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Mrs. Grace Collis Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Cochin
Decided On
Judge
Reported in(1984)8ITD453(Coch.)
AppellantMrs. Grace Collis
Respondentincome-tax Officer
Excerpt:
1. these appeals by the assessees relate to the assessment year 1976-77. the assessees in these appeals, who belong to the same family, owned the entire shares in the company collis line (p.) ltd. the dispute in the present appeals relate to the capital gains arising out of the sale of those shares to one shri b.k. chatterji and his group.the grounds taken in all the appeals are common.2. ground nos. 1 to 3: these are to the effect that the commissioner (appeals) erred in confirming the order of the ito, who computed the capital gains arising out of the transfer of the shares by applying sections 49(2) and 47(vii) of the income-tax act, 1961 ('the act').3. the company known as collis line (p.) ltd. was incorporated on 11-11-1968. on 1-8-1969, there was an amalgamation of the said company.....
Judgment:
1. These appeals by the assessees relate to the assessment year 1976-77. The assessees in these appeals, who belong to the same family, owned the entire shares in the company Collis Line (P.) Ltd. The dispute in the present appeals relate to the capital gains arising out of the sale of those shares to one Shri B.K. Chatterji and his group.

The grounds taken in all the appeals are common.

2. Ground Nos. 1 to 3: These are to the effect that the Commissioner (Appeals) erred in confirming the order of the ITO, who computed the capital gains arising out of the transfer of the shares by applying Sections 49(2) and 47(vii) of the Income-tax Act, 1961 ('the Act').

3. The company known as Collis Line (P.) Ltd. was incorporated on 11-11-1968. On 1-8-1969, there was an amalgamation of the said company with another company known as Ambassador Steamships (P.) Ltd., which has been incorporated in 1960. This was as per the orders of the Kerala High Court dated 2-4-1969. Under the scheme of amalgamation, the assets and liabilities of the Ambassador Steamships (P.) Ltd. were taken over by Collis Line (P.) Ltd. The face value of the shares of Ambassador Steamships (P.) Ltd., which were fully paid up, was Rs. 100 per share.

Under the scheme of amalgamation, the shareholders of Ambassador Steamships (P.) Ltd. were allotted 14 shares in the amalgamated company, namely, Collis Line (P.) Ltd. for every share of the face value of Rs. 100 in Ambassador Steamships (P.) Ltd. Thus, the assessees in the appeals acquired 45,318 shares of the face value of Rs. 100 each in Collis Line (P.) Ltd. The assessee in Appeal No. 368 (Coch.) of 1980 had 1979 shares, the assessee in IT Appeal No. 369 (Coch.) of 1980 had 2890 shares, the assessee in IT Appeal No. 376 (Coch.) of 1980 had 10,113 shares and the assessees in the remaining appeals had 5,056 shares each. All the 45,318 shares were transferred to Shri B.K.Chatterji and his group on 29-2-1976 for a consideration of Rs. 48,72,523. This works out at the rate of Rs. 107.50 per share. The ITO held that Sections 49(2) and Al{vii) will be attracted in computing the cost to the assessees for these shares. As the assessees had received 14 shares of the face value of Rs. 100 each in the amalgamated company, for one share of face value of Rs. 100 in Ambassador Steamships (P.) Ltd., the ITO held, applying Sections 49(2) and 47(vii), that the cost of the shares as far as the assessees are concerned, is the cost of their acquiring the shares in Ambassador Steamships (P.) Ltd. He, therefore, multiplied the number of shares by Rs. 100 and divided the same by 14 to arrive at the cost of the shares. In doing so, he rejected the contention of the assessees that Sections 49(2) and 47(vii) are not attracted to the case as the assessees had not become the owners of the shares of the amalgamated company in consideration of a transfer of their shares in Ambassador Steamships (P.) Ltd. and that they had become the owners of the shares in the amalgamated company only by a scheme of amalgamation approved by the Court. It had also been contended before the ITO that there had been only a merger and that there was no amalgamation at all. The ITO held that the assessees became owners of the shares by amalgamation and that the assessees had become the owners of the shares as a result of a transaction of the nature referred to in Section 47(vii).

4. The contentions of the assessees were negatived by the Commissioner (Appeals) also. He held that the intention of the Legislature was to treat the transaction referred to in Section 47(vii) as a transfer and to exempt it from the charge of capital gains and further that in such cases, the intention of the Legislature was that in future transactions the cost of the shares should be taken as the cost of acquiring the shares in the amalgamating company and not in the amalgamated company.

The Commissioner (Appeals) also rejected the contention of the assessees that no tax on capital gains can be levied for the reason that there was no cost of acquisition with regard to the shares as far as the assessees were concerned. He held that the shares in the amalgamated company were allotted to the assessees in lieu of their shares in the amalgamating company of Ambassador Steamships (P.) Ltd. and that it cannot, therefore, be said that there was no cost of acquisition of the shares in the amalgamated company. He also rejected an alternative contention advanced by the assessees that in any case, the cost of the shares should be determined on the basis of the market value as on 1-1-1954. This was for the reason that the necessary particulars for working out the cost on this basis were not furnished by the assessee. With regard to this aspect, the ITO stated in his order that the cost can be worked out as on 1-1-1954 as and when the assessees furnished the requisite details.

