1. The question referred to us by the Income-tax Appellate tribunal, C-Bench, Bombay, at the instance of the assessee is as under :
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 2,55,378 being the excess of the value of the net assets of Latham Abercrombie and Co. Ltd. on the date of its amalgamation over the cost of the applicant's shareholding in that company is chargeable to tax as capital gains under section 45 of the I.T. Act 1961 ?'
2. In order to appreciate the controversy involved, a few facts may be stated. We are concerned in this reference with the assessment year 1964-65 for which the previous year was the year ending on December 31, 1963. One Latham Abercrombie and Co. Ltd. (hereinafter referred to as 'Latham Abercrombie') was a 100% subsidiary company of the assessee. Latham Abercrombie had an issued and paid up capital of Rs. 2 lakhs divided into 2,000 equity shares of Rs. 100 each and the entire lot of 2,000 shares was held by the assessee. The total cost of the share capital shows in its books was at Rs. 1,82,575.
3. By its order dated December 2, 1963, the Bombay High Court approved the scheme of amalgamation between the two companies and the entire undertaking of Latham Abercrombie as on September 30, 1963, stood transferred to and vested in the assessee-company. Similarly, all assets and liabilities of the said company stood transferred to the assessee-company. All this was with effect from close of business on September 30, 1963. This order was passed under s. 294 of the Companies Act, 1956.
4. According to the ITO, on squaring up the accounts of Latham Abercrombie and by reason of the amalgamation of the assets and liabilities of the said company with the assessee, the assessee came upon an excess of Rs. 2,55,378 over and above the cost of its own shareholding. The ITO treated the said amount as one arising from the extinguishment of the assessee's rights in the shares of Latham Abercrombie and he treated the said amount as accruing to the assessee as capital gains.
5. The assessee carried the matter to the AAC and thereafter to the Tribunal and before both the authorities the assessee lost. Hence this reference.
6. It may be mentioned that the principal advanced on behalf of the assessee both before the AAC and the Tribunal was based on the phraseology of s. 2(47) of the I.T. Act which contains the definition of the word 'transfer'. It was contended on behalf of the assessee that as there was extinguishment in its entirety of its shareholding and not extinguishment of any rights in the shares, there was no transfer and hence, no accrual of capital gains which could be taxed. The said argument has not been pressed into service before us, and rightly so, inasmuch as the argument has been negatived initially by the Gujarat High Court in CIT v. R. M. Amin : 82ITR194(Guj) , which view has been subsequently approved by the Supreme Court in CIT v. R. M. Amin : 106ITR368(SC) . However, what has been argued before us is that by the scheme of amalgamation of a 100% subsidiary company with the assessee-company, there can be no accrual of capital gains of sustainment of capital loss. Out attention was drawn in this behalf to the view of the Calcutta High Court expressed in Shaw Wallace & Co. Ltd. v. CIT : 119ITR399(Cal) .
7. Before dealing with the Calcutta decision, we may point out that the amendments made in s. 47 by introduction of cls. (v) and (vi) would not apply to the assessment year under consideration and we must consider the law as it stood prior to the introduction of these two provisions in s. 47.
8. We find, however, that the scope and effect of amalgamation of companies under s. 394 of the Companies Act, 1956, has been set out and very succinctly analysed by Banerji J. of the Calcutta High Court in the aforesaid decision and the relevant observation of the said judge commended at p. 409 of the report. He has rightly pointed out that the legal effect of the amalgamation being considered by the High Court which were of three 100% subsidiary companies with the assessee-company before that court was that the transferor companies were absorbed into and blended with the assessee.
9. According to Banerji J. (p. 411) :
'The entire capital and assets of the transferor-companies having vested in the assessee, as a result of the said amalgamations, the assessee became the sole owner of the capital of the transferor-companies. There was, therefore, no extinguishment of the right of the assessee in participating in the capital on the liquidation of the transferor-companies.
The assessee was a party to the said schemes of amalgamation and consented and agreed to the same whereunder, as noted earlier, no shares were to be issued to the assessee in lieu of or in exchange for the shares held by it in the transfer-companies. The shares held by the assessee in the transferor-companies represented the capital invested by the assessee in the said companies and by the said amalgamations the assessee became the sole owner of the entire capital of the transferor-companies. By virtue of the said amalgamations the assessee as the transferee-company became the sole repository of all the rights which flowed from or were imbedded in the shares held by the assessee in the transferor-companies.'
10. In other words, it has been observed by the learned judge of the Calcutta High Court that the result of the amalgamation was not securing of any additional amount or asset by the assessee-company but blending of the assets of the transferor-company with it, and, in pursuance of that scheme of amalgamation, there was the abolition of the shares in the transferor-company which shares earlier represented the said assets. Whether the assets of the transferor-company exceeded its liabilities or whether the assets were less than the liabilities would seem to make no difference and there would be no capital gains or capital loss to the assessee-company, since the assessee-company continued to enjoy in a different manner what it already owned. We may point out that earlier, at p. 409, Justice Sen of the Calcutta High Court has looked behind the facade of the transaction and lifted the corporate veil to come to the identical conclusion. In his view, there was rearrangement of the capital base, for instead of keeping the capital in the name or in the control of its subsidiaries, the assessee brought back the same under its direct control. He has also opined that, in this situation, there cannot be any element of gain or loss.
11. This conclusion is derived without reference to the provision contained in cls. (v) and (vi) of s. 47. We are in agreement with the view expressed by the Calcutta High Court but we may make it clear that we are restricting our concurrence to a case of amalgamation of a 100% subsidiary with its parent company. This should not be taken to mean that that identical position may exist in other types of amalgamations. We are today not considering the question of amalgamation of a company with another which does not own 100% of the shares of the transferor-company. That position will be examined and considered in an appropriate case. Different considerations may perhaps exist in such a case. On the facts of the instance case, which is a case of amalgamation of a 100% subsidiary with its parent company, we are of the opinion that there was no question of accrued of capital gain or sustaining of capital loss. In this view of the matter, the question referred to us is answered in the negative.
12. Since the assessee has succeeded on a point other than the one argued before the lower authorities, the fair order as to costs is to direct the parties to bear their own costs of the reference. There will be an order accordingly.