' Vide this appeal, the assesse-appellant has assailed the order passed by Commissioner Inland Revenue (Appeals-I), Lahore dated 13-6-2011 in respect of tax year 2004.
2. Facts leading for disposal of the instant appeal are that the appellant, a public limited company, is engaged in the business of manufacturing and sale of juices, pickles, jams, ketchups etc. Income tax return for the tax year 2004 was filed by the appellant declaring income at Rs,79,967,801, which is deemed to be an assessm ent order under section 120 of the Income Tax Ordinance, 2001. Later on, the department found that the assessment is erroneous in so far as prejudicial to the interest of revenue; accordingly amended assessment was made at Rs,191,612,341 by putting in additions on account of capital gain under section 37 of the Ordinance as well as disallowing expense on repair and maintenance of vehicles. Being -aggrieved, the appellant filed appeal before the learned Commissioner Inland Revenue, Appeals-I, Lahore who by virtue bf his order -dated 13-6-2011 confirmed the addition on account of capital gain and made no comments on addition made on account of disallowing expense on repair and maintenance of vehicles. Being dis-satisfied with the treatment meted out by the learned CIR (Appeals-I), Lahore the appellant preferred appeal before this learned Tribunal.
3. The learned A.R. Appearing on behalf of the appellant contended that the learned Commissioner Inland Revenue (Appeals-I) has erred in confirming the order under section 122(5A) of the Ordinance, issued by the learned ACIR without having lawful jurisdiction. Further contended that the Commissioner Inland revenue (Appeals-I) has erred in confirming the addition of Rs,99,640,500 made by the learned ACIR under section 37 of the Ordinance by considering it as capital gains. He also agitated that the learned Commissioner Inland Revenue (Appeals-I) has erred in confirming the action of the learned ACIR by rejecting the claim of the appellant that the merger of wholly owned subsidiary duly approved by the Honourable Lahore High Court, Lahore is fully covered under the provisions of section 97 of the Ordinance, resultantly no gain or loss shall be taken to arise on disposal of its assets. He also vociferously contended that the learned Commissioner Inland Revenue (Appeals-I) has erred in confirming the action of the learned ACIR not to accept the claim of the appellant that the provisions of 97A squarely applies in this case, whereby, no gain or loss shall be taken to arise on disposal of assets under the scheme of arrangement and reconstruction duly approved by the Honorable Lahore High Court, Lahore. Further stated that the learned Commissioner Inland Revenue (Appeals-I) has erred in confirming the action of the learned ACIR, wherein, it has been held that the merger of the wholly owned subsidiary under the scheme of arrangement duly approved by the Honourable Lahore High Court, Lahore comes under the ambit of disposal of shares in terms of section 75 of the Ordinance. He also stated that the learned Commissioner of Income Tax (Appeals-I) has erred in not deciding the ground of appeal through which the lump sum addition of Rs,2,000,000 made by the learned ACIR on account of provisions of vehicles by considering it part of excess perquisites was contested, resultantly, confirming the said addition.
4. We have heard the arguments advanced' by the rival parties and the relevant available record as well as the case-laws submitted by the learned A.R have carefully been perused. After having gone through the relevant record, we have noted that the first contention of the learned A.R. On the issue of jurisdiction has no substance because of it that while deciding the Writ Petition No,653 of 2009 dated 16-7-2009, the Honourbale D.B of Islamabad High Court explained as "the Commissioner has delegated his powers under section 122(5A) to Additional Commissioner, therefore, he is competent to issue notice to the petitioner" and the order of the apex court has not been held as illegal in this regard. Consequently, we reject this plea of the learned A.R. And agree with the findings of the learned CIR(Appeals-1), Lahore on this score.
5. Coming to the main thrust of the learned A.R. On the addition of Rs,99,640,500 made by the Additional Commissioner under section 37 of the Ordinance by considering it as capital gains and confirmation thereof by the learned Commissioner Inland Revenue. We have observed that Messrs Hatter Fruit Products Limited (HFPL) merged into Shezan International Limited (SIL) under the scheme of arrangement for merger/ amalgamation duly approved by the Honourable Lahore High Court vide the order bearing No, CO 65-2003 dated 2nd December, 2003, which took effect from 1st July 2003. Thereafter, that the learned ACIR treated transfer of shares as disposal of shares in the hands of SIL and, hence, charged tax amounting to Rs,99,640,500 under section 37(3) holding that the shares were specifically included in the definition of capital assets under section 37(5). The Additional Commissioner Inland Revenue further validated his understanding by referring to the provisions of section 75(1), according to which disposal included sale, exchange, transfer, redemption, relinquishment or surrender. Thus, in the ACIR's analysis the transfer of shares of HFPL to SIL under the scheme of arrangement was disposal of shares in the eyes of law. Cost and consideration received was also determinable and difference of the same represented capital gain in terms of section 37. The learned A.R. Of the Company challenged the interpretation made by the ACIR and he firstly avers that the cases of merger/amalgamation do not generate any taxable activity, nor do they involve any transfer or exchange or relinquishment of assets. In support of his contention, the learned AR places reliance upon the following cases-law and for convenience and ready reference relevant extract of the judgments are being reproduced hereunder:--
(1) MA (Cond.) No,81/LB/2010 and ITA No,880/LB/2010, dated 11-2-2011, in case of Messrs Ghani Float Glass Ltd. v. CIR(Appeals-I), RTO, Lahore "From the above quoted case-law of the Indian Jurisdiction it is evident that merger does not involve any of the situation covered in section 75 relied and applied by the Taxation Officer for disallowing depreciation."
