DCIT, Cir-3(1)(2), Ahmedabad V. M/s. Ozone India Ltd, Ahmedabad

ITA 2081/AHD/2018

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 6704 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 6 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 05-10-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIRENDRA OJHA
• Keywords: Cost of acquisition; Fair market value; Scheme of amalgamation; Tax effect; Capital receipt
• Section: 143(3); 56(2); 13; 22; 56

Judgement Text

, A IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD ( CONVENED THROUGH VIRTUAL COURT ) BEFORE SHRI RAJPAL YADAV, VICE PRESIDENT AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER . / I.T.A. NOS. 2081/AHD/2018 WITH CROSS OBJECTION NO. 103/AHD/2019 ( ASSESSMENT YEAR : 2013-14) DCIT CIRCLE 3(1)(2), AHMEDABAD / VS. M/S. OZONE INDIA LTD. 301/1, PARSHWA, OPP. RAJPATH CLUB, S. G. HIGHWAY, BODAKDEV, AHMEDABAD ./ ./ PAN/GIR NO. : AAACO9588N ( APPELLANT / RESPONDENT ) .. ( RESPONDENT / CROSS OBJECTOR ) / REVENUE BY : SHRI VIRENDRA OJHA, CIT.D.R. / ASSESSEE BY : MS. NUPUR SHAH, A.R. DATE OF HEARING 03/03/2021 ! / DATE OF PRONOUNCEMENT 13/04/2021 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE REVENUE . THE ASSESSEE HAS FILED CROSS OBJECTION IN THE APP EAL OF THE REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-9, AHMEDABAD (CIT(A) IN SHORT) DATED 18.07.2018 ARISING ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 2 - IN THE ASSESSMENT ORDER DATED 30.03.2016 PASSED BY THE ASSESSING OFFICER (AO) UNDER S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) CONCERNING AY 2013-14. 2. THE APPEAL OF REVENUE AND CROSS OBJECTION OF ASS ESSEE EMANATES FROM COMMON ISSUE AND THUS DISPOSED OFF TO GETHER. 3. TO BEGIN WITH, WE SHALL TAKE UP REVENUE APPEAL F OR ADJUDICATION PURPOSES. ITA NO.2081/AHD/2018 REVENUES APPEAL- AY 2013-14 4. GROUNDS OF APPEAL RAISED BY THE REVENUE READ AS UNDER: (A) THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS 43,99,66,156/- MADE BY THE ASSESSING OFFICER U/S 56(2)(VIIB) OF THE ACT ON ACCOUNT OF DIFFERENCE OF NET ASSET VALUE OF RS.54,21,16,156/- CREDITED IN THE BOOKS WI THOUT APPRECIATING THE FACTUAL BACKDROP OF THE CASE IN WH ICH THE ADDITION WAS MADE BY THE ASSESSING OFFICER. (B) THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE FAIR MARKET VALUE OF SHARES OF ASS ESSEE COMPANY @ RS.6.81/- PER SHARE BASED ON WHICH ADDITI ON WAS CORRECTLY MADE BY THE ASSESSING OFFICER. (C) THE LD CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS 1,49,137/- MADE BY ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF ARCHITECT FEES ATTRIBUTABLE TO T HE UNSOLD INVENTORY. 5. BRIEFLY STATED, THE ASSESSEE COMPANY FILED IT S RETURN OF INCOME FOR AY 2013-14 IN QUESTION WHICH WAS SUBJECT ED TO SCRUTINY ASSESSMENT. IN THE COURSE OF ASSESSMENT PROCEEDING S, IT WAS GATHERED BY THE AO THAT ONE M/S. KALAVIR ESTATE PVT . LTD. (KEPL) AMALGAMATED WITH THE ASSESSEE COMPANY UNDER THE SCH EME OF AMALGAMATION. THE OBJECT OF AMALGAMATION WAS STATE D TO ACHIEVE BETTER UTILIZATION OF RESOURCES, HIGHER RETURN ON C APITAL, ECONOMY OF ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 3 - SCALE, OPTIMUM UTILIZATION OF AVAILABLE RESOURCES A ND EFFECTIVE CONTROL FOR BETTER PROFITABILITY. THE SCHEME OF AM ALGAMATION OF KEPL WITH ASSESSEE COMPANY WAS APPROVED BY THE HON BLE GUJARAT HIGH COURT VIDE ORDER DATED 07.09.2012 EFFECTIVE FR OM 01.04.2012 WHEREBY ALL THE ASSETS AND LIABILITIES OF M/S. KEPL WERE VESTED WITH THE ASSESSEE COMPANY AS PER SCHEME PLACED BEFORE TH E HONBLE COURT. HENCE, ON COMING INTO EFFECT OF THE SCHEME ON 01.04.2012, ALL THE ASSETS EXCEPT LAND AND ALL THE LIABILITIES OF KEPL WERE TAKEN IN THE BOOKS OF ASSESSEE AT BOOK VALUE AND LAND PAR CELS WERE TAKEN AT REVALUED PRICE. AS STATED, THE TRANSACTION OF A MALGAMATION HAS BEEN ACCOUNTED UNDER THE POOLING OF INTEREST METH OD AS PRESCRIBED BY THE ACCOUNTING STATNDARD-AS-14 ISSUED BY THE INS TITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) CONSEQUENT UP ON WHICH THE DIFFERENCE BETWEEN NET ASSETS OF KEPL VESTED WITH A SSESSEE COMPANY AND VALUE OF SHARES OF ASSESSEE COMPANY COR RESPONDINGLY ISSUED WAS ACCOUNTED FOR AS CAPITAL RECEIPTS AND TR EATED AS CAPITAL RESERVE. THE EXCESS VALUE OF NET ASSETS VIS--VIS CORRESPONDING VALUE OF SHARES ISSUED TOWARDS CONSIDERATION FOR AM ALGAMATION WAS THUS CREDITED IN THE BOOKS OF ASSESSEE COMPANY AS CAPITAL RESERVE. THE ASSESSEE COMPANY HAS ACCOUNTED FOR THE LAND SO ACQUIRED AS TRADING ASSET OF THE ASSESSEE COMPANY. 5.1 IN THIS BACKDROP, THE AO NOTED THAT ON THE DATE OF AMALGAMATION, THE ISSUED AND PAID UP CAPITAL OF ASS ESSEE COMPANY STOOD AT RS.21,00,000/- DIVIDED INTO 2,10,000 EQUIT Y SHARES OF RS.10/- EACH AND THAT OF KEPL STOOD AT RS.5,00,000/ - DIVIDED INTO 50,000 EQUITY-SHARES OF RS.10/- EACH. PURSUANT TO SCHEME OF AMALGAMATION, SHAREHOLDERS OF KEPL GOT 300 EQUITY S HARES OF ASSESSEE COMPANY FOR EACH SHARE OF KEPL TOWARDS CON SIDERATION FOR TRANSFER OF ITS ASSETS AND LIABILITIES. THE AO OBS ERVED THAT THE AMALGAMATED COMPANY I.E. ASSESSEE RECEIVED ASSETS W ORTH ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 4 - RS.60,26,55,864/- AND LIABILITIES WORTH RS.6,05,39, 708/- OF THE AMALGAMATING COMPANY I.E. KEPL. THUS, ASSESSEE REC EIVED NET ASSETS WORTH RS.54,21,16,156/- AGAINST CORRESPONDIN G ISSUE OF SHARES HAVING FACE VALUE OF RS.15,00,00,000/- TO THE SHARE HOLDERS OF KEPL. THE AO THUS OBSERVED THAT ASSESSEE HAS RECEIVED EXC ESS NET ASSET WORTH RS.39,21,16,156/- ON ACCOUNT OF AMALGAMATION WHICH WAS CREDITED BY IT AS CAPITAL RESERVE OF THE AMALGAMATE D COMPANY. 