EY Tax Alert Delhi Tribunal rules on non-taxability of fair value of properties received by amalgamated company under the scheme of amalgamation
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26 February 2019
EY Tax Alert
Delhi Tribunal rules on non-
taxability of fair value of properties
received by amalgamated company
under the scheme of amalgamation
Tax Alerts cover significant tax Executive summary
news, developments and changes
This Tax Alert summarizes a decision of the Delhi Income Tax Appellate Tribunal (Tribunal)
in legislation that affect Indian dated 22 February 2019 in the case of Aamby Valley Ltd. [1] (the Taxpayer), dealing with
businesses. They act as technical the taxability of fair valuation of properties received by the Taxpayer amalgamated
summaries to keep you on top of company pursuant to a scheme of amalgamation of its wholly owned subsidiary (WOS).
Pursuant to the amalgamation of its WOS, the Taxpayer received shares of direct
the latest tax issues. For more subsidiaries (SPVs) held by such WOS and the same were recorded by the Taxpayer at fair
information, please contact your value by crediting the general reserve.
EY advisor. The issues before the Tribunal were with regard to business perquisite taxation, book profit
taxation under provisions of minimum alternate tax (MAT) and gift taxation for receipt of
shares of the SPVs held by the WOS pursuant to the scheme of amalgamation.
[1]
ITA No. 1148/Del/2017Page 2
The Tribunal held that the transaction of amalgamation
cannot be considered as a transaction carried out in the Background of relevant ITL
course of business, so as to trigger taxation as business
perquisite. Also, in the absence of real income, any
provisions
notional income pursuant to increase in the general
reserve cannot be taxed under the Indian Tax Laws (ITL). ► The ITL provides capital gains exemption to an
The Tribunal further held that there could not be any book amalgamating company and its shareholders for the
profit taxation under the MAT provisions, since the amount transaction of transfer of capital asset under a
was directly credited to the general reserve, without any qualifying amalgamation. The shareholders are
impact on the P&L account. eligible for exemption, provided the consideration
received by such shareholders is only in the form of
The Tribunal further ruled in favor of the Taxpayer on non- shares of the amalgamated company and the
applicability of the gift tax provisions. The Tribunal held amalgamated company is an Indian company
that the gift tax provisions are anti-abuse provisions (”amalgamation exemption provision”).
introduced to prevent transferring of shares of a closely-
held company (CHC) at less than the fair market value The amalgamation exemption provision was
(FMV). The provisions are applicable only where there is amended with effect from tax year 2012-13 to
”transfer” of shares of a CHC in favor of the recipient firm remove the condition of allotment of shares by the
or the CHC. In case of amalgamation, there is no “transfer” amalgamated company in a case where the
of shares in favor of the amalgamated company, but there shareholder of the amalgamating company itself is
is a “statutory vesting” of assets pursuant to the the amalgamated company .
amalgamation scheme. Furthermore, in the facts of the
case, the fair value of shares received was not higher than ► The ITL taxes a firm and CHC on “receipt” of shares
the sacrifice suffered by the Taxpayer under the composite of another CHC[3] without consideration or for an
reorganization scheme, thereby leading to no incremental inadequate consideration exceeding INR50,000 (gift
benefit to the Taxpayer so as to warrant trigger of the gift tax provisions). Inadequate consideration is defined
tax provisions. Furthermore, exemption from gift tax as the difference between the FMV[4] and the
provision available to tax-neutral amalgamations also consideration paid. The ITL taxes the difference in
applied to the facts of the case. In this regard, the the hands of the recipient of such property. The gift
subsequent amendment to the capital gains exemption tax provisions are subject to certain exceptions for
provision, by which the requirement of issuance of shares specified business reorganizations, including the
was dispensed with in case of merger of a WOS with its transaction of receipt of shares as consideration by
holding company, was regarded as a curative amendment the shareholders of an amalgamating company
applicable retrospectively to the prior tax years. pursuant to the amalgamation exemption provision.
The Tribunal also relied on the ratio of the Supreme Court ► In terms of another specific provision in the ITL
(SC) in the case of Marshall Sons & Co. (India) Ltd. [2] , to dealing with business taxation, the value of any
hold that transfer and vesting of assets from amalgamating benefit or perquisite, whether or not convertible into
to amalgamated company under a scheme of money, arising from business, is treated as business
amalgamation becomes effective from the “appointed income (business perquisite).
date”.
