Devolution on amalgamation under income-tax law allowed substitution of fair market value for transferred capital assets.

A court-sanctioned amalgamation under section 394 of the Companies Act, 1956 was treated as a transfer of capital assets by operation of law. The key question was whether the transferee company acquired the assets by succession or devolution for section 12B(3) of the Indian Income-tax Act, 1922. The Court held that the decisive factor was not whether the whole business was transferred, but whether the capital assets passed by succession or devolution; on the finding that the business was taken over and continued, the transfer was a clear case of devolution. Section 12B(3) therefore applied, and the assessee could substitute the fair market value as on 1 January 1954.

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Issues: Whether, on an amalgamation sanctioned under the Companies Act, the capital assets transferred to the transferee company became its property by succession or devolution so as to attract section 12B(3) of the Indian Income-tax Act, 1922 and entitle the assessee to substitute the fair market value as on 1 January 1954.

Analysis: The transfer of the undertaking and its assets pursuant to a court-sanctioned amalgamation under section 394 of the Companies Act, 1956 was treated as a transfer by operation of law. Section 12B of the Indian Income-tax Act, 1922 governs transfer of capital assets, and its sub-section (3) applies where the asset becomes the property of the assessee by succession, inheritance or devolution. The Court held that whether the entire business was transferred was not decisive; the material question was whether the capital assets passed by succession or devolution. On the unchallenged finding that the business was taken over and continued, the transfer was held to be a clear case of devolution.

Conclusion: The answer was in the affirmative and in favour of the assessee; section 12B(3) applied and the assessee was entitled to substitute the fair market value as on 1 January 1954.

Ratio Decidendi: A transfer of capital assets pursuant to a court-sanctioned amalgamation constitutes devolution by operation of law for the purposes of section 12B(3) of the Indian Income-tax Act, 1922 where the assets are taken over and the business is continued.

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