TMI Blog1996 (6) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration, the questions to be considered and answered would be as follows : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that on the amalgamation of Ambassador Steamships Pvt. Ltd. with Collis Line Pvt. Ltd., there was a transfer by the assessees of their shares in Ambassador Steamships Pvt. Ltd. ? 2. In case the answer to question No. 1 above is in the affirmative, whether the Tribunal was right in holding that the transfer was made in consideration of the allotment to the assessees of shares in Collis Line Pvt. Ltd. ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that section 49(2) of the Income-tax Act, 1961, applied to the sale of the shares of the assessees in Collis Line Pvt. Ltd. which were obtained by the assessees on the amalgamation of Ambassador Steamships Pvt. Ltd. with Collis Line Pvt. Ltd.? " Since all these questions are common and identical in all these references, common judgment would be the requirement to avoid duplication. This is the one. The Income-tax Appellate Tribunal also has followed the same course. As stated above, the assessees submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accordance with the compromise or arrangement as the residue of the consideration for the said transfer in the process of amalgamation. Therefore, it is obvious that the assets and liabilities of the amalgamating company were taken over by the amalgamated company in accordance with the change in the proportional equivalence in accordance with clause 5 as stated above. The assessees, in pursuance thereof, were allotted 14 shares in the amalgamated company for every share of the face value of Rs. 100 each in pursuance of the order of amalgamation. To be precise arithmetically, these assessees acquired 45,318 shares each of the face value of Rs. 100 in the amalgamated company---Collis Line Pvt. Ltd. There is no dispute that all this took place in 1969 in pursuance of the order of this court referred to above, on and from August 1, 1969. Incidentally, Collis Line Pvt. Ltd. came into existence on November 11, 1968. It would be seen that these shares came to be transferred in favour of one Sri B. K. Chatterji and his group long thereafter on February 29, 1976, for a total consideration of Rs. 48,72,523 and this was at the rate of Rs. 107.50 per share. In regard to the assessment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order that in the amalgamating company each shareholder purchased a share of the face value of Rs. 100 and in lieu thereof became purchaser of 14 shares of equal denomination of Rs. 100 in the amalgamated company. As a result the Income-tax Officer divided the figure 100 by 14 to reach a conclusion that the original cost of each share would have to be understood as Rs. 7.50 in the context and proceeded with the consequential assessment. The appeals of the assessees before the office of the Commissioner of Income-tax (Appeals), Kerala, Ernakulam, came to be dismissed by separate orders dated March 20, 1980. Before the first appellate authority the same contention that section 49(2) would not apply since that section would apply only where there was a transfer within the meaning of section 47(vii) of the Act. Reliance was placed on the commentary referred to above which was also placed for consideration of the Income-tax Officer. In addition thereto it was urged before the first appellate authority that the first and primary rule of interpretation, the understanding of the language of the section has to suit the legislation in question to be understood. This was specified by re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the absence of any cost incurred for the shares, it would have to be stated that such a process overlooks the fact that the assessees had shares in the amalgamating company and in their situation the shares in the new company the amalgamated company--would be as a result of the consideration of the amalgamation taken into consideration by the company court. In the context, the contention was rejected. The assessee took up the matter before the Income-tax Appellate Tribunal. It was emphasised by the assessees before the Tribunal that the issue price of the shares of Collis Line Pvt. Ltd. should have been taken as the cost price in arriving at the capital gains. It was urged before the Tribunal that the provisions of section 49(2) and section 47(vii) would be inapplicable. It was further urged that the decision of the Bombay High Court in CIT v. Rasiklal Maneklal (HUF) [1974] 95 ITR 656 has not been properly appreciated. It was specifically urged that as far as the assessees are concerned, there has been no transfer as such and it cannot be said from the material on record that there was any transfer " by a shareholder " of any capital asset. Needless to state that it was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amalgamated company-Collis Line Pvt. Ltd. It is further clarified that it cannot be said that the shares of the amalgamated company were acquired by the concerned assessees in consideration of a transfer. Obviously referring to the order on compromise or arrangement by the court, it was further submitted that there was no transfer of the shares of the Ambassador Steamships Pvt. Ltd. to Collis Line Pvt. Ltd. and it was certainly not by the shareholders. In the context reliance was placed on the decision of the Supreme Court in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 and also another decision in CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC), the first dealing with two similar situations with reference to the dissolution of a firm and the company going in liquidation declaring the law in regard thereto clarifying the situation in section 47 of the Act pointedly to the conclusion that they are not transfers. Placing reliance on the above decisions, it was further submitted as a consequence that the transactions listed in section 47 would have to be understood as only by way of abundant caution and not because they would have been transfers but for the section. It was submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in CIT v. R. M. Amin [1977] 106 ITR 368. Incidentally, although the Tribunal was justifiably unaware of the position, the decision of the Bombay High Court in CIT v. Rasiklal Maneklal (HUF) [1974] 95 ITR 656 has been also confirmed by the Supreme Court in CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198 obviously because this was long after the Tribunal decided the appeals in 1984. Be that as it may, even otherwise it was submitted that the peculiar situation that there is no material on record to show that the shares in the Ambassador Steamships Pvt. Ltd.