AND LONG TERM CAPITAL GAIN . D. APPELLANT ASSESSEE HAS FAILED TO APPLY CLAUSE (J ) OF EXPLANATION (1) TO SECTION 115JB. 8.13 THE ABOVE FINDINGS OF THE LOWER AUTHORITIES AR E ILLEGAL AS BROUGHT OUT IN THE FOLLOWING DISCUSSION:- 8.14 ATTENTION IS SOUGHT TO PARA 1 AND 3.1 OF THE A S-13 REPRODUCED HERE-UNDER FOR YOUR READY REFERENCE:- PARA 1- THIS STANDARD DEALS WITH ACCOUNTING FOR INV ESTMENTS IN THE FINANCIAL STATEMENTS OF ENTERPRISES AND RELA TED DISCLOSURE ISSUES. INAGE 91 OF PAPER BOOK| ITA NO. 170/DEL/2019 22 PARA 3.1 INVESTMENTS ARE ASSETS HELD BY AN ENTERPRI SE FOR EARNING INCOME BY WAY OF DIVIDENDS, INTEREST AND RE NTALS, FOR CAPITAL. 8.15 AS-13 DEALS WITH INVESTMENTS. FURTHER INVESTME NTS ARE DEFINED IN AS-13 AS ASSETS HELD BY AN ENTERPRISE.. . IN THE CASE OF THE APPELLANT ASSESSEE SHARES OF IHFL WERE ACQUI RED BY THE APPELLANT COMPANY ON AMALGAMATION WITH M/S PREPL & M/S PPPL AT FAIR MARKET VALUE AS PER THE ORDER OF THE H ONBLE DELHI HIGH COURT UNDER SECTION 391 TO 394 OF THE COMPANIE S ACT, 1956. FURTHER, SINCE THE SHARES HAVE BEEN ACQUIRED UNDER THE PURCHASE METHOD DULY PRESCRIBED IN AS-14 THE ASSE TS WERE RECORDED AT THEIR FAIR MARKET VALUE, THE SAME BEING ITS COST OF ACQUISITION. THE HISTORICAL COST TO THE PREVIOUS OW NERS HAS NO BEARING TO THE ACCOUNTS OF THE APPELLANT COMPANY AS THE ASSETS WERE NOT ACQUIRED AT HISTORICAL COST. HENCE AS-13 H AS NO APPLICATION IN THE CASE OF THE APPELLANT AS FAR AS THE SHARES OF 1HFT ARE CONCERNED AS THE SAME ARE NOT REVALUED BUT ONLY RECORDED AT THEIR COST OF ACQUISITION. 8.16 FURTHER THE AMALGAMATION WAS SANCTIONED BY THE HONBLE HIGH COURT IN A SCHEME DULY ACCEPTED BY IT POST CAL LING FOR OBJECTIONS IF ANY FROM THE INCOME TAX DEPARTMENT. T HE SAID SCHEME CLEARLY MANDATED THAT ASSETS OF THE TRANSFER OR COMPANY WERE TO BE RECORDED BY THE TRANSFEREE COMPANY AT FA IR MARKET VALUE. THIS FACT WAS KNOWN TO THE DEPARTMENT AND IT S OPINION WAS ALSO SOUGHT BEFORE THE SCHEME WAS SANCTIONED. P OST THE SANCTION OF THE SCHEME THE APPELLANT ASSESSEE HAVIN G ACQUIRED THE ASSETS OF THE AMALGAMATING COMPANY AT FAIR MARK ET VALUE WAS BOUND BY THE ORDER TO RECORD THE ACQUISITION VA LUE OF THE AMALGAMATED ASSETS. HENCE THE SAME WERE RECORDED IN ITS BALANCE SHEET AT THE ACQUISITION VALUE. 8.17 AS REGARDS CAPITAL GAIN COMPUTED U/S 10(38) AN D APPLICATION OF SECTION 49(1) OF THE INCOME TAX ACT, 1961 FOR ITA NO. 170/DEL/2019 23 COMPUTING CAPITAL GAIN IT NEEDS TO BE NOTED THAT TH E SAME APPLIES TO NORMAL COMPUTATION OF CAPITAL GAIN. IN C ASE OF COMPUTATION OF BOOK PROFIT BY APPLYING CLAUSE (II) TO EXPLANATION OF SECTION 115JB WHERE SALE OF INVESTMENTS IS INCLU DED IN THE BOOKS PREPARED AND PROFIT/LOSS FROM SUCH SALE INCLU DED IN THE PROFIT AND LOSS ACCOUNT, THEN THE SAID EXEMPTION U/ S 10(38) OF THE ACT CANNOT BE INCLUDED. 8.18 IN THIS CASE THE DIFFERENCE BETWEEN COST OF AC QUISITION OF THE AMALGAMATED ASSETS AND THE SALE CONSIDERATION R ESULTED IN LOSS AND THE SAME WAS DULY RECORDED IN THE PROFIT A ND LOSS ACCOUNT. THE CIT(A)S ARGUMENT THAT IN COMPUTATION OF BOOK PROFIT CAPITAL GAIN SHOULD BE COMPUTED BY TAKING HI STORICAL COST OF ASSETS IS COMPLETELY FLAWED. 