Principal Commissioner Of Income Tax-4, Kolkata v. Philips Electronics India Limited

ORDER OD – 18 IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE ITA/11/2018 PRINCIPAL COMMISSIONER OF INCOME TAX-4, KOLKATAVERSUSPHILIPS ELECTRONICS INDIA LIMITED BEFORE: The Hon'ble Justice SURYA PRAKASH KESARWANI The Hon'ble Justice RAJARSHI BHARADWAJ Date : 20[th] December 2023. Appearance:Mr. J.P. Khaitan, Senior AdvocateMr. Pranit Bag, AdvocateMr. A.K. Dey, Advocate… for respondent. 1.Case called out. None appears for the appellant to press the appeal.Sri J.P. Khaitan, learned senior advocate assisted by Sri Pranit Bag, learnedcounsel for the respondent/assessee is present. 2.This appeal was admitted by order dated 05.02.2018, on the followingsubstantial question of law:- “[i]Whether pursuant to a scheme for amalgamation, approvedby the High Court, a transferee company that has issued itsshares at face value to the shareholders of the transferors, theactual market and/or valuation of the Shares of the transfereecompany being more than face value, the differential valuation ofsuch shares issued representing the value of the net identifiableassets accruing to the transferee constitutes a profit and/or taxable benefit accruing to the transferee company within themeaning of Section 28(iv) of the Income Tax Act, 1961?” By the aforesaid order, paper book was directed to be filed, but theappellant has chosen not to file even paper book. 3.Section 28(iv) of the Income Tax Act, 1961 [hereinafter referred to as‘Act 1961provides that value of any benefit or perquisite, whetherconvertible into money or not, arising from business or the exercise of aprofession, shall be chargeable to income tax under the head “profits andgains of business or profession”. 4.The assessing officer attempted to invoke this provision, despite theundisputed fact that in the audited accounts under clause 17A for the yearended 31.03.2023 (relating to assessment year 2003-04), the assesseefurnished details of scheme of amalgamation approved by this Court dated28.03.2023 pursuant to which three companies were amalgamated with theassessee during the relevant year and amalgamation reserve was created inthe assessee’s book for giving accounting effect thereto. 5.The assessing officer invoked Section 28(iv) of the Act 1961. The CIT(A) allowed the appeal of the assessee. Aggrieved with the order of the CIT(A, the revenue filed an appeal before the Income Tax Appellate Tribunal, ‘C’Bench, Kolkata being ITA No.755/Kol/2013 (assessment year 2003-04)which was dismissed by the Tribunal by the impugned order dated22.01.2016. Aggrieved with the order of the ITAT, the revenue has filed the present appeal, which was admitted on the afore-quoted substantialquestion of law. 6.We find that the Tribunal has well discussed the factual aspect of thecase and the provision of Section 28(iv) of the Act 1961. Relevant portion ofthe aforesaid impugned order of the ITAT, is reproduced below:- 5.The assessing officer invoked Section 28(iv) of the Act 1961. The CIT(A) allowed the appeal of the assessee. Aggrieved with the order of the CIT(A, the revenue filed an appeal before the Income Tax Appellate Tribunal, ‘C’Bench, Kolkata being ITA No.755/Kol/2013 (assessment year 2003-04)which was dismissed by the Tribunal by the impugned order dated22.01.2016. Aggrieved with the order of the ITAT, the revenue has filed the present appeal, which was admitted on the afore-quoted substantialquestion of law. 6.We find that the Tribunal has well discussed the factual aspect of thecase and the provision of Section 28(iv) of the Act 1961. Relevant portion ofthe aforesaid impugned order of the ITAT, is reproduced below:- “5. We have heard rival submissions and gone through factsand circumstances of the case. The assessee before uscontested that the amalgamation reserve created did notconstitute any benefit or perquisite arising from business of theassessee. According to him, the AO completely overlooked theprovision of section 28(iv) of the Act. Ld. Counsel for theassessee took us to Notes on Accounts and argued that it wouldbe noted that pursuant to sanction scheme of amalgamationassessee took over undertakings of the manufacturingcompanies on going concern basis. Consequent toamalgamation approved by Hon'ble Calcutta High Court, theassets and liabilities of the amalgamating companies wereaccounted in the books of account of the assessee. Inconsideration of such takeover, the assessee issued its ownequity shares to the shareholders of the amalgamatingcompanies and this fact is clearly mentioned in the Notes onAccounts that the amalgamation of the three companies wasaccounted in the assessee's books under the 'Pulling' of aninterest method as prescribed by Accounting Standard 14issued by ICAI. According to him, the Notes state that all theassets and liabilities and reserves of the amalgamatingcompanies were taken over and accounted for in the books ofthe assessee being the amalgamated companies at their respective book values. The consideration for taking over theassets and liabilities of the amalgamating companies was paidin the form of allotment of shares of the amalgamated companyto the shareholders of the amalgamating