1989 (3) TMI 3 - SC - Income Tax

Receipt of shares upon company amalgamation does not constitute exchange or relinquishment under section 12B

The SC upheld the HC's decision that receipt of shares upon amalgamation does not constitute 'exchange' or 'relinquishment' under section 12B of the ... Receipt of shares upon scheme of amalgamation constitutes an 'exchange' or 'relinquishment' - Applicability of section 12B of the Act - Hindu undivided family - capital gain - HELD THAT:- It seems plain to us that no exchange is involved in the transaction. An exchange involves the transfer of property by one person to another and reciprocally the transfer of property by that other to the first person. There must be mutual transfer of ownership of one thing for the ownership of another. In the present case, the assessee cannot be said to have transferred any property to any one. When he was allotted shares of the New Shorrock Co., he was entitled to such allotment because of his holding 90 shares of the Shorrock Co. The holding of the 90 shares in the Shorrock Co. was merely a qualifying condition entitling the assessee to the allotment of the 45 shares of the New Shorrock Co. The dissolution of the Shorrock Co. deprived the holding of the 90 shares of that company of all value. A relinquishment takes place when the owner withdraws himself from the property and abandons his rights thereto. It presumes that the property continues to exist after the relinquishment. Upon amalgamation, the shares of the Shorrock Co., as has been mentioned earlier, lost all value as that company stood dissolved. There is no relinquishment. The connected cases raise similar questions and are dealt with accordingly. In the result, we agree with the view taken by the High Court and dismiss these appeals with costs. Issues:1. Whether the receipt of shares upon amalgamation constitutes an 'exchange' or 'relinquishment' for the purpose of section 12B of the Income-tax Act, 1922.2. Whether the capital gain resulting from the transaction is assessable in the relevant assessment year.Detailed Analysis:The judgment involves a case where the assessee, a Hindu undivided family, acquired shares in a company through a scheme of amalgamation. The issue at hand was whether the receipt of these shares upon amalgamation should be considered an 'exchange' or 'relinquishment' under section 12B of the Income-tax Act, 1922. The assessee originally held 90 shares in the transferor company, which stood dissolved post-amalgamation. The Revenue contended that a capital gain had accrued to the assessee due to the acquisition of shares in the transferee company. The Commissioner of Income-tax directed the revision of the assessment to include the capital gain amount. However, the Income-tax Appellate Tribunal held that the transaction did not constitute an exchange or relinquishment, hence section 12B was not applicable.The matter was referred to the High Court, where the focus was on whether the transaction qualified as an exchange or relinquishment. The High Court determined that the transaction did not amount to either. The High Court's interpretation was that no exchange occurred upon the allotment of shares in the new company post-amalgamation, nor did it constitute a relinquishment. Consequently, the High Court ruled in favor of the assessee on both counts, rejecting the Revenue's arguments.The Supreme Court analyzed the relevant portion of section 12B of the Act, which pertains to capital gains arising from the sale, exchange, relinquishment, or transfer of a capital asset. The Court deliberated on whether the receipt of shares in the new company post-amalgamation, based on the holding of shares in the old company, could be classified as an exchange or relinquishment. The Court concluded that no exchange took place as there was no mutual transfer of ownership involved. The holding of shares in the old company was merely a qualifying condition for the allotment of shares in the new company. Additionally, the Court determined that no relinquishment occurred as the original shares lost all value post-amalgamation due to the dissolution of the old company.In summary, the Supreme Court upheld the High Court's decision, dismissing the Revenue's appeals and affirming that the transaction did not constitute an exchange or relinquishment under section 12B of the Income-tax Act, 1922.