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Tax Publishers Hespera Realty (P) Ltd. v. DCIT [ITA No. 764/Del/2020, dt. 27-7-2020] : 2020 TaxPub(DT) 2961 (Del.-Trib.) Amalgamation in the nature of purchase under court approval -- Sale of shares and capital gains claimed exempt -- MAT treatment -- Question of colourable transaction alleging tax evasion *Facts:* Assessee a closely held company in the business of real estate; to achieve group synergy sought court approval for a corporate reorganisation thru amalgamation of its five closely held subsidiaries. Court approved the scheme on 8-5-2015 with retrospective effect from 1-8-2014. The subsidiaries, i.e., the amalgamating companies had 95.15 lakh shares of India Bulls Housing Finance Ltd. (IBHFL) which was acquired by them for a book value of Rs. 142.68 crores. As part of the scheme of amalgamation in the nature of purchase the shares of IBHFL were taken over by the assessee (amalgamated company) at its closing price of Rs. 410.10 per share on 31-7-2014 (one day prior to amalgamation approval date). This resulted in the said 95.15 lakh shares being valued at a fair value of Rs. 390.21 crores. Ad interim during pendency of the Court application all the shares were sold by the assessee for a consideration of Rs. 423.60 crores thru stock exchange after paying Securities transaction tax (STT) and the long capital gains was claimed exempt Rs. 289.62 (423.60 minus STT 0.30 minus cost 142.68) under section 10(38). Since being an amalgamation in the nature of purchase ICAIs AS-14 (Accounting for Amalgamation) being mandatory for the assessee; they credited capital reserve by Rs. 247.52 crores (Fair value 390.21 minus 142.68). Post sale of the shares Rs. 33.09 crores (Rs. 423.30 minus 390.21) was credited to P&L account as gain on sale of shares and the same was offered to MAT. The debate arose on the amount credited in capital reserve of Rs. 247.52 out of amalgamation fair value measurement. Assessing officer alleged that the Capital reserve was nothing but Revaluation reserve disguised as capital reserve to subvert MAT liability and the entire amalgamation was only a hogwash thus a tax evasion measure as in McDowells case (1985) 154 ITR 148 (SC) : 1985 TaxPub(DT) 1186 (SC) thus added the capital reserve of Rs. 247.52 crores for MAT computation applying section 115JB Explanation 1, clause (j) which empowers adding back revaluation reserves for MAT computation. Commissioner (Appeals) seconded assessing officers views. Aggrieved assessee appealed to ITAT - Held in favour of the assessee that the capital reserve which factually arose as part of court approved amalgamation cannot be rechristened by revenue as revaluation reserve and the addition of Rs. 247.52 crores deserves deletion. The court amalgamation scheme cannot be questioned as a tax subversive tactic hit by McDowells case (1985) 154 ITR 148 (SC) : 1985 TaxPub(DT) 1186 (SC). The sale of shares pending court order of amalgamation also cannot be doubted. *Editorial Note:* Reference be made to JCT Ltd. v. DCIT [ITA No. 2389/Kol/2018/AY 2011-12/Kol-ITAT/Favour of assessee/Dated 8-7-2020] : 2020 TaxPub(DT) 2778 (Kol-Trib) where in this case department questioned a similar amalgamation by court disallowing set off of Unabsorbed depreciation against capital gains on sale of property. It was alleged by revenue that the amalgamation was a colourable transaction and a sham by invoking GAAR which was not even in vogue in the said year of appeal. This did not impress the ITAT who held against the revenue upholding the court approved scheme of amalgamation after an elaborate reading.

Tax Publishers

Hespera Realty (P) Ltd. v. DCIT [ITA No. 764/Del/2020, dt. 27-7-2020] : 2020 TaxPub(DT) 2961 (Del.-Trib.)

Amalgamation in the nature of purchase under court approval -- Sale of shares and capital gains claimed exempt -- MAT treatment -- Question of colourable transaction alleging tax evasion

Facts:

Assessee a closely held company in the business of real estate; to achieve group synergy sought court approval for a corporate reorganisation thru amalgamation of its five closely held subsidiaries. Court approved the scheme on 8-5-2015 with retrospective effect from 1-8-2014. The subsidiaries, i.e., the amalgamating companies had 95.15 lakh shares of India Bulls Housing Finance Ltd. (IBHFL) which was acquired by them for a book value of Rs. 142.68 crores. As part of the scheme of amalgamation in the nature of purchase the shares of IBHFL were taken over by the assessee (amalgamated company) at its closing price of Rs. 410.10 per share on 31-7-2014 (one day prior to amalgamation approval date). This resulted in the said 95.15 lakh shares being valued at a fair value of Rs. 390.21 crores. Ad interim during pendency of the Court application all the shares were sold by the assessee for a consideration of Rs. 423.60 crores thru stock exchange after paying Securities transaction tax (STT) and the long capital gains was claimed exempt Rs. 289.62 (423.60 minus STT 0.30 minus cost 142.68) under section 10(38). Since being an amalgamation in the nature of purchase ICAIs AS-14 (Accounting for Amalgamation) being mandatory for the assessee; they credited capital reserve by Rs. 247.52 crores (Fair value 390.21 minus 142.68). Post sale of the shares Rs. 33.09 crores (Rs. 423.30 minus 390.21) was credited to P&L account as gain on sale of shares and the same was offered to MAT. The debate arose on the amount credited in capital reserve of Rs. 247.52 out of amalgamation fair value measurement. Assessing officer alleged that the Capital reserve was nothing but Revaluation reserve disguised as capital reserve to subvert MAT liability and the entire amalgamation was only a hogwash thus a tax evasion measure as in McDowells case (1985) 154 ITR 148 (SC) : 1985 TaxPub(DT) 1186 (SC) thus added the capital reserve of Rs. 247.52 crores for MAT computation applying section 115JB Explanation 1, clause (j) which empowers adding back revaluation reserves for MAT computation. Commissioner (Appeals) seconded assessing officers views. Aggrieved assessee appealed to ITAT -

Held in favour of the assessee that the capital reserve which factually arose as part of court approved amalgamation cannot be rechristened by revenue as revaluation reserve and the addition of Rs. 247.52 crores deserves deletion.

The court amalgamation scheme cannot be questioned as a tax subversive tactic hit by McDowells case (1985) 154 ITR 148 (SC) : 1985 TaxPub(DT) 1186 (SC).

The sale of shares pending court order of amalgamation also cannot be doubted.

Editorial Note: Reference be made to JCT Ltd. v. DCIT [ITA No. 2389/Kol/2018/AY 2011-12/Kol-ITAT/Favour of assessee/Dated 8-7-2020] : 2020 TaxPub(DT) 2778 (Kol-Trib) where in this case department questioned a similar amalgamation by court disallowing set off of Unabsorbed depreciation against capital gains on sale of property. It was alleged by revenue that the amalgamation was a colourable transaction and a sham by invoking GAAR which was not even in vogue in the said year of appeal. This did not impress the ITAT who held against the revenue upholding the court approved scheme of amalgamation after an elaborate reading.