Business income – Scope of section 28(iv) – Amalgamation of companies – Excess of net consideration over value of companies taken over – Not assessable as income

Business income – Scope of section 28(iv) – Amalgamation of companies – Excess of net consideration over value of companies taken over – Not assessable as income

The assessee is engaged in the business of manufacturing heavy electrical equipment. Three companies were amalgamated with the assessee company and on amalgamation the assets stood transferred to the assessee company with effect from 1st January, 2006. The net excess value of the assets over the liability of the amalgamating company amounted to Rs. 54,26,56,000 and had been adjusted against the general reserve of the assessee company. In the assessment proceedings for the A.Y. 2006-07, the assessee was called upon to explain why the said excess asset, which was taken over as liability during the current year, should not be taxed u/s 28(iv). The explanation offered by the assessee was not accepted and the A.O. held that the said amount had to be charged to Income-tax under the head ‘Profits and gains of business’ u/s 28(iv).

The Commissioner (Appeals) allowed the assessee’s claim and deleted the addition. The Tribunal dismissed the appeal filed by the Revenue.

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

‘i) For applicability of section 28(iv) the income must arise from business or profession and the benefit which is received has to be in a form other than in the shape of money. The provisions of section 28(iv) make it clear that the amount reflected in the balance sheet of the assessee under the head “Reserves and surplus” cannot be treated as a benefit or perquisite arising from business or exercise of profession.

ii) The difference in amount post amalgamation was the amalgamation reserve and it cannot be said that it was out of normal transaction of the business being capital in nature, which arose on account of amalgamation of four companies, it cannot be treated as falling u/s 28(iv).’