12. BEFORE US, THE LD. DR STRONGLY REFERRED TO V ARIOUS OBSERVATIONS MADE BY THE ASSESSING OFFICER AND SUBMITTED THAT HE RE IN THIS CASE ON THE DATE OF AMALGAMATION, THE SHARES WERE VALUED AT FMV AND NOT ON COST AND ONCE, THE SHARES WERE AMALGAMATED I T BECAME PART OF RESERVE OF ASSESSEE, THEREFORE, SUCH REVALUATION AMOUNTS TO REVALUATION OF RESERVES. HERE, THE NATURE REMAINS T HE SAME, BECAUSE POST AMALGAMATION, THERE WAS REVALUATION OF SHARES A ND SUCH SHARES WERE SOLD, THEREFORE, IT IS CLEARLY HIT BY C LAUSE (J) OF EXPLANATION TO SECTION 115JB. HE FURTHER REFERRED T O VARIOUS OBSERVATION OF LD. CIT (A) AND SUBMITTED THAT THE H IGH COURT ORDER CANNOT BE INTERPRETED TO MEAN THAT THE MATTER CANNO T BE EXAMINED UNDER THE PROVISIONS OF INCOME TAX ACT. HERE WHAT IS REQUIRED TO BE SEEN IS THAT WHETHER ADJUSTMENT IN BOOK PROFIT CAN B E MADE U/S 115JB OR NOT. HE THUS STRONGLY RELIED UPON THE ORDE R OF LD. CIT (A). ITA NO. 170/DEL/2019 24 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALS O PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDER AS WE LL AS MATERIAL REFERRED TO BEFORE US AT THE TIME OF HEARING. THE S OLE ISSUE INVOLVED IN THIS CASE IS, WHETHER THE ADDITION OF RS.61,56,80 ,326/- CAN BE MADE IN THE BOOK PROFIT U/S. 115 JB ON ACCOUNT OF S HARES SOLD BY THE ASSESSEE, WHICH WAS HELD AS CAPITAL RESERVE, WH ICH THE ASSESSING OFFICER AND CIT(A) HAVE TREATED ON ACCOUN T OF AMOUNT STANDING IN REVALUED RESERVE RELATING TO REVALUATIO N OF ASSETS IN TERMS OF CLAUSE (J) OF EXPLANATION 1 OF SECTION 115 JB. AS DISCUSSED IN THE FOREGOING PARAGRAPHS, TWO SUBSIDIARY COMPANIE S OF THE ASSESSEE, PREPL AND PPPL WERE AMALGAMATED WITH THE ASSESSEE COMPANY BEING HOLDING COMPANY, VIDE JUDGMENT AND OR DER DATED 18.02.2016 OF HONBLE DELHI HIGH COURT, WHEREIN THE HONBLE COURT HAS SANCTIONED THE SCHEME OF AMALGAMATION. FIRST OF ALL IT WOULD BE QUITE PERTINENT TO NOTE THE RELEVANT CLAUSES OF SCH EME OF AMALGAMATION WHICH ARE IMPORTANT FOR THE PURPOSE OF ADJUDICATION OF PRESENT CONTROVERSY. THE RELEVANT CLAUSES DEALIN G WITH ACCOUNTING STANDARD AND PURCHASE METHOD ADOPTED FOR VALUING THE ASSETS AND LIABILITIES AT A FAIR MARKET VALUE AND H OW ANY EXCESS ON SUCH TRANSFER OF ASSETS AND LIABILITIES HAS TO BE T REATED AS PART OF THE CAPITAL RESERVE, READS AS UNDER:- 9.1. ON THE SCHEME BECOMING EFFECTIVE AND WITH EFF ECT FROM THE APPOINTED DATE, TRANSFEREE COMPANY SHALL ACCOUNT FO R AMALGAMATION OF TRANSFEROR COMPANY NO. 1 AND TRANSF EROR COMPANY NO. 2 IN ITS BOOKS OF ACCOUNTS AS PER THE PURCHASE ITA NO. 170/DEL/2019 25 METHOD SPECIFIED UNDER THE ACCOUNTING STANDARD 14 ACCOUNTING FOR AMALGAMATION. 9.2 ALL THE ASSETS AND LIABILITIES OF TRANSFEROR CO MPANY NO. 1 AND TRANSFEROR COMPANY NO. 2 SHALL BE TRANSFERRED T O AND VESTED IN TRANSFEREE COMPANY PURSUANT TO THIS SCHEM E AND SHALL BE RECORDED AT THEIR RESPECTIVE FAIR VALUES. 9.3. ANY EXCESS ARISING ON TRANSFER OF ASSETS AND LIABILITIES OF TRANSFEROR COMPANY NO. 1 AND TRANSFE ROR COMPANY NO. 2 AFTER GIVING EFFECT TO CLAUSE 9.4 BEL OW WOULD BE CONSIDERED TO FORM PART OF THE CAPITAL RE SERVE OF TRANSFEREE COMPANY . SUCH CAPITAL RESERVE SHALL BE A RESERVE WHICH ARISES PURSUANT TO THIS SCHEME AND SH ALL NOT BE, FOR ANY PURPOSE, BE CONSIDERED TO BE A RESERVE CREA TED BY TRANSFEREE COMPANY. ANY DEFICIT SHALL BE CONSIDERED TO FORM PART OF GOODWILL. 14. AFORESAID SCHEME THUS CLEARLY PROVIDES THAT, FIRSTLY , THE PURCHASE METHOD AS PRESCRIBED IN AS-14 WAS ADOPTE D STATING THAT THE TRANSFEREE COMPANY SHALL ACCOUNT FOR AMALGAMATI ON OF TRANSFEROR COMPANIES IN ITS BOOKS OF ACCOUNT; SECONDLY , ALL ASSETS AND LIABILITIES OF THE TRANSFEROR COMPANIES SHALL B E TRANSFERRED AND WOULD BE RECORDED IN THE RESPECTIVE FAIR VALUES; AND LASTLY , ANY EXCESS ARISING ON TRANSFER OF ASSETS AND LIABILITIE S OF THE TRANSFEROR COMPANIES WOULD BE CONSIDERED TO FORM PART OF THE C APITAL RESERVES OF THE TRANSFEREE COMPANY AND SUCH CAPITA L RESERVE SHALL