TMI Blog1978 (7) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... powers of the subsidiary companies would be transferred to the assessee as from the 1st January, 1966, and vest in the assessee under s. 394(2) of the Companies Act, 1956. (b) All liabilities and debts of the subsidiary companies would as from the said date be transferred to and become the liabilities and debts of the assessee. (a) The assessee being the beneficial owner of the entire issued share capital there would be no issue of shares to the assessee. (d) The subsidiary companies would within 21 days after the date of the order to be passed by the court cause a certified copy of the court's order to be delivered to the Registrar of Companies, West Bengal, for registration and on such certified copy being so delivered the subsidiary companies would be dissolved without winding up. In the assessment year 1967-68, the previous year having ended on the 31st December, 1966, the assessee claimed a capital loss of Rs. 19,43,551 alleging that such loss had occurred on amalgamation of the said subsidiary companies with the assessee. The ITO held that the said, claim was in admissible under s. 47(vi) of the I.T. Act,1961. Being aggrieved, the assessee preferred an appeal t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as referred for the opinion of this court the following question as a question of law arising from its order : " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the loss representing the difference between the cost of the shares held by the assessee in Atlas Fertilisers Ltd., Bengal Distilleries Co. Ltd. and Indo-Agri. Ltd. and the net assets taken over by the assessee from the respective companies as a result of the scheme of amalgamation cannot be allowed as a capital loss within the meaning of s. 45 read with s. 2(47) of the Income-tax Act, 1961 ? " To appreciate the controversy, in the instant case, it is necessary to keep in view the relevant provisions of the statute. Section 2(47) of the I.T. Act, 1961, reads as follows : " (47) 'Transfer', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law." Section 45 of the Act reads as follows : " 45. Capital gains.-- (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the amalgamating companies. Dr. Pal finally contended that the facts in the present case were distinguishable from the liquidation of a company where a shareholder continued to exercise his rights as a shareholder till dissolution and participated in the distribution of the surplus assets of the company, if any, as a shareholder. Mr. Ajit Sengupta learned counsel for the revenue, contended on the other hand that where there was amalgamation there could not be any profit or gain to the shareholder unless there was an exchange of shares as a result of amalgamation. Mr. Sengupta contended further that if it be held that the transfer in the instant case was the extinguishment of the rights of the assessee in the shares of the amalgamating companies then as no consideration passed in such a transfer there would be no question of capital gain or loss. In support of the respective contentions of the parties the following decisions were cited from the Bar which are considered hereinafter in their chronological order : (a) Mrs. Bacha F. Gazdar v. CIT [1955] 27 ITR 1 (SC). This decision was cited by Dr. Pal for the following observations of the Supreme Court defining the rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer exigible to capital gains tax. The High Court observed as follows : " Substituting the words 'extinguishment of any rights in the capital asset' for the words 'transfer of the capital asset ', the transaction, in order to attract the charge of tax as capital gains, must, therefore, be such that consideration is received by the assessee or accrues to the assessee as a result of the extinguishment of the rights in the capital asset. There must be an element of consideration for the extinguishment of the rights in the capital asset. Then only would it be a transfer exigible to capital gains tax. Now, as we have already pointed out above, when a shareholder receives moneys representing 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 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares in the old company ceased to exist, and, therefore, there could be no relinquishment and, accordingly, the assessee was not liable to be taxed for capital gains. On a reference, the Bombay High Court held that the assessee had not given up, surrendered or abandoned or even relinquished his interest in the shares. By reason of the order of the court the assets and liabilities of the amalgamating company were transferred to the new Shorrock company and, thereafter, the amalgamating company was directed to be dissolved and it ceased to exist. Therefore, there was no question of the assessee relinquishing his interest in the shares of that company, and consequently, the allotment of shares of the new Shorrock company to the assessee, though caused by the assessee's holding shares in the amalgamating company, was neither a transaction of exchange nor relinquishment and, therefore, the gain, if any, resulting therefrom was not liable to be taxed as capital gains. (d) Central India Industries Ltd. v. CIT[1975] 99 ITR 211 (Cal). The facts in this case were, inter alia, that the assessee held certain shares in two companies which were amalgamated with a third company under a scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 2,62,781 and the assessee received. a sum of Rs. 6,32,533 from the mill out of the insurance claims. The question arose as to what extent, if at all, the assessee was liable to be taxed for capital gains. On a reference, the Gujarat High Court held that the expression " extinguishment " as appearing in s. 2(47), in its ordinary meaning, included destruction or demolition and that there was nothing in the subject or context of the section to cut down the wide operation of its meaning. The High Court further held that under s. 45 real profits arising from such transactions would be brought to tax inasmuch as capital gain was the difference between the net consideration for the demolition or destruction and the original cost of acquisition and cost of improvement in the asset. Dr. Pal relied on the following observations of the High Court at p. 312 of the report : " It follows from the foregoing discussion that the Legislature, in order to effectuate its intention, has deliberately chosen the language of widest amplitude by using the expression ' the extinguishment of any rights therein ' in section 2(47). It covers every possible transaction which results in the destruction, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Under s. 47(vi) such a transaction has to be excluded from the operation of s. 45, and there cannot be any capital gain or loss. Looking at the matter from another angle, it seems to us that, in the instant case, the net effect of the scheme of amalgamation is a transfer of the entire capital assets of the subsidiary companies to the holding company which also holds the entire share capital of the subsidiary companies. Such a transfer or transaction would fall within s. 47(v) of the Act and again be excluded from the operation of s. 45. Lastly, if we look behind the facade and lift the corporate veil it appears that the assessee in effect had all the rights of an owner over all the assets of the subsidiary companies inasmuch as the assessee held 100% shares of the subsidiaries. In that view, it does not appear to us that there could be any element of gain or loss when the assessee rearranged its capital base and instead of keeping the capital in the name or in the control of its subsidiaries brought back the same under its direct control. For the reasons above, the revenue succeeds in this reference. The question is answered in the affirmative. There will be no order as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in the dividend of the transferor-companies when declared. (2) Right to take part in the management of the transferor-companies by voting in the meetings of the transferor-companies and on certain specified circumstances and on fulfilment of certain specified conditions could call an extraordinary general meeting by requisition. (3) Participation in the capital of the transferor-companies on liquidation. Keeping in view the above legal position let us now consider whether it could be said in the instant case that any of the above rights of the assessee as a shareholder of the transferor-companies were extinguished by the said schemes of amalgamation. The entire profits that might be earned by or through the undertakings, assets, rights and powers of the transferor-companies would become the profits of the assessee and thus there was no extinguishment of the right of the assessee to participate in the dividends of the transferor-companies but enlargement of such right of participation. In managing its own affairs the assessee would also be solely managing the entire affairs of the transferor-companies, and, therefore, there was no extinguishment of the right of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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