5. Before narrating the arguments advanced by Shri Soli Dastur, the learned counsel for the assessees, it would be useful to refer to the relevant provisions of the Act. Section 45 of the Act provides that any profits or gains arising out of the transfer of a capital asset shall be chargeable to income-tax as income of the previous year, subject to the exemptions contained in Sections 53 and 54 of the Act, with which we are not concerned, Section 2(47) of the Act defines 'transfer' in relation to a capital asset as inclusive of the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. Section 47 provides that nothing contained in Section 45 shall apply to the transactions set out in Clauses (i) to (ix) of the section. Clause (vii), which is the only clause which is relevant for the present purpose, reads as follows: (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 The revenue accepted the position that no tax on capital gains is leviable with regard to the allotment of shares in the amalgamated company at the time of the amalgamation on 1-8-1969. They sought to tax only the capital gains arising out of the subsequent transfer of the shares by the assessees on 29-2-1976 in favour of Shri B.K. Chatterji and others. In doing so, they invoked Sub-section (2) of Section 49, which reads thus: (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.

It is clear that if Section 49(2) is attracted, the cost of the shares will be the cost of acquiring the shares in the amalgamating company and not the cost of the shares in the amalgamated company.

6. We may now set out the arguments advanced by the learned counsel for the assessees, which were to the following effect: For the applicability of Section 49(2), the shares in the amalgamated company should have become the property of the assessees in consideration of a transfer referred to in Clause (vii) of Section 47. Clause (vii) contemplates a case where in working out the scheme of amalgamation there is a transfer by a shareholder of the shares held by him in the amalgamating company in consideration of the allotment to him of shares in the amalgamated company. In the present case, there has been no transfer by the assessees of their shares in the Ambassador Steamships (P.) Ltd. (hereinafter referred to as the amalgamating company) to Collis Line (P.) Ltd. (hereinafter referred to as the amalgamated company). In any case, the shares of the amalgamated company were not acquired by the assessees in consideration of a transfer. By amalgamation, there was no transfer of the shares of the amalgamating company. Even if there was such a transfer of the shares, it was not by the shareholders.

Section 47 mentions many instances which are not transfers in law.

For instance, it had been held by the Supreme Court in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 that no sale or transfer of capital assets is involved in the dissolution of a firm. In CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 it had been held by the Supreme Court that no transfer is involved in the distribution of assets of a company in liquidation. Still these have been mentioned in Section 47 for clarifying that they are not transfers. It is, therefore, clear that the various transactions have been listed in Section 47 only by way of abundant caution and not because they would have been transfers but for the section. Two parties are necessary for effecting a transfer. In the present case, there had been no transfers of the shares of the amalgamating company by the shareholders of that company. Resolutions were passed separately by the shareholders of the two companies agreeing to the scheme of amalgamation. There was no document inter partes between the two sets of shareholders. There was only an order of the Court approving the scheme of amalgamation and directing the allotment of 14 shares in the amalgamated company to each share of the amalgamating company. It has been held by the Madras High Court in United India Life Assurance Co. Ltd. v. CIT [1963] 49 ITR 965 that where a compromise or arrangement for amalgamation of companies involves an agreement for a transfer of the assets of one company to the other, the transfer takes effect only from the date on which the Court sanctions the scheme and that the sanction of the Court has no retrospective operation and does not make a transfer effective from the date of the agreement or from the date of the resolution of the company approving the agreement. This will show that the amalgamation is effected not by the action of the parties but by the order of the Court. The ratio of the decision of the Supreme Court in the case of Goli Eswariah v. CGT [1970] 16 ITR 675 which related to the question whether the throwing of self-acquired property into the common stock of the HUF will amount to a transfer for the purpose of the Gift-tax Act, ('the 1958 Act') will indicate that there cannot be a transfer by the unilateral act of one party. The decision by the shareholders at their meeting is to transfer the assets of the company. This is distinct from the shares held by the shareholders which could be transferred only by the shareholders in their individual capacity. Section 49(2) does not refer to a transfer during amalgamation but it refers to a transfer by the shareholders. In the present case, there was no direction by the High Court in its order to the shareholders of the amalgamating company to transfer their shares to the amalgamated company. In the case of CIT v. Rasiklal Maneklal (HUF) [1974] 95 ITR 656 (Bom.) also, there was no provision in the scheme of amalgamation directing the assessee to transfer his shares to the new company or anyone else. It was, therefore, held by the Bombay High Court that with the completion of the scheme of amalgamation the old company stood dissolved and, thereafter, the shares of the old company had no value and that the receipt of the shares in the new company in lieu of the shares of the old company did not constitute either exchange or relinquishment of the old shares. Consequently, it was held that no capital gains arose to the assessee as a result of the transaction under Section 12B of the Indian Income-tax Act, 1922 ('the 1922 Act'). Similarly, in CIT v. R.M. Amin [1971] 82 ITR 194 it was held by the Gujarat High Court that the distribution of assets to the shareholders in the course of liquidation of the company does not involve transfer and that it does not attract tax on capital gains. This was affirmed by the Supreme Court in CIT v. R.M. Amin [1977] 106 ITR 368. It is true that the Calcutta High Court in the case of Central India Industries Ltd. v. CIT [1975] 99 ITR 211 held that amalgamation can be a basis for claiming capital loss. In that case, the shares in the amalgamated company were allotted in exchange for the shares of the assessees in the amalgamating company, It was a case of amalgamation of two companies into another company. The position in this case was quite different.

