COMMISSIONER OF INCOME TAX Vs. GAUTAM SARABHAI TRUST

JUDGEMENT

(1.) THE assessee is a trust assessed in the status of an AOP. The assessment year under consideration is 1982 83, the relevant previous year ending on 31st March, 1982. The assessee owned 1,512 equity shares ("shares" for short) of Shahibag Entrepreneurs (P) Ltd. ("SEPL" for short) of the face value of Rs. 100 each. Alkapuri Investments (P) Ltd. ("Alkapuri" for short) was a wholly owned subsidiary of SEPL. By an order dt. 22nd Dec., 1980, passed in Company Petition No. 11 of 1980, under S. 394 of the Companies Act, 1956, this Court sanctioned a scheme of amalgamation of SEPL with Alkapuri. Under the scheme of amalgamation, which was to come into effect from 1st April, 1981, the assessee received the following for each share of SEPL held by it :

(2.) THE question which has been referred to us has to be decided on the assumption that the transaction, as a result of which the assessee acquired shares and bonds of Alkapuri for the shares of SEPL held by it under the scheme of amalgamation, amounts to transfer of a capital asset within the meaning of S. 2(47) of the Act and the profits and gains arising from such transfer are exigible to tax under the head "Capital gains". As before the Tribunal, learned counsel for the assessee made it clear before us that he was not conceding that the transaction amounted to such transfer, but it was only for the purpose of S. 47(vii) that he was assuming that there was such a transfer. He submitted that in case the question which is referred to us is answered in the negative and against the assessee, the Tribunal will have to decide the question whether the transaction amounted to transfer of a capital asset within the meaning of S. 2(47) so as to attract exigibility to tax under S. 45. This position was not disputed by learned counsel for the Revenue. Therefore, as observed above, we proceed to resolve the controversy involved in this reference on the assumption that the aforesaid transaction amounted to transfer of a capital asset within the meaning of S. 2(47) which would attract tax liability on the profits and gains from such transfer. The controversy which we are called upon to resolve is whether such a transfer is not to be regarded as a "transfer" under S. 47(vii). Section 47(vii) reads as under : "47. Nothing contained in S. 45 shall apply to the following transfers :.......... (vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if (a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company; and (b) the amalgamated company is an Indian company." The above provision was inserted by the Finance (No. 2) Act, 1967. Both learned counsel referred to paragraph 36 of the Memorandum explaining the provisions of the Finance (No. 2) Act, 1967, in which the Objects and Reasons for inserting the above provision are explained. The relevant portion of this para 36 which is reproduced at page 200 of (1967) 64 ITR (St) reads as under :

