No adjustment of revaluation u/s 115JB upon amalgamation when the same is credited to capital reserves

Priapus Developers (P.) Ltd v ACIT [2019] 104 298 (Delhi – Trib.)


  • Two subsidiary companies of the assessee were amalgamated with the assessee company. Delhi High Court had sanctioned the scheme of Amalgamation.
  • As per the Scheme of Amalgamation the accounting principles and ‘purchase method’ as prescribed in ‘AS-14 was adopted. Further, as per the Scheme, all the assets and liabilities of the amalgamating companies were to be transferred at their respective fair values. The scheme also provided for transferring any excess (difference between fair value and book value of the assets) to capital reserve.
  • Equity shares of a listed company – IFHL held by the subsidiary company were revalued and recorded in the books of the assessee company at fair value. The difference between book value of the shares so acquired and the FMV at which it was recorded in the books of the assessee being the amalgamated entity was credited to capital reserves. In the subsequent year, the shares were sold at a loss and STT was paid thereon.
  • In the year of amalgamation, the transfer of assets were claimed as exempt by virtue of section 47(vi). No adjustment was made in relation to the revaluation / excess value of the shares credited to capital reserves in the MAT computation u/s 115JB in the year of amalgamation. The sale of shares at a loss in the subsequent year was disallowed by the assessee itself u/s 10(38). However, the loss on sale recorded in the P&L A/c was not separately disallowed in the MAT computation u/s 115JB.
  • The AO observed that reserve created on account of revaluation of shares was not credited to P&L A/c and held that in terms of clause (v) to Explanation 1 of section 115JB, such revaluation of shares has to be taken into account while computing the book profit. In the first level of appellate proceedings, the CIT(A) upheld the order of AO.

Revenue’s Arguments:

  • Amalgamation has been used by the assessee as a tool for tax evasion.
  • As per AS-13 for accounting for investments, investments are to be carried at cost and not fair market value. Further AS-13 also clarifies that difference between carrying amount and disposal proceeds net of expenses, has to be recognised in the P/L A/c. Thus, the assessee has not even followed the accounting treatment required to be followed as per AS-13.
  • The adoption of fair market value of the Investments is nothing but revaluation. Merely, the credit of increase in value to “capital reserve” would not alter the true character and substance of the event.


  • The scheme has been duly approved by Delhi High Court. High Court had issued notices to the Income Tax Department / Assessing Officer to provide any objections to the said Scheme, if any. The Assessing Officer/ Department nowhere had objected to said Scheme at any point of time. Thus, Scheme of Amalgamation sanction by High court had become final.
  • Reliance was placed on the Supreme Court in the case of J.K. (Bombay) (P.) Ltd. [AIR 1971 SC 1041] wherein it was held that once the scheme has been sanctioned by the Court that does not operate as mere agreement between the parties, but it becomes binding on the company, their creditors and the share holders and other statutory force. Similar view has been echoed by the Gujrat High Court in the case of Wood Polymer Ltd.
  • The amalgamation order passed by the High Court is a judicial order and has statutory force and in case, the department had any objection, then same should have been given before the Hon’ble High Court for which sufficient time was allowed.
  • As per said scheme itself, such capital reserve was prohibited for any purpose by the transferee company. Thus, such a creation of capital reserve cannot be questioned by the Assessing Officer or CIT(A) or perceive it as any kind of tax evasion practice.
  • It is not revaluation of any asset held by the assessee, because no such reserve has been created by the assessee on revaluation of shares. Revaluation of assets takes place only when the assessee decides to revalue the asset existing in the balance sheet.
  • There is no dispute that the P&L A/c has not been prepared in compliance of requirement of Part-I and Part-II of the Companies Act, 2013 and as per accounting standard. The P&L A/c has been approved by the Statutory Auditors and also laid before the Members in the AGM, which is sacrosanct for computing the book profit u/s. 115JB. In this connection, reliance was placed on Supreme Court in the case of Apollo Tyres.


The above ruling reinforces the sanctity of the amalgamation orders approved by High Court / NCLT, if no objections are raised by the Department during the course of proceedings before HC / NCLT. Further, as per the CBDT clarification, GAAR will also not apply to an arrangement where the NCLT has “explicitly and adequately” considered its tax implication.

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