The above ruling was distinguished by the Calcutta High Court in Shaw Wallace & Co. Ltd. v. CIT [1979] 119 ITR 399 where it was held that no tax on capital gains can be levied on allotment of shares following the amalgamation of companies as no transfer was involved in such case. Even if it is held that there was a transfer of the shares on amalgamation and that such transfer was by a shareholder, still it cannot be said that the shares became the property of the assessee in consideration of a transfer, which is an essential requirement of Section 49(2). In this context, the learned counsel drew our attention to paragraphs 2 to 5 of the schedule to the orders of the High Court on company petition Nos. 2 and 3 of 1969 by which the amalgamation between the two companies was effected. The schedule contains the compromise or arrangement agreed to at the separate meetings of the shareholders of the two companies.

Paragraph 1 provided for the amalgamated company taking over all the assets of the amalgamating company. Paragraph 2 refers to the undertaking by the amalgamated company to discharge debts, liabilities and the obligations of the amalgamating company.

Paragraph 3 relates to indemnity in case of failure to discharge the liabilities. Paragraph 4 relates to the absorption of the employees of the amalgamating company. Then comes paragraph 5 which provides for the issue by the amalgamated company of 14 equity shares for each share of the amalgamating company. What was stressed by the learned counsel was that there was no provision by which the shareholders of the amalgamating company were required to transfer the shares in the amalgamating company to the amalgamated company.

It was then submitted by the learned counsel that if Section 49(2) does not apply, the cost of the shares to the assessee in the amalgamated company should be deemed to be the market value of such shares on the date on which they were issued to them, in support of this position, reliance was placed upon the rulings in Francis Vallabarayar v. CIT [1960] 40 ITR 426 (Mad.) and CIT v. Groz-Beckert Saboo Ltd. 11979] 116 ITR 125 (SC).

7. As against this, the arguments advanced by the learned standing counsel were to the following effect. A taxing provision should receive a reasonable construction if the intention of the Legislature is clear and beyond doubt. Then the fact that the provision could have been more artistically drafted cannot be a ground to treat any part of a provision as otiose. So long as the intention of the Legislature is clear and beyond doubt, the Courts have to carry out the intention vide CWT v. Kripashankar Dayashanker Worah [1971] 81 ITR 763 (SC). Any construction which imputes to the Legislature tautology or superfluity in the use of language must, as far as possible, be avoided and the Court should always prefer a construction which will give some meaning and effect to the words used by the Legislature rather than that which will reduce it to futility vide the Gujarat High Court and the Supreme Court decisions in R.M. Amin's case (supra). The construction given to the statute should be to give effect to its manifest intention vide Sri Krishna Coconut Co. v. East Godavari Coconut & Tobacco Market Committee AIR 1967 SC 973. The marginal note to a section can be relied upon as indicating the drift of the section or to show what the Section 1s dealing with vide K.P. Varghese v. ITO [1981] 131 ITR 597(SC). Applying the above principles to the construction of Sections 47(vii) and 49(2), it will be found that Section 47 deals with various transactions in spite of the fact that the word 'transfer' has been used in the various clauses. Reading Section 49(2) with Section 47(vii) the intention of the Legislature in enacting Section 47(vii) was to say that there will be no transfer giving rise to tax on capital gains when as a result of amalgamation, shares in the amalgamated company are issued to the shareholder of the amalgamating company. Similarly the intention in enacting Section 49(2) is that, in the case mentioned above, where the shares in the amalgamating company are subsequently transferred and the capital gains on the same have to be computed, the cost of such shares should be taken as the cost of acquiring the shares in the amalgamating company. It is not correct to say that the issue of the shares in the amalgamated company to the assessees did not fall within Section 47(vii). The allotment of the shares in the amalgamated company was in lieu of the shares held by the assessees in the amalgamating company.