5.2 IN THE OPINION OF THE AO, THE EXCESS VALUE OF A SSETS SO RECEIVED BY ASSESSEE COMPANY WAS LIABLE FOR TAXATIO N IN THE HANDS OF THE ASSESSEE BEING EXCESS CONSIDERATION FOR ISSUE O F ITS SHARE. A SHOW CAUSE WAS ACCORDINGLY ISSUED AND REPLY THEREON FILED BY THE ASSESSEE WAS ALSO RECORDED. HOWEVER, THE AO DID NO T FIND MERIT IN THE DEFENSE PROPAGATED BY THE ASSESSEE IN ITS REPLY . THE AO OBSERVED THAT THE ACCOUNTING TREATMENT GIVEN BY THE ASSESSEE IS IN DEPARTURE WITH AS-14 ISSUED BY THE ICAI. THE AO SI MULTANEOUSLY OBSERVED THAT THE ASSESSEE IS LIABLE TO TAX ON EXCE SS CONSIDERATION RECEIVED QUA FACE VALUE OF SHARES ISSUED UNDER THE HEAD INCOME FROM OTHER SOURCES IN TERMS OF S.56(2)(VIIB) OF TH E ACT. IT WAS THUS ESSENTIALLY OBSERVED THAT THE AGGREGATE CONSIDERATI ON IN THE FORM OF NET ASSETS (I.E. TOTAL ASSETS MINUS TOTAL LIABILITI ES ACQUIRED) RECEIVED BY THE ASSESSEE COMPANY FOR ISSUE OF ITS SHARES WHI CH EXCEEDS ITS FAIR VALUE IS LIABLE TO TAX IN TERMS OF SECTION 56( 2)(VIIB) OF THE ACT. FOR DETERMINATION OF FAIR VALUE OF SHARES OF ISSUIN G COMPANY I.E. ASSESSEE, THE AO RESORTED TO RULE 11UA OF THE INCOM E TAX RULES. THE FAIR VALUE WAS COMPUTED AT RS.6.81 PER SHARE AS AGAINST THE FACE VALUE OF RS.10/- PER SHARE ISSUED TO KEPL ON AMALGA MATION AS NOTED ABOVE. THE TOTAL FAIR MARKET VALUE OF SHARES ISSUE D TO SHAREHOLDERS OF KEPL WAS CONSEQUENTLY WORKED OUT AT RS.10,21,50, 000/- (1,50,00,000 X 6.81). THE AO THUS CONCLUDED THAT O N AMALGAMATION, THE ASSESSEE IS BENEFITTED BY RECEIVING NET CONSIDE RATION WORTH ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 5 - RS.54,21,16,156/- IN THE FORM OF EXCESS VALUE OF AS SETS OF KEPL AGAINST WHICH SHARES CARRYING INTRINSIC VALUE RS.10 ,21,50,000/- (FACE VALUE OF RS.15CRORE) WERE ISSUED TO THE SHARE HOLDERS OF KEPL I.E. AMALGAMATING COMPANY. CONSEQUENTLY, THE AO WA S OF THE OPINION THAT ASSESSEE IS BENEFITTED BY SURPLUS MONE Y WORTH NUMERICALLY WORKED OUT AT RS.43,99,66,156/- ON SUCH AMALGAMATION FOR WHICH THE ASSESSEE IS SUSCEPTIBLE TO TAXATION U NDER S.56(2)(VIIB) OF THE ACT. 5.3 A REFERENCE UNDER S.144A OF THE ACT WAS MADE TO THE SUPERIOR AUTHORITY I.E. ADDL. CIT FOR ISSUING SUITABLE DIREC TIONS IN THIS REGARD. ON REFERENCE SO MADE, THE ADDL. COMMISSION ER OF INCOME TAX COMMENCED PROCEEDINGS UNDER S.144A OF THE ACT A ND ULTIMATELY HELD THAT SECTION 56(2)(VIIB) OF THE ACT IS TRIGGER ED IN THE FACTS OF THE CASE ON THE EXCESS CONSIDERATION/ASSET WORTH RE CEIVED BY THE ASSESSEE COMPANY IN LIEU OF CORRESPONDING ISSUE OF SHARES. THE ADDL. CIT CONSEQUENTLY DIRECTED THE AO TO COVER THE EXCESS CONSIDERATION SO RECEIVED AS INCOME IN THE AMBIT OF TAXATION ON THE TOUCHSTONE OF SECTION 56(2)(VIIB) OF THE ACT. THE TAXABLE INCOME OF THE ASSESSEE WAS CONSEQUENTLY INCREASED TO THE EXTE NT OF RS.43,99,66,156/- TOWARDS ALLEGED EXCESS CONSIDERAT ION. 6. AGGRIEVED BY THE ADDITIONS MADE BY THE AO UNDER THE SHELTER OF SECTION 56(2)(VIIB) OF THE ACT ON ACCOUNT OF ALL EGED EXCESS CONSIDERATION RECEIVED BY THE ASSESSEE IN THE FORM OF ASSETS AND LIABILITIES OF AMALGAMATING COMPANY OVER FAIR MARKE T VALUE OF SHARES ISSUED TO KEPL, THE ASSESSEE PREFERRED APPEA L BEFORE THE CIT(A). THE CIT(A) IN THE COURSE OF THE APPELLATE P ROCEEDINGS BEFORE HIM, TOOK NOTE OF THE OBSERVATIONS MADE BY T HE AO AS WELL AS THE EXPLANATIONS AND LEGAL CONTENTIONS MADE ON BEHA LF OF THE ASSESSEE FOR INAPPLICABILITY OF SECTION 56(2)(VIIB) OF THE ACT IN THE ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 6 - FACTS OF THE CASE. THE CIT(A) FOUND HIMSELF IN AGR EEMENT WITH THE DETAILED SUBMISSIONS MADE BY THE ASSESSEE ON INAPPL ICABILITY OF S.56(2)(VIIB) OF THE ACT IN THE FACTS OF THE CASE. CONSEQUENTLY, THE CIT(A) REVERSED THE ACTION OF AO AND DELETED THE IM PUGNED ADDITIONS. THE RELEVANT OPERATIVE PARA OF THE ORDE R OF THE CIT(A) IS REPRODUCED HEREUNDER: 4.7. I HAVE CONSIDERED THE ASSESSMENT ORDER AND AR GUMENTS OF THE APPELLANT. THE APPELLANT COMPANY HAS ISSUED 1.5 LAC SHARES TO THE SHAREHOLDERS OF M/S. KALAVIR ESTATE PVT. LTD. AS PE R THE AMALGAMATION SCHEME APPROVED BY HONOURABLE HIGH COU RT. THE SHARES HAVE BEEN ISSUED AT THE FACE VALUE OF RS. 10 7- PER SHARE IN THE RATIO OF 1 TO 300 SHARES HELD BY THE SHAREHOLDE RS IN THE AMALGAMATING COMPANY. THE RELEVANT CLAUSE OF SCHEME OF AMALGAMATION AS APPROVED BY HONOURABLE GUJARAT HIGH COURT VIDE ORDER DATED 07/09/2012 IN COMPANY PETITION NO. 89 OF 2012 IS AS UNDER:- ' CLAUSE - 9 UPON THE TRANSFER OF UNDERTAKING OF KEPL TO OIL AND THE VESTING OF THE SAID ASSETS AND LIABILITIES AND THE AMALGAMATION BECOMING EFFECTIVE IN TERMS OF THIS SC HEME, THEN, IN CONSIDERATION OF THE AMALGAMATION AND SUBJ ECT TO THE PROVISIONS OF THIS SCHEME, OIL, SHALL, WITHOUT ANY FURTHER ACT, APPLICATION AND DEED, ISSUE AND ALLOT TO THE, EQUITY SHAREHOLDERS OF KEPL 300 EQUITY SHARES IN OI L OF RS. 10/- EACH, CREDITED AS FULLY PAID-UP IN THE CAPITAL OF OIL, FOR EVERY EQUITY SHARES OF THE FACE VALUE OF RS. 10/- E ACH HELD BY THE SHAREHOLDERS IN KEPL' 4.8. THE CLAUSE - 10 OF THE SCHEME OF AMALGAMATION FOR ACCOUNTING OF ASSETS AND LIABILITIES OF M/S. KALAVIR ESTATE PV T. LTD. (KEPL) IN THE APPELLANT COMPANY (OIL) HAS BEEN MENTIONED AS U NDER: - '10.1. UPON THE COMING INTO EFFECT OF THE SCHEME, O IL SHALL RECORD ALL ASSETS (EXCEPT LAND) AND LIABILITIES VES TED IN OIL PURSUANT TO THE SCHEME AT THEIR BOOK VALUES. THE OI L SHALL RECORD IN ITS BOOKS THE FAIR MARKET VALUE OF THE LA ND WITH RESULTANT CORRESPONDING ACCOUNTING EFFECTS AS PER G AAP AND ACCOUNTING STANDARD (AS)-14. 