AI Drafter 
TaxTMI 
TaxTMI 
1994 (9) TMI 349
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....the following questions : "(i) Whether any liability to pay income-tax in India under the Income-tax Act, 1961, read with the DTAA would arise on amalgamation of the applicant with its holding company whereby shares of an Indian company held by the company would vest in the amalgamated company ? (ii) Whether the provisions of section 47(via) of the Income-tax Act be considered as satisfied with regard to the above scheme of amalgamation?" A discussion of the above questions can conveniently commence by noting that, if the applicant-company and its holding company had been Indian companies, a transaction of the nature proposed would not have attracted capital gains tax on the change in the person holding the shares as a consequence of the amalgamation. This is clear on a perusal of the provisions contained in sections 2(1B), 2(14), 2(47), 45(1) and 47(vi) of the Act. Indeed, the specific provision in section 47(vi) of the Act places the matter beyond all doubt. A second preliminary question to be considered is whether the capital gain, if any, resulting from the change in ownership of the above Indian assets consequent on the amalgamation is liable to income-tax in India....
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....immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation ; (iii) shareholders holding not less than nine-tenths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation. An amalgamation fulfilling all the three conditions above is necessary before an exemption of capital gains arising on the merger of Indian companies can be claimed under section 47(vi). However, where the amalgamating companies are foreign companies, the third of the above requirements is relaxed and the exemption from capital gains tax is available even in the case of amalgamations where 25 per cent. or more of the shareholders are common to the amalgamated and amalgamating companies. In the present case, the applicant proposes to have a "vertical short form amalgamation" with its holding company under section 184(1) of the Canada Business Corporations Act. The relevant provisions of the said Act are these. Section 181 of ....
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....anada Business Corporations Act fulfils all the three requirements of an "amalgamation" within the meaning of section 2(1B) of the Indian Act. The first of the conditions spelt out in section 47(via) of the Indian Act is, therefore, fulfilled. This takes us to a consideration of the second condition for exemption specified in section 47(via) which makes the exemption under the Indian Act available only if a like exemption for this kind of transaction is available under "the Canadian Act". It is, therefore, necessary to examine the relevant provisions of that Act. The topic of capital gains is dealt with in "sub-division C" of Division B of the Act (sections 38 to 55). Though the provisions directly dealing with the topic are few, they are very complicated and contain cross references to several other provisions and it is no easy task to comprehend and digest the effect of all those provisions. However, it will be neither necessary nor convenient to extract the material portions of all the provisions to which reference has to be made. It is possible and sufficient to summarise the broad effect of the relevant provisions and, when one does that, one realises that the position is m....
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.... amalgamation or merger (section 69(13)) which is relevant for our present purposes. It reads : "(13) Amalgamation or merger.-Where there has been an amalgamation or merger of a corporation with one or more other corporations to form one corporate entity (in this sub-section referred to as the 'new corporation'), each property of the corporation that became property of the new corporation as a result of the amalgamation or merger shall be deemed, for the purpose of determining whether sub-section (11) is applicable in respect of the amalgamation or merger, to have been disposed of by the corporation immediately before the amalgamation or merger for proceeds of disposition equal to- (a) in the case of a Canadian resource property or a foreign resource property, nil ; and (b) [Repealed] ; (c) in the case of any other property, the cost amount to the corporation of the property immediately before the amalgamation or merger." Since the Indian shares here do not constitute Canadian resources property or foreign resource property (defined in section 66(15)(c) read with section 248(1)], they will be deemed to have been disposed of at their cost to the applicant immediately ....
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.... time." It will at once be seen that this sub-section is intended to cover a series of transactions under one of which property is disposed of for less than its fair market value but this is done with a view to obtain certain benefits available to a specified person, as defined in section 69(12), in respect of a subsequent disposition of the same property or a property substituted for that property. In such an event, if the subsequent disposition takes place within a period of three years, the person who made the original disposition shall be deemed to have disposed of that property at the earlier point of time for proceeds of disposition equal to its fair market value then. In other words, the Canadian statute implicitly recognises that the initial transaction of merger results only in a disposition of the property at actual cost but provides for taxation on the difference between the actual cost and the fair market value on the date of the disposition if a subsequent disposition of the type envisaged takes place within three years. Section 69 (13), therefore, implicitly recognises that no capital gains shall be chargeable in the event of an amalgamation or merger except in a c....
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....rtible. The authority did not pursue the matter further as the statutory provisions in this regard (sections 173 and 174), though capable of being invoked even before an actual assessment is made, do not appear capable of being invoked by the applicant at a stage anterior to the actual putting through of the transaction in regard to which a question is to be posed. At one stage in the arguments, counsel for the applicant, raised a larger issue. He contended that, even if he failed to bring his case under section 47(via), no income-tax can be charged under the Indian Act as (i) the amalgamation does not really involve a "transfer" within the meaning of section 2(47) of the Act, and (ii) no consideration will be passing between the applicant and the new corporation for the change in ownership of shares. According to him, section 47(vi) is really redundant (see the discussion in Kanga and Palkiwala's Law and Practice of Income-tax, 8th edition, pages 771 to 773) and that section 47(via) also cannot alter this position and impose a charge on some fictional gain on a notional transfer. In the view taken earlier, it is unnecessary to discuss this contention or express any opinion ther....