There was, therefore, consideration for the issue of the shares in the amalgamated company. The requirement with regard to consideration as mentioned in Sections 47(vii) and 49(2) are, therefore, satisfied in the present case. Before the shares in the amalgamated company were issued to the assessees there was an extinguishment of the rights of the asscssee in the shares of the amalgamating company. This is clear from the rulings under the corresponding provisions of the 1922 Act in James Anderson v. CIT [1960] 39 ITR 123 (SC) and Mangalore Electric Supply Co. Ltd. v. CIT [1978] 113 ITR 655 (SC). These rulings show that when an existing right is extinguished and a new right is created, there is a transfer. In Central India Industries Ltd.'s case (supra), 'amalgamation' has been defined as an arrangement whereby the assets of two companies become vested in or under the control of one company (which may or may not be one of the original two companies), which has as its shareholders, or substantially all, the shareholders of the two companies. It was also held that an amalgamation is effected by the shareholders of one or both the amalgamating companies exchanging their shares (either voluntarily or as a result of a legal operation) for shares in the other or a third company. This is what has taken place in the present case. It was held in the Gujarat High Court case of R.M.Amin (supra) that to claim that there has been an extinguishment of rights in a capital asset, it is not necessary that the capital assets should continue to exist. There was, therefore, an extinguishment of the rights of the assessee with regard to the shares in the amalgamating company in spite of the fact that the amalgamating company itself ceased to exist. It has been held in the case of Mangalore Electric Supply Co. Ltd. (supra) that there is a transfer when an existing title in a capital asset is extinguished and a new one is created. It has been held in CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 (Guj.) that there was an extinguishment of rights in a capital asset in spite of the fact that the capital asset in the case, namely, the machinery was destroyed by fire. This position is supported by the rulings in CIT v. Minor Bababhai alias Lavkumar Kantilal [1981] 128 ITR 1 (Guj.) and Marybong & Kyel Tea Estates Ltd. v. CIT [1981] 129 ITR 661 (Cal.). The purpose and meaning of Section 49(2) will be quite clear if it is read by substituting the word 'extinguishment' for the word 'transfer' occurring in the section. The definition of the term 'transfer' in Section 2(47) is not exhaustive but is only inclusive unlike in the case of the definition of the term occurring in Section 2(xxiv) of the 1958 Act. A settlement or an arrangement can also be a transfer. The Companies Act, 1956, refers to compromise or arrangement and both will amount to a transfer. In the present case, the petitions before the High Court were to sanction a compromise or agreement. The affidavit filed by one of the assessees before the High Court shows that the assessee as shareholder had requested the High Court to sanction the compromise or arrangement approved and agreed to by the members of the company. The order of the High Court also shows that the High Court approved the compromise or arrangement as set forth in paragraph 5 of the petition and in the schedule to the order. The views of the authors at page 554 of Kanga and Palkhiwala's Law and Practice of Income-tax (7th edition) that the provisions in Section 47(vii) and 49(2) are ill-conceived and which had been relied upon by the learned counsel for the assessee, are not acceptable. The words 'in consideration of occurring in the expression 'in consideration of a transfer referred to in Clause (vii) of Section 47' have been inserted in Section 49(2) only to indicate an assessee who had obtained the shares in the course of an amalgamation of companies as distinguished from an assessee who had purchased or acquired shares in the amalgamated companies otherwise than as a result of amalgamation. It has been held in Maharajadhiraj Sir Kameshwar Singh v. CIT [1963] 48 ITR 483 (Pat.) that the shareholders of a company and the company are distinct legal entities. While the assets of the company can be transferred by the company, the shares can be transferred only by the shareholders. When the amalgamating company transferred its assets and liabilities to the amalgamated company, there was an extinguishment of the rights of the shareholders of the amalgamating company and the issue of the shares of the amalgamated company to these shareholders was in consideration of the extinguishment of the rights. In this view of the matter, the issue of the shares of the amalgamated company to the assessees was for consideration. Thus, Sections 47(vii) and 49(2) are attracted to the present case. If so, the cost to the assessees of the shares transferred by the assessees will be the cost to them for acquisition of the shares in the amalgamating company. These were the arguments of the learned standing counsel.

8. We have carefully considered the matter. The intention of the Legislature in enacting Section 49(2) seems to be quite clear. By Clauses (vi) and (vii) of Section 47, the Legislature declared that any transfer of the assets or shares involved in the amalgamation of companies will not be treated as a transfer and will not attract tax on capital gains. Any profits or gains arising out of the amalgamation will not, therefore, be exigible to tax on capital gains. Thus, the amalgamation is not a reckoning event or point for the purpose of capital gains. But when subsequently the shares in the amalgamated company are sold, the profits or gains arising therefrom will be exigible to tax under Section 45. The purpose of Section 49(2) is to provide that when shares obtained during amalgamation in an amalgamated company are sold their cost shall be taken as the cost of acquiring the shares in the amalgating company. This is consistent with the position that amalgamation was not a reckoning point as far as tax on capital gains was concerned and the profits or gains arising out of amalgamation has not been brought to tax. In the present case, for a share of the face value of Rs. 100 in the amalgamating company, the assessees, at the time of amalgamation, obtained 14 shares of the face value of Rs. 100 each in the amalgamated company. Thus, they had made a profit or gain of Rs. 1,300 per share. But it has not been subjected to tax in view of Clause (vii) of Section 47. It is, therefore, consistent with the intention of Section 49(2), that while computing the capital gains arising out of the subsequent sale of the shares of the amalgamated company, the cost of acquisition shall be treated as the cost of acquiring the shares in the amalgamating company. It appeared to us that the learned counsel for the assessee did not seriously question the intention of the Legislature as set out earlier. His argument was that whatever may be the intention, Section 49(2), in the manner in which it is drafted, is not attracted to the present case for the reasons set out earlier in summarising the arguments of the learned counsel.