"The concept of amalgamation falls out of the scope of provisions of section 75 of the Income Tax Ordinance, 2001. The provisions of section 2(1A)(b) of the Income Tax Ordinance, 2001 clearly lay down that in amalgamation of assets of the amalgamated company are amalgamated otherwise then by purchase."
(2) 2012. PTD (Trib.) 1544 in case of Mashreq Bank, PSC, Karachi v. Commissioner of Inland Revenue (Legal Division), RTO, Karachi "It is a settled proposition that a merger of two or more companies is essentially a process of corporate reconstruction where by assets of the merging companies are either clubbed or brought together in the surviving if the new company. However, proprietary rights of assets remain intact. No financial transaction could be said to have taken place between the merging companies. As such in the scheme of merger arrangement there does not take place any sale, disposition, exchange or relinquishment or extinguishment of any right on the part of the amalgamating companies that gives rise to any income or gain resulting in a taxable event. The repositioning of the amalgamating companies through a due process of law resulting in the emergence of an amalgamated company only gives rise to one thing i,e, the shareholders of the merging companies eventually become the shareholders of the amalgamated company.
Accordingly, the ultimate interest and ownership of shareholders of a merging company remains unchanged based on appropriate share swap ratio forming part of the scheme of arrangement under which the merger is ultimately sanctioned by the State Bank of Pakistan or the Court of law as the case may be. It would be, therefore, clear that a shareholder's intrinsic right/interest remains the same as was prior to the merger. In view of this situation, whereupon merger the net assets of the merging companies remain unaltered as also the proprietary interest of the shareholders in the amalgamated company remains the same, a corporate merger does not give rise to any taxable event."
"It is a cardinal principal of revenue laws that in order to bring an amount in the ambit of taxation, the form of the transaction may not be given preference over the substance. In the case of CIT v.
Gammon Pak. Limited reported as (966) 14 Tax 304 the Hon'ble Karachi High Court relying on the observations recorded by Vivian Bose J. In case of Sir Kikabhai Premchand v. CIT (Central), Bombay reported as (1953) 24 ITR 506 has observed that it is a well settled principal that in.
Revenue cased regard must be had to the substance of the transaction rather than its mere form. It is also a trite law that mere book keeping entries are not determinative of the question whether the Taxpayer has earned any profit or incurred a loss, and that a receipt, which in law cannot be regarded as income, cannot become so, merely because the Taxpayer credited it to the Profit and Loss Account. In CIT, West Bengal v. India Discount Co. Ltd. Reported as 1970 ITR 191 (SC Ind.)"
"It is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries, which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee."
"There is a plethora of case-law, which defines as to what merger is, and what are its effects on the amalgamating companies vis-a-vis the amalgamated company. As held by the Delhi High Court in CIT (Delhi) v. Bhahrat Development (Pvt.) Limited 135 ITR 456 which was subsequently upheld by the Supreme Court of India in a number of decisions, a merger does not give rise to any financial transaction which becomes a taxable event and there is no cash payment involved in any manner. It was then held that "amalgamation does not involve any sale or 'purchase and any surplus of value of shares issued by the, amalgamated company over the value of one asset transferred does not result in any taxable gain."
"Under the income tax law, only real income accrued or received by a taxpayer can be brought into the ambit of taxation. Hypothetical entries resulting in accretion to notional income or in the value of assets do not, in any manner, give rise to a taxable event."
(3) 150-ITR-529 The Bombay High Court in case of Forbes Forbes Cambell and Company Ltd. v.
Commissioner of Income-Tax, Bombay City-III, Bombay dated 09 September 1983.
"In case of amalgamation of 100% subsidiary with its parent company the entire capital and assets of the subsidiary company vest in the parent company and as a result of the amalgamation the parent company becomes the sole owner of the capital of the subsidiary company. There is, therefore, no extinguishment of the right of the parent company in the capital on the liquidation of the subsidiary company and there is thus no question of accrual of capital gain or sustaining of capital loss. Hence, amalgamation over the cost of the parent company's shareholding in the subsidiary is not chargeable to tax as capital gain under section 45 of the Income Tax Act, 1961."
