Tax-neutral amalgamation and demerger allow carry forward of prior owner's cost and holding period for capital gains.

Shares received through a court-approved amalgamation and demerger were treated as acquiring the previous owner's cost and holding period for capital gains purposes. Where the restructuring satisfied the statutory conditions for tax-neutral treatment, the transferee could compute indexed cost of acquisition from the earlier date of holding, including fair market value as on 1.4.1981 where applicable. The restructuring was found to comply with the requirements for amalgamation and demerger, including transfer of assets and liabilities, shareholder continuity, and going-concern treatment, so the assessee stepped into the previous owner's position for computation of capital gains.

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Issues: (i) Whether, on the buyback of shares received through a restructuring, the assessee was entitled to adopt the cost of acquisition of the previous owner and claim indexation from the earlier period of holding, including fair market value as on 1.4.1981 where applicable; (ii) Whether the amalgamation and demerger arrangement satisfied the statutory conditions for tax neutrality so that the shares vested in the assessee with the benefit of the previous owner's holding period and cost.

Issue (i): Whether, on the buyback of shares received through a restructuring, the assessee was entitled to adopt the cost of acquisition of the previous owner and claim indexation from the earlier period of holding, including fair market value as on 1.4.1981 where applicable.

Analysis: The shares were received by the assessee pursuant to a court-approved restructuring implemented through amalgamation and demerger. The relevant capital gains framework required the cost in the hands of the previous owner to be substituted where the asset was acquired in the manner contemplated by the statute, and the period of holding was to include the holding of the previous owner. On that basis, indexation was to run from the date the previous owner first held the asset, and where the shares had been held before 1.4.1981, fair market value as on that date could be adopted for computation.

Conclusion: The assessee was entitled to compute capital gains by adopting the previous owner's cost and the corresponding indexed cost of acquisition.

Issue (ii): Whether the amalgamation and demerger arrangement satisfied the statutory conditions for tax neutrality so that the shares vested in the assessee with the benefit of the previous owner's holding period and cost.

Analysis: The restructuring was examined against the statutory conditions governing amalgamation and demerger, including transfer of properties and liabilities, issue of shares by the resulting company, shareholder continuity, book-value transfer, and carrying on of the undertaking on a going concern basis. The record showed compliance with those conditions, and the arrangement was treated as a tax-neutral corporate restructuring. The result was that the assessee stepped into the position of the previous owner for purposes of cost and holding period.

Conclusion: The conditions for tax-neutral amalgamation and demerger were satisfied.

Final Conclusion: The computation made by the assessee was upheld and the Revenue's challenge to the deletion of the assessed long-term capital gain failed.

Ratio Decidendi: Where shares are acquired through a tax-neutral amalgamation or demerger that satisfies the statutory conditions, the transferee takes the previous owner's cost and holding period for capital gains computation, with indexation flowing from the earlier holding and the relevant statutory base year where applicable.

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