9. Most of the decisions relied upon by either side relate to the question whether the transactions involved in those cases amounted to a transfer of a capital asset for the purpose of Section 45 and was, therefore, exigible to tax on capital gains. For instance, in the case of Rasiklal Manecklal (HUF) (supra) and in the case of Shaw Wallace & Co. Ltd. (supra) the question was whether the transfer of assets during an amalgamation will attract tax on capital gains. Similarly, in the case of Central India Industries Ltd. (supra) the question for consideration was whether the assesses can claim a capital loss on account of amalgamation of companies. The question for consideration before the Gujarat High Court in the case of R.M. Amin (supra) was whether the profits and gains arising out of the liquidation of a company is exigible to tax on capital gains. In other words, the question for consideration in the above case was whether the transactions themselves were transfers within the meaning of Section 45. This aspect is not in dispute in the present case because no tax was sought to be levied on the assessees on the profits and gains made by them during the amalgamation. As already stated, this now stands clearly exempted in view of Clauses (vi) and (vii) of Section 47. Here we are concerned with a case of subsequent transfer of the shares acquired in the amalgamated company. There is no dispute about the fact that the profits and gains arising out of the transfer is exigible to tax on capital gains. The dispute is limited to the application of Section 49(2) in determining the cost of acquisition for computing the profits and gains. As already stated, the purpose of Section 49(2) is to take the cost of acquisition of the shares in the amalgamating company as the cost of the shares. It is not, therefore, necessary to examine the present case to find out whether there is a transfer attracting the provisions of Section 45. The only dispute is whether the case of the assessees can be brought within the four corners of Section 49(2) because only by applying this provision, the revenue can treat the cost of the shares of the amalgamated company as the cost of the shares of the amalgamating company. If the revenue fails in this attempt, as fairly conceded by the learned representative for the assessees, the cost of the shares has to be treated as the market price of the shares when the assessees got the same as a result of the amalgamation.

10. Section 49(2) and Section 47(vii) refer to the shares in the amalgamated company as those which became the property of the assessee in consideration of a transfer made by the assessees, at the time of amalgamation, in consideration of the allotment to him of shares in the amalgamated company. The argument of the learned counsel for the assessees, in short is that the assessees did not acquire the shares in the amalgamated company by the transfer of the shares held by him in the amalgamating company and further that the allotment of shares to the assessees in the amalgamated company cannot be said to be in consideration of any transfer of the shares in the amalgamating company. As pointed out earlier, in considering the above question, it will not be correct to give to the word 'transfer' occurring in Section 49(2) and in Section 47(vii) the meaning attributing to the term in the definition. The marginal note given to Section 47 shows that the section relates to transactions not regarded as transfer. The various clauses in the section set out various transactions. As pointed out by both sides, transactions which have been held by the Courts to be not transfers have been included in some of the clauses in Section 47. This can only be by way of abundant caution. In any case, taking into consideration the construction and purpose of Section 47, it does not seem to be correct to attribute to the word 'transfer' occurring in the clauses of that section, the meaning attributed to the term in the definition in Section 2(47). Similar seems to be the case with regard to the word 'consideration'. As pointed out by the learned standing counsel by saying that there should have been a transfer of the shares in the amalgamating company by the assessee in consideration of the allotment of shares in the amalgamated company, what was intended to provide was only that the shares in the amalgamated company should have come to the assessees as a result of amalgamation. As further pointed out by the learned standing counsel, this provision has been made to confine the application of Section 49(2) to shares obtained as a result of amalgamation as distinguished from shares obtained in an amalgamated company otherwise than by amalgamation.