10.2. OIL SHALL CREDIT TO ITS SHARE CAPITAL ACCOUNT IN ITS BOOKS OF ACCOUNT THE AGGREGATE FACE VALUE OF THE NE W SHARES ISSUED BY IT TO THE MEMBERS OF KEPL PURSUANT TO THI S SCHEME'. ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 7 - THE APPELLANT COMPANY HAS DISCHARGED THE CONSIDERATION OF AMALGAMATION BY ISSUING 1.5 LAC EQUITY SHARES OF FACE VALUE OF RS. 10/- EACH AS PER THE AMALGAMAT ION SCHEME. THE AO AND ADDL. CIT HAVE INVOKED THE PROVISIONS OF SECTION 56(2) (VIIB) ON THE ISSUE OF SHARE WITHOUT APPRECIATING T HE INTENT AND LETTER OF SECTION 56(2)(VIIB). SECTION 56(2)(VIIB) HAS BEEN INTRODUCED BY THE FINANCE ACT, 2012 W.E.F. 01/04/20 13 TO DETER THE GENERATION AND USE OF UNACCOUNTED MONEY AND TAXING THE SHARE PREMIUM IN EXCESS OF MARKET VALUE WHICH IS EVIDENT FROM HONOURABLE FINANCE MINISTER'S BUDGET SPEECH AT THE TIME OF INTRODUCTION OF SECTION 56(2)(VIIB). THE EXPLANATOR Y MEMORANDUM TO THE PROVISIONS OF FINANCE BILL 2012 AND FINANCE ACT, 2012 HAS EXPLAINED THE PROVISIONS AS UNDER :- 'SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE TO BE TAKEN AS INCOME : SECTION 56(2) PROVIDES SPECIFIC CATEGORY OF INCOME THAT SHALL BE CHARGEABLE TO INCOME TAX UNDER THE HEAD INCOME F ROM OTHER SOURCES. IT IS PROPOSED TO INSERT A NEW CLAUS E IN SECTION 56(2). THE NEW CLAUSE WILL APPLY WHERE A CO MPANY NOT BEING A COMPANY IN ITS PUBLIC ARE SUBSTANTIALLY INTERESTED RECEIVES IN ANY PREVIOUS YEAR FROM ANY P ERSON BEING A RESIDENT ANY CONSIDERATION FOR ISSUE OF SHA RES, IN SUCH A CASE, IF THE CONSIDERATION RECEIVED FOR THE ISSUE OF SHARES EXCEEDS THE FACE VALUE OF SUCH SHARES, THE A GGREGATE CONSIDERATION RECEIVED FOR SUCH SHARE AS EXCEEDS TH E FAIR MARKET VALUE OF THE SHARE SHALL BE CHARGEABLE TO IN COME TAX UNDER THE HEAD INCOME FROM OTHER SOURCES....' IT IS THEREFORE, LEGISLATIVE INTENT TO COVER THE CA SES OF CLOSELY HELD COMPANY WHO RECEIVES DISPROPORTIONATE AMOUNT WHILE ISSUING SHARES OVER AND ABOVE THE FACE VALUE OF SHARE BY WA Y OF SHARE PREMIUM, IN THE INSTANT CASE, SHARES HAVE BEEN ISSU ED AT THE FACE VALUE AND THERE IS NO SHARE PREMIUM RECEIVED, THERE FORE, THERE IS NO QUESTION OF APPLICABILITY OF SECTION 56(2)(VIIB) . IN FACT, IN THE SCHEME OF AMALGAMATION, CONSIDERATION IS PAID BY TH E AMALGAMATED COMPANY IN THE FORM OF ISSUE OF SHARE C APITA! RATHER THAN CONSIDERATION BEING RECEIVED BY THE APPELLANT COMPANY AS UNDERSTOOD BY THE AO / ADDL. CIT. THE PERSONS TO WH OM SHARES HAVE BEEN ALLOTTED HAVE NOT PAID ANYTHING FOR ALLOT MENT OF SHARES. THE SHARES HAVE BEEN ALLOTTED IN CONSIDERATION OF T HEIR SHAREHOLDING IN. THE AMALGAMATING COMPANY. 4.9. SECTION 2(1B) OF INCOME TAX ACT, 1961 DEFINES THE MEANING OF AMALGAMATION AS MERGER OF ONE OR MORE COMPANY WITH ANOTHER COMPANY OR MERGER OF TWO OR MORE COMPANY TO FORM ON E COMPANY IN SUCH A MANNER THAT ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 8 - 1) ALL THE PROPERTY OF THE AMALGAMATING COMPANY OR COMPANIES IMMEDIATELY BEFORE THE AMALGAMATION BECOMES THE PROPERTY OF THE AMALGAMATED COMPANY BY VIRTUE OF THE AMALGAMATION. (2) ALL THE LIABILITIES OF THE AMALGAMATING COMPAN Y OR COMPANIES IMMEDIATELY BEFORE THE AMALGAMATION BECOMES THE LIABILITIES OF THE AMALGAMATED COMPANY BY VIRTUE OF THE AMALGAMATION. (3) SHAREHOLDERS HOLDING AT LEAST THREE-FOURTHS IN VALUE OF THE SHARES IN THE AMALGAMATING COMPANY OR COMPANIES (OTHER THAN SHARES ALREADY HELD THEREIN IMMEDIATELY BEFORE THE AMALGAMATED COMPANY OR ITS NOMINEE) BECOMES THE SHAREHOLDERS OF THE AMALGAMATED COMPANY BY VIRTUE OF THE AMALGAMATION. 4.10. THE ACCOUNTING STANDARD - 14 SPECIFICALLY DEA LS WITH THE ACCOUNTING FOR AMALGAMATION AND TREATMENT OF ANY RE SULT IN DIFFERENCE ARISING ON ACCOUNT OF AMALGAMATION IN TH E BOOKS OF TRANSFERRE COMPANY. BASED ON THE PROPRIETARY OF THE TRANSACTION, THE STANDARD CLASSIFIES THE AMALGAMATION AS UNDER:- ALL ASSETS ARID LIABILITIES OF THE TRANSFEROR CO MPANY BECOME, AFTER AMALGAMATION, THE ASSETS, AND LIABILITIES OF THE TRANSFEREE COMPANY. SHAREHOLDERS HOLDING NOT LESS THAN 90% OF THE FA CE VALUE OF THE EQUITY SHARES OF THE TRANSFEROR COMPAN Y (OTHER THAN THE EQUITY SHARES ALREADY HELD THEREIN, IMMEDIATELY BEFORE AMALGAMATION BY THE TRANSFEREE COMPANY OR ITS SUBSIDIARIES OR THEIR NOMINEES) BECO ME EQUITY SHAREHOLDERS OF THE TRANSFEREE COMPANY BY VIRTUE OF AMALGAMATION. THE CONSIDERATION IS DISCHARGED BY THE TRANSFERE E COMPANY WHOLLY BY THE ISSUE OF EQUITY SHARES ONLY, EXCEPT THAT CASH MAY BE PAID IN RESPECT OF ANY FRACTIONAL SHARES. AS PER THE SECTION 2(1B) OF THE I. T. ACT, 1961 AND ACCOUNTING STANDARD - 14, THE SHAREHOLDERS OF AMALG AMATING COMPANY BECOME SHAREHOLDERS OF APPELLANT COMPANY BY VIRTUE OF AMALGAMATION AND THE CONSIDERATION IS TO BE DISCHAR GED BY THE AMALGAMATED APPELLANT COMPANY BY ISSUE OF SHARE BUT NOT THE OTHER WAY AROUND AS UNDERSTOOD BY THE AO. 4.11. THE APPELLANT COMPANY HAS RECEIVED ASSETS OF RS.6,10,39,708/- AS PER BOOK VALUE OF M/S. KALAVIR ESTATE PVT. LTD. ALONG WITH ITS LIABILITY ON AMALGAMATION. THE AMALG AMATING ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 9 - COMPANY HAS TRANSFERRED ALL ASSETS AS PER BOOK VALU E EXCEPT THE LAND OF RS.5.38 CRORE WHICH WAS REVALUED AT RS.59.5 CRORE AND ACCOUNTED AT MARKET VALUE. THE AMALGAMATED COMPANY HAD ASSETS OVER LIABILITY OF ONLY RS.8,59,449/- IN THE FORM OF SHARE CAPITAL AND RESERVE AND SURPLUS AT THE TIME OF AMALGAMATION. TH E CAPITAL ACCOUNT RESERVE OF RS.39,21,16,156/- WAS CREDITED O N ACCOUNT OF REVALUATION OF LAND AS BALANCING FIGURE AS PER THE SCHEME OF AMALGAMATION AND ACCOUNTING STANDARD - 14. CAPITAL RESERVE ACCOUNT WHICH IS NOTIONAL BY NO STRETCH OF IMAGINAT ION CAN BE CALLED AS A SHARE PREMIUM OR CONSIDERATION FOR ISSU E OF SHARE. THEREFORE, SECTION 56(2) (VIIB) HAS NO APPLICABILIT Y IN THE CASE OF AMALGAMATION ON ISSUE OF SHARES AT FACE VALUE. 