NOT BE FOR ANY PURPOSE BE CONSIDERED TO BE A RESERV E CREATED BY THE TRANSFEREE COMPANY. ERGO, IF THERE IS AN EXCESS ON ACCOUNT OF VALUATION ON PURCHASE METHOD DETERMINING THE FAIR M ARKET VALUE ITA NO. 170/DEL/2019 26 WAS TO FORM PART OF THE CAPITAL RESERVE AND NO OTHER MANDATE WAS GIVEN TO THE TRANSFEREE COMPANY. THE SHARES OF IHFL WAS HELD BY THE AMALGAMATING COMPANIES WHICH HAS BEEN TRANSFERRE D TO THE ASSESSEE COMPANY AND THUS, IT WAS AKIN TO ACQUISITIO N OF AN ASSET WHICH AS PER THE MANDATE OF AMALGAMATION SCHEME HAS TO BE TREATED AS PART OF THE CAPITAL RESERVE. NOW, THIS SC HEME HAS BEEN DULY APPROVED BY HONBLE DELHI HIGH COURT VIDE JUDG MENT AND ORDER DATED 18.02.2016. IN THE CONCLUSION OF THE SAID ORD ER, HONBLE COURT HAS SPECIFICALLY OBSERVED THAT ANY PERSON INT ERESTED SHALL BE AT LIBERTY TO APPLY TO THE COURT IN THE ABOVE MATTE R FOR ANY DIRECTIONS THAT MAY BE NECESSARY. THE SAID ORDER OF HONBLE HI GH COURT SANCTIONING THE ENTIRE AMALGAMATION SCHEME HAD BECO ME FINAL. IT IS FURTHER SEEN THAT VIDE GENERAL CIRCULAR NO. 1 OF 20 14 ISSUED BY MINISTRY OF CORPORATE AFFAIRS TO ALL REGIONAL DIREC TIONS AND REGISTRARS OF COMPANIES AND ALL STAKE HOLDERS AND N OTICES WERE ISSUED TO ALL THE CONCERNED PARTIES INCLUDING THE I NCOME TAX DEPARTMENT, THE SAME READ AS UNDER : TO, ALL REGIONAL DIRECTORS, ALL REGISTRAR OF COMPANIES, ALL STAKEHOLDERS. SUBJECT: REPORT U/S 394A OF THE COMPANIES ACT, 1956 - TAKING ACCOUNTS OF COMMENTS/INPUTS FROM INCOME TAX DEPARTM ENT AND OTHER SECTORAL REGULATORS WHILE FILING REPORTS BY RDS. SIR, SECTION 394A OF THE COMPANIES ACT, 1956 REQUIRES SE RVICE OF A NOTICE ON THE CENTRAL GOVERNMENT WHEREVER CASES INV OLVING ARRANGEMENT/COMPROMISE (UNDER SECTION 391) OR RECON STRUCTION / ITA NO. 170/DEL/2019 27 AMALGAMATION (UNDER SECTION 394) COME UP BEFORE THE COURT OF COMPETENT JURISDICTION. AS THE POWERS OF THE CENTRA L GOVERNMENT HAVE BEEN DELEGATED TO THE REGIONAL DIRECTORS (RDS) WHO ALSO FILED REPRESENTATIONS ON BEHALF OF THE GOVERNMENT WHEREVE R NECESSARY. 2. IT IS TO BE NOTED THAT THE SAID PROVISIONS IS I N ADDITION TO THE REQUIREMENT OF THE REPORT TO BE RECEIVED RESPEC TIVELY FROM THE REGISTRAR OF COMPANIES AND THE OFFICIAL LIQUIDATOR UNDER THE FIRST AND SECOND PROVISOS TO SECTION 394(1). A JOINT READING OF SECTIONS 394 AND 394A MAKES IT CLEAR THAT THE DUTIES TO BE PERFORMED BY THE REGISTRAR AND OFFICIAL LIQUIDATOR UNDER SECTION 394 AND OF TH E REGIONAL DIRECTOR CONCERNED ACTING ON BEHALF OF THE CENTRAL GOVERNMEN T UNDER SECTION 394A ARE QUITE DIFFERENT. 3. AN INSTANCE HAS RECENTLY COME TO LIGHT WHEREIN A REGIONAL DIRECTOR DID NOT PROJECT THE OBJECTIONS OF THE INCOME TAX DEPARTMENT IN A CASE UNDER SECTION 394. THE MAT TER HAS BEEN EXAMINED AND IT IS DECIDED THAT WHILE RESPONDI NG TO NOTICES ON BEHALF OF THE CENTRAL GOVERNMENT UNDER S ECTION 394A, THE REGIONAL DIRECTOR CONCERNED SHALL INVITE SPECIFIC COMMENTS FROM INCOME TAX DEPARTMENT WITHIN 15 DAYS OF RECEIPT OF NOTICE BEFORE FILING HIS RESPONSE TO THE COURT. IF NO RESPONSE FROM THE INCOME TAX DEPARTMENT IS FORTHCOM ING, IT MAY BE PRESUMED THAT THE INCOME TAX DEPARTMENT HAS NO OBJECTION TO THE ACTION PROPOSED UNDER SECTION 391 OR 394 AS THE CASE MAY BE THE REGIONAL DIRECTORS MUST ALSO SE E IF IN A PARTICULAR CASE FEEDBACK FROM ANY OTHER SECTORAL RE GULATOR IS TO BE OBTAINED AND IF IT APPEARS NECESSARY FOR HIM TO OBTAIN SUCH FEEDBACK, IT WILL ALSO BE DEALT WITH IN A LIKE MANNER. 