Surplus on amalgamation not taxable u/s 28(iv) – Chennai ITAT

M/s Spencer & Co Ltd v ACIT [2012-TIOL-370-ITAT-MAD-TM] (Chennai ITAT)


The asseessee M/s Spencer and Company Ltd, had filed its return of income u/s 139(1) for assessment year 2002-03, on 30.10.2002. M/s. Spencer Industrial Fund Ltd. (SIFL) was amalgamated with the assessee company with effect from 1st April, 2001. Consequently, the assessee company revised its return u/s 139(5) by filing a return on 23.11.2003 disclosing information regarding amalgamation of SIFL with it. The AO observed that there was a direct nexus between loans obtained and investments made, expenditure incurred in relation to exempt income was not deductible u/s 14A. The assessee’s income was subject to income escapement proceedings and, a notice u/s 148 was issued.

Pursuant to the amalgamation, the assets and liabilities of SIFL got vested with the assessee company and were recorded at their fair values. The excess of fair value of net assets over the paid up value of allotted equity shares worked out to Rs. 2,899.68 lakhs. This surplus amount was transferred by the assessee to its General Reserve Account. The CIT observed that this surplus amount of Rs. 2,899.68 lakhs was not subjected to tax as business income under section 28(iv) and thereafter, initiated revision proceedings u/s 263. 

Assessee’s contentions

  • The proper head of income under which the income arising from the amalgamation of two companies could be assessed was ‘capital gains’ and not ‘profits and gains of business’.  The excess of fair value of net assets take over which was transferred to general reserve was merely an accounting entry and did not represent income chargeable to tax.
  • A benefit or perquisite that did not arise from carrying on of a business activity by the assessee, but arises in the course of acquiring a capital asset, was not taxable under section 28(iv).
  • For the purpose of section 28(iv), the benefit or perquisite must arise from business or exercise of profession. The phrase ‘arising from business’ in the context of section 28(iv) contemplated not only some connection with the business undertaking of the assessee, but it envisaged that the benefit or perquisite must arise from actual conduct of the business itself.

Tax Authorities arguments


  • The addition to General Reserve was due to increase in Net Asset Value (NAV) and the same was completed as per business expediency. Therefore, the increase reflected in the General Reserve Account was taxable in terms of section 28(iv) of the Act.
  • Madras High Court in the case of CIT vs. Aries Advertising Co. Pvt. Ltd., held that transfer of any amount to the General Reserve was to be treated as profits of the business.


  • The assessee acquired the business of another company through the medium of amalgamation. As there is no transfer of any capital asset made by the assessee, the question of taxing capital gains does not arise. Moreover, section 47(vi) provides that any transfer, in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company, is not treated as a transfer for the purpose of levy of capital gains tax.
  • A similar issue was considered by this Tribunal in the case of M/s.Quintegra Solutions Ltd, wherein the view taken by the assessee was upheld that the differential amount between the face value of the shares allotted and the value of net assets taken over did not represent any income assessable under section 28(iv) because such amount was merely a balancing figure adjusted in the books of the amalgamated company.
  • The decision of Madras High Court in the case of Commissioner of Income-tax vs. Aries Advertising Pvt. Ltd. cannot be relied upon as the facts are diametrically opposite.
  • There is no surplus. It was only an accounting notion. It was necessarily to be reflected in the accounts so as to tally the balance sheet.
  • In such a transaction of amalgamation, there is inherent possibility of the assessee gaining a “book surplus” being the difference between the market value and the face value of the shares. This is not in the revenue segment and not in the nature of any benefit or perquisite. Therefore, section 28(iv) does not apply to the case even remotely.
  • The  Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. vs. CIT has observed that the question whether an amount would constitute reserve or not will have to be decided having regard to the true nature and character of the sum so appropriated depending on the surrounding circumstances, particularly the intention and purpose for which such appropriation has been made.

Other issues

With regard to the period of limitation on issue of notice u/s 263, it was held that the period of limitation commences from the date of passing of the income-escaping assessment order under section 143(3), read with section 147 as all the proceedings prior to the passing of the assessment order under section 143(3), read with section 147, have been merged with the assessment order passed under section 143(3), read with section 147.


Leave a comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.