(3.) THE thrust of the argument of learned counsel for the assessee was that if S. 47(vii) is interpreted in the manner suggested by the Revenue, it would result in injustice and would defeat the very purpose and object for which the legislature introduced it in the Act. He submitted that there was no economical or legal reason or reason in equity, justice or fairplay as to why a shareholder getting a share and bond of the amalgamated company in consideration of the transfer of shares held by him in the amalgamating company under a scheme of amalgamation would be disentitled to the benefit of S. 47(vii). It was contended that the interpretation suggested by the assessee would not lead to any anomalies or absurdities as contended on behalf of the Revenue. It was urged that if a cash amount along with the shares of the amalgamated company was given in consideration of the transfer of shares of the amalgamating company under a scheme of amalgamation, such amalgamation would not amount to an amalgamation within the meaning of s. 2(1A) of the Act. Therefore, submitted the learned counsel for the assessee, the example which learned counsel for the Revenue gave was not an apt example and in case the exchange ratio as suggested by learned counsel for the Revenue was prescribed under a scheme of amalgamation, such amalgamation would not be an amalgamation within the meaning of S. 2(1A). Learned counsel urged that for application of S. 47(vii), three conditions were required to be satisfied, namely, (i) the shares in the amalgamating company should cease to belong to the shareholder of the amalgamating company; (ii) the shareholder of the amalgamating company should, in consideration, get any share or shares in the amalgamated company; and (iii) the amalgamated company should be an Indian company. If these three conditions are satisfied, the shareholder of the amalgamating company would be entitled to the benefit of S. 47(vii). It is not disputed that in the instant case, the assessee has ceased to hold the shares of the amalgamating company and that the amalgamated company is an Indian company. The assessee has received shares of the amalgamated company in consideration of the transfer of its shares in the amalgamating company. Therefore, all the three conditions requisite for the application of S. 47(vii) have been satisfied in the instant case. It was urged that merely because the assessee has received bonds in addition to the shares of the amalgamated company in consideration of the transfer of the shares held by it in the amalgamating company, it could not be said that its case does not fall under S. 47(vii). What s. 47(vii) contemplates is that a shareholder of the amalgamating company must receive any share or shares of the amalgamated company under the scheme of amalgamation, and if that is established, he would be entitled to the benefit of S. 47(vii) notwithstanding the fact that he had, in addition to the shares of the amalgamated company, received something more, such as bonds or a transistor radio. It was urged that if the interpretation canvassed on behalf of the Revenue is to be accepted, the word "only" will have to be read in S. 47(vii). It was submitted that there is nothing in the definition of 'amalgamation' in S. 2(1A) to contra indicate creation of new liability in the form of debentures by the amalgamated company. The learned counsel for the assessee argued that issue of debentures with shares is usage known for decades and it would be unthinkable that the law makers in 1967 were unaware of it. Therefore, when the Legislature enacted S. 47(vii), it did not intend to make it inapplicable where the consideration is composite consisting of shares and bonds or debentures of the amalgamated company. The consideration must, no doubt, consist of any share or shares of the amalgamated company, but if in addition to the share or shares, the shareholder of the amalgamating company is allotted bonds or debentures of the amalgamated company, he would not be deprived of the benefit of S. 47(vii). Learned counsel for the assessee argued that the object of S. 47(vii) is to encourage amalgamation and, therefore, it should be so interpreted as to advance that object. He submitted that the interpretation which is sought to be placed on that provision on behalf of the assessee is the correct interpretation and such interpretation would advance the legislative object. In support of his arguments, he also placed reliance upon the principles of interpretation of statutes laid down in the authorities which were cited on behalf of the Revenue. Learned counsel for the assessee further urged that in order to resolve the controversy involved in this reference, the provisions of S. 49(2) have no relevance. The question of application of S. 49(2) would arise when the shares of the amalgamated company allotted to the assessee are sold. In any case, when the shares of the amalgamated company are sold by the assessee, the provisions of S. 49(2) would apply and the cost of acquisition can be worked out by the application of proper principles. So far as the bonds are concerned, the cost of acquisition can be worked out under the provisions of s. 48. Therefore, submitted the learned counsel, apart from the fact that S. 49(2) has no relevance, there would not be any difficulty in working out the cost of acquisition of the shares and bonds of the amalgamated company. Learned counsel further urged that the Revenue has uniformly applied s. 47(vii) in the cases of hundreds of thousands of shareholders who were similarly situated. It was pointed out that the shareholders of many nationalised banking companies had received shares and debentures of the companies in which those banking companies were amalgamated under the scheme of amalgamation and the Revenue had given the benefit of S. 47(vii) to those shareholders. In this connection, learned counsel cited a decision of the Tribunal in the case of H.K. Bhavani on which reliance has been placed by the Tribunal. It was submitted that that was a case in which the assessee had received shares and debentures of the Tata Engg. & Locomotive Co. Ltd. for shares of the Central Bank of India Ltd., which had amalgamated with the Tata Engg. & Locomotive Co. Ltd. When the case came up for hearing before the Tribunal, the Departmental Representative had conceded that no capital gains charge was attracted. The Tribunal had also held that the assessee in that case was entitled to the benefit of S. 47(vii) which excluded from the operation of S. 45 any transfer by a shareholder, in the scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company. Learned counsel for the assessee, therefore, submitted that in the instant case, the Tribunal was right in holding that the assessee was entitled to the benefit of S. 47(vii).