TMI Blog1994 (9) TMI 349X X X X Extracts X X X X X X X X Extracts X X X X ..... oration. The applicant desires to know whether the proposed transaction will attract any tax under the head Capital gains qua the shares of the Indian company held by it. The applicant-company has filed this application under section 245Q(1) of the Income-tax Act, 1961 ( the Act ), and sought an advance ruling on the following questions : (i) Whether any liability to pay income-tax in India under the Income-tax Act, 1961, read with the DTAA would arise on amalgamation of the applicant with its holding company whereby shares of an Indian company held by the company would vest in the amalgamated company ? (ii) Whether the provisions of section 47(via) of the Income-tax Act be considered as satisfied with regard to the above scheme of amalgamation? A discussion of the above questions can conveniently commence by noting that, if the applicant-company and its holding company had been Indian companies, a transaction of the nature proposed would not have attracted capital gains tax on the change in the person holding the shares as a consequence of the amalgamation. This is clear on a perusal of the provisions contained in sections 2(1B), 2(14), 2(47), 45(1) and 47(vi) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and connotes the merger of two or more companies in such manner that- (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation ; (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation ; (iii) shareholders holding not less than nine-tenths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation. An amalgamation fulfilling all the three conditions above is necessary before an exemption of capital gains arising on the merger of Indian companies can be claimed under section 47(vi). However, where the amalgamating companies are foreign companies, the third of the above requirements is relaxed and the exemption from capital gains tax is available even in the case of amalgamations where 25 per cent. or more of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articles of amalgamation are deemed to be the articles of incorporation of the amalgamated corporation and the certificate of amalgamation is deemed to be the certificate of incorporation of the amalgamated corporation. It will at once be seen that a vertical short form amalgamation under section 184(1) of the Canada Business Corporations Act fulfils all the three requirements of an amalgamation within the meaning of section 2(1B) of the Indian Act. The first of the conditions spelt out in section 47(via) of the Indian Act is, therefore, fulfilled. This takes us to a consideration of the second condition for exemption specified in section 47(via) which makes the exemption under the Indian Act available only if a like exemption for this kind of transaction is available under the Canadian Act . It is, therefore, necessary to examine the relevant provisions of that Act. The topic of capital gains is dealt with in sub-division C of Division B of the Act (sections 38 to 55). Though the provisions directly dealing with the topic are few, they are very complicated and contain cross references to several other provisions and it is no easy task to comprehend and digest the ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty in question is taken as the proceeds of disposition for computing the capital gains. These are situations when dispositions are made for a consideration which is nil or less than the fair market value in various kinds of situation (section 69(1) to (10)). There is also a special provision in relation to cases of amalgamation or merger (section 69(13)) which is relevant for our present purposes. It reads : (13) Amalgamation or merger.-Where there has been an amalgamation or merger of a corporation with one or more other corporations to form one corporate entity (in this sub-section referred to as the new corporation ), each property of the corporation that became property of the new corporation as a result of the amalgamation or merger shall be deemed, for the purpose of determining whether sub-section (11) is applicable in respect of the amalgamation or merger, to have been disposed of by the corporation immediately before the amalgamation or merger for proceeds of disposition equal to- (a) in the case of a Canadian resource property or a foreign resource property, nil ; and (b) [Repealed] ; (c) in the case of any other property, the cost amount to the corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty or property substituted for the property, notwithstanding any other provision of this Act, the vendor shall, where the subsequent disposition occurs within three years after that time, be deemed to have disposed of the property at that time for proceeds of disposition equal to its fair market value at that time. It will at once be seen that this sub-section is intended to cover a series of transactions under one of which property is disposed of for less than its fair market value but this is done with a view to obtain certain benefits available to a specified person, as defined in section 69(12), in respect of a subsequent disposition of the same property or a property substituted for that property. In such an event, if the subsequent disposition takes place within a period of three years, the person who made the original disposition shall be deemed to have disposed of that property at the earlier point of time for proceeds of disposition equal to its fair market value then. In other words, the Canadian statute implicitly recognises that the initial transaction of merger results only in a disposition of the property at actual cost but provides for taxation on the differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruling from the Canadian authorities regarding its liability under the Canadian Act. Counsel for the applicant stated that he was instructed that the procedure would be very expensive and that there was no need to follow that procedure as, in the applicant s view, the legal position was quite clear and incontrovertible. The authority did not pursue the matter further as the statutory provisions in this regard (sections 173 and 174), though capable of being invoked even before an actual assessment is made, do not appear capable of being invoked by the applicant at a stage anterior to the actual putting through of the transaction in regard to which a question is to be posed. At one stage in the arguments, counsel for the applicant, raised a larger issue. He contended that, even if he failed to bring his case under section 47(via), no income-tax can be charged under the Indian Act as (i) the amalgamation does not really involve a transfer within the meaning of section 2(47) of the Act, and (ii) no consideration will be passing between the applicant and the new corporation for the change in ownership of shares. According to him, section 47(vi) is really redundant (see the discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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