Ahmedabad bench of Tribunal holds that the excess of net assets taken over by the amalgamated company against issue of its shares at face value towards consideration for amalgamation cannot be taxed under section 56(2)(viib) of the Act.
Background
Pursuant to a scheme of amalgamation approved by the High Court of Gujarat, assets and liabilities of an amalgamating company (‘transferor company’) were taken over by the taxpayer company (‘transferee company’ or ‘amalgamated company’).
The shareholders of the transferor company were issued equity shares of the taxpayer company at face value as consideration in lieu of shares of the transferor company held by them. As a result, shares of taxpayer company of INR 15 crores in aggregate at face value were issued to the shareholders of the transferor company. The value of net assets (assets less liabilities) vested in the taxpayer company under the scheme was INR 54.21 crores. The difference between the share capital issued and the value of net assets received pursuant to merger (viz. INR 39.21 crores i.e. INR 54.21 crores less INR 15 crores) was recorded by the taxpayer company as Capital Reserve.
The Assessing Officer (‘AO’) computed the total fair market value (‘FMV’) of shares issued on amalgamation at INR 6.81 per share as per Rule 11UA of the Income-tax Rules, 1962 as against the face value of INR 10 per share. Accordingly, the total FMV of shares issued on amalgamation was worked out to INR 10.21 crores.
The AO added the excess of net assets taken over by the taxpayer company against the fair market value of shares issued i.e. INR 44 crores (INR 54.21 crores less INR 10.21 Crores) as the income of the taxpayer company taxable under section 56(2)(viib) of the Income-tax Act, 1961 (‘the Act’).
On appeal before the first appellate authority, viz., the Commissioner of Income tax (Appeals), the matter was held in favour of the taxpayer company and the addition of INR 44 crores made under section 56(2)(viib) of the Act was deleted. It was held that the deeming provisions of section 56(2)(viib) of the Act cannot be invoked in the present case.
The Revenue appealed against the order of the first appellate authority before the Ahmedabad bench of the Income Tax Appellate Tribunal (‘the Tribunal’).
