1. This is a reference under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred referred to as 'the Act'), at the instance of the revenue. The question referred for our determination relates to the assessment year 1961-62, for which the corresponding accounting year ended on March 31, 1961.
2. The assessee is a Hindu undivided family deriving income from interest on securities, dividends, property and dealing in shares, both ready and forward. In or about the year 1941, the assessee purchased one share of the Shorrock Spinning and . (hereinafter referred to as 'the Shorrock company') of the face value of Rs. 1,000 for Rs. 3,307. Later on, this share was split up into 10 shares of Rs. 100 each and 30 shares of the face value of Rs. 100 each were issued to the assessee from time to time by way of bonus shares by the Shorrock company. As a result of this splitting up and the issue of bonus shares, on December 31, 1959, the assessee owned 90 shares in the Shorrock company of the face value of Rs. 100 each.
3. There is another company by name the New Shorrock Spinning & . (hereinafter referred to as 'the New Shorrock company'). In or about the middle of the year 1960, a scheme of amalgamation of Shorrock company and New Shorrock company was propounded and petitions were filed under the provisions of section 391 and section 394 of the companies Act, 1956, in the Gujarat High Court both by the Shorrock company as the transferor company and the New Shorrock company as the transferee company. Pursuant to these petitions on September of 23, 1960, the Gujarat High Court directed meetings of the shareholders of both the companies to be convened. Accordingly, meetings were held on October 27, 1960, and the shareholders of both the companies approved of the scheme of amalgamation. The matter was later on heard by the Gujarat High Court and by its order dated November 25, 1960, in the petition filed by the New Shorrock company under section 391 the court sanctioned the scheme of amalgamation set out in the schedule to the order and ordered that the said scheme would be binding on the members of both the companies. Under the scheme of amalgamation the undertaking and all the property, right and powers of the Shorrock company were without further act or deed transferred to and made to vest with effect from January 1, 1960, in the New Shorrock company. So also the liabilities and duties of the Shorrock company were transferred with effect from January 1, 1960, without any further at or deed to the New Shorrock company. Necessary directions were given in respect of legal proceedings pending either at the instance of or against the Shorrock company and the New Shorrock company. The scheme of amalgamation further provided for an increase in the share capital of New Shorrock company and it permitted reaction of 14,625 new ordinary shares of the face value of Rs. 125 each of the transferee-company. These newly created shares were to rank pari passu with the existing shares of the transferee-company in all respects. By this scheme the New Shorrock company as the transferee company was directed to allot to members of the Shorrock company (transferor-company) one share in the transferee-company for every two shares of the transferor-company held by them respectively. On the same day an order was passed in the petition that was presented under section 394 and this order, inter alia, provided that the Shorrock company should file the certified copy of the order with the Registrar of Companies within 14 days from the date thereof for registration and on such certified copy being delivered the transferor-company shall be dissolved and the Registrar of companies was directed to place all documents relating to the relation to the transferor company and registered with him on the file kept by him in relation to the transferee-company, and the files relating to the said two companies were directed to be consolidated accordingly. Appropriate orders were also passed in the petitions filed by the Shorrock company to carry out the scheme of amalgamation.
4. The Income-tax Officer at the time of the assessment, though he was apprised of the fact of the scheme of amalgamation and of acquisition of 45 shares by the assessee of the New Shorrock company, did not consider the matter from the point of view of the applicability of section 12B of the Act. On January 21, 1964, the Commissioner of Income-tax, Bombay City II, issued a notice under section 33B of the Act to the assessee, inter alia, informing him that upon sanctioning of the scheme of amalgamation of the two companies he received 45 shares of New Shorrock company in exchange of his original holding of 90 shares in Shorrock company in December, 1960; that this exchange of shares resulted in a considerable amount of profit to him, which was not considered by the Income-tax Officer in the regular assessment; that the order of the Income-tax Officer is erroneous and prejudicial to the interests of the revenue and that in exercise of the powers conferred by section 33B(1) he proposed to direct the Income-tax Officer to revise the assessment and include in the total income the profits arising to the assessee in the transaction. By this notice an opportunity was given to the assessee to show cause why such an order should not be passed. By the attorney's letter, dated January 23, 1964, the assessee objected to the proposed action on the part of the Commissioner of Income-tax. After hearing the assessee on January 29, 1964, the Commissioner of Income-tax passed an order directing the Income-tax Officer to revise the assessment and include an amount of Rs. 49,350 which according to him was capital gain in the transaction resulting in acquisition of 45 shares of New Shorrock company in place of 90 shares held by him in Shorrock company.