4.12. IT IS EVIDENT FROM PARA - 4 OF THE ASSESSMENT ORDER THAT AO HAD INITIALLY PROPOSED TO TAX THE CAPITAL RESERVE O F RS.39,21,16,1567- ON ACCOUNT OF AMALGAMATION, BUT S UBSEQUENTLY INVOKED SECTION 56(2) (VIIB) OF THE I. T. ACT, 1961 . I HAVE EXAMINED THE ISSUE OF TAXABILITY ON REVALUATION OF LAND AND CREDIT OF CAPITAL RESERVE ACCOUNT AS A BALANCING FIGURE IN THE CASE O F AMALGAMATION FROM THIS POINT AS WELL. APPELLANT COMPANY BUT FOR THE SCHEME OF AMALGAMATIO N APPROVED BY HONOURABLE HIGH COURT TRANSFERRING ALL ASSETS EXCEPT LAND AT BOOK VALUE, WAS REQUIRED TO TRANSFER ALL-AS SETS INCLUDING LAND AT BOOK VALUE AS PER POOLING OF INTEREST METHO D PRESCRIBED IN AS-14. IN THAT CASE, ASSETS OVER LIABILITY OF AMALG AMATING COMPANY WOULD HAVE BEEN ONLY RS.8,59,449/- AS AGAINST RS.54 ,21,16,156/- ACCOUNTED BY APPELLANT COMPANY WHICH BECAME THE BAS IS FOR INVOCATION OF SECTION 56(2) (VIIB) BY AO. THEREFORE , THE NET ASSET OVER LIABILITY OF RS.54,21,16,156/- OF AMALGAMATING COMPANY IS ONLY DUE TO REVALUATION OF LAND AND FOR ACCOUNTING PURPOSES, AS LAND OF BOOK VALUE OF RS.5.38 CRORE HAS BEEN REVALU ED AT RS.59.55 CRORE AND TAKEN AS STOCK IN TRADE. THE HONOURABLE S UPREME COURT IN THE CASE OF CHAIN RUP SAMPATRAM VS. CIT [224 ITR 481] AND CIT VS. HIND CONSTRUCTION LTD. [83 ITR 211] HAS HEL D THAT PUTTING THE STOCK AT MARKET VALUE DOES NOT AND CANNOT BRING IN ANY REAL PROFIT WHICH IS NECESSARY FOR TAXING THE INCOME. TH E HONOURABLE SUPREME COURT IN THE CASE OF CIT VS. BIRLA GWALIOR PVT. LTD. [89 ITR 266] AND CIT, BOMBAY CITY 1 VS. SHOORJI VALLABH DAS & CO. IN 46 ITR 144 HAS LAID DOWN THAT IT IS THE REAL INCOME WHICH IS TAXABLE UNDER THE INCOME TAX ACT AND NOT THE NOTION AL ONE LIKE ON REVALUATION OF ASSETS. THE HONOURABLE MADRAS HIGH C OURT IN THE CASE OF CIT VS. CIT VS. M.CT.M CORPORATION PVT. LTD . [221 ITR 524] RELYING ON THE DECISION OF HONOURABLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. LEENA SARABHAI [221 ITR 520] HA S HELD THAT IN THE SCHEME OF AMALGAMATION, SHARES ARE ISSUED IN LIEU OF SHAREHOLDING IN AMALGAMATING COMPANY , AND THEREFORE, THERE IS NO TAX IMPLICATION:- ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 10 - '8. IN THE CASE OF CIT VS. LEENA SARABHAI (1996) 22 1 ITR 520 (GUJ), THE ASSESSEE WAS A HOLDER OF SHARES IN A N AMALGAMATING COMPANY. BY A SCHEME OF AMALGAMATION, THE ASSETS OF THE AMALGAMATING COMPANY AS ALSO ITS LIAB ILITIES WERE TRANSFERRED TO THE AMALGAMATED COMPANY, WHICH IN TURN, WAS OBLIGED TO ISSUE AND ALLOT TO THE SHAREHO LDERS OF THE AMALGAMATING COMPANY ONE EQUITY SHARE OF THE FA CE VALUE OF RS. 100 AND TWO FRACTIONAL CERTIFICATES, E ACH REPRESENTING ENTITLEMENT OF L/10TH OF ONE EQUITY SH ARE AND ONE 11% REDEEMABLE BOND OF THE FACE VALUE OF RS. 10 0 IN RESPECT OF ONE EQUITY SHARE OF THE AMALGAMATING COM PANY. ON THESE FACTS ON A REFERENCE, THE GUJARAT HIGH COU RT WAS REQUESTED TO RENDER ITS OPINION ON THE QUESTION WHE THER ON AMALGAMATION OF A COMPANY, WHEN THE ASSESSEE RECEIV ED SHARES AND BONDS OF THE AMALGAMATED COMPANY IN LIEU OF HER SHAREHOLDING IN THE AMALGAMATING COMPANY , IT WAS A TRANSFER AS CONTEMPLATED UNDER S.2(47). IN VIEW OF A LETTER FROM THE CIT STATING THAT THE DEPARTMENT IN A SIMIL AR CASE BELONGING TO THE SAME GROUP HAD ACCEPTED THAT WHERE THE ASSESSEES HAD RECEIVED SHARES AND BONDS BECAUSE OF AMALGAMATION THERE WAS NO TRANSFER WITHIN THE MEANI NG OF S.2(47), IT WAS HELD THAT IN THE PRESENT CASE ALSO THERE IS NO TRANSFER AS CONTEMPLATED UNDER S. 2(47) OF THE ACT. THUS, ACCORDING TO THE FACTS ARISING IN THAT CASE, THE DE PARTMENT ACCEPTED THAT WHENEVER THERE IS AMALGAMATION OF THE TWO COMPANIES, THERE IS NO TRANSFER AND THE QUESTION OF LEVYING CAPITAL GAIN TAX DOES NOT ARISE.' THE HONOURABLE MUMBAI TRIBUNAL IN THE CASE OF MAKER S DEVELOPMENT SERVICES PVT. LTD. VS. DY. CIT [40 ITD 185] HAS HELD THAT WHERE THE STOCK IN TRADE WAS REVALUED ON AMALG AMATION AND ACQUIRED BY THE AMALGAMATED COMPANY AT HIGHER VALUE , IN ABSENCE OF ANY SPECIFIC PROVISION OF TAX, THERE WILL NOT BE ANY TAX IMPLICATION ON SUCH NOTIONAL GAIN. THE INCOME TAX A CT HAS BEEN SUBSEQUENTLY AMENDED TO TAX THE REVALUATION OF AS SETS ON AMALGAMATION BY INSERTING A NEW SECTION 43C BY FINA NCE ACT, 1988 WHICH PROVIDED THAT WHERE AN ASSET ACQUIRED UN DER THE SCHEME OF AMALGAMATION IS SOLD BY AN AMALGAMATED CO MPANY AS ITS STOCK IN TRADE, THEN IN COMPUTING THE BUSINESS INCO ME, THE COST OF ACQUISITION OF SUCH STOCK IN TRADE SHALL BE THE COS T OF ACQUISITION IN THE LAND OF AMALGAMATING COMPANY. THEREFORE, THE REVALUATION OF LAND DOES NOT ATTRACT TAX AT THE TIME OF AMALGAM ATION, BUT WOULD BE TAXED AT THE TIME OF ITS DISPOSAL. 4.13. IN VIEW OF THE ABOVE, THE AO WAS NOT JUSTIFIE D TO INVOKE SECTION 56(2)(VIIB) 'ON ISSUE OF SHARES AT FACE VAL UE TO THE SHAREHOLDERS OF THE AMALGAMATING COMPANY AS PER THE SCHEME OF AMALGAMATION APPROVED BY HONOURABLE HIGH COURT. THE ADDITION MADE BY THE AO, IS THEREFORE, DELETED. ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 11 - THE GROUND OF APPEAL IS ACCORDINGLY ALLOWED . 7. THE REVENUE, IN THE CAPTIONED APPEAL, HAS SOUGHT TO IMPUGN THE ACTION OF CIT(A) TOWARDS REVERSAL OF ADDITIONS. 8. THE LEARNED DR FOR THE REVENUE RELIED UPON THE O RDER OF THE AO PASSED IN TERMS OF DIRECTIONS OF ADDL.CIT ISSUED UNDER S.144A OF THE ACT AND SUBMITTED THAT THE ASSESSEE IS CLEAR LY BENEFITTED BY THE SCHEME OF AMALGAMATION AND RECEIVED EXCESS CONS IDERATION BY WAY OF NET ASSETS AGAINST ISSUE OF SHARES OF ITS CO MPANY IN FAVOUR OF THE SHAREHOLDERS OF AMALGAMATING COMPANY KEPL. THE LEARNED DR FOR THE REVENUE QUIPPED THAT THE BENEFIT BY WAY OF EXCESS CONSIDERATION SO RECEIVED AND QUANTIFIED BY AO APPA RENTLY FALLS WITHIN THE SWEEP OF SECTION 56(2)(VIIB) OF THE ACT AND THE CIT(A) HAS CLEARLY MIS-DIRECTED HIMSELF IN LAW AND ON FACT S IN REVERSAL OF THE ADDITIONS. 9. THE LEARNED AR FOR THE ASSESSEE, ON THE OTHER HA ND, STRONGLY DEFENDED THE CONCLUSION OF THE CIT(A) AND SUBMITTED THAT THE AO HAS GROSSLY MISCONSTRUED THE LETTER AS WELL AS SPIR IT OF SECTION 56(2)(VIIB) OF THE ACT. IT WAS SUBMITTED THAT A CO URT SUPERVISED AMALGAMATION WHERE SHARES OF ASSESSEE COMPANY WERE ISSUED TO SHAREHOLDERS OF AMALGAMATING COMPANY IN TERMS OF SC HEME OF AMALGAMATION DO NOT FALL WITHIN THE SWEEP OF DEEMIN G PROVISIONS OF S. 56(2)(VIIB) OF THE ACT. REFERENCES WERE MADE TO THE PROVISIONS OF S.56(2)(VIIB) OF THE ACT, THE SCHEME OF AMALGAMATIO N APPROVED BY HONBLE HIGH COURT AS WELL AS AS-14 ISSUED BY ICAI WHICH SHALL BE DEALT WITH AS AND WHERE CONSIDERED EXPEDIENT IN THE SUCCEEDING PARAGRAPHS. ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 12 - 9.1 IT WAS CONTENDED THAT SO CALLED EXCESS VALUE OF ASSETS VESTED ON AMALGAMATION CANNOT BE NOTIONALLY TERMED AS PREM IUM OVER FACE VALUE FOR THE PURPOSES OF DEEMING PROVISION. IT WA S CONTENDED THAT ANOTHER DEEMING FICTION CANNOT BE ADDED TO THE EXIS TING FICTION WITHOUT EXPRESS CONSENT OF THE STATUTE. 9.2 IN ESSENCE, IT WAS CONTENDED THAT THE PLAIN LAN GUAGE OF DEEMING FICTION IN S.56(2)(VIIB) OF THE ACT DOES NO T PERMIT THE REVENUE TO COVER THE IMPUGNED TRANSACTIONS ARISING FROM AMALGAMATION WITHIN ITS SWEEP. 9.3 IT WAS CONTENDED THAT AS RIGHTLY OBSERVED BY TH E CIT(A), IN TERMS OF SECTION 2(1B) OF THE I.T. ACT,1961 AND AS- 14 ISSUED BY ICAI, THE SHAREHOLDERS OF AMALAGAMATING CO. BECOME SHAREHOLDERS OF ASSESSEE CO. BY VIRTUE OF AMALGAMATION AND THE C ONSIDERATION IS TO BE DISCHARGED BY THE AMALGAMATED CO. (ASSESSEE) BY ISSUE OF ITS SHARES AND NOT OTHER WAY ROUND WHERE THE SUBSCRIBER OF THE SHARES PAYS MONEY FOR SUBSCRIPTION TO THE ISSUER COMPANY. 9.4 IT WAS THUS ASSERTED THAT THE CIT(A) HAS RIGHTL Y DELETED THE WRONGLY FASTENED ADDITIONS AFTER FULL ANALYSIS OF L AW AND FACTS INVOLVED. HE ACCORDINGLY SUBMITTED THAT NO INTERFE RENCE WITH THE FIRST APPELLATE ORDER IS CALLED FOR. 10. WE HAVE DISPASSIONATELY CONSIDERED THE RIVAL SU BMISSIONS AND PERUSED THE ASSESSMENT ORDER AS WELL AS FIRST APPEL LATE ORDER. THE DOCUMENTS REFERRED AND RELIED UPON HAS BEEN TAKEN C OGNIZANCE IN TERMS OF RULE 18(6) OF THE INCOME TAX(APPELLATE TRI BUNAL) RULES, 1963. 10.1 IN THE CASE IN HAND, THE SHORT QUESTION THAT A RISES IN ESSENCE IS WHETHER THE SHARES RECEIVED BY THE AMALGAMATING COM PANY IN ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 13 - CONSIDERATION OF VESTING OF ITS ASSETS, LIABILITIE S AND UNDERTAKING IN THE AMALGAMATED COMPANY PURSUANT TO SCHEME OF AMALG AMATION IS HIT BY THE DEEMING PROVISIONS OF SECTION 56(2)(VIIB ) OF THE ACT IN THE FACTS OF THE PRESENT CASE? 10.2 THE AO HAS MADE IMPUGNED ADDITIONS TOWARDS EXC ESS CONSIDERATION SOLELY UNDER S. 56(2)(VIIB) IN TERMS OF APPROVAL GRANTED BY THE ADDL. CIT ON REFERENCE MADE UNDER S. 144A OF THE ACT. HENCE, NO OTHER POINT SUCH AS CURSORY ALLEGATI ON OF VIOLATION OF AS-14 OF ICAI ETC. NEEDS OUR INDULGENCE IN ISOLATIO N FOR ADJUDICATION OF CONTROVERSY. TO ADDRESS THE ISSUE, IT MAY BE PERTINENT TO REPRODUCE THE PROVISION OF SECTION 56( 2)(VIIB) FOR AN EASY REFERENCE: (VIIB)WHERE A COMPANY, NOT BEING A COMPANY IN WHIC H THE PUBLIC ARE SUBSTANTIALLY INTERESTED, RECEIVES, IN ANY PREV IOUS YEAR, FROM ANY PERSON BEING A RESIDENT, ANY CONSIDERATION FOR ISSUE OF SHARES THAT EXCEEDS THE FACE VALUE OF SUCH SHARE S, THE AGGREGATE CONSIDERATION RECEIVED FOR SUCH SHARES AS EXCEEDS THE FAIR MARKET VALUE OF THE SHARES: PROVIDED THAT THIS CLAUSE SHALL NOT APPLY WHERE THE CONSIDERATION FOR ISSUE OF SHARES IS RECEIVED (I) BY A VENTURE CAPITAL UNDERTAKING FROM A VENTURE CAPITAL COMPANY OR A VENTURE CAPITAL FUND; OR (II) BY A COMPANY FROM A CLASS OR CLASSES OF PERSON S AS MAY BE NOTIFIED BY THE CENTRAL GOVERNMENT IN THIS BEHALF, EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, (A) THE FAIR MARKET VALUE OF THE SHARES SHALL BE TH E VALUE (I) AS MAY BE DETERMINED IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED; OR (II) AS MAY BE SUBSTANTIATED BY THE COMPANY TO THE SATISFACTION OF THE ASSESSING OFFICER, BASED ON THE VALUE, ON THE DATE OF ISSUE OF SHARES, OF ITS ASSET S, INCLUDING INTANGIBLE ASSETS BEING GOODWILL, KNOW- HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 14 - WHICHEVER IS HIGHER; (B) VENTURE CAPITAL COMPANY, VENTURE CAPITAL FUN D AND VENTURE CAPITAL UNDERTAKING SHALL HAVE THE MEANIN GS RESPECTIVELY ASSIGNED TO THEM IN CLAUSE (A), CLAUSE (B) AND CLAUSE (C) OF [EXPLANATION] TO CLAUSE (23FB) O F SECTION 10;] 10.3 IN THE INSTANT CASE, PURSUANT TO AMALGAMATION, ALL ASSETS, LIABILITIES, UNDERTAKING