1988 (4) TMI 27 - HC - Income Tax

Court rules against assessee's exemption claim in amalgamation scheme due to consideration including non-share assets.

The High Court held that the assessee was not entitled to exemption under section 47(vii) of the Income-tax Act as the consideration for the transfer of ... Capital Gains, Exemptions Issues Involved:1. Whether the transaction amounts to a transfer of a capital asset within the meaning of section 2(47) of the Income-tax Act, 1961.2. Whether the assessee is entitled to exemption u/s 47(vii) of the Income-tax Act, 1961.Summary:1. Transfer of Capital Asset u/s 2(47):The Tribunal and the High Court proceeded on the assumption that the transaction, where the assessee acquired shares and bonds of Alkapuri for shares of SEPL under a scheme of amalgamation, amounted to a transfer of a capital asset within the meaning of section 2(47) of the Income-tax Act, 1961. The assessee did not concede this point but agreed to assume it for the purpose of deciding the applicability of section 47(vii).2. Exemption u/s 47(vii):The key issue was whether the transfer of shares of SEPL in exchange for shares and bonds of Alkapuri qualified for exemption u/s 47(vii). Section 47(vii) exempts transfers by shareholders in a scheme of amalgamation if:1. The transfer is of shares in the amalgamating company.2. The consideration is the allotment of shares in the amalgamated company.3. The amalgamated company is an Indian company.The Tribunal initially held that the assessee was entitled to exemption u/s 47(vii) even though it received bonds along with shares, reasoning that section 47(vii) did not restrict receiving anything else besides shares.However, the High Court disagreed, stating that the language of section 47(vii) is clear and unambiguous. The provision requires that the consideration for the transfer must be solely shares of the amalgamated company. If the consideration includes something more, such as bonds, it does not fall within the purview of section 47(vii). The Court emphasized that the legislative intent was to facilitate the merger of uneconomic company units with financially sound Indian companies, not to encourage amalgamations in general.The High Court also noted that the provisions of sections 2(42A) and 49(2) are relevant for interpreting section 47(vii). These sections indicate that the consideration must be shares only, as they provide mechanisms to determine the cost of acquisition and the holding period of the shares in the amalgamated company, which would be unworkable if the consideration included other assets.In conclusion, the High Court held that the assessee was not entitled to exemption u/s 47(vii) because the consideration included bonds in addition to shares. The Tribunal's interpretation was deemed incorrect, and the reference was answered in the negative and against the assessee.