5. On an appeal by the assessee before the Tribunal, several contentions were urged but we are concerned with the finding of the Tribunal in so far as it is relevant to the questions referred for our determination. The Tribunal, inter alia, held that to attract the provisions of section 12B there must be a sale, exchange, transfer or relinquishment of a capital asset after March 31, 1956; that in the case before it there was admittedly neither a sale nor transfer; that an exchange connotes existence of a person with whom one could exchange; that in this case the assessee had not exchanged the shares with any particular person in return for the shares of New Shorrock company; that upon consideration of the definition of the word 'exchange' given in various statutes it took the view that no exchange was involved in amalgamation as had taken place in this case. The Tribunal further held that there could be no relinquishment because relinquishment implied existence of the property relinquished even after such relinquishment, but in the present case the assessee's shares in Shorrock company ceased to exist and, therefore, there could not be relinquishment. At the instance of the revenue the following two questions are referred for out determination by the Tribunal :
'1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 49,350 could be assessed in the hands of the assessee as capital gains as having accrued to the assessee by exchange or relinquishment as provided for under section 12B of the Act
2. If the answer to the above question is in the affirmative, whether the said sum of Rs. 49,350 was assessable in the assessment year 1961-62 ?'
6. Mr. Joshi on behalf of the revenue contended that the provisions of section 12B of the Act relating to capital gains are attracted, as in the present case there is either an exchange or relinquishment of a capital asset by the assessee. His submission is that the nature of the transaction in the present case is that the shares held by the assessee in Shorrock company were exchanged for the shares of New Shorrock company; that it is a process of exchange of one security for another; that under the scheme of amalgamation the assessee obtained in lieu of 90 shares held in Shorrock company, 45 shares of New Shorrock company in exchange; that the exchange effected in the present case is exactly equivalent of what would have happened or taken place had instruction been given for sale of 90 shares of Shorrock company by the assessee and for investment of the sale proceeds in the shares of New Shorrock company In short his submission is that when as a result of the provisions of the scheme of amalgamation the assessee is allotted 45 shares of New Shorrock company in consideration of his holding of 90 shares of Shorrock company there is an exchange as understood in law. Alternatively, he submitted that, as there is relinquishment of the interest by the assessee in the 90 shares of Shorrock company and as a result of such relinquishment capital gain has accrued to the assessee the provisions of section 12B are attracted.
7. Sub-section (1) of section 12B provides as under :
'12B. Capital gains. - (1) The tax shall be payable by an assessee under the head '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. There are two provisos to this sub-section as well there are other sub-sections, but it is unnecessary to refer to the same. Under the main provisions of sub-section (1) it is only profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset that could be regarded as capital gains. In the present case, it is not contended by the revenue before us that there is either sale or transfer as understood under this sub-section. The only alternative plea is that there is either an exchange or relinquishment. In the Act, neither the word 'exchange' nor 'relinquishment' is defined. However, it will not be out of place to refer to the definition of the word 'exchange' contained in section 118 of the Transfer or Property Act, 1882. That section provides that when two persons mutually transfer the ownership of one thing for the ownership of another, neither thing or both things being money only, the transaction is called an 'exchange'. The definition of the word 'exchange' is not limited to immovable property. 'Exchange' is not only exchange of lands but also barter of goods. Even the dictionary meaning of the word 'exchange' is not different from the one given for the word in the Transfer of Property Act. Several meanings are given for the word 'exchange' in the Concise Oxford Dictionary, but the relevant meaning for our purpose is 'the thing exchanged for another'. Thus, if regard be had to the definition of the word 'exchange' as given in the Transfer of Property Act, or even if regard be had to the meaning of that word as understood in common parlance, the following facts or circumstances must exist before a transaction of exchange an come into effect as understood in law or in common parlance. A transaction of exchange pre-supposes existence of different properties owned by different persons; that as a result of the transaction of exchange both the properties continued to exist; that as a result of such a transaction both the properties continue to be owned by two different parties but the ownership of one property is transferred to the owner of the other and vice versa. If these essential features of a transaction of exchange are borne in mind, the question arises whether in the present case a transaction of exchange has taken place, when the assessee was allotted 45 shares of New Shorrock company under the scheme of amalgamation sanctioned by the Gujarat High Court in lieu of his holding of 90 shares in Shorrock company. At the outset it should not be overlooked that after the shares were allotted by the Shorrock company to its shareholders such shares eased to be the property of the company, but they became the property of the shareholders in their own right. By the scheme of amalgamation sanctioned by the Gujarat High Court the undertaking and all properties, rights and powers and all liabilities and duties of Shorrock company are with effect from January 1, 1960, without any further act or deed transferred to New Shorrock company and they became so vested in New Shorrock company. There is nothing in the scheme of amalgamation to indicate that the 90 shares of Shorrock company which were held by the assessee are at all transferred to New Shorrock company though undoubtedly the scheme, inter alia, provides that New Shorrock company shall without any further application allot to every member of Shorrock company one share in New Shorrock company for every two shares of Shorrock company held by him. The allotment of 45 shares pursuant to this scheme of amalgamation to the assessee is in consideration of the fact that he was prior to the scheme being sanctioned by the Gujarat High Court holder of 90 shares of Shorrock company. However, such allotment of 45 shares of New Shorrock company cannot be regarded as a transaction of exchange as understood either in law or in common parlance. There is no provision in the scheme of amalgamation directing that the assessee is under an obligation to transfer either to New Shorrock company or to anybody else the 90 shares of Shorrock company held by him. In fact, the order on the petition under section 394 clearly shows that the order has to be filed with the Registrar of Companies within the time order has to be filed with the Registrar of Companies within the time specified and upon such order being delivered up in the office of the Registrar, Shorrock company shall be dissolved. The result of this provision that upon compliance with the requirements of the order Shorrock company shall get automatically dissolved and the 90 shares of Shorrock company held by the assessee will become mere scrap of paper of which the ownership is not transferred to New Shorrock company or to anybody else. Thus, more than one essential feature before a transaction of exchange can come into effect are lacking in the present case and it is not possible to take the view that an exchange took place simply because the assessee was allotted 45 shares of New Shorrock company under the scheme of amalgamation by reason of his holding of 90 shares of Shorrock company.
