No Sec. 28(iv) Additions on Amount Credited to Capital Reserve on Account of Amalgamation ITAT

November 17, 2025

Can a capital reserve arising from an amalgamation be treated as taxable income under Section 28(iv) of the Income Tax Act?

What is Section 28(iv)?

Section 28(iv) of the Income Tax Act, 1961 deals with the taxation of perquisites or benefits received by a taxpayer in the course of business or profession.

Conditions for Taxability:

• The benefit must be received in the course of carrying out the business or profession.

• It must be non-monetary (i.e., not in cash).

• It should be of a revenue nature, not capital in nature.

Capital Reserve arising out of Amalgamation

A capital reserve arising out of an amalgamation refers to the reserve created in the books of the acquiring company as a result of the merger or consolidation of two or more companies. It reflects the difference between the fair value of assets acquired and the liabilities assumed during the amalgamation process.

Source of Capital Reserve in Amalgamation:

Case Study: Samagra Wealthmax Pvt. Ltd . Vs CIT(A)

In a notable judgment, the Income Tax Appellate Tribunal (ITAT), Mumbai ruled in favor of Samagra Wealthmax Private Limited, holding that capital reserves arising from amalgamation are not taxable as income under Section 28(iv) of the Income Tax Act. This decision is crucial for companies involved in corporate restructuring and amalgamations.

Case Background:

• Assessee: Samagra Wealthmax Pvt. Ltd., engaged in real estate activities.

• Transaction:The company underwent a corporate restructuring where M/s Celina Buildcon and Infra Pvt. Ltd. was amalgamated with it.

• Purpose of Amalgamation:To simplify the group structure, reduce administrative overhead, and enhance operational efficiency.

• Key Issue:Post-amalgamation, a capital reserve was created in the assessee’s books. The Assessing Officer (AO) added this reserve as income under Section 28(iv), arguing it represented a non-monetary benefit received without consideration.

ITAT’s Reasoning:

1. Application to the Case:

• No Perquisite or Benefit: The ITAT observed that the assessee did not receive any tangible or intangible benefit from the amalgamation. The process was an internal restructuring, and the company’s overall financial position remained unchanged.

• Nature of the Reserve:The capital reserve was merely a book entry reflecting the accounting adjustments post-amalgamation, not an income item.

• Business ContextThe amalgamation was not a business transaction but an Internal restructuring exercise. Therefore, it could not be classified as a business activity giving rise to taxable perquisites.

2. Comparison with Established Principles:

• The ITAT referred to earlier rulings where capital receipts from restructuring activities were held to be non-taxable, as they do not constitute revenue income.

Implication of Judgement for Tax Practitioners:

• This ruling clarifies the scope of Section 28(iv) and helps in advising clients on handling accounting entries related to amalgamations. It also helps in accurate tax filings and preparedness for Audits without any fear of Litigations under treatment of such Reserves.

• The Judgement has also reduced Ambiguity regarding the Treatment of Reserves arising out of Amalgamation and it has become very easy for tax practitioners to explain it to the Clients.

Implications of the Judgment for Corporates:

• Companies involved in mergers, demergers, or restructuring can be reassured that capital reserves created during such transactions are not taxable under Section 28(iv).

Conclusion:

• The ITAT upheld the CIT(A)'s order, which had already deleted the AO’s additions.

• It confirmed that the capital reserve arising from the amalgamation is capital in nature and not taxable under Section 28(iv).