11. Viewing the matter from the above perspective, it would be clear that in the present case the assessees were allotted shares in the amalgamated company in lieu of the shares held by them in the amalgamating company. As pointed out in the case of Rasiklal Maneklal (HUF) (supra), on the completion of the amalgamation, the shares in the amalgamating company had no value as all the assets of the company were transferred to the amalgamated company. The transfer of these worthless scraps of paper to the amalgamated company as a condition precedent for the issue of shares in the amalgamated company will be an empty formality. The shareholders of both the companies had approved identical schemes by which the assets of the amalgamating company were transferred to the amalgamated company and the shareholders of the amalgamating company were to be issued shares in the amalgamated company. It would be too much to say that the shares in the amalgamated company were issued to the assessees without consideration. It is true that in the case of United India Life Assurance Co, Ltd. (supra) relied upon by the learned counsel for the assessee, it has been held that the compromise or arrangement for the amalgamation of the company takes effect on the date on which the Court sanctions the scheme under the relevant provisions of the Companies Act and that the sanctioa has no retrospective operation and does not make the transfer effective from the date of agreement or resolution. But this does not mean that the shareholders were not in the picture at all and that the entire scheme should be treated as one propounded and enforced by the Court. If the contention of the assessees that when a Court approves a scheme of the present nature, there is no transfer of the shares by the shareholders of the amalgamating company is accepted, the result will be that a distinction without, difference will be made in the case of schemes which provide for a formal transfer or exchange of the shares of the amalgamating company and the schemes like the present one where there is only a direction to issue shares of the amalgamated company. It is difficult of accept the proposition that in the present case the shares in the amalgamated company were issued to the assessees without any consideration and without being deprived of the shares in the amalgamating company. We are also unable to accept the contention of the learned counsel for the assessees that the transfer of the assets of the amalgamating company to the amalgamated company was a transaction entirely between the companies as distinct from a transaction between the shareholders. It is true that the shares belong to the shareholders and that the shareholders are a different entity from the company. But this will not render the issue of the shares in the amalgamated company to the shareholders of the amalgamating company as a transaction without consideration.

12. In our view, the revenue is entitled to succeed even if we attribute to the term 'transfer' occurring in Clause (vii) of Section 47, the meaning assigned to the term by the definition in Section 2(47). The definition is an inclusive one and the scope of the term has been enlarged by the inclusions made. Under the definition, the term 'transfer' in relation to a capital asset includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or compulsory acquisition thereof under any law. We are inclined to accept the contention of the learned standing counsel that there has been transfer in the present case because of the extinguishment of the rights of the assessee in the shares in the amalgamating company. It has been held in the case of Mangalore Electric Supply Co. Ltd. (supra), relied upon by the learned standing counsel, that there will be a transfer if an existing title in a capital asset is extinguished and a new one is created. It was held in the case of Vania Silk Mills (P.) Ltd. (supra) also, relied upon by the learned standing counsel, that when there was an extinguishment of the rights of the assessee in a capital asset and consideration was received by the assessee as a result of such extinguishment, there was a transfer within the meaning of Section 2(47). To the same effect is the decision in the case of Minor Bababhai alias Lavkumar Kantilal (supra). In the present case, even if it be by the order of the Court, there was an extinguishment of the rights of the assessees in the shares of the amalgamating company as the shares held by them were rendered worthless. Similarly, new rights or assets were created in the form of shares in the amalgamated company. The case of Rasiklal Maneklal (HUF) (supra), relied upon by the assessees, was one arising under the 1922 Act, and the effect of the word 'extinguishment' occurring in Section 2(47) of the 1961 Act had not been considered in that case. Only the scope of the word 'exchange' or 'relinquishment' was considered in that case. The ruling in the case of Goli Eswariah (supra), relied upon by the learned counsel for the assessees is one arising under the gift-tax and relating to the throwing of self-acquired property into the common stock of the HUF, It is not applicable to the facts of the present case. The ruling of the Gujarat High Court in the case of R.M. Amin (supra) as affirmed by the Supreme Court in R.M. Amin's case (supra), which was also relied upon by the assessees, was a case relating to the distribution of assets in the course of liquidation of a company. As pointed out by the Gujarat High Court itself, in the case of Minor Babahhai alias Lavkumar Kantilal (supra), the decision in the case of R.M. Amin (supra) is distinguishable because in that case the shareholder did not receive anything pursuant to the creation of new rights and had only received money in satisfaction of his pre-existing right by virtue of his holding shares. The ruling in Shaw Wallace & Co. Ltd. (supra), relied upon by the assessees, only lays down the proposition that for a transfer there should be more than one party. In that case, the question for consideration was whether there would be a transfer when the holding company takes over the assets of the subsidiary company by amalgamation. This is not applicable to the facts of the present case where there are two parties, namely, the assessee and the amalgamated company. It is, therefore, clear that in the present case there is a transfer by the extinguishment of the rights of the assessee in the shares of the amalgamating of company. It is also clear that this extinguishment is in consideration the allotment of the shares of the amalgamated company. With regard to the conflict of the views expressed by the Bombay High Court in the case of Rasiklal Maneklal (HUF) (supra) and the views expressed by the Gujarat High Court in the case of R.M.Amin (supra) as to whether the continued existence of the capital asset is necessary to work out extinguishment of the right therein, we prefer respectfully to follow the view of the Gujarat High Court that for extinguishment of rights in a capital asset, the continued existence of the capital asset is not necessary. We, therefore, confirm the order of the Commissioner (Appeals) on this aspect and hold that Section 49(2) is attracted to the present case and that, consequently, the cost of the shares will be the cost to the assessees of the shares in the amalgamating company. These grounds are, therefore, decided against the assessees.