--the amalgamating company--were allotted in exchange for the shares in Collis Line Pvt. Ltd,--the amalgamated company--by way of an exchange, but it was by an order of the court precisely by way of a transfer in the process of amalgamation. It was alternatively submitted on the assumption that the transaction is understood as transfer, still it cannot be said that the shares became the property of the assessees in consideration of the transfer which is an essential requirement of section 49(2) of the Act. It was in this connection pointed attention was invited to the text of the orders of this court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the intention in enacting section 49(2) would be, where the shares in the amalgamated company are subsequently transferred and the capital gains on the same have to be computed, the cost of such shares should be taken as the cost of acquiring shares in the amalgamating company. The Revenue contended that the requirements of section 47(vii) and section 49(2) would have to be understood as satisfied in the present case. It was submitted that before the shares in the amalgamated company were issued to the assessees, there was an extinguishment of the rights of the assessees in the shares of the amalgamating company. It was submitted that when an existing right is extinguished and a new right is created, such extinguishment could not be considered and understood otherwise than as a transfer. Amalgamation is only an arrangement whereby the assets of the two companies become vested in and under the control of one of them. Substantially all the shareholders of the two companies in the process of amalgamation would have to be understood as exchanging their shares for the shares in the other or the amalgamated company. It was submitted that by the order of the court there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 45 making capital gains charged shall apply to exceptions stated therein. Illustratively, before reproducing the relevant provisions of the sections for the purposes of these references it would be worthwhile to examine the situations which are not considered as transfers. They are relating to the distribution of capital assets on the partition of a Hindu undivided family, on the dissolution of a partnership firm or other association of persons ; a transfer under a gift or will or an irrevocable trust ; a transfer of capital asset by a company to its subsidiary company ; transfer of capital asset by a subsidiary company to a holding company. A bare perusal of the above provisions would show that the intention which directly flows from these provisions which are referred to in section 47(i) to (v) are of such a nature which would be understood as situations analogous to the situations of transfer and are specifically taken away from the rigour of the operation of section 45. It is thereafter what would be required to be examined carefully in the context of the background would be section 47(vi) and 47(vii). They are reproduced as hereunder : " 47. Nothing contained in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the capital asset the following amounts, namely :--- (i) expenditure incurred wholly and exclusively in connection with such transfer ; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto : " It is plain from the above provisions that in the process of computation in regard thereto, expenditure incurred wholly or exclusively in connection with such transfer as well as the cost of acquisition of any capital asset and the cost of any improvement thereto would have to be deducted. As far as the process of computation and the deductions, if any, it must be stated that there is no controversy or dispute as such in these proceedings and the controversy relates to the situation as to whether, in working out the cost for the purpose of computation, it is legally permissible to calculate the cost on the basis that the transfer is by the share holder in consideration of the allotment of the share in the amalgamated company. If the statutory requirements of section 47 govern the situation, the answer would be that the cost could be calculated as contended by the Revenue. If the situation shows that the shareholders do not come anywhere near abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question in 1976. With regard to the figures and the fact that the shares are sold for Rs. 107.50, there is no dispute. With regard to this undisputed factual position, the question is as to whether the situation could be firstly considered as transfer and, if that be so, secondly, a situation of transfer which could be understood as excepted by the provisions of section 47. In our judgment apart from the plain and natural meaning of the statutory provisions referred to and discussed hereinbefore, the declaration of law of the apex court in regard thereto in the context of the relevant situation and factual matrix is not otherwise. For the sake of facility or convenience the decision of the Bombay High Court in CIT v. Rasiklal Maneklal (HUF) [1974] 95 ITR 656 is confirmed by the Supreme Court in CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198. In this the factual matrix deals with the amalgamation proceedings with the only exception that the question of capital gains was required to be considered without knowing any loss of passage of time as is the situation of the assessees before us. In the said case, the assessee is a Hindu undivided family deriving income from interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the transaction because it involves the transfer of property by one person to another and reciprocally the transfer of property by the other to the first person. It is observed that there must be a mutual transfer of ownership of one thing for the ownership of other. The assessee could not be said to have transferred any property to any one when he was allotted the shares of the New Shorrock Company, as a result of a qualifying condition entitling the assessee to the allotment of shares of the New Shorrock Company. Even on the question of relinquishment it is observed at page 202 that it takes place when the owner withdraws himself from the property and abandons his right thereto ; and in a situation upon amalgamation, it will have to be said, the shares lost all value as the company stood dissolved and, therefore, there is no relinquishment. In our judgment, this decision of the Supreme Court confirming the decision of the Bombay High Court, as referred to above, would go a long way in understanding the situation that by an order of the court the shares of the Ambassador Steamships Pvt. Ltd. would have to be understood to have become worthless and of no value whatsoever. Some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he situation can be equated with the extinguishment of right on account of its transfer. Apart from the plain language of the concerned statutory provisions referred to above and discussed in detail by us, the discussion reverts down to the basic features of legal requirements. There has to be the concern of the shareholder in the process that is known as " transfer ". If it is a situation that is made available to him as a consequence of the order of the company court in a