Amalgamation shares are not taxed as inadequate consideration where the exchange is under a genuine court-approved scheme.

Shares issued under a court-approved amalgamation scheme are treated as not constituting a transfer in the shareholder's hands under section 47(vii) of the Income-tax Act. Because there is no transfer, section 45 has no role in computing capital gains. The receipt of shares in such an amalgamation is also not receipt of property for inadequate consideration, so section 56(2)(vii)(c)(ii) does not apply. The later exclusion for transactions not regarded as transfers was treated as clarificatory and consistent with the statutory scheme of uniform tax treatment for genuine amalgamations.

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Issues: Whether shares received by an individual shareholder in a scheme of amalgamation could be brought to tax under section 56(2)(vii)(c)(ii) of the Income-tax Act, 1961 as consideration allegedly received for less than fair market value.

Analysis: The shares were issued pursuant to a court-approved amalgamation scheme and the exchange of shares under such scheme did not amount to a transfer in the hands of the shareholder within the meaning of section 47(vii) of the Income-tax Act, 1961. Since there was no transfer, section 45 had no application to compute capital gains. The consideration received by the shareholder was in the form of shares issued under the amalgamation and was not a case of receiving property for inadequate consideration so as to attract section 56(2)(vii)(c)(ii). The later insertion of the exclusion for transactions not regarded as transfer under section 47 was treated as clarificatory and consistent with the legislative intent to bring uniformity in tax treatment.

Conclusion: Section 56(2)(vii)(c)(ii) was held inapplicable to shares received on amalgamation, and the addition made by the Assessing Officer was rightly deleted.

Ratio Decidendi: Shares allotted under a genuine scheme of amalgamation are not received by way of a taxable transfer, and therefore the deeming provision taxing receipt of property for inadequate consideration does not apply.

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