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23 April 2021
Ahmedabad ITAT: Sec. 56(2)(viib) held not applicable to issue of shares on the amalgamation
M/s. Kalavir Estate Pvt. Ltd. (KEPL) amalgamated with Ozone India Ltd. (the assessee) under a scheme of amalgamation approved by the High Court of Gujarat effective from 1 April 2012. Pursuant to the amalgamation, the assessee took over all the assets and liabilities of the KEPL (net assets were worth ~INR 540 million). In consideration, the assessee issued 300 shares for each share held by the shareholders of KEPL, amounting to INR 150 million.

The excess of net assets over consideration was credited to capital reserve by the assessee. The tax authorities considered the same as income liable to tax under section 56(2)(viib) of the Income-tax Act being excess of the consideration received on the issue of shares in the course of amalgamation. The ITAT ruled out the applicability of section 56(2)(viib) in transactions like amalgamations observing as under:
  • The intent of the provision was to deter the generation and use of unaccounted money.
  • The Budget Memorandum to Finance Bill, 2012 and CBDT Circular 3/2012 indicates that the legislative intent was to cover the cases of the closely held company that receives the disproportionate amount on the issue of shares, which is over and above the face value of the share by way of share-premium.
  • In the scheme of amalgamation, consideration is paid by the amalgamated company in the form of issue of share capital rather than consideration being received by the assessee as understood by the tax authorities. The persons to whom shares have been allotted have not paid anything for the allotment of shares. The shares have been allotted in consideration of their shareholding in the amalgamating company.
  • The SC ruling in Mother India Refrigeration has held that deeming fictions are limited to the underlying purpose and cannot be extended beyond their legitimate field.
  • In cases of amalgamation, there is a tripartite agreement between the amalgamated co., amalgamating co and shareholders of amalgamating co. and such agreements are not contemplated in the deeming clause in question.
In view of the above, the Ahmedabad ITAT held that issue of shares at face value by amalgamated co. to shareholders of amalgamating co. in pursuance to the scheme of amalgamation does not fall under Section 56(2)(viib) of the Income-tax Act.

Citation: M/s. Ozone India Ltd. (I.T.A. Nos. 2081/Ahd/2018)
Our Comments
The ruling clearly reflects the unintended ambiguity caused by the provision and thus unsettling the settled. Deeming fiction must be construed strictly and cannot be extended beyond its purpose/intent.
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