By TIOL News Service

CHENNAI, AUG 10, 2017: THE ISSUE BEFORE THE COURT IS - Whether surplus arising upon amalgamation of subsidiary with its parent company, is taxable u/s.28(iv). NO is the answer.

Facts of the case:

The assessee company amalgamated with its wholly owned subsidiary company. During assessment, AO found that Sundaram Auto Finance Ltd., a joint venture company promoted by the assessee company amalgamated with the assessee company under the "purchase method" as prescribed by accounting standard. The scheme of amalgamation had been given effect to in the accounts and accordingly, the assets and liabilities of the amalgamating company were transferred to and vested with the company w.e.f. 1.4.2002. The excess of assets over liabilities on account of amalgamation of M/s.Sundaram Auto Finance Ltd., to the tune of Rs.2554.235 lakhs was transferred to the capital reserve. The AO was of the view that the amount of excess of assets over liabilities are in the nature of benefit or perquisite arising from business or the excess of profession and required to be taxed u/s 28(iv). In response, it was submitted by AR that the assessee company was already the 100% owner of the surplus of the assets over liability of the subsidiary company and value of the shares in the subsidiary reflects this surplus. Thus, when the shares of subsidiary, on amalgamation, replaced by assets and liabilities of the subsidiary company there was no fresh benefit or amenity accruing to the company. The assessee further submitted before the AO that the transfer of assets in amalgamation of companies would be chargeable under the head "Capital gains" but specifically exempted in respect of transfer of assets between Holding and Subsidiary Companies. Not being impressed by the explanation of assessee company, the AO brought to tax the capital reserve u/s 28(iv) of I-T Act.

On appeal, the ITAT held that,

++ the AO was of the view that the amalgamation resulted in a benefit in the form of surplus of assets over liability of the subsidiary company. As rightly stated by the AR, the surplus in amalgamation attracts capital gains tax, but the capital gains are specifically exempted by Sec.47 of Income Tax Act. Sec.28(iv) applies to the business profits arising out of normal business transactions. In the case of the assessee, the subsidiary company was amalgamated with the assessee company and there was no business transaction in the amalgamation. Hence, Sec.28(iv) has no application in the assessee's case. The assessee relied on the decision of the High Court in the case of CIT v. Stads Ltd. and its case is squarely covered by the same. Therefore, respectfully following the decision of the jurisdictional High Court, it was held that the surplus on amalgamation is not taxable u/s.28(iv) of Income Tax Act.

(See 2017-TIOL-1123-ITAT-MAD)