2001 (2) TMI 9 - SC - Income Tax

Extinguishment in amalgamation under ss.391-394 is a 'transfer' under s.2(47), invoking s.47(vii) and s.49(2) deeming original share cost

Commissioner of Income-Tax Versus Mrs. Grace Collis And Others

SC held that the extinguishment of rights in a capital asset arising under a scheme of amalgamation under ss.391-394, Companies Act, constitutes a ... Capital Gains - transfer of shares - provisions of section 49(2) read with section 47(vii) for the purposes of computing the capital gains - scheme of arrangement under sections 391(2) and 394 of the Companies Act, 1956 - HELD THAT:- We have given careful thought to the definition of 'transfer' in section 2(47) and to the decision of this court in Vania Silk Mills Pvt. Ltd.'s case [1991 (8) TMI 2 - SUPREME COURT]. In our view., the definition clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. We do not approve, respectfully, of the limitation of the expression 'extinguishment of any rights therein' to such extinguishment on account of transfers or to the view that the expression 'extinguishment of any rights therein' cannot be extended to mean the extinguishment of rights independent of or otherwise than on account of transfer. To so read the expression is to render it ineffective and its use meaningless. As we read it, therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer. This being so, the rights of the assessees in the capital asset, being their shares in the amalgamating company, stood extinguished upon the amalgamation of the amalgamating company with the amalgamated company. There was, therefore, a transfer of the shares in the amalgamating company within the meaning of section 2(47). It was, therefore, a transaction to which section 47(vii) applied and, consequently, the cost to the assessees of the acquisition of the shares of the amalgamated company had to be determined in accordance with the provision of section 49(2), that is to say, the cost was deemed to be the cost of the acquisition by the assessees of their shares in the amalgamating company. Appeals are allowed. Issues Involved:1. Whether the Tribunal was right in holding that there was a transfer of shares upon the amalgamation of Ambassador Steamships Pvt. Ltd. with Collis Line Pvt. Ltd.2. If the answer to the first question is affirmative, whether the Tribunal was right in holding that the transfer was made in consideration of the allotment of shares in Collis Line Pvt. Ltd.3. Whether section 49(2) of the Income-tax Act, 1961, applied to the sale of shares in Collis Line Pvt. Ltd. obtained upon the amalgamation.Detailed Analysis:Issue 1: Transfer of Shares Upon AmalgamationThe High Court of Kerala had answered this question in the negative, stating there was no transfer of shares. However, the Supreme Court analyzed the relevant provisions of the Income-tax Act, 1961, particularly section 2(47) which defines 'transfer' to include the extinguishment of any rights in a capital asset. The court noted that the rights of the assessees in the shares of Ambassador Steamships Pvt. Ltd. were extinguished upon the amalgamation with Collis Line Pvt. Ltd. Therefore, it concluded that there was indeed a transfer of shares within the meaning of section 2(47).Issue 2: Consideration of Allotment of SharesSince the Supreme Court answered the first question affirmatively, it did not need to address the second question separately. The court implicitly recognized that the transfer was made in consideration of the allotment of shares in Collis Line Pvt. Ltd., as per the sanctioned scheme of amalgamation.Issue 3: Application of Section 49(2) of the Income-tax ActThe High Court had answered this question in the negative, but the Supreme Court disagreed. Section 49(2) specifies that the cost of acquisition of shares in the amalgamated company should be deemed to be the cost of acquisition of shares in the amalgamating company. The Supreme Court held that since there was a transfer under section 2(47), section 49(2) applied. Consequently, the cost of acquisition for the shares in Collis Line Pvt. Ltd. should be computed based on the cost of the shares in Ambassador Steamships Pvt. Ltd.Conclusion:1. The Supreme Court answered the first question in the affirmative, holding that there was a transfer of shares upon the amalgamation.2. The second question did not arise due to the affirmative answer to the first question.3. The Supreme Court answered the third question in the affirmative, holding that section 49(2) applied to the sale of shares in Collis Line Pvt. Ltd.The Supreme Court set aside the High Court's judgment and allowed the appeals, affirming the Income-tax Officer's computation of capital gains. The court found no reason to deviate from the computation method used by the Income-tax Officer, who had multiplied the number of shares sold by their face value and divided the result by 14 to determine the cost. The Supreme Court also criticized the High Court's reasoning for allowing the Revenue to tax the assessees based on the sale price of Rs. 107.50 per share, finding it inconsistent with the applicable legal provisions.