petition under section 394 of the Companies Act resulting in amalgamation of Ambassador Steamships P. Ltd. and, as specifically appearing in the order itself, it is as a result of the consideration for and arising out of the process of amalgamation of the two companies. It is not possible to term the situation as arising out of transfer in any sense of the situation. Learned counsel for the assessees placed submissions for our consideration on the basis of certain observations of the Tribunal that it cannot be ignored that both section 47(vii). and section 49(2) statutorily described itself as a transfer. In this context, it would be, at once, clear that a bare perusal of the above provisions would show that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no occasion to deal with the difficulty of this nature. The Supreme Court in Sri Gopal Jalan and Co. v. Calcutta Stock Exchange Association Ltd., [1963] 33 Comp Cas 862 (SC) ; AIR 1964 SC 250, had to deal with such a situation with regard to the provisions of section 75(5) of the Companies Act, 1956, and in this connection in paragraph 11 thereof had occasion to understand the term " allotment " occurring in section 75(1) as including the issue of shares forfeited for other reasons also. It is observed that such situation has its own origin and if the context or other provisions of the Act are taken into consideration, the basic situation need not alter the plain situation in any manner. The courts are duty-bound to take into consideration the intent in the context. Section 2(47) speaks about situations of transfer referring to the analogous expressions. Section 45 tells us that profits or gains arising out of the transfer of a capital asset become chargeable to income-tax under the head " Capital gains " and in the context comes the statutory provision of section 47, as stated above, which carves out exceptions to the situations contemplated as transfers. In our judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, the amalgamation proceedings would not have any relevance whatsoever, especially in a situation that it is snapped by a passage of time, well nigh seven years. In this context on the accepted position of the Revenue reproduced hereinbefore, had the assessees never transferred the shares, it is plain, they could never have been taxed. In other words, in understanding the situation it is more than difficult to assume a situation that whenever there is a transfer of such situation, the assessees will have Damocles' sword hanging on their heads almost till eternity to be liable to taxation. The matter can also be considered yet from another angle. The share of Rs. 100 of Ambassador Steamships Pvt. Ltd., which has become known as having merged as a result of proclamation has been, on calculation, reduced to Rs. 7.50 resulting in a situation that the assessees would not be considered independently with regard to the transaction in question of 1976 and would be chargeable to tax with reference to Rs. 100 in regard to each of the shares covered by the transactions and that too when the situation has emerged as a direct result of the order of the court. These factual peculiarities als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eady said and reiterated more than once hereinbefore that the shareholders are not concerned. They have not acted and nothing is flown from them much less as a consideration in the matter of transfer of shares. We have also concluded and said that the proceedings of amalgamation were terminated and by clause 5 thereof this equivalence is the order of the court as a consideration in the process of amalgamation. In view of this situation, in our judgment, the situation of 1976 gets completely snapped from what took place in 1969. It is not possible to accept the submission of learned counsel. Learned senior counsel also placed for our consideration certain observations of the Gujarat High Court in CIT v. R. M. Amin [1971] 82 ITR 194, in regard to a situation of liquidation of the company in the matter of distribution of assets to the shareholders receiving more than the value of the shares in question. Learned counsel was meticulous to tell us that the said decision is affirmed by the Supreme Court in CIT v. R. M. Amin [1977] 106 ITR 368. In Amin's case [1971] 82 ITR 194 (Guj), the question was of liquidation of a company and the shareholders getting more than the value of the orig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enting his share on distribution of the net assets of the company in liquidation, he receives such moneys in satisfaction of the right which belongs to him by virtue of his holding the share and not by way of consideration for the extinguishment of his right or rights in the share. The share merely represents the right to receive moneys on distribution of the net assets of the company in liquidation and that right is satisfied and, by satisfaction, extinguished when such moneys are received by the shareholder. Such moneys received by the shareholder do not represent any consideration received by him as a result of the extinguishment of his rights in the share. It is not the extinguishment of his rights in the share for which consideration is received by him, it is rather because moneys representing his share in the distribution are received by him that his rights in the share are extinguished. " Thus, the approach is not in any way different with regard to the basic requirement in the matter of an amount which could be understood legally as capital gains. Learned counsel referred to certain other authorities and relies specifically on stray sentences and paragraphs in regard th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee receiving compensation from the insurance company which is held to be not a " transfer " as contemplated by section 45 read with section 48 of the Income-tax Act. Since we have held that this amounts to " transfer ", the observations that the definition of " transfer " being an inclusive definition, which is rejected by the Madras High Court, would not be of any use. We hold that the equivalence of one share to 14 shares is a result of the process of amalgamation by the order of the court. This is out of consideration of the amalgamation granted by the court. The shareholder cannot be understood to be a party in regard thereto is any manner. Therefore, taking the situation in any way, it cannot be understood to be an amount which could be consideration of the transfer of the share by the shareholder. We also hold that as a direct consequence of the amalgamation order, Ambassador Steamships Pvt. Ltd., became known as their shares became worthless papers and, therefore, could not be with reference to the calculation of the capital gains tax. We further hold that the situation of 1976 is a situation having no kind of relationship with the situation of 1969 resulting in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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