OF THE AMALGAMATING COMPAN Y (KEPL) ARE AGREED TO BE VESTED IN THE AMALGAMATED COMPANY( THE ASSESSEE) AS A GOING CONCERN. THE AMALGAMATED COMPANY HAS ISSUED 3 00 EQUITY SHARES OF ITS COMPANY AT FACE VALUE FOR EACH SHARES OF AMALGAMATING COMPANY IN CONSIDERATION OF SUCH VESTING OF ASSETS, LIABILITIES ETC. AS PER THE SCHEME OF AMALGAMATION DULY APPROVED BY THE JURISDICTIONAL HIGH COURT. AS A RESULT, SHARES WORT H RS. 15 CRORE OF THE AMALGAMATED CO. (ASSESSEE CO.) WERE ISSUED AGAI NST THE VESTING OF ASSETS ETC. THE ASSESSING OFFICER OBSERVED THAT THE VALUE OF NET ASSETS (ASSETS LESS LIABILITIES) VESTED IN THE AMAL GAMATED COMPANY UNDER THE SCHEME STANDS AT RS. 54,21,16,156 AGAINST WHICH SHARES WORTH RS. 15 CRORE WERE ISSUED BY IT FOR SUCH ACQUI SITION. THE DIFFERENCE BETWEEN THE VALUE OF ASSETS AND CORRESPO NDING SHARES ISSUED AMOUNTING TO RS.39,21,16,156/- CREDITED BY T HE ASSESSEE CO.( AMALGAMATED CO.) TO ITS CAPITAL RESERVE WITHOUT AN Y PAYMENT OF TAXES TRIGGERED THE CAUSE OF ACTION FOR THE AO. IN THE COURSE OF ASSESSMENT, THE AO FURTHER FOUND ON A INCISIVE VERI FICATION THAT THE INTRINSIC VALUE OF SHARE OF AMALGAMATED CO. ISSUED AT FACE VALUE OF RS. 10 STANDS AT RS. 6.81 PER SHARES ONLY. THE AO A CCORDINGLY NOTED THAT THE SHARE OF AMALGAMATED CO. SO ISSUED CARRIES WORTH RS. 10.22 CRORES ONLY( 1,50,00,000 *6.81= 10,21,50,000) AS AG AINST THE NET ASSETS ACQUIRED RS. 54.21 CRORE. THE AO AFTER MAKIN G REFERENCE TO ADDL. CIT UNDER S. 144A HAS BROUGHT THE DIFFERENCE OF RS. 43.99 CRORE WITHIN THE AMBIT OF TAXABLE INCOME WITH THE A ID OF DEEMING ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 15 - PROVISION OF S. 56(2)(VIIB) OF THE ACT AND INCREASE D THE ASSESSED INCOME TO THAT EXTENT. 10.4 IN THE BACKDROP OF FACTS CAPSULED ABOVE, IT IS THE CONTENTION OF THE ASSESSEE THAT IMPUGNED TRANSACTION OF VESTING O F ASSETS OF AMALGAMATED CO. IN EXCHANGE OF ISSUE OF SHARES OF A SSESSEE CO. AT FACE VALUE NEITHER MATCHES THE ESSENTIAL INGREDIENT S OF S. 56(VIIB) OF THE ACT NOR IS THE TRANSACTION CARRIED OUT PURSUANT TO APPROVED SCHEME, IN CONFORMITY OF THE OBJECTS AND PURPOSES O F INSERTION OF SECTION 56(VIIB) OF THE ACT. IT IS FURTHER CONTENDE D THAT APPLICABILITY OF DEEMING CLAUSE IS UNFOUNDED ON GIVING SCHEMATIC INTERPRETATION TO THE LANGUAGE EMPLOYED. THE REVENUE ON THE OTHER HAND SEEKS TO SUPPORT THE ACTION OF AO AND ESSENTIALLY CONTENDS T HAT NEWLY INSERTED S. 56(2)(VIIB) WAS INTRODUCED WITH AN OBJE CT TO INTER ALIA PLUG THE PRESENT SITUATION WHERE CONSIDERATION RECE IVED IN KIND (BY WAY OF VESTING OF ASSETS OF AMALGAMATED CO.) IS FAR HIGHER THAN THE FACE VALUE OF CORRESPONDING SHARES ISSUED IN LIEU O F SUCH EXCESS VALUE OF ASSETS VESTED. 10.5 THE INTERPRETATION OF S. 56(VIIB) QUA THE FACTS OF THE PRESENT CASE IS IN CONTROVERSY. S. 56(2) DEEMS CERTAIN INCO ME CHARGEABLE TO INCOME TAX UNDER THE HEAD INCOME FROM OTHER SOURCE S. FINANCE ACT 2012 HAS, UNDERSTANDABLY, INSERTED CLAUSE (VIIB) WI TH EFFECT FROM 1- 4-2013(ASSESSMENT YEAR 2013-14) TO INCLUDE CONSIDER ATION RECEIVED IN EXCESS OF FACE VALUE OF SHARES ISSUED I.E. SHAR E PREMIUM RECEIVED BY AN ISSUING COMPANY AS IT EXCEEDS THE FA IR MARKET VALUE OF SHARES AS ITS INCOME CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. ON A PLAIN READING, TWO THINGS IMME DIATELY EMERGES FROM THE NEWLY INSERTED PROVISION (I) CONSIDERATION WHICH IS TAXABLE IS THE ONE WHICH EXCEEDS FACE VALUE OF SHARES ISSUE D (II) IN THE EVENT OF SHARES ISSUED AT CONSIDERATION ABOVE FACE VALUE, THE SAME NEED TO ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 16 - BE COMPARED WITH FAIR MARKET VALUE TO BE DETERMINED AS PER SUB- CLAUSE(A) APPENDED THERETO. THE ASSESSEE IN THE PRE SENT CASE, IS NOT FOUND TO HAVE ISSUED SHARES AT VALUE MORE THAN FACE VALUE AT THE FIRST INSTANCE AS REPEATEDLY EXHORTED ON BEHALF OF THE AS SESSEE. 10.6 TO DECIPHER THE TRUE PURPORT OF ITERATION OF L AW IN THE CONTEXT AND OBJECT FOR INSERTION OF THE PROVISION, IT MAY B E USEFUL TO REFER TO THE EXPLANATIONS GIVEN AT THE TIME OF ENACTMENT OF THE PROVISION. EXPLANATORY MEMORANDUM TO FINANCE BILL, 2012 SHARE PREMIUM IN EXCESS OF THE FAIR MARKET VALUE TO BE TREATED AS INCOME SECTION 56(2) PROVIDES FOR THE SPECIFIC CATEGORY OF INCOMES THAT SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD INCOME FROM OTHER SOURCES. IT IS PROPOSED TO INSERT A NEW CLAUSE IN SECTION 56 (2). THE NEW CLAUSE WILL APPLY WHERE A COMPANY, NOT BEIN G A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, RECE IVES, IN ANY PREVIOUS YEAR, FROM ANY PERSON BEING A RESIDENT, AN Y CONSIDERATION FOR ISSUE OF SHARES. IN SUCH A CASE IF THE CONSIDER ATION RECEIVED FOR ISSUE OF SHARES EXCEEDS THE FACE VALUE OF SUCH SHAR ES, THE AGGREGATE CONSIDERATION RECEIVED FOR SUCH SHARES AS EXCEEDS T HE FAIR MARKET VALUE OF THE SHARES SHALL BE CHARGEABLE TO INCOME T AX UNDER THE HEAD INCOME FROM OTHER SOURCES. HOWEVER, THIS PROVISION SHALL NOT APPLY WHERE THE C ONSIDERATION FOR ISSUE OF SHARES IS RECEIVED BY A VENTURE CAPITAL UN DERTAKING FROM A VENTURE CAPITAL COMPANY OR A VENTURE CAPITAL FUND. FURTHER, IT IS ALSO PROPOSED TO PROVIDE THE COMPANY AN OPPORTUNITY TO S UBSTANTIATE ITS CLAIM REGARDING THE FAIR MARKET VALUE. ACCORDINGLY, IT IS PROPOSED THAT THE FAIR MARKET VALUE OF THE SHARES SHALL BE T HE HIGHER OF THE VALUE (I) AS MAY BE DETERMINED IN ACCORDANCE WITH THE MET HOD AS MAY BE PRESCRIBED; OR (II) AS MAY BE SUBSTANTIATED BY THE COMPANY TO THE SATISFACTION OF THE ASSESSING