TaxTMI 
TaxTMI 
2020 (8) TMI 178
X X X X Extracts X X X X
X X X X Extracts X X X X
....AT') in ITA No.(s) 1739,1740,1742 & 1743/Del/ 2001 Assessment Year 1997-98 ('AY'), allowing the appeals preferred by the Respondent-assessees against the order of the CIT(A). Resultantly, additions made by the Assessing Officer ('AO') in the orders of assessment, as confirmed by CIT(A) have been set-aside. 2. The ITAT has decided all the appeals by way of a common order and furthermore since the question of law arising therefrom is identical in all the appeals, the same were heard together and are being disposed of by way of this common judgment. However, for the sake of convenience and to precisely delineate the controversy in the present appeals, factual background in ITA No. 822/2005 is being noted and discussed in detail. Facts in brief: 3. The Respondent-assessee (Nalwa Investment Limited) belongs to Jindal Group of Companies and is its promoter company. It was holding shares of Jindal Ferro Alloy Ltd. ("JFAL"). Vide amalgamation scheme sanctioned under Section 391-394 of the Companies Act, 1956, JFAL got amalgamated with Jindal Strips Ltd. ("JSL"). Consequently, the Respondent-assessee company transferred its shareholding in JFAL in lieu of receipt of shares of JSL a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oning the correctness of the reasoning given by the ITAT and raised several questions of law. Vide order dated 5th July, 2006, the present appeals were admitted and substantial question of law was framed as follows: "Whether the ITAT was correct in holding that where the assessee gets shares of Amalgamated Company in lieu of shares of amalgamating company, no transfer takes place?" Contentions of the parties: 6. Mr. Sunil Agarwal, learned Senior Standing Counsel led the arguments on behalf of Appellant. He commenced his submissions by referring to the impugned order and contended that the Tribunal has erroneously allowed the appeals in favour of Respondent-assessees without recording a clear-cut finding of fact and resolving the crucial question whether the assessees were holding the shares as 'capital asset' or 'stock-in-trade'. On this aspect he drew our attention to the observations and analysis given by ITAT in Paragraph nos. 7 and 10 of the impugned order which has been reproduced hereinabove. Mr. Agarwal argued that in absence of factual determination on the above-said vital aspect, Tribunal has grossly erred in coming to the conclusion that it did and the same is wholl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 28 of the Act. The learned AO has treated the shares of JFAL as stock-in-trade and not as capital asset/investment not only in the relevant AY but in the earlier AYs as well. This finding of fact has been upheld by the CIT(A). The ITAT erroneously held that there is no transfer of shares in the case of amalgamation of company. The judgment relied upon by the ITAT in the case of Rasiklal Maneklal (supra) does not deal with the issue in hand and is only in respect of exchange and relinquishment within the meaning of Section 12B of the IT Act, 1922. 8. Mr. Ajay Vohra, learned Senior Counsel on behalf of the Respondent-assessees countered the submissions of Revenue and argued that the preliminary objection/ submission of Mr. Agarwal is beyond the scope of appeal. He contended that having regard to the questions of law proposed by the Revenue and the substantial question of law admitted vide order dated 5th July, 2006, Revenue is seeking to expand the scope of appeal by contending that matter has to be sent back to the Tribunal, which is impermissible in terms of Section 260A of the Act. 9. On merits, Mr. Vohra argued that the Respondent-assessees are investment companies of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of JSL on 23rd December, 1996 [record date under the scheme of amalgamation] and even if the value of Rs. 76 per share is adopted, the same will result in business loss instead of business profit as worked out by the AO. 10. Mr. Vohra strenuously urged that there is no necessity for determining the nature and character of the shareholding of the assessees i.e. whether it is a capital asset or stock-in-trade. The Tribunal correctly did not go into this controversy and aptly decided the appeals in favour of the Respondent-assessees, on the correct reading of the legal position with respect to the concept of transfer of shares in amalgamation of companies. He submitted that there could be no income of the Respondent-assessees on mere receipt of shares of JSL (in lieu of extinguishment of shares held in JFAL). In the event the shares were held as capital asset, no capital gain would be liable to tax on receipt of shares of JSL in lieu of shares held in JFAL. He referred to Section 45 of the Act which deals with taxing profits and gains arising from 'transfer' of 'capital asset' effected during the relevant year under the head 'capital gain' and further contended that the assessees ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cers in holding whether the surplus generated from, sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following- (a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, (b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; (c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issue....