13. Ground No. 4: This is in the alter native and is to the effect that there is no capital gains exigible to tax because the cost of acquisition of the shares was nil. This contention is based on the ruling of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 wherein it has been held that all transactions encompassed by Section 45 must fall under the governance of its computation provisions, that, a transaction to which these provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge, that what is contemplated by Section 480(ii) of the Act is an asset in the acquisition of which it is possible to envisage a cost or, in other words, it must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it and that none of the provisions pertaining to the head 'Capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived. The contention of the learned counsel for the assessee, as set out while dealing with ground Nos. 1 to 3, is that there is no consideration for the issue of the shares in the amalgamated company.

It is, therefore, claimed that there is no cost of acquisition with regard to those shares. This contention, in our view, is not sustainable even on the ruling of the Supreme Court referred to above.

The observations of the Supreme Court were with regard to an asset, in the acquisition of which it is not possible to envisage a cost and where the asset does not possess the inherent quality of being available on the expenditure of money to a person who is seeking to acquire it. These observations were with regard to goodwill. Shares in a company cannot be placed on the same footing because, with regard to shares, it is possible to envisage a cost. Shares possess the inherent quality of being available on the expenditure of money to a person seeking to acquire it. Further, we have held in considering ground Nos.

1 to 3 that there is consideration for the issue of shares in the amalgamated company. This contention cannot, therefore, be accepted.

14. Another argument advanced under this ground by the learned counsel for the assessee was that, in any case, shares are not capable of improvement, that the cost of improvement of shares on an identifiable date cannot be ascertained, that for computing capital gains both the cost of acquisition as well as the cost of improvements must be ascertainable, that if one of them is not ascertainable, the matter falls within the ratio of the decision of the Supreme Court in the case of B.C. Srinivasa Setty (supra) referred to in the preceding paragraph.

The learned counsel, in this context also relied upon the ruling of the Kerala High Court in the case of CIT v. E.C. Jacob [1973] 89 ITR 88 (FB), which was approved by the Supreme Court in the case of B.C.Srinivasa Setty (supra). Particular reliance was also placed upon the decision of the Bombay High Court in the case of Evans Fraser & Co.

Lid, v. CIT [1982] 137 ITR 493 where in spite of the fact that the cost of acquisition was ascertain-able, the Bombay High Court held that no tax on capital gains is attracted as the cost of improvement is not ascertainable. The learned counsel also relied upon the observations in the case of Elphinstone Spg. & Wvg. Mills Co. Ltd. v. CIT [1955] 28 ITR 811 (Bom.) to the effect that if the construction placed on a provision of law defeats the purpose of the legislation, the fault is that of the Legislature in not using appropriate words.

15. As against this, it was contended by the learned standing counsel that the decisions relied upon by the learned counsel for the assessees relate to goodwill, that they cannot apply in the case of shares for which a cost of acquisition can be envisaged and that the observations of the Supreme Court in the case of B.C. Srinivasa Setty (supra) were only with regard to a self-generating asset like goodwill. In this connection the learned standing counsel also relied upon the observations of the Madhya Pradesh High Court in CIT v. Hukumchand Mannalal & Co. [1965] 57 ITR 213,224 that the generality of the expressions found in a judgment are not intended to be expositions of the whole law but are governed and qualified by the particular facts of the case.

16. We have considered the matter. The decision of the Supreme Court in the case B.C. Srinivasa Setty (supra) was entirely with reference to the cost of acquisition of the capital asset and not with reference to the cost of improvement. Further, the decision of the Supreme Court was with reference to goodwill and particularly with regard to self-generated goodwill. This is clear from the following findings of the Supreme Court: We are of opinion that the goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 and, therefore, its transfer is not subject to income-tax under the head 'Capital gains'.

... It is apparent that the preponderance of judicial opinion favours the view that the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax. (p. 301) Earlier what the Supreme Court had held was that the provisions in Section 48 indicate that what is contemplates* is an asset, in the acquisition of which it is possible to envisage a cost and which possesses the inherent quality of being available on the expenditure of money. In our view, it is totally inappropriate to apply the ruling to the case of shares for the acquisition of which it is possible to envisage cost and which possess the inherent quality of being available on the expenditure of money. In this context the following observations in the case of Hukumchand Mannalal & Co (supra) relied upon by the learned standing counsel are appropriate; ... every judgment must be read as applicable to 'the particular facts proved or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found....