OFFICER, BASED ON THE VALUE OF ITS ASSETS , INCLUDING INTANGIBLE ASSETS, BEING GOODWILL, KNOW-HOW, PATENT S, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSIN ESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 17 - 10.7 THE BUDGET SPEECH OF THE HONBLE FINANCE MI NISTER MR. PRANAB MUKHERJEE ON 16/03/2012 IN PARA 155 CONCERNI NG SECTION 56(2)(VIIB) MAY ALSO BE QUOTED TO UNDERSTAND THE OB JECT BEHIND THE INSERTION. I PROPOSE A SERIES OF MEASURES TO DETER THE GENERAT ION AND USE OF UNACCOUNTED MONEY. TO THIS END, I PROPOSE ----- INCREASING THE ONUS OF PROOF ON CLOSELY HELD COMPA NIES FOR FUNDS RECEIVED FROM SHAREHOLDERS AS WELL AS TAXING SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE 10.8 THE CIRCULAR OF THE DEPARTMENT BEING A CONTE MPORANEOUS EXPOSITION MAY ALSO SERVE AS USEFUL GUIDE TO UNDERS TAND THE TRUE INTENT OF S. 56(2)(VIIB) OF THE ACT. THE RELEVANT TEXT OF CBDT CIRCULAR NO, 3/2012 DATED 12-6-2012 IN THS REGARD I S REPRODUCED HEREUNDER: SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE TO BE TREATED AS INCOME IN THE FINANCE BILL, 2012, IT HAD BEEN PROPOSED [SE CTION 56(2), AS SUB-CLAUSE [(VIIB)] THAT IN CASE OF A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, W HICH RECEIVES, IN ANY PREVIOUS YEAR, FROM ANY PERSON BEING A RESIDENT , ANY CONSIDERATION FOR ISSUE OF SHARES AND THE CONSIDERA TION RECEIVED FOR ISSUE OF SUCH SHARES EXCEEDS THE FACE VALUE OF SUCH SHARES, THEN THE AGGREGATE CONSIDERATION RECEIVED FOR SUCH SHARES AS EXCEEDS THE FAIR MARKET VALUE OF THE SHARES SHALL BE CHARGEABLE TO I NCOME TAX. AN EXEMPTION WAS PROVIDED IN A CASE WHERE THE CONSIDER ATION FOR ISSUE OF SHARES IS RECEIVED BY A VENTURE CAPITAL UNDERTAK ING FROM A VENTURE CAPITAL COMPANY OR A VENTURE CAPITAL FUND. (I) IT HAS NOW BEEN FURTHER PROVIDED THAT SUCH EXC ESS SHARE PREMIUM IS INCLUDED IN THE DEFINITION OF 'INCOME' UNDER SUB -CLAUSE (XVI) OF CLAUSE (24) OF SECTION 2. (II) CONSIDERING THAT THE PROPOSED AMENDMENT MAY C AUSE AVOIDABLE DIFFICULTY TO INVESTORS WHO INVEST IN START-UPS WHE RE THE FAIR MARKET VALUE MAY NOT BE DETERMINED ACCURATELY, IT IS PROPO SED TO PROVIDE AN EXEMPTION TO ANY OTHER CLASS OF INVESTORS AS MAY BE NOTIFIED BY THE CENTRAL GOVERNMENT. ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 18 - THESE AMENDMENTS WILL TAKE EFFECT FROM 1ST APRIL, 2 013 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YE AR 2013-14 AND SUBSEQUENT ASSESSMENT YEARS. 10.9 WHEN THE CLAUSE IN SECTION 56(2)(VIIB) OF THE ACT IS READ IN TANDEM WITH ELUCIDATIONS PROVIDED IN CBDT CIRCULAR; FINANCE MINISTERS SPEECH IN PARLIAMENT DISCLOSING HIS INTE NTIONS BEHIND SUCH INSERTION AND ALSO MEMORANDUM EXPLAINING FINAN CE BILL, IT APPEARS THAT WHOLE THRUST FOR SUCH INSERTION IS TO BRING MEASURES TO TAX HEFTY OR EXCESSIVE SHARE PREMIUM RECEIVED UNJUS TIFIABLY BY PRIVATE COMPANIES ON ISSUE OF SHARES WITHOUT CARRYI NG UNDERLYING VALUE TO SUPPORT SUCH UNCALLED FOR PREMIUM AND THER EBY ENRICHING ITSELF WITHOUT PAYING TAXES LEGITIMATELY DUE TO THE M. IT ALSO SEEMS THAT SUBSCRIPTION TO THE SHARES ISSUED BY A COMPANY AT A SUBSTANTIAL PREMIUM (NOT NECESSARILY BACKED BY A VALUATION JUST IFYING THE PREMIUM) WAS SUPPOSEDLY RESORTED TO CONVERT UNACCOU NTED MONEY. THE EXTANT FRAMEWORK OF LAW WERE NOT FOUND SUFFICIE NT BY THE LEGISLATURE TO CURB SUCH PRACTICES. EARLIER ATTEMPT S TO TAX SUCH EXCESSIVE RECEIPTS IN THE GARB OF SHARE PREMIUM BY PRIVATE COS. DID NOT ARGUABLY FRUCTIFY. THE PROVISION WAS INSERTED T O CHANGE THE LANDSCAPE FOR CHARGING PREMIUM TO TAX OF CAPITAL NA TURE. 10.10 SECTION 56(2)(VIIB) CREATES A DEEMING FICTION TO IMAGINE AND FICTIONALLY CONVERT A CAPITAL RECEIPT INTO REVENUE INCOME. IT IS WELL ENTRENCHED BY THE BODY OF CASE LAWS THAT WHILE GIVI NG EFFECT TO SUCH LEGAL FICTIONS, ALL FACTS AND CIRCUMSTANCES THERETO AND INEVITABLE COROLLARIES THEREOF HAVE TO BE ASSUMED. IN CIT VS. MOTHER INDIA REFRIGERATION (P) LTD. (1985) 155 ITR 711 , THE HONBLE SUPREME COURT HAS HELD THAT THE LEGAL FICTIONS ARE ONLY FOR A DEFINIT E PURPOSE AND THEY ARE LIMITED TO THE PURPOSE FOR WHICH THEY ARE CREAT ED AND SHOULD NOT BE EXTENDED BEYOND THE LEGITIMATE FIELD. THUS, A D EEMING FICTION ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 19 - CANNOT BE STRETCHED BEYOND ITS PURPOSE AND IMPORT A NOTHER FICTION IN IT. 10.11 IN THE LIGHT OF UNDERSTANDING DEVELOPED ON OBJECT AND PURPOSE OF THE DEEMING CLAUSE, AS DISCUSSED ABOVE, THE PROVISIONS OF SECTION 56(VIIB), WOULD NOT COME TO MOTION WHERE TH E ASSESSEE COMPANY AS ADMITTEDLY NOT CHARGED ANY PREMIUM AT AL L AND THE SHARES WERE ISSUED AT FACE VALUE. 11. HOWEVER, WE HAVE EXAMINED THE ISSUE FROM YET ANOTHER PERSPECTIVE DISCUSSED BELOW 11.1 IT MAY BE POSSIBLY ARGUED THAT SECTION 56(2 )(VIIB) DOES NOT OUST ITS APPLICABILITY IN THE EVENT OF SHARES ISSUE D PURSUANT TO AMALGAMATION. THE AMALGAMATION IS A COMPROMISE OR A RRANGEMENT BETWEEN THE PARTIES, WHICH INTER ALIA INCLUDES THE AMALGAMATED COMPANY ISSUING THE SHARES AND THE SHAREHOLDERS OF THE AMALGAMATING COMPANY, WHICH IS SUPERVISED BY THE CO URT, IN TERMS OF THE COMPANIES ACT. IN OTHER WORDS, THERE IS AN A GREEMENT OR ARRANGEMENT BETWEEN THE AMALGAMATED COMPANY ISSUING THE SHARES AND THE SHAREHOLDERS OF THE AMALGAMATING COMPANY. T HE CLAUSE CONTEMPLATES THE ISSUE OF SHARES AND THE RECEIPT OF CONSIDERATION FROM A RESIDENT PERSON AND IT IS FULFILLED ON AMALG AMATION. THIS PERSPECTIVE SEEKS TO COVER THE ISSUE OF SHARES ARIS ING FROM AMALGAMATION WITH EQUAL MEASURE. 