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inancial Year 1996-97. In response thereto, the Respondent-company vide letter dated 16th February, 2000 inter alia contented that the assessee has not transferred any share for consideration and drew support from the views of the Supreme Court in Rasiklal Maneklal (supra). Respondent-company also contended that nothing in Section 45 of the Act would apply as it is a transfer of a capital asset being the shares held in the amalgamating company and the assessee was entitled to avail benefit of section 47 (vii) of the Act. The Respondent-assessees further contended that if the shares were to be considered as 'stock-in-trade', assessees should be allowed benefit of fall in value of shares after valuing them at cost or market value, whichever is less. 14. The AO considered all contentions raised by the assessees but did not agree with any of them. He relied upon the decision of the Supreme Court in Orient Trading Co. Ltd. (supra) and held that the Respondent-assessees had earned profit by realising the shares of JSL in exchange for its own shareholding in a planned scheme of amalgamation. With respect to the contentions raised by the assessees regarding applicability of Section 47 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of the Supreme Court in Rasiklal Maneklal (supra) by decisively concluding that "there was no transfer of shares and consequently, question of accruing any profit to the appellants would not arise" (Paragraph 8 of the impugned order). 15. Therefore, before us, there is indeed no factual determination as to whether the shares in questions were being held by the Respondent-assessees as capital asset or stock-in-trade. Nonetheless, even in absence of this factual determination, the legal proposition vis-a-vis the applicability of Section 45 and 47(vii) of the Act is beyond controversy. We shall elaborate why we say this. If the Shares are held to be Capital Asset - Effect of Section 45 and exception thereto under section 47(vii) of the Act; 16. Mr. Ajay Vohra submitted that if shares were held as capital asset, the assessees are entitled to the benefit of the exemption provided under Section 47(vii) of the Act. At this juncture, let us first take note of Section 45 of the Act, relevant portion whereof is extracted as under: "Capital gains. 45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld be exempt from the capital gain taxation under Section 47(vii) of the Act and 'Revenue would have no case to argue'. These precise words are captured from rejoinder written submission of the Revenue filed before this Court. Thus, if the shares in question are a capital asset, there is no disagreement between the parties that the assessees would be entitled to take benefit of exemption under Section 47(vii) of the Act, provided of course, if they fulfil the requirements enumerated therein. This stand of the parties substantially narrows down the gamut of controversy as far as the legal propositions are concerned. Nevertheless, this concurrence between the parties does not resolve the dispute before us since Revenue strongly refutes the factual assertion of the assessees and zealously argues that the shares are 'stock-in-trade'. This contentious fact coupled with the lack of factual determination by the ITAT leaves things in the state of uncertainty. In this backdrop we shall now deal with the analysis of ITAT holding the factual determination vis-a-vis the holding of shares as capital asset or stock-in-trade to be a non-issue for taxation, for the reason that there is no transfer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t as well as extinguishment of any right therein. In fact, under subsection (iv) of Section 2(47) even if an asset is converted by the owner thereof into or treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment would amount to transfer in relation to capital asset. This shows that the transfer of a capital asset is not confined only to sale or exchange but is a concept that would cover several other situations which may not be understood as 'transfer' in common parlance. 21. In the present case, the Tribunal has come to a conclusion that there is no transfer of shares and has primarily relied upon the case of the Rasiklal Maneklal (supra). First and foremost, the said case does not deal with the issue as to whether amalgamation of company leads to transfer of shares. In the said case, the assessee which was an HUF derived income from interest on security. The assessee purchased shares of Shorrock SPG and MSG.Co Ltd. and later the share was split into 10 shares of Rs. 100/- each and from time to time a total of 80 shares of face value of Rs. 100/- each was issued to the assessee by way of bonus shares. As a consequence, the assessee owned....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ommissioner of Income Tax passed an order dated 29-1-1964 directing the Income Tax Officer to revise the assessment and to include an amount of Rs. 49,350 representing the capital gain resulting from the transaction of the acquisition of 45 shares of New Shorrock Co. in place of the 90 shares held in Shorrock Co. On appeal by the assessee before the Income Tax Appellate Tribunal, the Appellate Tribunal held that the transaction represented neither an exchange nor a relinquishment and, therefore, Section 12-B of the Act was not attracted. XXXXX 6. Before the High Court the Revenue did not contend that the transaction constituted a sale or a transfer, and the parties confined themselves to the point whether the transaction represented an exchange or a relinquishment for the purposes of Section 12-B. The High Court took the view that no exchange can be said to have taken place on the allotment of the 45 shares of the New Shorrock Co. under the scheme of amalgamation. Nor, in the opinion of the High Court, did it constitute a relinquishment. In the result, the High Court answered both questions in favour of the assessee and against the Revenue. 