4. IT IS ALSO EMPHASIZED THAT IT IS NOT FOR THE RE GIONAL DIRECTOR TO DECIDE CORRECTNESS OR OTHERWISE OF THE OBJECTIONS/VIEWS OF THE INCOME TAX DEPARTMENT OR OTHER REGULATORS. WHIL E ORDINARILY SUCH VIEWS SHOULD BE PROJECTED BY THE REGIONAL DIRECTOR IN HIS REPRESENTATION, IF THERE ARE COMPELLING REASONS FOR DOUBTING THE CORRECTNESS OF SUCH VIEWS, THE REGIONAL DIRECTOR MU ST MAKE A REFERENCE TO THIS MINISTRY FOR TAKING UP THE MATTER WITH THE MINISTRY CONCERNED BEFORE FILING THE REPRESENTATION UNDER SE CTION 394A. 5. THIS CIRCULAR IS EFFECTIVE FROM THE DATE OF ISS UE. ITA NO. 170/DEL/2019 28 15. THEREAFTER, HONBLE HIGH COURT HAD ALSO ISS UED NOTICES TO THE INCOME TAX DEPARTMENT THROUGH ASSESSING OFFICER WHIC H WAS RECEIVED IN THE OFFICE OF THE ASSESSING OFFICER ON 18.05.2015. THE ASSESSING OFFICER/ DEPARTMENT NOWHERE HAD OBJECTED T O SAID SCHEME AT ANY POINT OF TIME, NEITHER IN PURSUANCE O F CIRCULAR ISSUED BY MINISTRY OF CORPORATE AFFAIRS NOR WHEN THE NOTICE WAS ISSUED BY THE HIGH COURT. THUS, SCHEME OF AMALGAMATION SANCTI ON BY HONBLE HIGH COURT HAD BECOME FINAL. SUCH AN ORDER HAS A BI NDING EFFECT UPON ALL. HONBLE SUPREME COURT IN THE CASE OF J.K. (BOMBAY) PVT. LTD. (SUPRA) HELD THAT ONCE THE SCHEME HAS BEEN SAN CTIONED BY THE COURT THAT DOES NOT OPERATE AS MERE AGREEMENT BETWE EN THE PARTIES, BUT IT BECOMES BINDING ON THE COMPANY, THEIR CREDIT ORS AND THE SHARE HOLDERS AND OTHER STATUTORY FORCE. THE RELEVA NT OBSERVATION OF THE HONBLE APEX COURT READS AS UNDER: THE PRINCIPLE IS THAT A SCHEME SANCTIONED BY THE CO URT DOES NOT OPERATE AS A MERE AGREEMENT BETWEEN THE PARTIES. IT BECOMES BINDING ON THE COMPANY, THE CREDITORS AND THE SHAREHOLDERS AND HAS STATUTORY FORCE, AND THEREFORE, THE JOINT-DEBTOR COULD NOT INVOKE THE PRINCIPLE OF ACCO RD AND SATISFACTION. BY VIRTUE OF THE PROVISIONS OF SEC. 3 91 OF THE ACT, A SCHEME IS STATUTORILY BINDING EVEN ON CREDITORS, AN D SHAREHOLDERS WHO DISSENTED FROM OR OPPOSED TO ITS B EING SANCTIONED. IT HAS STATUTORY FORCE IN THAT SENSE AND THEREFORE CANNOT BE ALTERED EXCEPT WITH THE SANCTIO N OF THE COURT EVEN IF THE SHAREHOLDERS AND THE CREDITOR S ACQUIESCE IN SUCH ALTERATION . ITA NO. 170/DEL/2019 29 FROM THE AFORESAID RATIO IT IS QUITE OSTENSIBLE TH AT, ONCE THE AMALGAMATION SCHEME HAS BEEN APPROVED AND SANCTIONE D BY THE COURT, IT HAS A STATUTORY FORCE AND IS BINDING ON T HE COMPANY AND ALL THE STAKE HOLDERS. SIMILAR VIEW HAS BEEN ECHOED BY THE HONBLE GUJRAT HIGH COURT IN THE CASE OF WOOD POLYMER LTD. (SUPRA), WHEREIN HONBLE COURT HAS OBSERVED AND HELD AS UNDER :- THE EXPRESSION 'PUBLIC INTEREST' IS TO BE FOUND IN THE SECOND PROVISO AND IN THE CONTEXT OF A COMPANY WHICH, IF, SCHEME OF AMALGAMATION IS SANCTIONED, IS LIKELY TO LOSE ITS I DENTITY BY GETTING MERGED WITH THE TRANSFEREE-COMPANY. IT IS T O BE DISSOLVED WITHOUT WINDING UP. IN WINDING UP THE MAN NER IN WHICH AFFAIRS OF A COMPANY ARE CONDUCTED CAN BE PRO BED IN DEPTH; BUT A SCHEME OF AMALGAMATION WHICH PROVIDES FOR MERGER OF THE TRANSFEROR-COMPANY WITH THE TRANSFEREE-COMPA NY, WOULD DESTROY ANY OPPORTUNITY FOR EXAMINATION OF THE AFFA IRS OF THE TRANSFEROR-COMPANY. THE SECOND PROVISO WOULD PROVID E THE LAST OPPORTUNITY TO PEEP INTO THE AFFAIRS OF THE TRANSFE ROR COMPANY BEFORE IT GETS VIRTUALLY EXTINCT. THE COURT IS, THE REFORE, CHARGED WITH A DUTY BEFORE IT FINALLY CONFIRMS BURIAL-CUM-C REMATION OF THE TRANSFEROR-COMPANY, TO PEEP INTO ITS AFFAIRS TO ASC ERTAIN WHETHER THEY HAVE BEEN CARRIED ON NOT ONLY IN A MANNER NOT PREJUDICIAL TO ITS MEMBERS BUT IN EVEN PUBLIC INTEREST. THE EXP RESSION 'PUBLIC INTEREST' MUST TAKE ITS COLOUR AND CONTENT FROM THE CONTEXT IN WHICH IT IS USED. THE