1996 (2) TMI 98 - HC - Income Tax

Transfer of shares in amalgamation scheme exempt from capital gains tax under Income-tax Act

The court held that the transfer of shares in a scheme of amalgamation in consideration of shares and debentures is a single indivisible transaction ... Transfer within meaning of section 2(47) - capital gains under section 45 - exemption under section 47(vii) - amalgamation - allotment of shares and debentures - single indivisible transactionTransfer within meaning of section 2(47) - capital gains under section 45 - amalgamation - allotment of shares and debentures - There is no transfer liable to capital gains tax when shares and debentures are allotted to a shareholder pursuant to a courtsanctioned scheme of amalgamation in the facts of this case. - HELD THAT: - The Court examined whether the extinguishment of shareholder rights on amalgamation amounted to a 'transfer' attracting section 45 read with section 2(47). Having considered authorities which distinguish between extinguishment by destruction or statutory operation and transfer for consideration, the Court held that the Tribunal's reliance on Central India Industries Ltd. was not sustainable on these facts. Precedents showing that rights lost by operation of amalgamation or statutory scheme do not necessarily amount to a transfer were applied. Where shares and debentures are allotted pursuant to the amalgamation and the identity of the transferor-company is lost, there is no transfer within the meaning of section 2(47) so as to attract capital gains under section 45.Answered against the Department: no transfer liable to capital gains in the circumstances of this amalgamation.Exemption under section 47(vii) - allotment of shares and debentures - single indivisible transaction - If a transfer on amalgamation were to be regarded as having occurred, the allotment of shares and debentures to the shareholder is exempt under section 47(vii). - HELD THAT: - The Court addressed whether the consideration contemplated by section 47(vii) covers the allotment received on amalgamation. Noting the Tribunal's view that the transaction was indivisible and following authorities favouring nontaxation of such amalgamation transfers, the Court held that, even if a transfer were to be found, the allotment received by the assessee on amalgamation falls within the exemption in section 47(vii). Accordingly the allotment of debentures along with shares would be covered by the exemption and not chargeable to capital gains tax.Answered in favour of the assessee: exemption under section 47(vii) applies to the allotment on amalgamation.Final Conclusion: The questions referred are answered in favour of the assessee: on the facts there is no transfer attracting capital gains; and even if transfer were assumed, the allotment of shares and debentures on amalgamation is exempt under section 47(vii). The answers are against the Department; no order as to costs. Issues Involved:1. Whether the transfer of shares in a scheme of amalgamation in consideration of shares and debentures is a single indivisible transaction and exempt from capital gains tax under section 47(vii) of the Income-tax Act, 1961.2. Whether the assessee is liable to capital gains tax for receiving equity shares and debentures in the amalgamation.Issue-wise Detailed Analysis:Issue 1: Single Indivisible Transaction and Exemption under Section 47(vii):The Tribunal referred two questions for the court's opinion under section 256(1) of the Income-tax Act, 1961. The first question was whether the transfer of shares in a scheme of amalgamation in consideration of shares and debentures is a single indivisible transaction and exempt from capital gains tax under section 47(vii). The assessee, a shareholder of the Indian Overseas Bank Limited, received shares and debentures of Travancore Rayons Ltd. under a scheme of amalgamation. The Income-tax Officer initially accepted the assessee's claim that the allotment did not involve a transfer within the meaning of section 45, thus not liable to capital gains tax. However, the Commissioner of Income-tax later held that the extinguishment of shareholding rights constituted a 'transfer' under section 2(47) and directed the Income-tax Officer to tax the capital gains attributable to the debentures.The Tribunal, while acknowledging the transfer by extinguishment of rights, held that the transaction was exempt under section 47(vii) as it was a single indivisible transaction. The Tribunal's decision was based on the understanding that the transfer in consideration of shares and debentures cannot be split into two transactions, thereby exempting it from capital gains tax.Issue 2: Liability to Capital Gains Tax for Receiving Shares and Debentures:The second question addressed whether the assessee was liable to capital gains tax for receiving 88,644 equity shares and 11,438 debentures of Travancore Rayons Ltd. The Tribunal had referred this question to bring out the real controversy, even though the Department did not seek its reference. The court examined whether the Tribunal had jurisdiction to refer a question not sought by the Department. It was determined that the Tribunal could refer a question not suggested by the Department if it was necessary to resolve the controversy comprehensively.The court analyzed section 45(1) of the Income-tax Act, which charges profits or gains from the transfer of a capital asset to income-tax under the head 'Capital gains.' Section 47(vii) exempts transfers by a shareholder in a scheme of amalgamation if the transfer is made in consideration of shares in the amalgamated company and the amalgamated company is an Indian company. The court referred to various precedents, including CIT v. Rasiklal Maneklal (HUF) and CIT v. Master Raghuveer Trust, which held that amalgamation does not constitute a transfer of capital assets for capital gains tax purposes.The court concluded that the allotment of shares and debentures to the assessee did not constitute a transfer or extinguishment of rights under section 2(47). Therefore, the transaction was not liable to capital gains tax. The court also cited the Gujarat High Court's decision in CIT v. Gautam Sarabhai Trust, which held that if a shareholder receives shares and something more (like debentures) in consideration of the transfer, they cannot get the benefit of section 47(vii). However, since the court found no transfer in this case, the question of exemption under section 47(vii) did not arise.Conclusion:The court reframed the questions for clarity:1. Whether the transfer of shares in a scheme of amalgamation in consideration of shares and debentures is a transfer under section 45 liable to capital gains tax.2. If there is a transfer, whether the assessee is entitled to exemption under section 47(vii) for the allotment of debentures.The court answered the first question in the negative, against the Department, concluding there was no transfer. Even if there was a transfer, it would be exempt under section 47(vii). The second question was answered in the affirmative, favoring the assessee, with no order as to costs.