► Furthermore, in case of a company taxpayer, book
profit taxation is triggered when tax liability,
computed at a specified percentage of book profit[5] ,
is higher than the tax computed as per the normal
scheme of taxation (MAT provisions). The “book
profit” is determined basis the P&L account prepared
in compliance with the relevant provisions of the
Companies Law and further adjusted by specified
upward and downward adjustments provided in the
ITL.
[3]
Closely held companies means companies in which the public is not
substantially interested, as defined under Section 2(18) of the ITL
[4]
Determined on the date of receipt of shares based on normative rules
prescribed under the ITL
[5]
Currently 18.5%, plus applicable surcharge and cess
[2]
[(1997) 223 ITR 809]Page 3
Schematics
Steps under the composite scheme Resultant Structure
Taxpayer Taxpayer
Step 2:
Step 1: Demerger of Amalgamation of
100% 100%
various business WOS with
undertakings to Taxpayer
respective SPV
without any
consideration WOS
SPVs
100%
SPVs
► The Taxpayer believed that the scheme had not
Facts resulted in any gain or income to it and, accordingly,
no income was offered by the Taxpayer in its return of
► The Taxpayer, a company, is engaged in the business income in relation to the scheme.
of construction of residential and commercial
complexes, townships etc. The Taxpayer had several ► However, the Tax Authority, while concluding the
business undertakings such as real estate, golf assessment for tax year 2011-12, observed that the
courses, airports, adventure sports etc. Taxpayer had received the shares of the SPVs without
any consideration and, accordingly, held that the
► The Taxpayer had a 100% subsidiary (WOS) which in receipt of such shares was liable to be taxed under the
turn had eight direct subsidiaries (SPVs) and three gift tax provisions. The Tax Authority determined the
step-down subsidiaries. The Taxpayer, the WOS, the fair value of such shares under the normative rules,
SPVs and the step-down subsidiaries filed a composite by considering the balance sheet of the SPVs dated
scheme of arrangement before the Bombay High 31 March 2012.
Court (the scheme) for demerger of various business
undertakings from the Taxpayer to the SPVs and the ► On reference to the Dispute Resolution Panel (DRP),
step-down subsidiaries and merger of the WOS with the addition under the gift tax provisions was
the Taxpayer with effect from the appointed date of confirmed. Additionally, the DRP held that the amount
31 March 2011 (tax year 2010-11). The scheme was credited to the general reserve, on account of the fair
sanctioned by the Bombay High Court in January valuation of the shares received on amalgamation,
2012 (tax year 2011-12). represents business profits liable to be taxed as
business perquisite, and also directed book profit
► Pursuant to the amalgamation of the WOS with the taxation of such amount by contending that such
Taxpayer, the shares of the SPVs received were amount ought to have been credited to the P&L
recorded in the books of the Taxpayer at fair value by instead of to the general reserve.
crediting the general reserve.
► Aggrieved by the DRP’s order, the Taxpayer appealed
to the Tribunal.Page 4
pursuant to the amalgamation, registering of properties
Tax Authority’s arguments and passing of book entries[6] at a subsequent date, will
not impact the date of transfer/vesting under the
The arguments of the Tax Authority before the Tribunal are scheme, which continues to be the “appointed date”.
summarized below: Thus, the transactions have taken place in tax year 2010-
11, and not in tax year 2011-12.
1) Year of taxability will be the year of effective date of
the scheme 2)Business perquisite taxation for the amount credited
The shares of the SPVs cannot be considered to have been to the general reserve
transferred or vested as on the appointed date i.e., 31 The Tribunal held that in the absence of real income, any
March 2011, since the valuation of such shares and the notional income [7] pursuant to increase in the general
entries in the books of account of the Taxpayer were reserve, cannot be taxed under the ITL. Additionally, the
passed in the subsequent tax year 2011-12. Thus, the transaction of amalgamation cannot be considered as a
appointed date of the scheme, which falls in tax year 2010- transaction carried out in the course of business for
11, is not relevant and the transaction is liable to be taxed taxation as business perquisite.
in the year under appeal i.e., tax year 2011-12.
3)Taxability under the gift tax provisions
2) Taxability of the amount credited to the general The Tribunal ruled in favor of the Taxpayer on non-
reserve as business perquisite applicability of the gift tax provisions, basis the following:
The fair valuation of assets received by the Taxpayer
amalgamated company under the scheme of amalgamation ► The gift tax provisions are anti-abuse provisions
resulted in creation of the general reserve in the books of introduced to prevent transferring of shares of a
the Taxpayer. The creation of the general reserve CHC at less than the FMV. The provision is
represents a non-cash (in the form of shares of the SPVs) intended to apply only if there is transfer of shares
benefit arising from the business of the Taxpayer, leading in favor of the recipient firm or CHC. In case of the
to business perquisite taxation in the hands of the amalgamation, there is no transfer of shares in
Taxpayer. favor of the Taxpayer amalgamated company, but
there is merely statutory vesting of assets
3) Taxability under the gift tax provisions pursuant to the amalgamation scheme.