CONTEXT IN WHICH T HE EXPRESSION PUBLIC INTEREST IS USED SHOULD PERMIT THE COURT T O BRING OUT WHY THE TRANSFEROR-COMPANY CAME INTO EXISTENCE, FOR WHAT PURPOSE IT WAS SET UP, WHO WERE ITS PROMOTER, WHO W ERE CONTROLLING IT, WHAT OBJECT WAS SOUGHT TO BE ACHIEV ED THROUGH CREATION OF THE TRANSFEROR-COMPANY AND WHY IT IS NO W BEING DISSOLVED BY MERGING IT WITH ANOTHER COMPANY. ALL T HESE ASPECTS WILL HAVE TO BE EXAMINED IN THE CONTEXT OF THE SATI SFACTION OF THE ITA NO. 170/DEL/2019 30 COURT WHETHER ITS AFFAIRS HAVE NOT BEEN CARRIED ON IN A MANNER PREJUDICIAL TO PUBLIC INTEREST. THAT IS THE COLOUR AND CONTENT OF THE EXPRESSION 'PUBLIC INTEREST' AS USED IN SECTION 394(1), SECOND PROVISO AND THE FACTS OF THIS CASE WILL HAV E TO BE EXAMINED KEEPING IN VIEW THE COLOUR AND CONTENT OF THE EXPRESSION PUBLIC INTEREST. THE SCHEME OF AMALGAMATION MUST HAVE SOME PURPOSE O R OBJECT TO ACHIEVE. IT WAS REPEATEDLY INQUIRED WHAT PURPOSE OR OBJECT WAS TO BE ACHIEVED BY A SCHEME OF AMALGAMATION OFFE RED FOR COURT'S SANCTION.IT WAS SAID THAT THE PROPERTY BELO NGING TO THE TRANSFEROR-COMPANY WILL BE AVAILABLE TO THE TRANSFE REE- COMPANY. NOW, THE PROPERTY BELONGING TO THE TRANSFE ROR- COMPANY IS SITUATED IN CALCUTTA. THE TRANSFEROR-COM PANY IS HAVING ITS FACTORY AT BILLIMORA. THE TRANSFEROR-COM PANY APPEARS TO HAVE NOT DONE ANY BUSINESS EXCEPT ACQUIRING CAPI TAL ASSET FROM ITS PARENT COMPANY OF WHICH IT WAS A SUBSIDIAR Y COMPANY AND GOT IT REVALUED SO THAT BY THE PROCESS OF REVAL UATION, THE EQUITY SHAREHOLDERS OF THE TRANSFEROR-COMPANY CAN G ET LARGE NUMBER OF SHARES OF THE TRANSFEREE COMPANY BY THE E XCHANGE RATIO PRESCRIBED IN THE SCHEME OF AMALGAMATION. NO APPARENT UNDERSTANDABLE PURPOSE OR OBJECT BEHIND THE SCHEME IS DISCERNIBLE. THE PURPOSE AND THE ONLY PURPOSE APPEA RS TO BE TO ACQUIRE CAPITAL ASSET OF THE DOC PVT. LTD. THROUGH THE INTERMEDIARY OF THE TRANSFEROR-COMPANY WHICH WAS CR EATED FOR THAT VERY PURPOSE TO MEET THE REQUIREMENT OF LAW, A ND IN THE PROCESS TO DEFEAT TAX LIABILITY THAT WOULD OTHERWIS E ARISE. IF SUCH BE THE SCHEME OF AMALGAMATION AND IF SUCH IS THE US E MADE OF THE TRANSFEROR-COMPANY BY THOSE CONTROLLING IT, IT CAN NEVER BE SAID THAT THE AFFAIRS OF THE TRANSFEROR-COMPANY SOU GHT TO BE AMALGAMATED, CREATED FOR THE SOLE PURPOSE OF FACILI TATING TRANSFER OF CAPITAL ASSET, THROUGH ITS MEDIUM, HAVE NOT BEEN CARRIED ON IN A MANNER PREJUDICIAL TO PUBLIC INTERE ST. PUBLIC ITA NO. 170/DEL/2019 31 INTEREST LOOMS LARGE IN THIS BACKGROUND, AND THE MA CHINERY OF JUDICIAL PROCESS IS SOUGHT TO BE UTILIZED FOR DEFEA TING PUBLIC INTEREST AND THE COURT WOULD NOT LEND ITS ASSISTANC E TO DEFEAT PUBLIC INTEREST, NAMELY, TAX PROVISION. THUS, WHEN AMALGAMATION SCHEME HAS BEEN APPROVED BY THE COURT, IT IS NOT OPEN FOR THE ASSESSING OFFICER AND CIT (A) TO HOLD THAT AMALGAMATION HAS BEEN USED BY THE ASSESSEE COM PANY AS A TOOL FOR TAX EVASION. THE AMALGAMATION ORDER PASSED BY THE HIGH COURT IS A JUDICIAL ORDER AND HAS STATUTORY FORCE A ND IN CASE, THE DEPARTMENT HAD ANY OBJECTION, THEN SAME SHOULD HAVE BEEN GIVEN BEFORE THE HONBLE HIGH COURT FOR WHICH SUFFICIENT T IME WAS ALLOWED. NOW, THE DEPARTMENT CANNOT CLAMOUR THAT SUCH AN AMAL GAMATION HAVE BEEN USED BY THE ASSESSEE AS A TOOL FOR TAX EV ASION OR AS COLOURABLE DEVICE. 