6. We have given anxious thought to the arguments advanced by the rival parties and the relevant available record perused and we are of the considered view that the contention raised by the learned counsel for the appellant on the issue of capital gains carries much weight. Before reaching in an escapable conclusion, we deem it appropriate to reproduce section 97 of the Income Tax Ordinance, 2001 as under:-
97. Disposal of asset between wholly-owned companies.---(1) Where a resident company (hereinafter referred to as the---transferor) disposes of an asset to another resident company (hereinafter referred to as the---transferee), no gain or loss shall be taken to arise on the disposal if the following conditions are satisfied, namely:-
(a) Both companies belong to a wholly-owned group of resident companies at the time of the disposal;
(b) the transferee must undertake to discharge any liability in respect of the asset acquired;
(c) any liability in respect of the asset must not exceed the transferor's cost of the asset at the time of the disposal; and
(d) the transferee must not be exempt from tax for the tax year in which the disposal takes place.
(2) Where subsection (1) applies -
(a) the asset acquired by the transferee shall be treated as having the same character as it had in the hands of the transferor;
(b) the transferee's cost in respect of the acquisition of the asset shall be-
(i) in the case of a depreciable asset or amortized intangible, the written down value of the asset or intangible immediately before the disposal;
(ii) in the case of stock-in-trade valued for tax purposes under subsection (4) of section 35, that value; or
(iii) in any other case, the transferor's cost at the time of the disposal;
(c) if, immediately before the disposal, the transferor has deductions allowed under sections 22, 23 and 24 in respect of the asset transferred which have not been set off against the transferor's income, the amount not set off shall be added to the deductions allowed under those sections to the transferee in the tax year in which the transfer is made; and
(d) the transferor's cost in respect of any consideration in kind received for the asset shall be the transferor's cost of the asset transferred as determined under clause (b), as reduced by the amount of any liability that the transferee has undertaken to discharge in respect of the asset.
(3) In determining whether the transferor's deductions under sections 22, 23 or 24 in respect of the asset transferred have been set off against income for the purposes of clause (c) of subsection (2), those deductions shall be taken into account last.
(4) The transferor and transferee companies belong to a wholly-owned group if--
(a) one company beneficially holds all the issued shares of the other company; or
(b) a third company beneficially holds all the issued shares in both companies.
We have also gone through the reported judgments and find its a crystal clear and settled proposition that a merger of two or more companies is essentially a process of corporate reconstruction whereby assets of the merging companies are either clubbed or brought together in the surviving or the new company.. However, proprietary rights of assets remain intact. No financial transaction could be said to have taken place between the merging companies. As such in the scheme of merger arrangement there does not take place any sale, disposition, exchange or relinquishment or extinguishment of any right on the part of the amalgamating companies that gives rise to any income or gain resulting in a taxable event.
7. In view of the aforementioned discussion as well as bare reading of the reported judgments and section 97 of the Ordinance cited supra, we are of the view that the Company has fulfilled all the conditions laid down in section 97 of the Ordinance, 2001 and no doubt that the contention raised by the assessee-appellant hold water. Consequently, we have no ambiguity in our mind to state here that the addition of Rs,99,640,500 made by the Additional Commissioner under section 37 of the Ordinance and confirmed by the learned Appeal Commissioner is illegal, void and ab initio which obviously warrants deletion, accordingly the same is hereby deleted. Consequently, this would result into acceptance of the assessee's appeal on this issue.
8. Next contention of the learned A.R. Relates on the addition made by the ACIR amounting to Rs,2,000,000 on account of repair and maintenance paid in respect of vehicles provided to executive employees. The learned A.R. Argued that the Company has provided vehicles to its few executive staff members for official duties besides allowing them personal use thereof to some extent as per terms of employment. Allocation of such vehicles is a part of remuneration of the employees against their services. The A.R. Contends that the vehicles are owned by the Company and used for the purposes of business, therefore, the claim of amount of repair and maintenance on these vehicles is business expense of the Company. The personal use of vehicles by the employees is in accordance with the terms of employment contract and its value can be treated only as perquisite/benefit to employees, chargeable to tax under the head salary. Furthermore, he states, the Company was also D taxed on account of excess perquisites under section 21(k) of the Ordinance. The ACIR while calculating the amount of excess perquisites has also made addition of the value of conveyance provided to different executive staff members while computing the excess perquisites. As a result, disallowance of expense, amounting to Rs,2,000,000 on account of repair and maintenance on these vehicles is against the law. On the other hand, the learned D.R. Strongly supported the orders of the authorities below on this score.
9. After appraising the facts obtaining on record and also after hearing the divergent views expressed by the rival parties, we are of the considered view that the submissions made by the learned A.R. At the bar is without any substance. After scrutinizing the relevant record, we have observed that the appellant had not provided any detail of expenses incurred on repair and maintenance of vehicles provided to the employees and directors. Consequently, the Additional Commissioner had added an amount of Rs,2,000,000 on account of running and maintenance of vehicles provided to the directors: In view of the aforementioned facts and circumstances of the case, we are constrained to agree with the treatment meted out by the by the authorities below, hence the addition made by them are hereby maintained.
10. As a result, the assessee's appeal for the tax year 2004 is disposed of to the extent and in the manner as indicated above.