17. The case of Evans Fraser & Co. Ltd. (supra) was also one relating to goodwill. But it was not a self-generated one. It was one acquired at a cost. It was found that the moment of its acquisition and its cost could be pinpointed vide page 513. The decision, therefore, turned upon the question whether its cost of improvement can be ascertained in terms of money. It was found that it cannot be done. The Court rejected the contention of the learned standing counsel that the earlier decisions of some High Courts approved by the Supreme Court in the case of B C. Srinivasa Setty (supra) should be deemed to have been approved only with regard to their findings with regard to nature of the cost of acquisition and not with regard to the nature of the cost of improvement. It was held by the Bombay High Court that all the reasons given by the High Courts are integral reasons for reaching the conclusions arrived at by them--vide page 516. The High Court relied particularly on the decision of the Bombay High Court in the case of CIT v. Home Industries & Co. [1977] 107 ITR 609 and the observations there that the capital asset must be such that it is capable of improvement at an ascertainable cost in terms of money. Reliance was also placed upon the rulings in the cases of E.C. Jacob (supra), CIT v.Chunilal Prabhudas & Co. [1970] 76 ITR 566 (Cal.) and CIT v. Jaswantlal Dayabhai [1978] 114 ITR 798 (MP), But it has to be noted that all those cases related to self-generated goodwill. With regard to self-generated goodwill, the cost of acquisition cannot be envisaged with regard to goodwill acquired at a cost, the cost of acquisition can be envisaged.

But with regard to both, it is possible to improve the same. What has been pointed out is that the improvement will be by the personal effort of the owner of the asset and that it will be impossible to evaluate the same. The difference between goodwill and shares has been brought out and emphasised by the Bombay High Court in the case of Evans Fraser & Co. Ltd. (supra). It was observed: ... Goodwill differs from a tangible asset such an immovable property or a share in a joint stock company which retains its shape and form but of which the market value fluctuates. The market value of goodwill also fluctuates, but it fluctuates because of the fluid nature of goodwill....

The High Court pointed out that it is not possible to ascertain in terms of money the cost of addition or alteration to the quality of goodwill. In our opinion, these findings or observations cannot be applied to the case of an assest like shares, which, even according to the learned counsel for assessee, is incapable of improvement. In the case of an asset which is incapable of improvement, no question of ascertaining the cost of improvement arises. If so, no question of the computation provisions being unworkable or inadequate arises. If so, the ratio of the decision of the Supreme Court in the case of B.C.Srinivasa Setty (supra) that when there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging Section 1s not attracted. As the High Courts in the cases referred to earlier were dealing with goodwill, the observations made must be treated as relating to an asset which was capable of improvement. In our view, what the High Courts said was that when the capital asset was capable of improvement, the asset in question must be such that it is capable of improvement at an ascertainable cost in terms of money. In our view, the High Courts have not laid down that there will be no tax on capital gains, if the asset was not capable of improvement at all. To hold otherwise will be to say that the High Courts and the Supreme Court have already pronounced on the whole law relating to all kinds of assets and not merely on the law relating to goodwill. If the contention of the assessee is accepted, as rightly pointed out by the learned standing counsel, the sale of pure gold will not attract tax on capital gains, as it is incapable of improvement. Various provisions in the Act provide for computation of income after allowing various deductions. It will be strange to contend that the computation provisions are inadequate or unworkable because a particular assessee has no deductions to claim. The purpose of Clause (ii) of Section 48 is only to enable an assessee who has improved an asset to claim deduction of the cost of improvement. When the asset, is capable of improvement but it is not possible to ascertain the cost of improvement in terms of money, he escapes from the tax net, for the reasons given in the case of B.C. Srinivasa Setty (supra). We do not think he is entitled to escape where the asset is incapable of improvement and when there is no question of claiming deduction of the cost of improvement. This ground is also decided against the assessee.

18. Ground No. 5: This is also without prejudice to the earlier contentions and is to the effect that, in any case, the market value as on 1-1-1954 should have been substituted for the cost price adopted by the ITO. This claim was rejected by the ITO only for the reason that the necessary particulars for working out the market value as on 1-1-1954 were not furnished by the assessee. In fact, the ITO had even observed in para 8 of the assessment order that the question will be considered as and when the assessee furnishes the requisite details. No details were furnished before the Commissioner (Appeals) also. Before us, the learned counsel for the assessee submitted that he is not pressing the ground. It is, therefore, decided against the assessee.

19. Ground No. 6: This is to the effect that the levy of interest under Section 139(8) and under Section 216 of the Act was not justified.

Before the Commissioner (Appeals) no specific arguments were addressed with regard to the levy of interest under Section 216. With regard to the interest under Section 139, it was held by the Commissioner (Appeals) that no appeal was maintainable with regard to the same in the light of the ruling of the Kerala High Court dated 4-7-1983 in CIT v. K.P. Ratna-karan [IT Reference Nos. 81, 82 and 83 of 1972]. Before us, it was submitted by the learned counsel for the assessee that the issue may be decided according to the decision of the Kerala High Court, although the assessee is not accepting the same. Following the said decision, we decide this ground againt the assessee.


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