16. HERE IN THIS CASE, BY TRANSFERRING THE EXCES S FAIR MARKET VALUE OF THE ASSETS/SHARES TO CAPITAL RESERVE COULD NOT B E TREATED AS A TAX EVASION PRACTICE. THE DIFFERENCE BETWEEN THE FAIR M ARKET VALUE OF ASSETS AND LIABILITIES TAKEN OVER AS PER THE BOOK V ALUES, WHICH HAS RESULTED IN CAPITAL RESERVE, WAS RECORDED IN THE BOOKS IN THE FOLLOWING MANNER:- PARTICULARS PRIAPUS PROPERTIES PVT LTD. PRIAPUS REAL ESTATE PVT LTD. PRIAPUS DEVELOPERS PVT LTD. TOTAL ON REVALUATION OF SHARES 232,19,92,283 85,84,92,000 318,04,84,283 ON REVALUATION OF LAND 3,27,760 3,27,760 3,27,760 9,83,280 ON PURCHASE CONSIDERATION 62,80,58,323 14,95,05,680 77,75,64,003 ITA NO. 170/DEL/2019 32 AS PER SAID SCHEME ITSELF, SUCH CAPITAL RESE RVE WAS PROHIBITED FOR ANY PURPOSE BY THE TRANSFEREE COMPANY. THUS, SU CH A CREATION OF CAPITAL RESERVE CANNOT BE QUESTIONED BY THE ASSE SSING OFFICER OR CIT(A) OR PERCEIVE IT AS ANY KIND OF TAX EVASION PR ACTICE. HERE IN THIS CASE, THE ASSETS TRANSFERRED TO THE ASSESSEE COMPAN Y FROM TRANSFEROR COMPANIES PURSUANT TO SCHEME OF AMALGAMA TION, INCLUDED 1,06,39,926 SHARES OF INDIA BULL HOUSING F INANCE LTD. IN THE FOLLOWING MANNER:- M/S. PRIAPUS PROPERTIES PVT LTD. HELD 70,39,926 SHA RES (ACQUIRED BY THEM AT RS.89,15,22,739/-); M/S. PRIAPUS REAL ESTATES PVT. LTD. HELD 36,00,000 SHARES (ACQUIRED BY THEM AT RS.78,48,00,000/-). THE FAIR MARKET VALUE OF THE SAID SHARES ON THE DA TE OF AMALGAMATION WAS RS. 456.47 PER SHARE WHICH AGGREGAT ED TO RS.485,68,07,021/-. POST AMALGAMATION, THE ASSESSEE COMPANY HAD SOLD 20,42,053 SHARES OF IHFL OUT OF 1,06,39,92 6 SHARES ACQUIRED ON AMALGAMATION, WHICH WAS SOLD FOR CONSIDER ATION OF RS.453.88 PER SHARE RESULTING INTO A SHORT TERM CAP ITAL LOSS OF RS.52,69,843/-. SAID LOSS HAS BEEN INCLUDED IN THE PROFIT AND LOSS ACCOUNT. THE LD. AO HAS ALLEGED THAT THIS RESERVE WH ICH HAS BEEN CREATED IS ON ACCOUNT OF REVALUATION OF ASSETS AND SINCE DURING THE RELEVANT PREVIOUS YEAR SUCH REVALUED ASSETS HAS BEE N DISPOSED OF AND SUCH AMOUNT WHICH IS STANDING AS RESERVE WAS NOT CREDITED IN THE PROFIT AND LOSS ACCOUNT. ITA NO. 170/DEL/2019 33 17. SUCH A PREMISE OF THE ASSESSING OFFICER CANN OT BE APPROVED FOR THE REASON THAT; FIRSTLY , THIS RESERVE HAS NOT BEEN CREATED ON REVALUATION OF ASSET ALBEIT SAME HAS BEEN ACQUIRED THROUGH AMALGAMATION AND THE SHARES HAVE BEEN VALUED AS PER THE PURCHASE METHOD FOR A CERTAIN PRICE. SECONDLY, IT IS NOT REVALUATION OF ANY ASSET HELD BY THE ASSESSEE, BECAUSE NO SUCH RESERVE HAS BEEN CREATED BY THE ASSESSEE ON REVALUATION OF SHARES. REVALUATION OF A SSETS TAKES PLACE ONLY WHEN THE ASSESSEE DECIDES TO REVALUE THE ASSET EXISTING IN THE BALANCE SHEET. LASTLY, IN THIS CASE ALL THE ASSETS BELONGED TO AMALGAMATIN G COMPANIES, THAT IS, THE SHARES OF IHFL ORIGINALLY B ELONGED TO PREPL AND PPPL AND APPEARED IN THEIR BALANCE SHEET; AND THESE ASSETS ENTERED IN THE BOOKS OF ASSESSEE BY VI RTUE OF AMALGAMATION VALUED ON FAIR MARKET VALUE AS MANDATE D BY THE ORDER OF HONBLE HIGH COURT. THUS, IT WOULD BE WRONG TO SAY THAT THERE WAS ANY KIND OF REVALUATION OF ASSETS. THEREFORE, THERE COULD NOT BE ANY QUESTION OF INVOK ING CLAUSE (J) OF EXPLANATION TO SECTION 115JB FOR CALCULATION OF BOOK PROFIT U/S . 115JB. HERE IN THIS CASE, NOWHERE IT HAS BEEN DISPUT ED THAT THE PROFIT AND LOSS ACCOUNT HAS NOT BEEN PREPARED IN CO MPLIANCE OF REQUIREMENT OF PART-I AND PART-II OF THE COMPANIES ACT, 2013 AND AS PER ACCOUNTING STANDARD. THE PROFIT AND LOSS ACCOUN T HAS BEEN APPROVED BY THE STATUTORY AUDITORS AND ALSO LAID BE FORE THE ITA NO. 170/DEL/2019 34 MEMBERS IN THE AGM, WHICH IS SACROSANCT FOR COMPUTIN G THE BOOK PROFIT U/S. 115JB. THUS, ONCE THE ACCOUNTS HAVE BEE N PREPARED IN ACCORDANCE WITH THE COMPANIES ACT DULY CERTIFIED BY STATUTORY AUDITORS AND APPROVED BY COMPANY AGM, THEN SAME CAN NOT BE DISTURBED AS HELD BY HONBLE SUPREME COURT IN THE C ASE OF APOLLO TYRES (SUPRA). HERE THE ASSESSING OFFICER CANNOT TI NKER WITH SUCH PROFIT AND LOSS ACCOUNT OR TREAT THE PART OF CAPITA L RESERVE BY HOLDING THAT IT SHOULD HAVE BEEN ROUTED THROUGH REG ULAR PROFIT AND LOSS ACCOUNT. THE REASONING GIVEN BY THE LD. CIT (A ) TOO CANNOT BE UPHELD FOR THE SAME REASON. 