Pursuant to the amalgamation of the WOS with the
Taxpayer, there was receipt of shares of the SPVs held by ► Under the composite scheme of arrangement,
such WOS for an inadequate consideration, triggering the there was demerger of business undertakings by
gift tax provisions. As the shares were not received in the Taxpayer to different SPVs, against which
consideration of the amalgamation, but the same has shares of the SPVs were received as consideration
vested pursuant to amalgamation of the WOS with the pursuant to the scheme of amalgamation. The fair
Taxpayer, specific carve-out or exemption provided under value of shares is not higher than the fair value of
the gift tax provisions does not apply. the demerged undertaking to qualify for gift
taxation.
4) Book profit taxation under the MAT provisions
The general reserve created in the Taxpayer’s books of ► The gift tax provisions are not applicable to shares
account, pursuant to fair valuation of the assets received of the CHC received pursuant to transactions
on amalgamation, ought to have been credited to the covered under the amalgamation exemption
P&L, leading to taxability under the MAT provisions. provision applicable to a shareholder of the
amalgamating company. The exemption to
shareholder was available only if the consideration
Tribunal’s rulings for amalgamation was received in the form of
shares of the amalgamated company. However,
The Tribunal ruled in favor of the Taxpayer and observed as this condition of allotment of shares could not be
under on the following issues: complied with in a scenario where the
amalgamated company itself is a 100%
shareholder of the amalgamating company,
1)Year of taxability will be in the year of the appointed
thereby leading to ambiguity on applicability of
date
the amalgamation exemption provision. Such
The Tribunal held that the properties of the amalgamating defect was cured by the Finance Act, 2012, by
company (WOS) would vest in the Taxpayer amalgamated specifically inserting the clause that issuance of
company with effect from the appointed date which is 31 shares by the amalgamated company is not
March 2011. The amalgamating company would be
[6]
carrying on business on behalf of the amalgamated Reliance in this regard was placed on the SC decisions in the case of
company from the appointed date and the scheme would Sutlez Cotton Mills [(1979) 116 ITR 1] and Tuticorin Alkali Chemicals and
Fertilizers Ltd. [(1997) 227 ITR 172], where accounting entries were not
be effective from the appointed date. Furthermore, construed to be the determinative factor for tax implications
determination of the FMV of the properties received [7]
Reliance was placed on the SC decision in the case of Godhra Electricity
Co. [(1997) 225 ITR 746], where taxation of hypothetical income was
denied despite entries in the books of accountPage 5
required to fall within the amalgamation
exemption provision where the amalgamated
company itself is a 100% shareholder of the
Comments
amalgamating company. The Tribunal held that
The Tribunal favorably rules that credit to the
such amendment made to remove defect is
general reserve by the amalgamated company,
clarificatory and retrospective in nature so as to
pursuant to fair valuation of the assets received
be applicable to the tax year under appeal (i.e.,
under the scheme of amalgamation, would neither
tax year 2010-11), despite the amendment being
be liable for business perquisite taxation nor gift
legislatively made effective from tax year 2012-
taxation. The Tribunal has reiterated certain well-
13.
settled principles while ruling in favor of the
Taxpayer. The Tribunal reiterated that there can be
► The Tribunal, on without prejudice basis, held that no business taxation for receipt which is not in the
if the gift tax provisions were applicable, the course of business. Also, gift taxation is permissible
balance sheet as on the appointed date of 31 only if there is incremental benefit reckoned after
March 2011 may be considered for determining taking into account the detriment suffered by the
the fair value of the shares received under the gift recipient. Additionally, the curative amendment to
tax provisions. the capital gains exemption provision, dispensing
with the requirement of issuance of shares in case of
merger of a WOS with the parent, could be given
4) Book profits taxation under the MAT provisions for the retrospective effect to earlier tax years. The Tribunal
amount credited to the general reserve also reaffirmed that there cannot be book profit
Placing reliance on the SC decision in the case of Apollo taxation in respect of credit directly made to the
Tyres[8] , the Tribunal held that since the amount was reserves account. This ruling could be of help to
directly credited to the general reserve without any debit to taxpayers in litigation.
the P&L account, such amount cannot be added back to the
profits while computing book profits for taxation under
MAT.
[8]
[(2002) 255 ITR 273]Page 6
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