𝐀𝐦𝐚𝐥𝐠𝐚𝐦𝐚𝐭𝐢𝐨𝐧 𝐌𝐞𝐞𝐭𝐬 𝐓𝐚𝐱𝐚𝐭𝐢𝐨𝐧: 𝐀 𝐅𝐫𝐞𝐬𝐡 𝐏𝐞𝐫𝐬𝐩𝐞𝐜𝐭𝐢𝐯𝐞 by 𝐈𝐓𝐀𝐓 𝐨𝐧 𝐒𝐞𝐜𝐭𝐢𝐨𝐧 𝟓6(2)(viia) - ITAT on Applicability of Section 56(2)(viia) in case of Amalgamation
Introduction
In a recent ruling by the Hyderabad Income Tax Appellate Tribunal (ITAT), it was held that Section 56(2)(viia) of the Income Tax Act, 1961, is applicable on shares received pursuant to a scheme of amalgamation, despite the exclusion by Section 47(vi). The case in question is Vertex Projects LLP [TS-224-ITAT-2023(HYD)].
Background
Vertex Projects LLP, the assessee, received an order from the Andhra Pradesh High Court approving a scheme of amalgamation, whereby various companies held by Dr. GVK Reddy and his family merged into Vertex Projects LLP, with effect from April 1, 2011. As per the amalgamation scheme, one share of Vertex Projects LLP was allotted for every one share held by the shareholders of the amalgamating companies. The assessee received shares of 11 companies, which were merged with Vertex Projects LLP, along with other underlying properties.
The Revenue held that since the assessee received investments in such closely held companies for inadequate consideration, the provisions of Section 56(2)(viia) were applicable. The deemed gift was brought to tax in the assessment year (AY) 2014-15 on a protective basis, amounting to Rs. 55.92 crores.
However, the Commissioner of Income Tax (Appeals) held that since the shareholding and shareholders were identical and even post-amalgamation, the shareholders were the same, as well as the shareholding was in the same ratio, it would not be a transfer under Section 47(vi), and thus, neither capital gain would arise nor any deeming charge under Section 56 could be attributed for the receipt of property/assets/shares for inadequate consideration.
ITAT Decision
The Hyderabad ITAT rejected the CIT(A)’s finding that since the transaction cannot be treated as a transfer in terms of Section 47(vi), the provisions of Section 56(2)(viia) cannot be invoked. The tribunal referred to the explanatory notes of the Finance Act, 2010, which introduced Section 56(2)(viia), and opined that Section 56(2)(viia), being a specific charging provision, would have an overriding effect and prevail over Section 47(vi).
The ITAT observed that under the scheme of arrangement, shares were received by the assessee from the 11 transferor companies and the amalgamated company. In consideration of receipt of the shares of the transferor company, the transferee company had allotted its shares to the members of the amalgamating company. The tribunal held that the transfer of shares (assets) had taken place and, therefore, it would be wrong to say that on the part of the assessee there were no transfer of shares.
The tribunal rejected the assessee's contention that mere merger transactions are outside the purview of Section 56(2)(viia). The ITAT held that the assessee received shares of the 11 amalgamating companies and the underlying properties, including shares of various companies, and allotted its shares. The tribunal, therefore, rejected the assessee's contention that there was no transfer or receipt of shares and explained that Section 56(2)(viia) makes it abundantly clear that there is no requirement of transfer as the requirement under the provision is the receipt of any property being the share of a company without or inadequate consideration, which is less than the fair market value.
The ITAT also upheld the Revenue's action of making an addition under Section 56(2)(viia) and rejected the challenge against the protective addition. The tribunal noted that for the purpose of attracting Section 56(2)(viia), the date of receipt of any property, being shares of a company, is crucial. It held that since the assessee received the property on account of the approval of the scheme of amalgamation in the year under consideration, the income is required to be charged in the year under consideration.
The ITAT further observed that the Revenue had an erroneous view that the addition was required to be made in the year of transfer, i.e., AY 2012-13, on a substantive basis, and thus on a protective basis, the addition was made in the subject AY. The tribunal remarked that, "If we hold the same, then the Bench would be asking the Assessing Officer to do the impossible."
The ITAT explained that the assessment proceedings for AY 2014-15, on the basis of protective addition, cannot be put in abeyance till the additions are made on a substantive basis for A.Y. 2012-13 owing to the time limit for completion of assessment under Section 143(3). Furthermore, the tribunal pointed out that the assessee did not exist for AY 2012-13, and thus no addition could be made in the hands of a non-existent entity.
Conclusion
The Hyderabad ITAT's ruling in the Vertex Projects LLP case has clarified the applicability of Section 56(2)(viia) on shares received pursuant to a scheme of amalgamation, despite the exclusion by Section 47(vi). The decision emphasizes that the specific charging provision under Section 56(2)(viia) would have an overriding effect and prevail over Section 47(vi). The ruling also highlights the importance of the date of receipt of property for attracting the provisions of Section 56(2)(viia) and the limitations of protective addition in assessment proceedings.