Court rules amalgamation loss not capital loss under Income-tax Act. Section 47(vi) excludes from Section 45.

Shaw Wallace And Co. Limited Versus Commissioner Of Income-Tax, West Bengal II

Shaw Wallace And Co. Limited Versus Commissioner Of Income-Tax, West Bengal II - [1979] 119 ITR 399, 1 TAXMANN 551 Issues Involved:
1. Whether the loss claimed by the assessee on the amalgamation of subsidiary companies can be allowed as a capital loss under Section 45 read with Section 2(47) of the Income-tax Act, 1961.
2. Applicability of Section 47(vi) of the Income-tax Act, 1961, in the context of the amalgamation.
3. Interpretation of 'transfer' and 'extinguishment of rights' under Section 2(47) of the Income-tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Capital Loss Claim under Section 45 read with Section 2(47):
The assessee, Shaw Wallace & Co. Ltd., claimed a capital loss of Rs. 19,43,551 due to the amalgamation of its subsidiary companies. The Income Tax Officer (ITO) disallowed this claim under Section 47(vi) of the Income-tax Act, 1961, which was upheld by the Appellate Assistant Commissioner (AAC) and the Tribunal. The Tribunal reasoned that the rights and liabilities of the amalgamating companies vested in the assessee, leading to the extinguishment of the assessee's rights in the share capital of the amalgamating companies. This was akin to a shareholder receiving their share of capital on the final distribution of net assets in liquidation, thereby not constituting a transfer of capital assets resulting in capital gain or loss.

2. Applicability of Section 47(vi):
The Tribunal and the High Court examined whether Section 47(vi) applied to the amalgamation in question. Section 47(vi) exempts any transfer of a capital asset by the amalgamating company to the amalgamated company if the latter is an Indian company. The High Court concluded that the initial transfer of capital assets from the amalgamating companies to the amalgamated company (assessee) fell under Section 47(vi), thus excluding it from the purview of Section 45. The subsequent dissolution of the amalgamating companies did not involve any element of transfer involving another person or consideration, thereby not resulting in any capital gain or loss.

3. Interpretation of 'Transfer' and 'Extinguishment of Rights':
The High Court referred to Section 2(47), which defines 'transfer' to include the sale, exchange, relinquishment of the asset, or the extinguishment of any rights therein. The Court noted that a transfer must involve more than one party and consideration. The extinguishment of rights in the shares of the amalgamating companies, as argued by the assessee, did not involve another party or consideration. The Court cited several precedents, including CIT v. R.M. Amin and CIT v. Rasiklal Maneklal, to support its conclusion that the extinguishment of rights must involve consideration to be deemed a transfer.

Conclusion:
The High Court held that the loss claimed by the assessee could not be allowed as a capital loss under Section 45 read with Section 2(47). The transfer of capital assets under the amalgamation scheme was covered by Section 47(vi), excluding it from the ambit of Section 45. The extinguishment of the assessee's rights in the shares did not involve any transfer or consideration. The question was answered in the affirmative, in favor of the revenue, with no order as to costs.

Additional Observations:
The judgment also included a detailed analysis of the legal effect of amalgamation under Section 394 of the Companies Act, 1956. It was noted that the assessee, as the beneficial owner of the entire issued share capital of the transferor-companies, did not experience any extinguishment of rights but rather an enlargement of its rights in managing and participating in the profits and capital of the amalgamated entity. The Court emphasized that there was no element of gain or loss when the assessee rearranged its capital base by bringing the capital under its direct control.