9. Reliance was placed by Mr. Joshi upon two decisions of the English court in Royal Insurance Co. Ltd. v. Stephen and in Westminster Bank Ltd. v. Osler (inspector of Taxes). The first of these decisions is a decision of the King's Bench Division while the latter is a decision of the House of Lords. Though undoubtedly while reciting the facts in each one of these cases, the word 'exchange' has been used, the question whether the transaction amounted to an exchange was neither canvassed nor gone into and what was merely considered was whether there was a realisation as a result of the amalgamation scheme. In the first of these cases the Royal Insurance Company for the purpose of its fire, accident and general insurance held large investments including a variety of British railway stocks. The company admitted that any profit made on the realisation of an investment was part of its profits for income-tax purposes, and the Crown admitted that any loss Act, 1921, the company was required to accept new stocks in the amalgamated companies in exchange for the stocks previously held in the companies which under the Act were either amalgamated or absorbed. The new stocks received had a definite market value on the date of exchange and this value was less than the original cost to the company of the stocks surrendered. The company claimed that the difference should be allowed as a deduction in computing its profits assessable under case I of Schedule D. The Crown contended that the company had not realized any loss and that its claim held. The Special commissioners, on appeal, upheld the crown's contentions. When the matter came before that court, the court took the view that the surrender of the old stocks enable the result of the company's holding of those investments to be definitely ascertained and was equivalent to a realisation. There is nothing in the judgment delivered in this case to indicate that the court at all considered the transaction as one of an exchange as normally understood in law. The only question which arose for consideration was whether the transaction constituted a realisation or not and that was answered in favour of the assessee.
10. Even in the decision of Westminster Bank's case, the House of Lords has not considered the question whether the transaction amounted to an exchange and the question that arose for consideration was merely whether it was a realisation having regard to the facts of the case. Neither of these decisions is, therefore, of any assistance to us in determining the meaning of the word 'exchange' as appearing in section 12B of the Act.
11. The question then arises whether there is relinquishment as a result of which capital gains have accrued to the assessee. The word 'relinquishment' is neither defined in the Act nor any other statute to which our attention has been drawn. However, the essential features of a transaction of relinquishment can be clearly specified. In a transaction of relinquishment the property in which interest is relinquished continues to exist; the property continues to be owned by some person or persons even after the transaction of relinquishment and the interest of the person relinquishing his interest in the property is either given up or abandoned or surrendered. The question whether a transaction of relinquishment has come into existence in the present case can only arise qua the 90 shares of Shorrock company held by the assessee. The assessee has not given up, surrendered or abandoned or even relinquished his interest in these shares. As by the appropriate orders of the court all the assets and liabilities of Shorrock company are transferred to New Shorrock company and as upon the filing of the order Shorrock company is directed to be dissolved, that company eased to exist. Thus, if Shorrock company ceased to exist upon compliance of the orders there is no question of the assessee relinquishing his interest in the 90 shares of the company and, therefore, such a transaction can in no sense of the term be regarded as a relinquishment as understood either in law of in common parlance. Relinquishment also presupposes that the property in which the interest is relinquished continues to be in existence. In this case, upon dissolution of Shorrock company the shares of that company have become a scrap of paper and of no value.
12. In the result, in our opinion, as a result of allotment of 45 shares of New Shorrock company under the scheme of amalgamation to the assessee by reason of his holding of 90 shares of Shorrock company, neither a transaction of exchange nor relinquishment has taken place and our answer to question No. 1 is accordingly in the negative. As question No. 1 is answered in the negative, question No. 2 does not survive for determination and it is unnecessary to answer the same. The revenue shall pay the costs of the assessee.