7. The relevan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of transfer of shares in the amalgamation of companies. The Court noticed that the factual situation in Rasiklal Maneklal (supra) was decided in refence to 1922 Act, while observing as under: "9. In CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198, this Court was concerned with a case of acquisition of shares consequent upon a scheme of amalgamation virtually identical to the Scheme before us. At that time, capital gains were chargeable to tax by reason of section 12B of the Indian Income-tax Act, 1922, which stated thus: "12B. Capital gains.-(1) The tax shall be payable by an assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place." The question this Court was called upon to consider read thus: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 49,350 could be assessed in the hands of the assessee as capital gains as having accrued to the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... regard, our attention was drawn by the learned counsel for the assessees to the decision of a Bench of two learned judges of this Court in Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 647. This was a case in which the appellant-company carried on the business of manufacture and sale of art-silk cloth. It purchased during the year 1957 machinery and gave it on hire to Jasmine Mills at an annual rent. Jasmine Mills, as bailee of the machinery, insured it against fire along with its own machinery. The insurance policy contained a reinstatement clause requiring the insurer to pay the cost of the machinery as on the date of the fire in case of destruction or loss. A fire did break out in the premises of Jasmine Mills causing extensive damage, inter alia, to the machinery which became useless as a result. On settlement of the insurance claim, Jasmine Mills received an amount from the insurance company. From out of it, it paid Rs. 6,32,533 to the appellant on account of the destruction of the machinery. The ITO brought to tax the sum of Rs. 3,50,792, being the difference between the insurance amount received by the appellant for the machinery and the original cost thereof as a capita....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ence of the asset and of the transferee, according to the rule of noscitur a sociis, the expression 'extinguishment of any right therein' would take colour from the said associated words and expressions and will have to be restricted to the sense analogous to them. If the Legislature intended to extend the definition to any extinguishment of right, it would not have included the obvious instances of transfer, viz., sale, exchange, etc. Hence, the expression 'extinguishment of any rights therein' will have to be confined to the extinguishment of rights on account of transfer and cannot be extended to mean any extinguishment of right independent of or otherwise than on account of transfer." (p. 653) 13. The learned counsel for the assessees relied upon this decision to contend, again, that there had been no transfer by the assessees of their shares in the amalgamating company and that, therefore, the case would still not fall within the meaning of the expression 'extinguishment of any rights therein' in section 2(47) . By reason of the decision, the expression 'extinguishment of any rights therein' had to be confined to the extinguishment of r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ating company with the amalgamated company. There was, therefore, a transfer of the shares in the amalgamating company with 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." [Emphasis Supplied] 25. Admittedly, in the present case we are concerned with the 1961 Act and not the old Act. Notably, in Grace Collis and Ors. (supra) the scheme of amalgamation was virtually identical to the scheme that was in question in Rasiklal Maneklal (supra). The Court went into the expanded definition of 'transfer' under Section 2 (47) of the Act and extinguishment of rights of assessee in the capital asset, being shares in the amalgamating company, was held to be a 'transfer' within the meaning of Section 2(47). Thus, the judgment of Grace Collis and Ors. (supra) has a direct bearing on the present case, and pertinently because the findings of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for consideration in kind (exchange or barter). In the said case, the Supreme Court was dealing with a case where the assessee was a company dealing in shares. It was holding 14,500 shares in a company of the face value of Rs. 10/- as stock-in-trade. The shares were valued and included in its closing stock. In the AY in question i.e. 1963-64, a new company offered to obtain shares in exchange for allotment of its own shares. The assessee accepted the offer and received shares. The assessee valued the shares at the same amount at which it was holding the exchange shares. The AO found the market quotation of the shares and valued the