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

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 ... Extinguishment of rights as a mode of - scheme of amalgamation and allotment as consideration - exclusion from capital-gains charge under where transfer is in consideration of allotment in amalgamation - deemed cost of acquisition on amalgamation under - capital gains chargeability on transfer of capital assetExtinguishment of rights as a mode of - capital gains chargeability on transfer of capital asset - Rights in the shares of the amalgamating company stood extinguished on amalgamation and thus constituted a transfer within the definition of 'transfer'. - HELD THAT: - The Court held that the expression 'extinguishment of any rights therein' in the inclusive definition of 'transfer' contemplates extinguishment distinct from, and not confined to, extinguishment consequent upon transfer. The earlier restrictive interpretation in Vania Silk Mills Pvt. Ltd. was disapproved to the extent it confined extinguishment to cases analogous to sale or exchange. Applying the inclusive definition, the shareholders' rights in the amalgamating company were extinguished on amalgamation and therefore amounted to a transfer of the shares for the purposes of charging capital gains.Held that there was a transfer by reason of extinguishment of rights on amalgamation.Scheme of amalgamation and allotment as consideration - exclusion from capital-gains charge under where transfer is in consideration of allotment in amalgamation - The question whether the transfer was made in consideration of allotment to the shareholders was answered as not arising. - HELD THAT: - Having concluded that a transfer occurred by virtue of extinguishment of rights on amalgamation, the Court recorded that the specific question posed in the reference regarding whether the transfer was made in consideration of the allotment did not require separate determination in the course of its decision.Recorded that the question does not arise.Deemed cost of acquisition on amalgamation under - exclusion from capital-gains charge under where transfer is in consideration of allotment in amalgamation - Section 49(2) applied and the cost of the shares of the amalgamated company is to be deemed to be the cost of the shares of the amalgamating company. - HELD THAT: - On the finding that the shares of the amalgamating company were transferred within the meaning of the Act, the Court held that the transaction fell within the scope of section 47(vii) and consequently section 49(2) governed the computation of the cost of acquisition. The Court approved the Income-tax Officer's method of computing capital gain in the absence of specific cost information being furnished by the assessees and affirmed that the deemed cost under section 49(2) is the proper basis for computation.Held that section 49(2) applies; the cost of the amalgamated-company shares is the cost of the amalgamating-company shares.Final Conclusion: Revenue's appeals allowed; the High Court judgment and order set aside; questions answered as indicated, with no order as to costs. 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.