11.2 IN CONTRAST, THE APPLICABILITY OF THE CLAUSE IN THE CASE OF AMALGAMATION MAY BE EQUALLY LOOKED FROM A LITTLE DI FFERENT PERSPECTIVE AS WELL. IN AMALGAMATION, THE ISSUE OF SHARES IS MADE BY INVITING SUBSCRIPTION FROM THE PERSONS TO WHOM OFFE R IS MADE. THE ISSUE OF SHARES IS TO GIVE EFFECT TO THE AMALGAMATI ON, AS PER MUTUAL ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 20 - AGREEMENT AND THE COURT ORDER. IN OTHER WORDS, IT M AY BE ARGUED THAT THE ISSUE OF SHARES DOES NOT TRIGGER ANY CONSI DERATION AND IN CONVERSE, THE OBLIGATION TO GIVE CONSIDERATION, TRI GGERS ISSUE OF SHARES. SECONDLY, THE CLAUSE CONTEMPLATES RECEIPT OF THE CONSIDERATION FOR THE SHARES FROM A RESIDENT PERSON . IN OTHER WORDS, IT CONTEMPLATES A TRANSACTION BETWEEN A RESIDENT PE RSON AND THE COMPANY ISSUING SHARES. IN THE CASE OF AN AMALGAMAT ION, THE CONSIDERATION, WHICH WOULD BE UNDERTAKING ALONG WIT H ALL ITS ASSETS AND LIABILITIES IS IN THE FORM OF VESTING BY THE AM ALGAMATING COMPANY, WHEREAS THE SHARES ARE ISSUED TO ITS SHARE HOLDERS. THUS, IT IS, IN EFFECT, A TRIPARTITE ARRANGEMENT BETWEEN (I) AMALGAMATED CO. (II) AMALGAMATING CO. (III) THE SHAREHOLDERS OF AMA LGAMATING CO.. SUCH TRIPARTITE ARRANGEMENTS IN AMALGAMATION CASES ARE NOT CONTEMPLATED IN THE DEEMING CLAUSE IN QUESTION. 11.3 THERE IS YET ANOTHER PERSPECTIVE TO DWELL UP ON. AS PER THE PROVISO TO THE CLAUSE, IT DOES NOT APPLY TO THE CO NSIDERATION FOR ISSUE OF SHARES BY A VENTURE CAPITAL UNDERTAKING(VC U) FROM A VENTURE CAPITAL COMPANY(VCC) OR A VENTURE CAPITAL F UND(VCF). THE PROVISO IMPLIES THAT THERE SHOULD ISSUE OF SHARES D IRECTLY BY THE COMPANY TO THE SUBSCRIBER, OBVIOUSLY, FOR A CONSIDE RATION. IN OTHER WORDS, IT CONTEMPLATES A BILATERAL TRANSACTION. FUR THER, IT ALSO CONTEMPLATES A TRANSACTION IN THE NATURE OF ISSUE O F SHARES AT THE INSTANCE OF THE COMPANY ON ITS OWN AND IT DOES NOT CONTEMPLATE A TRANSACTION IN THE NATURE OF ISSUE OF SHARES FOR DI SCHARGING THE CONSIDERATION OR ISSUE OF SHARES OBLIGATED PURSUANT AMALGAMATION ETC. IF A VIEW IS ADOPTED THAT THE TRANSACTION CAN ALSO APPLY TO AMALGAMATION ETC. THEN, IN THAT CASE, IF THERE IS A MALGAMATION BY AND BETWEEN VENTURE CAPITAL UNDERTAKINGS, THE PROVI SION WOULD POSSIBLY APPLY INCONSISTENT WITH THE INTENT OF THE LEGISLATURE TO EXCLUDE VCUS ETC. IF THE SHAREHOLDERS ARE REGARDED AS THE PERSONS ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 21 - PROVIDING CONSIDERATION IN THE CONTEXT, THEY COULD INCLUDE VCC OR VCF OR EVEN NOTIFIED PERSONS OR NON-RESIDENTS ALONG WITH OTHER RESIDENT PERSONS. SUCH A SITUATION CONTRADICTS IN T HE INTENT OF THE LEGISLATURE EXPRESSED IN THE CLAUSE. HENCE, IN TERM S OF PROVISO, THE CLAUSE CANNOT APPLY IN THE CASE OF AMALGAMATION ETC . 11.4 WE MAY ALSO LOOK AT THE SCHEME OF THE ACT IN TOTALITY FOR CONTEXTUAL UNDERSTANDING OF THE ISSUE. THE LEGISLAT URE HAS CONTEMPLATED THAT THERE ARISES TRANSFER OF SHARES BY THE SHAREHOLDERS OF AMALGAMATING COMPANY IN CONSIDERATI ON OF THE ALLOTMENT OF SHARES BY THE AMALGAMATED COMPANY AND CONSEQUENTLY WITH A VIEW TO NEUTRALIZE TAX EFFECT, THE ACT PROVI DES FOR SUITABLE EXCLUSION/ EXEMPTION, FROM THE AMBIT OF EXPRESSION TRANSFER, UNDER SECTION 47(VII) WHICH IS ALSO OF DEEMING NATURE. IN OTHER WORDS, AS PER THE PROVISIONS OF THE ACT, THE CONSIDERATION FO R ISSUE OF SHARES BY THE AMALGAMATED COMPANY, IN SO FAR AS THE SHAREH OLDER IS CONCERNED, IS THE SHARES HELD IN THE AMALGAMATED CO MPANY BY WAY OF TRANSFER (EXCEPT FOR THE SAVING CLAUSE IN S.47(V II) OF THE ACT). A BARE ISSUE OF SHARES CONTEMPLATED IN S. 56(VIIB) TH US CANNOT BE EQUATED WITH A SITUATION OF TRANSFER GATHERED FROM AN INTENT IMPLICIT IN S. 47(VII). THUS, THE CONSIDERATION AND THE ISSU E OF SHARES ENVISAGED BY SECTION 56(2)(VIIB) IS NOT FOUND COMPA TIBLE WITH SCHEME ENACTED, WHEN SEEN FROM THE PERSPECTIVE OF R EVENUE. 12. TO SUMMARISE, IN OUR VIEW, THE ISSUE OF SHARES AT FACE VALUE BY THE AMALGAMATED COMPANY (ASSESSEE) TO THE SHAREH OLDERS OF AMALGAMATING COMPANY IN PURSUANCE OF SCHEME OF AMAL GAMATION LEGALLY RECOGNIZED IN THE COURT OF LAW NEITHER FALL S WITH SCOPE & AMBIT OF CLAUSE (VIIB) TO S. 56(2), WHEN TESTED ON THE TOUCHSTONE OF OBJECTS AND PURPOSE OF SUCH INSERTION I.E. TO DEEM UNJUSTIFIED PREMIUMS CHARGED ON ISSUE OF SHARES AS TAXABLE INCO ME; NOR DOES IT ITA NO. 2081/AHD/18 WITH CO NO.103/AHD/19 (M/S. OZONE INDIA LTD.) A.Y. 2013-14 - 22 - FALL IN ITS SWEEP WHEN SUCH DEEMING CLAUSE IS SUBJE CTED TO INTERPRETATIVE PROCESS HAVING REGARD TO THE SCHEME OF THE ACT. 13. IN THE WAKE OF ABOVE DELINEATION, WE SEE NO ER ROR IN THE CONCLUSION DRAWN BY THE CIT(A) IN THIS REGARD. THE CIT(A) IN OUR VIEW, HAS RIGHTLY FOUND INAPPLICABILITY OF S. 56(VI IB) IN THE FACTS OF THE PRESENT CASE. WE THUS DECLINE TO INTERFERE WITH THE CONCLUSION SO DRAWN BY THE CIT(A) WHOSE ORDER IS UNDER CHALLENGE BY THE REVENUE. SIMILARLY, THE CROSS OBJECTION FILED BY THE ASSESSE E WHICH MERELY SEEKS TO SUPPORT THE ACTION OF CIT(A) ALSO DOES NOT CALL FOR SEPARATE ADJUDICATION AND IS INFRUCTUOUS. 14. IN THE RESULT, THE APPEAL OF THE REVENUE AS WEL L AS CROSS OBJECTION OF THE ASSESSEE IS DISMISSED. SD/- SD/- (RAJPAL YADAV) (PRADIP KUMA R KEDIA) VICE PRESIDENT ACCOUNTANT MEMBER AHMEDABAD: DATED 13/04/2021 TRUE COPY S. K. SINHA !'#' / COPY OF ORDER FORWARDED TO:- $. / REVENUE 2. / ASSESSEE &. '() * / CONCERNED CIT 4. *- / CIT (A) -. ./0 122()3 ()!3 45' / DR, ITAT, AHMEDABAD 6. 078 9 / GUARD FILE. BY ORDER / 3 /4 ()!3 45' THIS ORDER PRONOUNCED ON 13/04/2021