Tax dept fails to create additional demand on capital gains

LAHORE: The income tax department failed to create additional demand on account of capital gains in the wake of amalgamation of subsidiary company with its parent company.

According to details, a public limited company deriving income from manufacturing and sale of juices, pickles, jams, ketchups etc., had filed income tax return, which the department found to be erroneous insofar as prejudicial to the interest of revenue.

Consequently, the assessment was amended by putting in additions on account of capital gains and disallowing the expenses on repair and maintenance of vehicles.

The Commissioner Appeals also confirmed the additional demand. While dealing with the issue, the Commissioner Appeals observed that the value of assets received in lieu of shares is the consideration received against the cancellation of shares and the parent company became the owner of assets of the subsidiary company after scheme of amalgamation was affected.

However, the taxpayer maintained that it is well-settled that merger of two or more companies is essentially a process of corporate reconstruction whereby assets of merging companies are either clubbed or brought together in the surviving or new company.

No financial transaction could be said to have taken place between the merging companies, as no sale, disposition, exchange or relinquishment or extinguishment of any right on the part of amalgamating companies takes place that gives rise to any income or gain resulting in a taxable event. He stressed that the net assets of the merging companies remain unaltered like the proprietary interest of the shareholders and no cash payment is involved in any manner.

The taxpayer was further of the view that the liability of capital gains tax can only be on the transferor company, i.e., the subsidiary company, which in the instant case has lost its identity and ceased to exist.

In case, the amalgamating company receives nothing but the shareholders receive shares if the amalgamated company, there is no question of capital gains in the hands of the amalgamating company since it is the shareholders who receive consideration, if any.

The relevant forums sided with the taxpayer and set aside the additional demand raised by the department.

Copyright Business Recorder, 2024