TMI Blog1973 (7) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is a Hindu undivided family deriving income from interest on securities, dividends, property and dealing in shares, both ready and forward. In or about the year 1941, the assessee purchased one share of the Shorrock Spinning and Manufacturing Co. Ltd. (hereinafter referred to as "the Shorrock company") of the face value of Rs. 1,000 for Rs. 3,307. Later on, this share was split up into 10 shares of Rs. 100 each and 30 shares of the face value of Rs. 100 each were issued to the assessee from time to time by way of bonus shares by the Shorrock company. As a result of this splitting up and the issue of bonus shares, on December 31, 1959, the assessee owned 90 shares in the Shorrock company of the face value of Rs. 100 each. There is another company by name the New Shorrock Spinning Manufacturing Co. Ltd. (hereinafter referred to as "the New Shorrock company"). In or about the middle of the year 1960, a scheme of amalgamation of Shorrock company and New Shorrock company was propounded and petitions were filed under the provisions of section 391 and section 394 of the Companies Act, 1956, in the Gujarat High Court both by the Shorrock company as the transferor company and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the files relating to the said two companies were directed to be consolidated accordingly. Appropriate orders were also passed in the petitions filed by the Shorrock company to carry out the scheme of amalgamation. The Income-tax Officer at the time of the assessment, though he was apprised of the fact of the scheme of amalgamation and of acquisition of 45 shares by the assessee of the New Shorrock company, did not consider the matter from the point of view of the applicability of section 12B of the Act. On January 21, 1964, the Commissioner of Income-tax, Bombay City II, issued a notice under section 33B of the Act to the assessee, inter alia, informing him that upon sanctioning of the scheme of amalgamation of the two companies he received 45 shares of New Shorrock company in exchange of his original holding of 90 shares in Shorrock company in December, 1960 ; that this exchange of shares resulted in a considerable amount of profit to him, which was not considered by the Income-tax Officer in the regular assessment ; that the order of the Income-tax Officer is erroneous and prejudicial to the interests of the revenue and that in exercise of the powers conferred by section 33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said sum of Rs. 49,350 was assessable in the assessment year 1961-62?" Mr. Joshi on behalf of the revenue contended that the provisions of section 12B of the Act relating to capital gains are attracted, as in the present case there is either an exchange or relinquishment of a capital asset by the assessee. His submission is that the nature of the transaction in the present case is that the shares held by the assessee in Shorrock company were exchanged for the shares of New Shorrock company ; that it is a process of exchange of one security for another ; that under the scheme of amalgamation the assessee obtained in lieu of 90 shares held in Shorrock company, 45 shares of New Shorrock company in exchange ; that the exchange effected in the present case is exactly equivalent of what would have happened or taken place had instructions been given for sale of 90 shares of Shorrock company by the assessee and for investment of the sale proceeds in the shares of New Shorrock company. In short his submission is that when as a result of the provisions of the scheme of amalgamation the assessee is allotted 45 shares of New Shorrock company in consideration of his holding of 90 shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing facts or circumstances must exist before a transaction of exchange can come into effect as understood in law or in common parlance. A transaction of exchange pre-supposes existence of different properties owned by different persons ; that as a result of the transaction of exchange both the properties continued to exist ; that as a result of such a transaction both the properties continue to be owned by two different parties but the ownership of one property is transferred to the owner of the other and vice versa. If these essential features of a transsaction of exchange are borne in mind, the question arises whether in the present case a transaction of exchange has taken place, when the assessee was allotted 45 shares of New Shorrock company under the scheme of amalgamation sanctioned by the Gujarat High Court in lieu of his holding of 90 shares in Shorrock company. At the outset it should not be overlooked that after the shares were allotted by the Shorrock company to its shareholders such shares ceased to be the property of the company, but they became the property of the shareholders in their own right. By the scheme of amalgamation sanctioned by the Gujarat High Court the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first of these decisions is a decision of the King's Bench Division while the latter is a decision of the House of Lords. Though undoubtedly while reciting the facts in each one of these cases, the word "exchange" has been used, the question whether the transaction amounted to an exchange was neither canvassed nor gone into and what was merely considered was whether there was a realisation as a result of the amalgamation scheme. In the first of these cases the Royal Insurance Company for the purpose of its fire, accident and general insurance held large investments including a variety of British railway stocks. The company admitted that any profit made on the realisation of an investment was part of its profits for income-tax purposes, and the Crown admitted that any loss was an admissible deduction from the company's profits. Under the Railways Act, 1921, the company was required to accept new stocks in the amalgamated companies in exchange for the stocks previously held in the companies which under the Act were either amalgamated or absorbed. The new stocks received had a definite market value on the date of exchange and this value was less than the original cost to the company o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shorrock company are transferred to New Shorrock company and as upon the filing of the order Shorrock company is directed to be dissolved, that company ceased to exist. Thus, if Shorrock company ceased to exist upon compliance of the orders there is no question of the assessee relinquishing his interest in the 90 shares of that company and, therefore, such a transaction can in no sense of the term be regarded as a relinquishment as understood either in law or in common parlance. Relinquishment also presupposes that the property in which the interest is relinquished continues to be in existence. In this case, upon dissolution of Shorrock company the shares of that company have become a scrap of paper and of no value. In the result, in our opinion, as a result of allotment of 45 shares of New Shorrock company under the scheme of amalgamation to the assessee by reason of his holding of 90 shares of Shorrock company, neither a transaction of exchange nor relinquishment has taken place and our answer to question No. 1 is accordingly in the negative. As question No. 1 is answered in the negative, question No. 2 does not survive for determination and it is unnecessary to answer the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X
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