TMI Blog2020 (8) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... sent to the scheme of the amalgamation [ dissenting shareholders ] are given the option of receiving cash or equivalent kind as the price for the shares on the basis of exchange ratio. The dissenting shareholders receive the value of their shareholding while the approving shareholders receive the same value in the form of shares of the amalgamated company. The process of amalgamation in its legal effect from the taxation viewpoint would apply equally, irrespective of the status of the shareholder. The taxable event is not just a matter of entries made in the account books of the assessee but is essentially one of substance and of the real nature of what transpired in the transaction. The income generated from the transaction has to be charged to Income tax as per provisions of law.The fundamental principle to be followed is that the basic substance for the transaction has to be separated from the form and the taxing statue has to be applied accordingly. In light of the above discussion, the findings of the Tribunal are plainly erroneous. Thus, question of law formulated before us is answered in favour of the Revenue and against the assessee. Having answered the question of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The AO adopting the value of shares of JSL at the rate of ₹ 218 per share, calculated the profit on receipts of shares of JSL under the scheme of amalgamation at ₹ 5,31,28,579/-, and taxed the same as business income . Revenue contended that since the Respondent-assessee was holding JFAL shares as stock-in-trade and not as capital asset, it was not entitled to exemption under Section 47(vii) of the Act. The statutory first Appellate Authority [ CIT(A) ] upheld the action of AO. In further appeal before ITAT at the instance of the Respondent herein, the Tribunal without recording a categorical finding as to whether the shares qualified as capital asset or stock- in- trade , allowed the appeals in favour of the Respondents, holding that no profit accrues when shares of the amalgamated company are received in lieu of shares of amalgamating company. The relevant portion of the impugned order reads as under: 7. In view of the above decision, it cannot be said that the appellants were holding the shares of JFAL either by way of investment or stock in trade. However, we need not adjudicate upon this issue since the decision on this issue is not of much relevance in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al with a direction to first adjudicate the fundamental factual question that has been left undecided. Without prejudice to his preliminary submission, Mr. Agarwal further argued that the impugned order is unsustainable for the reason that the question of law arising out of the present appeals is entirely covered in favour of Revenue by virtue of decision of the Supreme Court in Commissioner of Income-Tax v. Mrs. Grace Collis and Ors., [2001] 248 ITR 323 (SC). He submitted that the reasoning of the Tribunal is flawed since it is primarily based on views of the Supreme Court in its earlier decision in the case of Commissioner of Income-Tax, Bombay v. Rasiklal Maneklal (HUF), [1989] 177 ITR 198 (SC) which was decided in context of the Income Tax Act, 1922 ,when the relevant provision was different. Further, the issue as to whether the holding of shares was capital asset or stock-in-trade was not in controversy in the said case. In any event, subsequently, Supreme Court in Grace Collis and Others (supra) after examining the facts and circumstances in Rasiklal Maneklal (supra) and on consideration of the provisions of Section 47(vii) of the current Act, held that the receipt of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L are held as part of the promoter holding, representing controlling interest; the Respondent-assessees had furnished non-disposal undertaking to financial institution and lenders who had lent money to the operating company. Further such shares were reflected as investment in balance-sheet. He argued that irrespective of the fact whether the shares were held as stock-in-trade or capital asset, there is no taxable income arising in the year under consideration on the Respondent-assessees receiving shares in JSL in lieu of shares held in JFAL under the scheme of amalgamation. On demurrer, he submitted that if it is assumed that shares are held in stock-in-trade as alleged by Revenue, the receipt of shares of JSL, without anything more, could not lead to any addition to the income of the Respondent-assessees since there can be no addition of any notional accretion/notional profit under the head profit and gain of business or profession under Section 28 of the Act. Only profit on realisation of stockin-trade by way of sale thereof can be brought to tax under that head. The shares received in JSL on amalgamation were not sold during the relevant previous year and therefore there can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. He also argued that the decision of Grace Collis and Ors. (supra) has no application to the facts of the present case. He further relied upon the CBDT Circular No.6/2016 dated 29th February, 2016 and argued that although the Tribunal has left the aforesaid issue open for adjudication in the year of subsequent sale of shares, the issue is today no longer res integra as in the aforenoted circular, CBDT has clarified as under: CIRCULAR NO.6/2016 [F.NO.225/12/2016-ITA-lI], DATED 29-2- 2016 Sub-section (14) of section 2 of the Income-tax Act, 1961 (Act) defines the term capital asset to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-intrade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-in-trade/trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham transactions. 5. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities. 11. He summed up his submissions by contending that there is no error in the order passed by the Tribunal and the same deserves to be upheld and the appeals of the Revenue should be dismissed. Analysis : 12. We have given our thoughtful consideration to the contentions of the parties. During the course of final hearing, as the Learned counsel forged ahead with their arguments, the controversy in the present case got streamlined which we shall hereinafter crystalize and then comprehensively deliberate upon the same. However, before we proceed to do that, in order to fully comprehend the controver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed as the same related to transfer of capital asset and not to stock held as stockin-trade. During income tax assessment proceedings for the preceding year, holding of shares were treated as stock-in-trade and not as capital asset. Further relying upon the decision of the Supreme Court in G.Venkataswami Naidu Co. v. CIT, (1959) 35 ITR 594, (SC), it was concluded that Section 45 has no applicability to the case of the Respondent-assessees. The appeal before CIT(A) also was rejected and the assessment order passed by the AO was confirmed. When the matter travelled to the Tribunal, the Respondent-assesees assailed the common order of CIT(A) by raising several contentions; the foremost being that shares of JFAL were acquired by way of investment and not as stock-in-trade and that the said issue stands covered by various decisions of the Tribunal. The Tribunal did not agree with Respondent-assessees on this count and held that reliance on the decisions cited by them was misplaced. Nevertheless, in paragraph 7 of the impugned order, the ITAT concluded that in view of the above decision it cannot be said that the appellants were holding the shares of JFAL either by way of investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4G and 54H, be chargeable to income-tax under the head Capital gains , and shall be deemed to be the income of the previous year in which the transfer took place. XXXXX [Emphasis Supplied] 17. The aforesaid Section is under the head of capital gains . Any profit or gain arising from transfer of a capital asset effected in the previous year shall, save as otherwise provided in the Section, be chargeable to Income Tax under the head capital gains and shall be deemed to be the income of the previous year in which the transfer took place. Section 47 of the Act enumerates the transactions which are not regarded as transfer . In this provision, we are concerned with sub-section (vii) which read as under: 47. Nothing contained in section 45 shall apply to the following transfers :- XXXX (vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if- (a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company except where the shareholder itself is the amalgamated company, and (b) the amalgamated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orenoted conclusion. Section 2(47) defines the concept of transfer in the context of capital asset by enumerating several sub-sets. The said provision read as under: (47) transfer , in relation to a capital asset, includes, - (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w Shorrock Co. and upon petitions filed under Section 391 - 394 of the Companies Act, the Gujarat High Court approved the scheme of amalgamation. Under the scheme of amalgamation, the undertaking and all the property rights and powers as well as all liabilities and duties of Shorrock Co. were to stand transferred and vest in the New Shorrock Co. Under the scheme of amalgamation, the New Shorrock Co., as the transferee company was directed to allot to the members of Shorrock Co. the transferor company one share in transferee company for every two shares of transferor company held by them. During assessment proceedings, although ITO was apprised of the scheme of amalgamation and the acquisition of 45 shares of New Shorrock Co. but he omitted to consider applicability of section 12B of the Income Tax Act, 1922 (the relevant provision under the said Act dealing with capital gains). The question arose whether in the facts and circumstances of the case the amount representing the capital gain resulting from transaction of acquiring 45 shares of New Shorrock Co. in place of 90 shares held in Shorrock Co. could be assessed in the hands of the assessee as capital gain since it has been accr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead capital gains in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place. 8. The sole question is whether the receipt of the 45 shares of the New Shorrock Co. upon amalgamation by reason of the shareholding of 90 shares of the Shorrock Co. can be described as an exchange or a relinquishment within the meaning of Section 12-B of the Act. It seems plain to us that no exchange is involved in the transaction. An exchange involves the transfer of property by one person to another and reciprocally the transfer of property by that other to the first person. There must be a mutual transfer of ownership of one thing for the ownership of another. In the present case, the assessee cannot be said to have transferred any property to anyone. When he was allotted the shares of the New Shorrock Co. he was entitled to such allotment because of his holding the 90 shares of Shorrock Co. The holding of the 90 shares in the Shorrock Co. was merely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. An exchange involved the transfer of property by one person to another and, reciprocally, the transfer of property by that other to the first person. There had to be a mutual transfer of ownership of one thing for the ownership of another. In the case before the Court, the assessee could not be said to have transferred any property to anyone. When he was allotted shares of the amalgamated company, he was entitled to such allotment because of his holding 90 shares of the amalgamating company. The holding of 90 shares in the amalgamating company was merely a qualifying condition entitling the assessee to the allotment of 45 shares in the amalgamated company. The dissolution of the amalgamating company deprived the holding of the 90 shares of that company of all value. 10. The learned counsel for the assessees submitted that no capital gains tax could be levied upon the assessees in respect of the sale by them of their shares in the amalgamated company because there was no provision in the Act with regard to the manner of determination of the cost of these shares. This was for the reason that section 49(2) prescribed the mode of determining the cost where the shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amage to its machinery and that section 45 of the Act was not attracted. On a reference, the High Court reversed the decision of the Tribunal. This Court held in appeal therefrom that when an asset was destroyed, there was no question of transferring it to others. The destruction or loss brought about the destruction of the right of the owner of the asset in it, but it was not on account of a transfer but on account of the disappearance of the asset. The extinguishment of the right in an asset on account of the extinguishment of the asset was not a transfer of the right but its destruction. The destruction of the right on account of the destruction of the asset could not be equated with the extinguishment of the right on account of its transfer. Section 45 of the Act was, therefore, not attracted. The fact that while paying for the total loss or damage to the property the insurance company took over such property or whatever was left of it did not change the nature of the insurance claim, which was an indemnity or compensation for the loss. The payment of the insurance claim was not in consideration of the property taken over by the insurance company for one was not consideration f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer. 14. The learned counsel for the revenue submitted that having held that the payment in settlement of the insurance claim was not in consideration of the transfer to the insurer of the damaged machinery and that, therefore, there was no transfer within the meaning of section 45, it was unnecessary for this Court in Vania Silk Mills (P.) Ltd.'s case (supra) to go on to consider the definition in section 2(47) and the meaning to be attached to the expression 'extinguishment of any rights therein'. In his submission, the decision in Vania Silk Mills (P.) Ltd.'s case (supra) was to this extent obiter dicta. The definition in section 2(47) of 'transfer' included sale and exchange. In each of those cases there was an extinguishment of the right of the seller or exchanger in the capital asset. To restrict the extinguishment of rights to extinguishment on account of transfer was, in the learned counsel's submission, to render the expression 'extinguishment of any rights therein' otiose and to nullify the effect of their use in the definition. 15. We have given careful thought to the definition of 'transfer' in section 2(47) and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ors. (supra). The upshot of the above discussion is that, the observation of ITAT that there is no transfer in the scheme of amalgamation, is flawed and unsustainable in so far as capital asset is concerned. Therefore, the decision of ITAT is liable to be set aside on this short ground alone. However, since the parties agree that such transfer will be exempted under section 47(vii) of the Act, we will have to examine whether the scheme of amalgamation viz shares held in stock-in-trade results in a taxable event which renders factual determination inconsequential as held by the ITAT. If shares are held as Stock-in-trade, whether amalgamation would result in income chargeable to tax under the head profits and gain of business or profession . 26. In case the transaction comes out of the ambit of Section 47(vii), it s taxability would be governed by Section 28 of the Act, where there is no exemption akin to section 47 of the Act. If the shares are held as stock-intrade, income shall be chargeable to income-tax under the head profits and gain of business or profession . Here the spotlight should not entirely be on the concept of transfer but instead whether there is business inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veral judgments, the Supreme Court affirmed the view of the High Court, holding it to be in consonance with the established principles governing the law in this field. 28. At this juncture, we would like to note that the decision in Orient Trading Co. Ltd. (supra), the Supreme Court has dealt with approval English cases which deal with amalgamation. The relevant portion of the said judgment is reproduced hereinunder: 4. The question that arises for consideration is whether the surrendering of its shares in the first Company in exchange for the shares of the second Company by the assessee can be regarded as realisation of the security on the date of such surrender and exchange. If it can be so regarded that the sum of ₹ 4,06,000/-, the difference between the book value of 14,500 shares of the first Company and the market value of the 55,500 shares of the second Company as on the date of such realisation, will have to be treated as profit earned by the assessee in that transaction: 5. In the impugned judgment, the High Court has agreed with the decision of the Tribunal that the exchange of the shares of the first company with the shares of the second company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is wound up I will say - 'wound up' is an unfortunate expression perhaps and I will say when an investment ceases to figure in the company's affairs, when it is known exactly what the holding of that investment has meant, plus or minus to the company, and then the company starts so far as that portion of its resources is concerned with a new investment. Then one knows where one is and it is no longer a question of paper, it is a question of fact and that is a realisation. I think that is the point of view from which it ought to be looked at, and looking at it from that point of view the Company is right. It has done with the investments in the companies. They have disappeared. It is known exactly in money. It is known now exactly what their holding of them has meant to the company. They will never more go up or down. What will go up or down now are the different shares in the new companies, altogether different investments really, and therefore, I think that the old investment is closed and realised and a new investment is started. (pp. 28, 29) Similarly, in California Copper Syndicate v. Harris 5 Tax Case 159, decided by the Court of Exchequer in Scotland, Lord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was rejected by the House of Lords (Lord Guest dissenting). It was held that the appellant-company never, in fact, realised their option in the sense of passing it on, for a consideration to someone else and that there was neither a sale of the option nor its exchange for something else and that when the company exercised their option or used or availed themselves of their rights they did not make the end of the trading transaction and that there was merely the end of the beginning of a trading transaction. It was emphasised that there was no element of exchange as there was in Royal Insurance Co. Ltd.'s case (supra) and in Westminster Bank Ltd.'s case (supra) [See: Lord Morris of Borth- Y-Gest at pp. 394-395], Lord Guest, in his dissenting judgment, however, felt that the option was a trading asset of the appellant-company and, applying the principles laid down in Royal Insurance Co. Ltd.'s case (supra) and Westminster Bank Ltd.'s case (supra), held that the exercise of option amounted to a realisation of the option which resulted in a trading profit of 11,75,000 pounds. This would show that the principles laid down in Royal Insurance Co. Ltd.'s case (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espective of whether it is in cash or kind. As we can see in Orient Trading Co. Ltd. (supra), if the shares are exchanged, it can be said the assessee has made realisation of the value of the shares and the difference in the price of the shares would have to be treated as profit of the assessee for the taxation purpose. Assesses also agree that taxable event would occur under amalgamation if shares are treated as capital asset, but argue to the contrary if the same are treated as stock-in-trade . Now, can it be said that this concept of extinguishment/transfer would not lose its relevance if the same shares are characterized as stock-in-trade in the hands of assessee? In Hindustan Lever versus State of Maharashtra, (2004) 9 SCC 438, expounding on the concept of amalgamation and whether it amounts to transfer, it was held as under: 9. Section 394 provides that application and order of amalgamation under Section 394 is based on compromise or arrangement which has been proposed for the purpose of amalgamation of two or more companies. The amalgamation scheme, which is an agreement between the companies is presented before the court and the court passes an appropriate order s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of exchange ratio. In another words, the dissenting shareholders receive the value of their shareholding while the approving shareholders receive the same value in the form of shares of the amalgamated company. The process of amalgamation in its legal effect from the taxation viewpoint would apply equally, irrespective of the status of the shareholder. The taxable event is not just a matter of entries made in the account books of the assessee but is essentially one of substance and of the real nature of what transpired in the transaction. The income generated from the transaction has to be charged to Income tax as per provisions of law.The fundamental principle to be followed is that the basic substance for the transaction has to be separated from the form and the taxing statue has to be applied accordingly. In light of the above discussion, the findings of the Tribunal are plainly erroneous. Thus, question of law formulated before us is answered in favour of the Revenue and against the assessees. 31. Having answered the question of law in the above terms, we are of the view that the matter needs to be remanded back to ITAT since the factual dispute between the parties has not ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