18. AS REGARDS THE CAPITAL GAIN COMPUTED U/S. 10 (38), AND APPLICATION OF 49(1) FOR COMPUTING THE CAPITAL GAIN , THE SAME WOULD BE RELEVANT WHILE COMPUTING THE NORMAL COMPUTATION O F CAPITAL GAIN IN THE COMPUTATION OF BOOK PROFIT WHERE THE SALE OF INVESTMENT IS INCLUDED IN THE BOOKS PREPARED AND PROFIT AND LOSS IS INCLUDED IN THE PROFIT AND LOSS ACCOUNT. IT IS ONLY IN SUCH SIT UATION THE SAID EXEMPTION U/S. 10(38) CANNOT BE INCLUDED. HERE IN T HIS CASE, THE DIFFERENCE BETWEEN THE COST OF ACQUISITION OF THE A MALGAMATED ASSETS AND SALE CONSIDERATION HAS RESULTED IN LOSS AND THE SAME HAS BEEN DULY RECORDED IN THE PROFIT AND LOSS ACCOUNT; AND THUS THE CONTENTION OF THE LD. CIT (A) THAT IN COMPUTATION O F BOOK PROFIT CAPITAL GAIN SHOULD BE COMPUTED BY TAKING HISTORICA L COST OF ASSETS IS NOT CORRECT. IT IS CLEAR FROM PLAIN READING OF C LAUSE (II) OF EXPLANATION TO SECTION 115JB, WHICH READS AS UNDER:- ITA NO. 170/DEL/2019 35 (II). THE AMOUNT OF INCOME TO WHICH ANY OF THE PROV ISIONS OF [SECTION 10 (OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE (38) THEREOF)] OR SECTION 11 OR SECTION 12 APPLY, IF ANY SUCH AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT; THE PROVISO TO SECTION 10(38) RESORTED BY THE LD. CIT (A) CANN OT BE READ INDEPENDENTLY AS THE SAME HAS TO READ ALONGWITH CLA USE (II) OF SECTION 115JB. SUCH A FINDING OF THE LD. CIT (A) TO UPHOLD THE ADDITION IN OUR OPINION IS NOT CORRECT. 19. THUS, WE HOLD THAT IN THIS CASE THE PROVISION S OF CLAUSE (J) OF EXPLANATION 1 TO SECTION 115JB WOULD NOT BE APPLICABLE AT ALL AS , THERE IS NO DISPOSAL OF ASSET FROM THE AMOUNT STAND ING IN REVALUATION RESERVE RELATING TO REVALUED ASSET AS P ER THE REASONING GIVEN ABOVE; AND ACCORDINGLY, THE ADDITION MADE BY THE AO AND SUSTAINED BY THE LD. CIT (A) IS DIRECTED TO BE DELE TED. 20 THE OTHER ISSUE INVOLVED IS WITH REGARD TO ADDI TION MADE U/S. 14A OF RS.1,58,96,544/-. THE BRIEF FACTS ARE THAT T HE ASSESSEE COMPANY HAS EARNED DIVIDEND INCOME OF RS.7,73,92,42 3/- ON SHARES AND RS. 92,345/- ON MUTUAL FUNDS. THE DIVIDE ND WAS EARNED FROM SHARES OF IHFL, WHICH WAS ACQUIRED BY THE ASSESS EE COMPANY ON AMALGAMATION. HENCE, IT WAS STATED THAT IT HAS NO T INCURRED ANY EXPENDITURE. FURTHER, NO LOAN FUND WAS UTILIZED FOR MAKING ANY INVESTMENT. HOWEVER, THE ASSESSEE HAD SUO MOTO CALC ULATED THE DISALLOWANCE AT RS.7,74,848/-. THE ASSESSING OFFICER WITHOUT EXAMINING THE BOOKS OF ACCOUNT, NATURE OF EXPENDITU RE DEBITED, HAS ITA NO. 170/DEL/2019 36 PROCEEDED TO APPLY RULE 8D MECHANICALLY AND CALCULA TED DISALLOWANCE OF RS.1,58,96,544/- WHICH IS MOSTLY ON A CCOUNT OF INDIRECT EXPENDITURE CALCULATED U/S. 8D(2)(II) WHIC H HAS BEEN CONFIRMED BY THE LD. CIT(A) ALSO FOLLOWING THE SPECI AL BENCH DECISION OF ITAT IN THE CASE OF DAGA CAPITAL MANAGE MENT (P) LTD. 26 SOT 603 (MUM). 21. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS, WE F IND THAT THE ASSESSING OFFICER WHILE MAKING THE ADDITION HAS NOT EXAMINED THE VERACITY OF CLAIM MADE BY THE ASSESSEE NOR HAS HE E XAMINED THE BOOKS OF ACCOUNT WHICH IS A STATUTORY MANDATE PROVID ED IN SUB- SECTION (2) OF SECTION 14A. HERE IN THIS CASE, THE MAJOR EXEMPT INCOME HAS COME FROM SHARES OF IHFL WHICH HAS BEEN A CQUIRED BY THE ASSESSEE BY WAY OF AMALGAMATION. HENCE, IT CANNO T BE SAID THAT THE ASSESSEE COULD HAVE INCURRED ANY KIND OF INDIRE CT EXPENSES FOR EARNING OF DIVIDEND INCOME. IT IS TRITE AND WELL SE TTLED LAW BY HONBLE DELHI HIGH COURT AND NOW BY THE HONBLE APEX COURT IN MAXOPP INVESTMENT REPORTED IN 402 ITR 640 (SC) , THAT IF THE ASSESSING OFFICER HAS NOT RECORDED HIS SATISFACTION TO DISBELIEVE THE DISALLOWANCE MADE BY ASSESSEE, HE CANNOT RESORT TO T HE PROVISIONS OF RULE 8D. RELEVANT OBSERVATIONS OF HONBLE SUPREM E COURT READ AS UNDER: IN THE FIRST INSTANCE, IT NEEDS TO BE RECOGNISED TH AT AS PER SECTION 14A(1), DEDUCTION OF THAT EXPENDITURE IS NO T TO BE ALLOWED WHICH HAS BEEN INCURRED BY THE ASSESSEE IN RELATION TO ITA NO. 170/DEL/2019 37 INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. AXIOMATICALLY, IT IS THAT EXPENDITURE ALONE WH ICH HAS BEEN INCURRED IN RELATION TO THE INCOME WHICH IS INCLUDI BLE IN TOTAL INCOME THAT HAS TO BE DISALLOWED. IF AN EXPENDITURE INCURRED HAS NO CAUSAL CONNECTION WITH THE EXEMPTED INCOME, THEN SUCH AN EXPENDITURE WOULD OBVIOUSLY BE TREATED AS NOT RE LATED TO THE INCOME THAT IS EXEMPTED FROM TAX, AND SUCH EXPENDIT URE WOULD BE ALLOWED AS BUSINESS EXPENDITURE. TO PUT IT DIFFE RENTLY, SUCH EXPENDITURE WOULD THEN BE CONSIDERED AS INCURRED IN RESPECT OF OTHER INCOME WHICH IS TO BE TREATED AS PART OF THE TOTAL INCOME. IF EXPENDITURE IS INCURRED ON EARNING THE DIVIDEND INCOME, THAT MUCH OF THE EXPENDITURE WHICH IS ATTRIBUTABLE TO TH E DIVIDEND INCOME HAS TO BE DISALLOWED AND CANNOT BE TREATED A S BUSINESS EXPENDITURE. KEEPING THIS OBJECTIVE BEHIND SECTION 14A IN MIND, THE SAID PROVISION HAS TO BE INTERPRETED, PARTICULA RLY, THE WORD 'IN RELATION TO THE INCOME' THAT DOES NOT FORM PART OF TOTAL INCOME. CONSIDERED IN THIS HUE, THE PRINCIPLE OF APPORTIONM ENT OF EXPENSES COMES INTO PLAY AS THAT IS THE PRINCIPLE W HICH IS ENGRAINED IN SECTION 14A.[PARA 34] HAVING REGARD TO THE LANGUAGE OF SECTION 14A(2), R EAD WITH RULE 8D OF THE RULES, IT IS ALSO MADE CLEAR THAT BEFORE APPLYING THE THEORY OF APPORTIONMENT, THE ASSESSING OFFICER NEED S TO RECORD SATISFACTION THAT HAVING REGARD TO THE KIND OF THE ASSESSEE, SUO MOTO DISALLOWANCE UNDER SECTION 14A WAS NOT CORRECT . IT WILL BE IN THOSE CASES WHERE THE ASSESSEE IN HIS RETURN HAS HIMSELF APPORTIONED BUT THE ASSESSING OFFICER WAS NOT ACCEP TING THE SAID APPORTIONMENT. IN THAT EVENTUALITY, IT WILL HA VE TO RECORD SATISFACTION TO THIS EFFECT. FURTHER WHILE RECORDIN G SUCH A SATISFACTION, NATURE OF LOAN TAKEN BY THE ASSESSEE FOR PURCHASING THE SHARES/MAKING INVESTMENT IN SHARES I S TO BE EXAMINED BY THE ASSESSING OFFICER. ITA NO. 170/DEL/2019 38 22. THUS, IN ABSENCE OF ANY SATISFACTION BEING RECORDED BY THE ASSESSING OFFICER, NO DISALLOWANCE COULD HAVE BEEN M ADE. ACCORDINGLY, DISALLOWANCE MADE BY THEAO AND CONFIRME D BY THE LD. CIT (A) IS DIRECTED TO BE DELETED. 23. SINCE WE HAVE ALREADY DELETED THE ADDITION MADE U/S. 14A, HENCE WE DO NOT DEEMED FIT TO DECIDE, WHETHER SUCH D ISALLOWANCE SHOULD BE MADE WHILE COMPUTING THE BOOK PROFIT U/S. 115JB WHICH OTHERWISE IS COVERED BY THE DECISION OF ITAT DELHI B ENCH IN THE CASE OF ACIT VS. VIREET INVESTMENT PVT. LTD. IN ITA NO. 502/DEL/2012. 24. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH MARCH, 2019 . SD/- SD/- (L.P. SAHU) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 12 TH MARCH, 2019. *AKS* COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPOND ENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI