| SooperKanoon Citation | sooperkanoon.com/62243 |
| Court | Income Tax Appellate Tribunal ITAT Ahmedabad |
| Decided On | Nov-19-1986 |
| Judge | U Shah, R Mehta |
| Reported in | (1987)20ITD528(Ahd.) |
| Appellant | Gautam Sarabhai Trust No. 31 |
| Respondent | income-tax Officer |
2. The assessee is a trust and is assessed in the status of an AOP. The assessment year is 1982-83 and the relevant previous year ended on 31-3-1982.
3. The assessee owned 1512 ordinary shares of Shahibaug Entrepreneurs (P.) Ltd. (SEPL) of the face value of Rs. 100 each. Alkapuri Investments (P.) Ltd. (Alkapuri) was wholly owned subsidiary of SEPL.
Under the scheme of amalgamation, SEPL amalgamated with Alkapuri by the order of the Hon'ble Gujarat High Court under the company Petition No.11 of 1980.. As per the scheme of amalgamation approved by the Hon'ble High Court, the assessee received the following in respect of each equity share of SEPL : (i) one equity share of face value of Rs. 100 each and two fractional certificates, each certificate representing a fractional entitlement of one-tenth of one equity share of Rs. 100 of Alkapuri credited as fully paid-up ; (ii) one 11 per cent Redeemable Bond of face value of Rs. 100 of Alkapuri credited as fully paid-up.
In other words, the assessee received 1815 equity shares and 1512, 11 per cent Redeemable Bonds of Alkapuri of Rs. 100 each.
4. On the aforesaid facts, during the course of the assessment proceedings, the assessee claimed exemption from tax of capital gains on two counts, viz., (a) there was no transfer of capital asset involved within the meaning of Section 2(47) of the Income-tax Act, 1961 ('the Act'), and (b) even if there was a transfer, the capital gains was not exigible to tax by virtue of Section 47(vii) of the Act, Reliance was also placed on the decision in the cases of CIT v.Rasiklal Maneklal HUF [1974] 95 ITR 656 (Bom.) and CIT v. Master Raghuveer Trust [1985] 151 ITR 368 (Kar.). The ITO, however, negatived the assessee's claim in the following manner : 4. The case law CIT v. Rasiklal Maneklal is not relevant in the case as it relates to the position of law before the introduction of Section 47(vii). The entire argument regarding the occurrence of transfer or otherwise along the lines suggested by you in paragraph 1 of your reply is not acceptable in view of the changed situation of law, after the insertion of several provisions regarding amalgamation by the Finance (No. 2) Act, 1967, one of which is for Section 47(vii).
5. The said provisions assume among other things that there definitely is a transfer on the occasion of amalgamation, but that, for the purpose of capital gains, these transactions, which results from amalgamation under certain circumstances should not be considered transfer. The assumption behind the scheme is that the unless those specified circumstances enumerated in the law are found in a case of transaction for to be looked upon as non-transfer, the issue of shares on other assets to the shareholder in lieu of shares in the amalgamating company would be transfer for the purposes of capital gains under Income-tax Act. One of the circumstances which is specified in Section 47(vii) is applicable to the assessee.
Therefore, apparently the transaction under consideration can be looked upon as non-transfer but for one complication, namely, that the assessee is getting shares as well as bonds in the amalgamated company whereas Section 47(vii) craves out for non-application of the provisions of capital gains only these transactions where only shares are issued against shares. In short it is held here that since the introduction of Section 47(vii) cannot be redundant, in the position of law as obtained after the introduction of Section 47(vii) by the Finance Act, 1967, there is a transfer by the shareholder when he receives shares in the amalgamated company in lieu of shares in the amalgamating company though deemed to non-transfer under Section 47(vii). Since in this particular case the shareholder received not only shares but bonds as well, we have a case of transfer to which provisions of capital gains are attracted and the benefit of Section 47(vii), which visualised no such composite transaction, cannot be extended. This view is further strengthened by the case law cited by the assessee against the proposed imposition of capital gains tax. In the case of CIT v. Master Raghuveer Trust, their Lordships of the Karnataka High Court which holding that in the facts of the case under their consideration, there was no transfer at all, declined very specifically to express any opinion on the applicability or otherwise of Section 47(vii) 'when the consideration for transfer of shares is paid partly by shares and partly by cash bonds or debentures' implying thereby that there is in that case transfer to which the benefit of Section 47(vii) may or may not be extended as the position of law is still uncertain. Moreover the department has gone in further appeal against this order of Karnataka High Court.
Now the reason why this uncertain position of law does not favour the assessee is that the deemed non-transfer under Section 47(vii) applied only in a case where to quote the status 'the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company'. This refers only to the event of allotment of shares only in the amalgamated company By no logic or law can the redeemable bonds be held equal or synonymous with the shares. In fact shares and redeemable bonds are on quite a different footing vis-a-vis their rights and interest in the company which can be given back to the shareholder either in full or in 'instalments'.
In any case there is no basis for equating issue of bonds with the allotments of share in the amalgamated company on the plea that shares can be substituted by redeemable bonds in the text of the statute. Thus benefit of the provision of Section 47(vii) can, under no circumstances, be extended to an event where the transfer is made in consideration of the allotment of bonds as well as shares. The whole transfer forefeits the protection because of the composite nature of the transaction. When there is no reference to redeemable bonds in the statute, it cannot be construed from the context especially when shares and bonds are so different from each other that no inclusive definition of 'share or shares' can cover redeemable bonds also. The cost of acquisition for the purpose of capital gains would be, under Explanation of Section 49 'deemed to be the cost of acquisition to him of the share or shares in the amalgamating company'.
5. In view of the aforesaid reasonings, the ITO worked out the capital gains of Rs. 1,05,427 in the following manner :Total receipt Rs.(a) Value of shares in the amalgamated company 1,81,500(b) Value of bonds in the amalgamated company 1,51,200 3,32,700per B/s.
1,51,310 1,81,390Less Deduction under Section 80T 5,000 1,76,390Accordingly the total income is computed as follows :Income from capital gains as worked out above 1,05,834Income from other sources nilAggregated income 1,05,834Less Expenses 407 Total income 1,05,427 6. In appeal before the Commissioner (Appeals), apart from oral submissions, the assessee filed written submissions, which read as under : I. There is no transfer of any capital asset on an amalgamation of a company. Transfer is defined in Section 2(47) of the Income-tax Act as being sale, exchange, relinquishment or extinguishment of rights therein. It is not a sale, exchange or relinquishment. See CIT v. Rasiklal Maneklal (HUF) [1974] 95 ITR 656 decided by Bombay High Court on 24-7-1973. It is not an extinguishment of a right therein see 119 ITR 393 (sic) at page 410. It is true that the Calcutta High Court in Central India Industries Ltd. v. CIT [1975] 99 ITR 211 (Cal.) in the case of Central India Industries Ltd. has held that the amalgamation gives rise to capital gain or loss. This case was decided on April 10, 1974 hence it was not available to the Bombay High Court. In this case, the Hon'ble High Court has emphasised that one of the terms of amalgamation was that the shares will be issued and delivered to the shareholders in exchange for ordinary shares of Merchandise & Stores Ltd. See page 218; otherwise the High Court has accepted that where the amalgamated company issued the shares, there is no transfer by that company to the allottee see page 219. But for the fact that as a term of amalgamation there was an exchange of shares, the judgment of the High Court would have been entirely different. In our case, there is no such term.
The direct judgment is that of the Karnataka High Court reported in CIT v. Master Raghuveer Trust [1985] 151 ITR 368 where the High Court has considered both Bombay and Calcutta High Courts' judgments and upheld the view that there is no transfer by shareholder of amalgamating company.
II. There is no consideration for the so-called transfer. See CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC), CIT v. R.M. Amin [1977] 106 ITR 368 at page 372 (SC).
III. Even otherwise the transaction is exempt by virtue of Section 47(vii) of the Income-tax Act. Even assuming that there is a transfer (it is respectfully submitted that it is not) in a scheme of amalgamation, there is no transfer of capital asset by shareholder of the amalgamated company as held by the Calcutta High Court in Krishna Industrial Corpn, (P.) Ltd. v. CIT [1979] 119 ITR 656 (All.) On amalgamation, the shares of the amalgamated company become the assets of the holders of the amalgamating company and the shares held by the shareholders of the amalgamating company become valueless. Accordingly, there is no question of transfer of such valueless rights ; no extinguishment of rights therein. Even assuming there is such a transfer, such transfer can be made in consideration of the allotment of any share or shares in the amalgamated company. Share or shares does not necessarily mean only the equity or preference shares of the company. Such share in the amalgamated company can be represented by equity or preference shares and debentures or bonds. It is for the two companies to decide how the respective shareholders will be given the rights in another company. It may be that the amalgamated company may give only their shares to the erstwhile shareholders of the amalgamated company or it may for various reasons, give the shares and debentures and bonds. In either case, the shareholders of amalgamating company have the share represented by the shares plus bonds issued by the amalgamated company. The ITO has denied exemption under Section 47(vii) on the ground that the transfer is made in consideration of allotment of bonds as well as shares taxable event. If shares are allotted, there is no transfer, it is difficult to understand how it becomes taxable--when what is allotted is not only the shares but also the bonds.
IV. In any event, to the extent the transfer is for shares, the transaction should be exempt under Section 47 (Karnataka High Court has rejected this argument).
7. In his order under appeal, the Commissioner (Appeals) held that there was a transfer when the shareholder of the amalgamating company were allotted shares of the amalgamated company in lieu of their shareholding in the amalgamating company, in the following manner : 8. I have carefully considered the facts of the case and the law relating, to the amalgamation of the company as discussed by various High Courts. Coming to the first question as to whether there is transfer when the shareholder of amalgamating company receives shares of the amalgamated company in lieu of the shares held by him in the amalgamating company whether there is a transfer or not, there is no doubt that Bombay High Court in two decisions mentioned above and Calcutta High Court (sic) 119 ITR 393 have held that there is no transfer. But where the shareholder receives shares and bonds in question which has not been answered by any of the High Courts.
They have not answered as to whether without benefit of Section 47(vii) of the Income-tax Act, such transaction would amount to transfer or not. The Bombay High Court has not referred to Section 47(vii) at all whereas the Karnataka High Court in the case of CIT v. Master Raghuveer Trust [1985] 151 ITR 368 did not express opinion on the applicability of Section 47(vii) but when the consideration for transfer of shares is paid partly by shares and partly by bonds or debentures. If the reasoning advanced by the learned Counsel to be accepted, Section 47(vz7) will become redundant or otiose. If there was no transfer without the benefit of Section 47(vii), I am at a loss to understand why such provision was inserted for the benefit of the shareholders of the amalgamating company. An interpretation which renders any section or sub-section redundant should be avoided as far as possible. Moreover, there is decision of Calcutta High Court itself in Central India Industries v. CIT in which it has been decided that there is a transfer which takes place inter se when the shareholders of the amalgamating company were allotted shares in the amalgamated company, in lieu of shareholding in the amalgamating company. The learned Counsel for the assessee argued that the case was decided on the particular facts of the case. He stressed that in the scheme of amalgamation the word 'exchange' was used and hence the Calcutta High Court held that there was a transfer in this case. He argued that this is not the case here. However, I find that though the word 'exchange' was used in the scheme of amalgamation in the decision of Calcutta High Court, Central India Industries Ltd. v. CIT [1975] 99 ITR 211, the High Court held that it was clearly a case, at least of transfer of shares by the petitioner if not exchange. Thus, the Calcutta High Court was not led away by mere wording 'exchange' used in the scheme of amalgamation. In categorical terms, the Calcutta High Court has held that the transfer does take place even if there is no exchange.
It would, therefore, appear that the law is not settled as has been canvassed by the learned Counsel. Moreover, by insertion of Section 47(vii) by Finance Act (No. 2), 1967, the Legislature clearly meant that but for Section 47(vii), there would be a transfer. In this view of the matter, I hold that there was a transfer when the shareholder of the amalgamating company were allotted shares of the amalgamated company in lieu of their shareholding in the amalgamating company.
8. As regards the applicability of the provisions of Section 47(vii) the Commissioner (Appeals) upheld the view of the ITO as under : 11. The ITO has taken a view that on receipt of share or shares only Section 47(VII) will apply. If the assessee receives bonds, debentures, etc., along with shares, the provisions of Section 47(vii) would not apply. I see quite some merit in this argument of the ITO. It is a composite transaction in which the assessee has received not only the shares of the amalgamated company but the bonds also. If there was the intention of the Legislature to include the bonds within the meaning of share or shares, these would have set it out in clear terms. Thus, I am in agreement with the ITO's logic that when assessee receives share or shares along with bonds, debenture, etc., this being a composite transaction, Section 47(v/7) would not apply. 'In a taxing statute one has to look merely at what is clearly said. There is no room for intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied' (Per Rowlatt, J.), Cape Brandy Syndicate v. 1R [1921] 1 KB 64, 71, 12 TC 358, 366 approved in CIT v. Aiax Products Ltd. [1965] 55 ITR 741, 747 (SC), CIT v. Shahzada Nand & Sons [1966] 60 ITR 392, 400 (SC). In the nut-shell, I hold that there was a transfer and the transfer was for consideration and Section 47(vii) does not apply to the assessee's case.
12. In the grounds of appeal, the assessee in ground No. (xii) has raised the issue that even if the capital gain is leviable on receipt of bonds, the cost of such bonds will be nil. In that case, there is no liability of capital gains in view of decision of Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC). Since I have held that Section 47(vii).will not be applicable, there is no question of exempting the value of shares received from amalgamated company, because it is a single and composite transaction in which shares and bonds are given to the shareholders of the amalgamating company in lieu of holding shares in the amalgamating company. Thus, the main ground fails.
9, Being aggrieved by the order of the Commissioner (Appeals), the assessee has come up in appeal before the Tribunal. At the outset, the learned Counsel for the assessee stated that there are two issues involved in the present appeal, namely, (1) whether there was a transfer of capital asset within the meaning of Section 2(47), and (2) if so, whether the assessee would still be not liable to tax on the capital gains, by virtue of the provisions of Section 47(vii). As regards the first issue, the learned Counsel for the assessee submitted that the same is covered in favour of the assessee by a direct decision of the Hon'ble Karnataka High Court in the case of Master Raghuveer Trust (supra) which the Commissioner (Appeals), as an appellate authority, ought to have followed instead of by passing the same in the manner he did. The learned Counsel for the assessee stated that even if it is to be presumed that there was a transfer within the meaning of Section 2(47), it would be his endeavour to impress upon the Tribunal that still, the assessee would not be liable to tax on the capital gains, by virtue of the provisions of Section 47(vii). In this connection, he further stated that there was no dispute about the fact that in the instant case there was amalgamation of SEPL with Alkapuri within the meaning of Section 2(1A), as all the conditions stipulated in that section have been fulfilled by the concerned companies. He also stated that there was no doubt about the genuineness or the bona fide in the scheme of amalgamation inasmuch as the same was approved by the Hon'ble High Court in a company petition made under the Companies Act, 1956. Thereafter, he invited the attention of the Tribunal to Section 47(vii), and submitted that the assessee had, in fact, transferred shares held by it in the amalgamating company, viz., SEPL in consideration of the allotment of shares to it of the amalgamated company, viz., Alkapuri. The fact that the assessee had also received bonds of the amalgamated company would not, in the opinion of the learned Counsel, disentitle the assessee to claim exemption as contemplated under that section. According to the learned Counsel for the assessee the income-tax authorities were not justified in taking a view that the exemption as contemplated in Section 47(vii), would be available to the assessee in a case of allotment of only the shares of the amalgamated company but not in a case where the assessee has been allotted shares plus something by the amalgamated company. According to him, if we were to accept the stand taken by the income-tax authorities, we will have to insert the word 'only' at an appropriate place in the said section. This would amount to re-writing the section which is neither the function of the income-tax authorities nor that of the Tribunal or the Courts. The learned Counsel for the assessee emphasised that we have to read the said section as it is and nothing more should be read in it as was done by the income-tax authorities.
According to the learned counsel for the assessee, the amalgamated company could have given a transister radio or a discount coupon of certain value or some such thing along with allotment of its shares to the shareholders of the amalgamating company. That would not have disentitled the shareholders to claim exemption as contemplated under Section 47(vii). Similarly, the fact that bonds of Alkapuri were allotted to the shareholders of the amalgamating company would not make any difference in claiming exemption as contemplated under Section 47(vii). He, therefore, urged that the income-tax authorities were not justified in charging capital gains of Rs. 1,05,427 in the hands of the assessee.
In this connection, he relied on the order of the Tribunal in the case of H.K. Bhavnani [IT Appeal Nos. 1766 and 1767 (Bom.) of 1977-78 dated 6-7-1978] wherein, the assessee was a shareholder of Central Bank of India Ltd., Bank of India Ltd. and Union Bank of India Ltd., which were merged respectively with Tata Engg. & Locomotive Co. Ltd., Ahmedabad Manufacturing & Calico Printing Co. Ltd. and Mahindra and Mahindra Co.
Ltd. The ITO had brought to tax long-term capital gains in respect of the shares and debentures which the assessee received from the first company as well as the shares of the second company and short-term capital gains in respect of the shares of the third company. The AAC had held that by virtue of the provisions of Section 47(vii), no capital gains were chargeable in the hands of the assessee. This action of the AAC was upheld by the Tribunal in the following manner : 4. At the hearing of these appeals it is fairly conceded by the learned departmental representative Shri Anjaria that the objection raised by the department in this to the order of the Appellate Assistant Commissioner allowing the assessee's claim that no capital gains charge is attracted is directly covered by the decision of the Bombay High Court in CIT v. Rasiklal Maneklal (HUF) [1974] 95 ITR 656 which is against the contention of the revenue. It is, however, stated by him that since the decision has not been accepted by the department and the matter is said to have been pursued further, he does not wish to concede the department's case. In view of the decision of the Bombay High Court referred to by him and which has also been relied on by the Appellate Assistant Commissioner in his order, we consider that the appeals of the department on this point are without any merit. Furthermore, we may add the Appellate Assistant Commissioner has also referred to the provisions of Section 47(VII) in accepting the contention of the assessee that Section 47(VII) excludes from the operation of Section 45 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 and (b) the amalgamated company is an Indian company. As this is the clear statutory provision which supports the assessee and as no argument has been advanced before us by the learned departmental representative as to why this is not applicable to the facts of this case, we uphold the order of the Appellate Assistant Commissioner, even apart from the decision of the Bombay High Court in Rasiklal Maneklal (HUF)'s case (supra) which was concerned with the charge of capital gains in respect of similar transaction under the repealed Indian Income-tax Act, 1922.
10. The learned standing counsel for the department, first of all, adverted to the relevant provisions of the Companies Act, under which amalgamation takes place between the companies perhaps with a view to impress upon the Tribunal that the shareholders of the amalgamating company are privy to the scheme of amalgamation. He also adverted to Clauses 5, 10 and 11 of the scheme of amalgamation approved by the Hon'ble High Court. Relying on the decision in the case of CIT v. R.M.Amin [1971] 82 ITR 194 (Guj.), he submitted that in the instant case, there was a transfer inasmuch as in the satisfaction of his shareholding in the amalgamating company, the assessee got shares of the amalgamated company plus 11 per cent redeemable bonds. He further submitted that if we were to accept the stand taken on behalf of the assessee that it would be entitled to exemption as contemplated under Section 47(vii), certain anomalous situation would arise. In this connection, he invited the attention of the Tribunal to Section 49(2) and pointed out that it talks of 'share or shares' and nothing else.
Therefore, what would be the cost of acquisition of the bonds which the assessee received on amalgamation When the assessee sells the bonds in future, he would as well--relying on the decision in the case of CIT v. B.C. Srinivasa Setty v. CIT [1981] 128 ITR 294 (SC)--take a stand that no capital gains would be attracted on the sale of such bonds as they had not cost him anything. Similarly, inviting the attention of the Tribunal to Section 2(42A) Explanation (i) and (c) he submitted that it would be difficult to determine the period for which the assessee held the bonds for the purpose of deciding whether such bonds should be treated as 'short-term capital asset' or 'long-term capital asset'. He also submitted that in a given case, a shareholder of the amalgamating company may receive only 10 per cent shares of the amalgamated company and 90 per cent of its debenture/bonds for consideration of his shareholding in the amalgamating company and thus try to avoid capital gains altogether.
His other line of argument was that since Section 47(vii) is an exception, the same should be interpreted strictly to effectuate the charging of capital gains. Relying on the decision in the cases of Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503 (SC) and Bengal Immunity Co. Ltd. v. State of Bihar AIR 1955 SC 661, he submitted that it is a sound rule of interpretation that a statute should be so construed as to prevent the mischief and to advance the remedy according to the true intention of the makers of the statute. He also relied on the following observations in the case of Gursahai Saigal v.CIT [1963] 48 ITR 1 (SC) : Now it is well recognised that the rule of construction on which the assessee relies applies only to a taxing provision and has no application to all provisions in a taxing statute. It does not, for example, apply to a provision not creating a charge for the tax but laying down the machinery for its calculation or procedure for its collection. The provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction, that is to say, in accordance with the clear intention of the Legislature which is to make a charge levied effective....(p. 5) He also invited the attention of the Tribunal to the following observations in the case of CWT v. Sadiqali Samsuddin [1985] 152 ITR 190 (Guj.) : . . .On recognised principles of interpretation of statutes, an exception clause is to be strictly construed. It is, therefore, difficult for us to agree with the learned Counsel for the revenue that there is no warrant in the section for giving a restricted meaning to the term 'cash'. On principle as well as on authority, it is settled position in law that an exception clause must be construed strictly and cannot be interpreted so as to nullify or destroy the main provision. (See T. Devadasan v. Union of India AIR 1964 SC 179). An exception has to be confined within its own limits and must be restricted to the matter embraced within it and it is not permissible to extend the meaning of the exception by analogy or by reference to the meaning of the same or similar word, in other cases, so as to include cases which cannot be reasonably brought within the purview of the language employed....(p. 195) Inviting the attention of the Tribunal to the decision in the case of Master Raghuveer Trust, the learned standing counsel for the revenue submitted that the Hon'ble High Court has not held that on an amalgamation of two companies, no transfer was involved. Thereafter he referred to the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148, more particularly, to the following observations of Justice Chinnappa Reddy of the report : . . . In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd., In re and Bengal Hotels Ltd., In re [1977] 47 Comp. Cas. 597 (Guj.), where the learned judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax. (p. 160) Inviting the attention of the Tribunal to page 171 of the report, he pointed out that all the learned judges had agreed with the aforesaid view expressed by the Justice Chinnappa Reddy.
Finally, he submitted that the order of the Tribunal in the case of Shri H.K. Bhavnani should not be followed in the instant case as the decision of the Tribunal in that case was on a concession made on behalf of the revenue. He, therefore, urged that the order of the Commissioner (Appeals) should be upheld.11. The learned Counsel for the assessee, in his reply, submitted that there appears to be some confusion in the mind of the revenue when reference was made to the provisions of Sections 49(2) and 2(42 A).
According to him, there are two separate and distinct stages which should be kept in mind. The first stage is the amalgamation of the companies and the second stage is when a shareholder of the amalgamated company selling his shares and certain other things which were allotted to him on amalgamation by the amalgamated company. In the instant case, we are concerned with the first stage and, therefore, there is no need to get influenced by the provisions contained in Section 49(2) and 2(42A). According to the learned Counsel for the assessee, there is no anomaly as apprehended by the revenue. As and when the assessee sells the shares of the amalgamated company, which are allotted to him on amalgamation, we will have to consider the provisions of Sections 49(2) and 2(42 A), in order to ascertain the cost of acquisition and the period for which such shares were held by the shareholder. However, in the case of the sale of bonds by the assessee, the provisions of the said sections are not to be considered at all.
Thereafter, the learned Counsel for the assessee dealt with the canon of construction of a statute. According to him, a statute contains (i) machinery/charging provisions, (ii) exception provisions, and (iii) exemption/relief provisions. The charging provisions and the exception provisions have to be interpreted strictly as has been held in a number of cases which were cited on behalf of the revenue. However, according to him, it is a trite law that the exemption/relief provisions of a statute are to be interpreted liberally. In this connection, he relied on the decision in the cases of CIT v. Clive Insurance Co. Ltd. [1978] 113 ITR 636 (SC) and CIT v. Simpson & Co. [1980] 122 ITR 283 (Mad.).
Since in the instant case, we are dealing with the exemption/relief provisions like Section 47(vii), the learned Counsel for the assessee strongly urged that the same should be interpreted liberally.
The learned Counsel for the assessee submitted that the decision in the case of McDowell & Co. Ltd. (supra) has no application to the facts and circumstances of the case under consideration as it is not the case of the revenue that the amalgamation of SEPL with Alkapuri was done with a view to avoid tax or that it was a colourable transaction or that the parties never intended to act upon it. The learned Counsel for the assessee once again emphasized the fact that since the amalgamation of SEPL with Alkapuri was approved by the Hon'ble High Court in a company petition, it would be difficult to attach a motive on the part of the shareholders of both the companies. If the motive of the shareholders/companies was to evade tax, the Hon'ble High Court would not have approved the amalgamation as was done by it in the case of Wood Polymer Ltd., In re [1977] 109 ITR 177 (Guj.).
Finally, he invited the attention of the Tribunal to the decision in the case of Master Raghuveer Trust (supra), more particularly at page 360 of the report and highlighted the fact that after recasting the question, the Hon'ble High Court had in fact, held that there was no transfer of capital asset within the meaning of Section 2(47) on the amalgamation of two companies, of which the assessee was a shareholder of the amalgamating company prior to the amalgamation. The learned Counsel for the assessee also highlighted the fact that the Hon'ble High Court has clearly held that if the provisions of Section 47(VII) were to be applied then the exemption claimed by the assessee has to be accepted. In doing so, the Hon'ble High Court has not approved the action of the Tribunal giving pro rata exemption in respect of the shares allotted to the assessee and denying such exemption in respect of the bonds/debentures allotted to the assessee by the amalgamated company.
12. We have carefully considered the rival submissions of the parties and the material already brought on record. At the outset, we may mention that the learned Counsel for the assessee had not argued in detail the first issue involved in the appeal, viz., whether there was a transfer of capital asset within the meaning of Section 2(47), as according to him, even if it is assumed that there was a transfer of capital asset within the meaning of Section 2(47), the capital gains would still not be exigible to tax by virtue of the exemption provisions contained in Section 47(vii). The learned standing counsel for the revenue stoutly argued that on the facts and circumstances of the case, the assessee would not be entitled to claim exemption under Section 47(vii). In order to resolve this dispute, it would be necessary to refer to certain provisions of the Act, to which our attention was drawn by the learned Counsel of the parties.
Section 2(1A) defines the expression 'amalgamation' in relation to companies. Since there is no dispute that the conditions stipulated therein are fulfilled by SEPL and Alkapuri, we do not discuss anything further on this aspect of the matter. Section 2(14) defines 'capital assets'. Here also, there is no dispute that the shares of SEPL and Alkapuri are 'capital assets' as defined in that section. Section 2(42A) defines 'short-term capital asset' to mean a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. The material portion of the said section for our purpose is reproduced below : Explanation : (i) In determining the period for which any capital asset is held by the assessee-- (c) in the case of a capital asset being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in Clause (vii) of Section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee.
Section 2(47) defines 'transfer'. Since the arguments were advanced by both the parties on the assumption that there was a transfer in relation to a capital asset in the case under consideration, it is not necessary to discuss anything further in this regard. Suffice it to say that in the decision of Master Raghuveer Trust (supra), the Hon'ble Karnataka High Court has held that no transfer of capital asset is involved within the meaning of Section 2(47) in the case of amalgamation of companies. Section 45 of the Act is a charging section for taxing income under the head 'Capital gains'. The relevant portion of Sub-section (1) of the said section reads as under : Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, ... 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 enumerates instances which are not regarded as transfer for the purpose of Section 45. Since both the learned Counsels had vigorously argued on this aspect of the matter, we reproduce below the relevant provisions of the said section : 47. Nothing contained in Section 45 shall apply to the following transfers : (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, and Section 49 provides for the cost with reference to certain modes of acquisition. For our purpose, Sub-section (2) of Section 49 is relevant and it reads as under : (2) Where the capital asset being a share or shares in an amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in Clause (vii) of Section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating company.
13. It is the case of the assessee that just because it was allotted 11 per cent bonds along with shares of the amalgamated company in consideration of its transferring the shares of the amalgamating company, it should not lose the exemption as provided under Section 47(vii). Further, if Section 47(vii) contemplated allotment of only the share or shares of the amalgamated company in consideration of its transferring the share or shares of the amalgamating company, the Legislature would have used the word 'only' at some appropriate place in that section. In the absence of the use of the word 'only' at appropriate place in the said section, the revenue was not justified in denying the exemption to it as contemplated under that section. The case of the revenue, on the other hand, is that what is contemplated under that section is the allotment of only the share or shares of amalgamated company in consideration of transfer of share or shares of amalgamating company. In order to strengthen this stand, the revenue wanted to get support from the provisions of Section 2(42A) and Section 49(2) (reproduced above). The revenue has also taken up a stand that the amalgamation of SEPL with Alkapuri was done with a view to avoid tax. Therefore, in view of the decision in the case of McDowell & Co.
Ltd. (supra), such attempt made by the assessee should not be encouraged. The assessee, on the other hand, has taken up a stand that since the amalgamation of SEPL with Alkapuri was approved by the Hon'ble High Court in a company petition made under the Companies Act, it cannot be presumed that the amalgamation of the companies involved was made with a view to avoid tax. If that would have been the case, the Hon'ble High Court would not have approved the amalgamation as it was done in the case of Wood Polymer Ltd. (supra). Therefore, the decision in the case of McDowell & Co. Ltd. (supra) has no application to the facts and circumstances of the instant case.
14. On the plain reading of Section 47(vii), we are of the view that a shareholder of amalgamating company would be entitled to claim exemption from the provisions of Section 45 if the following conditions are fulfilled by him : (b) in consideration of such transfer, he has been allotted share or shares of the amalgamated company, and It is not in dispute that in the instant case, the assessee fulfils the conditions (a) and (c) above. However, there is dispute between the parties in respect of fulfilment of the condition mentioned in (b) above, viz., whether a shareholder of the amalgamating company loses the exemption contemplated under Section 47(vii), merely on the ground that along with the allotment of share or shares of the amalgamated company, he receives something else from the amalgamated company. In our considered opinion, since there is no restriction provided in the condition (b) above that along with the allotment of share or shares of the amalgamated company, the assessee should not receive anything else from the amalgamated company, we fail to appreciate how the exemption contemplated under Section 47(vii) could be denied to the assessee. As we are concerned in the present case with certain things received by the assessee from the amalgamated company in consideration of his transferring the shares of the amalgamating company, it is not possible for us to give any decision as to what will happen in future when the assessee transfers 11 per cent bonds merely because Section 2(42A) and Section 49(2) do not deal with such a situation but they deal with a situation where shares of the amalgamated company are sold by the previous shareholder of the amalgamating company. In this view of the matter, we entirely agree with the submissions made on behalf of the assessee that there is some confusion in the mind of the revenue in not appreciating two separate and distinct stages. In the instant case, we are concerned with the first stage, viz., amalgamation of the two companies and consequences arising therefrom. We are not concerned with the second stage where the shareholder of the amalgamated company sells his shares and certain other things allotted to him on the amalgamation. If we keep these two separate and distinct stages in mind, we are of the opinion that the assessee would be entitled to claim exemption contemplated under Section 47(vii). It is no doubt true that in the case of Master Raghuveer Trust (supra), the Hon'ble High Court has not given its decision on the provisions of Section 47(vii).
However, it is pertinent to note that in the said case, the Hon'ble High Court has not approved the action of the Tribunal granting pro rata exemption under Section 47(vii), in respect of the shares allotted and denying such exemption in respect of bonds/debentures allotted to the shareholder by the amalgamated company. In our view, once it is held that the assessee is entitled to claim exemption under Section 47(vii), it is of no consequence to see whether along with the allotment of share or shares of the amalgamated company, the assessee has also received bonds/debentures. We are fortified in the view we are taking by the order of the Tribunal in the case of H.K. Bhavnani (supra), the relevant portion of which is reproduced above, more particularly the latter portion of that order, which reads as under : Furthermore, we may add the Appellate Assistant Commissioner has also referred to the provisions of Section 47(vii) in accepting the contention of the assessee that Section 47(vii) excludes from the operation of Section 45 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, and (b) the amalgamated company is an Indian company. As this is the clear statutory provision which supports the assessee and as no argument has been advanced before us by the learned departmental representatives as to why this is not applicable to the facts of this case, we uphold the order of the Appellate Assistant Commissioner, even apart from the decision of the Bombay High Court in Rasiklal Maneklal (HUF) (supra) which was concerned with the charge of capital gains in respect of similar transaction under the repealed Indian Income-tax Act of 1922.
As regards the applicability of the decision in the case of McDowell & Co. Ltd. (supra), we do not find any merit in the submissions made on behalf of the revenue. If the object and purpose of the shareholders and the concerned companies were to avoid/evade tax, the Hon'ble High Court would not have approved the amalgamation in a company petition made under the Companies Act, as the Hon'ble High Court was pleased to do in the case of Wood Polymer Ltd. (supra). Again, it is pertinent to note that there is no allegation made by the revenue that the amalgamation between SEPL and Alkapuri was with a view to evade tax or that fit was a colourable transaction or that the parties never intended to act upon it. In this view of the matter, we fail to appreciate how the decision in the case of McDowell & Co. Ltd. (supra) could be applied.
For the aforesaid reasons, we hold that the income-tax authorities were not justified in working out capital gains of Rs. 1,05,427 in the hands of the assessee. We would, therefore, set aside the orders of the income-tax authorities.