shares at a higher amount and taxed the difference as profit in the said transaction. Both the Tribunal and High Court upheld the decision of ITO. When the matter reached the Supreme Court, the Court formulated the question whether the surrendering of shares in the first company in exchange of the shares in the second company by the assessee can be regarded as realisation of the security on the date of such surrender and exchange. In such a case, difference between the book value of the shares of the first company and the market value of the shares of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s in fact the exact equivalent of what would have taken place had instructions been given to sell the original stock and invest the proceeds in the new security. The investment represented by the original War Bonds came to an end as soon as the new securities were taken in its place, when a new venture was begun in relation to the new holding, and the fact that this transformation took place by the process of exchange does not in any opinion avoid the conclusion that there has been what is described as a realisation of the security." (pp. 68, 69) 7. The decision of Rowlatt, J. in Royal Insurance Co. Ltd. v. Stephen 14 Tax Cas 22, was approved in the said case. In the case of Royal Insurance Co. Ltd. (supra), the appellantcompany had, under the Railways Act, 1921, to accept new stocks in the amalgamated companies in exchange for the stock held in the companies which were absorbed and which resulted in loss to the appellant-company. The claim of the appellant-company for deduction of such loss was upheld by Rowlatt, J. who held: "At the bottom of this principle of waiting for a realisation, I think there is this idea; while an investment is going up or down for inco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he appellant in the year relevant to the assessment year subsequent to the year in which they were received. It was held that the Bonds were a fresh security the liability of the original debtor having been substituted by an obligation by the State and since the Bonds were convertible in terms of money, income was realised by the assessee when the bonds were received. 9. The subsequent decision of the House of Lords in British South Africa Co.'s case (supra) does not lend assistance to the submission of Shri Puri. In that case, the appellant-company in 1953 had lent 2,00,000 pounds to a gold mining company and in return had received, inter alia, an option to subscribe for 100,000 shares in the mining company at 1 pound per share, the value of the shares then being 19 s. 6 d. a share. In 1954 when the value of the shares had gone up to 43 s. 6 d. a share the appellant exercised the option and obtained shares worth 2,17,500 pounds for which they paid 1,00,000 pounds. The company was assessed for income-tax on a profit of 11,75,000 pounds. On behalf of the company it was urged that upon the exercise of the option there was a realisation because the option which was a '....
X X X X Extracts X X X X
X X X X Extracts X X X X
....refore, do not find any merit in the appeal and the same is accordingly dismissed. But in the circumstances, no order as to costs." [Emphasis Supplied] 29. As a matter of fact, after reserving the appeals for pronouncement of judgment, we relisted the matter to have the views of the Counsel on the above referred case law. Mr. Vohra attempted to distinguish the decision of Orient Trading Co. Ltd. (supra) by contending that there is no sale or exchange under the scheme of amalgamation and the factual situation in the said case was entirely different. He also sought to distinguish the case of Royal Insurance Co. Ltd. v. Stephen, 14 Tax Cases 22 by arguing that there are different provisions of Income Tax Act relating to Insurance Companies and taxation of Insurance Companies are dealt differently. In our considered opinion the fine distinction which Mr. Vohra has tried to bring out to render the said decision inapplicable is not the correct approach. There are separate provisions under the Act for business and investment income. Consequently, the characterization of an item of income determines which tax provision would be applicable to it. A gain may be income from business if ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at the scheme of compromise or arrangement proposed for the purposes of amalgamation or in connection therewith, shall not be sanctioned unless the court has received a report from the Company Law Board or the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or to public interest; and secondly, that the order of resolution of transfer of the company shall not be made unless official liquidator on scrutiny of the books and papers of the company makes a report to the court that the affairs of the company had not been conducted in a manner prejudicial to the interest of its members or to public interest." 30. No doubt, here under the scheme of amalgamation, the amalgamating company is getting extinguished in the sense that the surviving entity now is only the amalgamated company. However, we cannot ignore the fact that the shares that were with the assessees have undergone the amalgamation process whereby they are replaced with new shares which would be valued entirely on different fundamentals. Subsequent to the amalgamation it is not the same stock in the inventory of the assessees. Under the Companies Act, t....