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Issues: Whether, on the facts of the amalgamation scheme, the allotment of new shares in exchange for the assessee's holding amounted to "exchange" or "relinquishment" of a capital asset so as to attract capital gains under section 12B of the Indian Income-tax Act, 1922.
Analysis: Section 12B taxed profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset. The expression "exchange", read in its ordinary sense and with guidance from section 118 of the Transfer of Property Act, 1882, contemplated mutual transfer of ownership between existing properties owned by different persons, with both properties continuing to exist. In the amalgamation scheme, the assessee's original shares in the transferor company were not transferred to the transferee company or to any other person; on dissolution of the transferor company those shares ceased to have any existence. The allotment of new shares in the transferee company was made because the assessee had been a shareholder of the transferor company, but that allotment did not amount to a legal exchange. For the same reason, there was no relinquishment, since relinquishment presupposes continued existence of the property in which the interest is given up. Once the transferor company stood dissolved, the old shares no longer subsisted as property capable of relinquishment.
Conclusion: The transaction did not constitute either an exchange or a relinquishment within section 12B, and the capital gains addition was not sustainable against the assessee.
Final Conclusion: The reference was answered against the revenue and in favour of the assessee, and the second question did not arise.
Ratio Decidendi: For capital gains under section 12B of the Indian Income-tax Act, 1922, an amalgamation-driven allotment of new shares is not an exchange unless there is a mutual transfer between subsisting properties of different owners, and it is not a relinquishment where the original shareholding itself ceases to exist on dissolution of the transferor company.
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