COMMISSIONER INLAND REVENUE, ZONE-II, LTU, LAHORE vs SHEZAN INTERNATIONAL LTD

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COMMISSIONER INLAND REVENUE, ZONE-II, LTU, LAHORE VS SHEZAN INTERNATIONAL LTD., LAHORE Ss. 37, 75, 97 & 120---amalgamation of companies---Merger of wholly owned subsidiary---Capital gains---Scope and effect---assessment order (Income Tax Return) filed by the Taxpayer/company (deriving income from manufacturing and sale of juices, pickles, jams, ketchups etc.) was amended by putting in additions on account of capital gains thereby disallowing the expense on repair and maintenance of the vehicles---appellate Tribunal Inland Revenue ('Tribunal'), on appeal preferred by the company, deleted the addition, made under S.37 of Income Tax Ordinance, 2001 ('the Ordinance, 2001'), by the additional Commissioner Inland Revenue which was confirmed by the Commissioner (appeals)---Department filed reference before the High Court against the order passed by the Tribunal---Contention of the applicant/Department was that the appellate Tribunal was not justified in deleting the addition made on account of capital gains under S. 37 of the Ordinance, 2001 without making any comparison or without having any material before it for the purpose of cross-checking in order to satisfy the parameters provided in S.97 of the Ordinance 2001---Plea of the respondent(company/taxpayer) was that merger of wholly owned subsidiary was fully covered under the provisions of S. 97 of the Ordinance of 2001, thus, no gain or loss shall be taken to arise on disposal of its assets---Validity---Record revealed that respondent/company had a subsidiary company with a different name and style ('the subsidiary'), which was merged into respondent/company pursuant to a Court's order, and the subsidiary merged into respondent/company under the scheme of arrangement for merger / amalgamation---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, however, proprietary rights of assets remained 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---If upon merger, the net assets of the merging companies remain unaltered and 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---a merger does not give rise to any financial transaction to create a taxable event and no cash payment is involved in any manner---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---amalgamation of the wholly-owned subsidiary company with its parent company does not result in transfer for consideration and, therefore, does not give rise to any capital gains---Liability to capital gains tax (if any) can only be on the transferor company (subsidiary), which in the present case had lost its identity and ceased to exist---Subsidiary (company), which got amalgamated with the respondent/company, was a hundred percent subsidiary of the respondent/company---By virtue of the amalgamation, all the assets and liabilities of the subsidiary became the assets and liabilities of the respondent/company---Where the amalgamating company, which is a hundred percent subsidiary, merges with the holding company (amalgamated company), no question of any profit or gain would arise because the amalgamating company (wholly owned subsidiary), on amalgamation, ceases to exist and its identity merges completely with the amalgamated company; however, in case the amalgamating company receives nothing but the shareholders receive shares of 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)---In an amalgamation where no shares are issued by the amalgamated company, because the amalgamating company was a wholly owned subsidiary, no question of capital gains can arise because the amalgamating company does not receive any consideration---applicant/department had failed to point out any illegality or legal infirmity in the order passed by the appellate Tribunal, which even otherwise was unexceptionable, thus, needed no interference---High Court answered to the purposed questions in affirmative, i.e. against applicant/department and in favour of respondent/company---Reference application filed by the Department was dismissed accordingly.

COMMISSIONER INLAND REVENUE, ZONE-II, LTU, LAHORE vs SHEZAN INTERNATIONAL LTD — 2024 PTD 758 LAHORE-HIGH-COURT-LAHORE

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