companies. Hereferred to the scheme of arrangement which was sanctionedby the Hon'ble Calcutta High Court that the share exchangeratio was also approved by Hon'ble Calcutta High court, whichwas based on intrinsic fair value of shares of the amalgamatingcompanies and the amalgamated company. He stated the factthat the shares were allotted by the assessee having face valueof Rs. 0/- each, yet if determined the exchange ratio CalcuttaHigh court has taken into consideration the intrinsic fair valueof the shares issued by the assessee. Since the intrinsic fairvalue of assessee's shares were higher than the face value ofthe shares allotted and while exchanging the shares on fairvaluation basis accounting difference between the face valueand the intrinsic fair value of the shares allotted wereaccounted through the amalgamation reserve account in thebooks of account of the assessee company. According to him,when the exchanges of shares were based on fair valuationbasis, there was no question of any benefit or perquisite in termof section 28(iv) of the Act. The Ld. Counsel for the assesseedrew our attention to the judgment of Hon'ble Delhi High Courtin the case of CIT Vs. Bharat Development P. Ltd., (1982) 135ITR 456 (Del.) that an accounting reserve which is created in thebooks of the amalgamated company to give accounting effect tothe amalgamation is nothing but an entry passed with the soleobject to balance the books of account which are maintained onthe principle of double entry system of book keeping. Therelevant finding is as under: "Learned counsel for the department urges that it should alsobe considered that the business of the assessee-companyincluded amalgamation with other companies. It is, therefore,contended that the amounts appearing as surplus arerevenue receipts received in the course of business by theassessee-company in these cases. I cannot accept thiscontention for the simple reason that in a case ofamalgamation, the assets of the amalgamating companycome to the amalgamated company. The amalgamatedcompany, i.e., the assessees in these cases, do not have topay anything to any one. They have only to replace theshareholding of the amalgamating company by their ownshares. This is the only form in which the amalgamatedcompanies pay for the assets of the amalgamatingcompanies. These shares may be issued at any convenientvalue. The shareholders of the previous company, i.e., thetransferring-company, may be given more shares than theypreviously had or they may be given less shares. Thisdepends on the scheme of amalgamation entered intobetween the two sets of shareholders which is again subjectto the approval of the court. If less shares are issued, i.e., forlesser than par value, then a surplus appears in the account.If more shares of greater than par value are issued, then adeficit will appear in the amalgamated account. In no eventwill this surplus or deficit be a capital or revenue receipt orpayment. They are merely book entries introduced for thepurpose of accountancy, i.e., for balancing the balance-sheet."On the other hand, Ld. CIT, DR relied on the order of AO. 6. After hearing both the sides and going through the factsof the case, we find that this is a simple case of accountingreserve which is created in the books of the amalgamatedcompany to give accounting effect to the amalgamation. According to us, this is nothing but an entry passed in theBalance Sheet with a sole object to balance the accountswhich are maintained on double entry system of accounting.This view of ours is supported by the decision of Hon'bleDelhi High Court in the case of Bharat Development P. Ltd.,supra. As such, when the exchange of shares was based onfair valuation basis, there was no question of any benefit orperquisite being earned by the assessee or by theamalgamating companies. In our view section 28(iv) of theAct therefore had no application in the assessee's case. TheAO was not justified in assessing this amount as income ofthe assessee u/s 28(iv) of the Act because such reserve didnot represent real income and secondly it did not constituteany benefit or perquisite arising from the business activity ofthe assessee. Hence we confirm the order of CIT(A) and thisissue of revenue's appeal is dismissed.” 7.There is no dispute on facts noted by the Tribunal in its orderreproduced above. To invoke Section 28(iv) of the Act 1961, the necessaryrequirement is that firstly there should be a benefit and secondly thebenefit should arise from business. In the present set of facts, there wasneither any benefit nor any benefit arising from business to attract Section28(iv) of the Act 1961. Under the circumstances, Section 28(iv) of the Act1961 has no application at all, on the present set of facts. The findingsrecorded by the Tribunal are findings of fact based on consideration ofrelevant evidences on record. The findings recorded by the Tribunal do notsuffer from any illegality or perversity. 8.For all the reasons afore-stated, we do not find any merit in thisappeal. The substantial question of law, as framed and reproduced above, isanswered against the revenue and in favour of the assessee. The appeal isdismissed. (SURYA PRAKASH KESARWANI, J.) S. Kumar (RAJARSHI BHARADWAJ, J.)