Companies Act Case Law Commissioner Of Income Tax, Cochin Vs Mrs Grace Collis And Ors.

CASE NO.:
Appeal (civil) 4437-4445 of 1997

 

PETITIONER:
COMMISSIONER OF INCOME TAX, COCHIN

Vs.

RESPONDENT:
MRS. GRACE COLLIS AND ORS.

DATE OF JUDGMENT: 23/02/2001

BENCH:
Y.K.Sabharwal, S.N.Hegde, S.P.Bharucha

 
JUDGMENT:
Bharucha, J.
L…..I………T…….T…….T…….T…….T…….T..J

These are the appeals by the Revenue against the
decision of a Division Bench of the High Court of Kerala on
a reference application at the instance of the assessees
under Section 256(1) of the Income Tax Act, 1961. The High
Court was called upon to answer the following three
questions : 1. Whether, on the facts and in the
circumstances of the case, the Tribunal was right in holding
that on the amalgamation of Ambassador Steamships Pvt. Ltd.
with Collis Line Pvt. Ltd., there was a transfer by the
assessee of their shares in Ambassador Steamships Pvt. Ltd.
?

2. In case the answer to question No. 1 above is in
the affirmative, whether the Tribunal was right in holding
that the transfer was made in consideration of the allotment
for to the assessees of shares in Collis Line Pvt. Ltd. ?

3. Whether on the facts and in the circumstances of
the case, the Tribunal was right in holding that Section
49(2) of the I.T. Act, 1961 applied to the sale of the
shares of the assessees in Collis Line Pvt. Ltd., which
were obtained by the assessees on the amalgamation of
Ambassador Steamship Pvt. Ltd. with Collis Line Pvt. Ltd.
?

The High Court answered the first question in the
negative and in favour of the assessees, namely, that there
was no transfer. In view of this answer, it held that the
second question did not arise. It answered the third
question in the negative and in favour of the assessees.
Even so, it held that the taxing authorities could consider
taxing the assessees on the basis of the transaction
whereunder the share of Rs.100/- was sold for Rs.107.50.
The assessees were shareholders of Ambassador Steamship Pvt.
Ltd.. The High Court of Kerala sanctioned a Scheme of
Arrangement under Section 391(2) and 394 of the Companies
Act whereby Ambassador Steamship Pvt. Ltd. (the
amalgamating company) was amalgamated with Collis Line Pvt.
Ltd.(the amalgamated company). The Scheme contemplated
the transfer by way of amalgamation of all assets and
liabilities of the amalgamating company to the amalgamated
company in consideration of the amalgamated company issuing
to the members of the amalgamating company 14 equity shares
of Rs.100/- each, credited as fully paid up, in the
amalgamated company for each share held in the amalgamating
company. Upon amalgamation, the amalgamating company would
cease to function and the amalgamated company would take
over all its business, assets and liabilities and carry on
its business. The sanctioned Scheme stated: As the
residue of the consideration for the said transfer, the
Transferee Company shall issue to the members of the
Transferor Company 14 equity shares of Rs.100/- each in the
Transferee Company credited as fully paid up in respect of
each share held by him or her in the Transferor Company

The assessees sold the 45318 shares of the amalgamated
company of the face value of Rs.100/- each which they had
acquired under the Scheme to one B.K. Chatterji and his
associates on 29th February, 1976 for the aggregate sum of
Rs.48,72,523/-. This meant that they had sold each share
for Rs.107.50.

For the Assessment Year 1976-77, the previous year
whereof ended on 31st March, 1976, the Income Tax Officer
levied capital gains tax upon the assessees in respect of
the sale to Chatterji and others. The Income Tax Officer
applied the provisions of Section 49(2) read with Section
47(vii) for the purposes of computing the capital gain.
Thereunder the cost of the shares of the amalgamating
company is the cost of the shares of the amalgamated company
that the assessee surrendered in exchange under a scheme of
arrangement. The assessees had not furnished to the Income
Tax Officer information as to the cost at which they had
acquired the shares of the amalgamating company.
Accordingly, the Income Tax Officer noted that under the
Scheme the assessees had received 14 shares of the face
value of Rs.100/- each in the amalgamated company for one
share of the face value of Rs.100/- in the amalgamating
company. He multiplied the number of shares of the
amalgamated company that the assessees had sold by their
face value of Rs.100/- and divided the result by 14 to
arrive at their cost. The price at which the assessees had
sold the shares less their cost as aforesaid was the capital
gain that the Income Tax Officer subjected to tax. The
Income Tax Officer rejected the contention of the assessees
that Sections 49(2) and 47(vii) were not attracted as the
assessees had not become the owners of the shares of the
amalgamated company in consideration of the transfer of
their shares in the amalgamating company.

The order of the Income Tax Officer was confirmed by
the C.I.T.(Appeals). The matter went up before the Tribunal
and the Tribunal upheld the appellate order. From out of
the order of the Tribunal, the questions aforestated were
referred to the High Court and answered as set out above.

For the purposes of appreciating the controversy in
this appeal, it is necessary to set out the relevant
provisions of the Act as they obtained at the relevant time.

Section 2(47) defines transfer, in relation to a
capital asset, to include the sale, exchange or
relinquishment of the asset or the extinguishment of any
rights therein or the compulsory acquisition thereof under
any law. Section 45 states that any profits or gains
arising from the transfer of a capital asset effected in the
previous year shall be chargeable to income-tax under the
head Capital gains and shall be deemed to be the income of
the previous year in which the transfer took place. Section
47 states which transactions are not to be regarded as
transfers. Nothing contained in Section 45 applies, by
reason thereof, to: (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.

Section 49 sets out how cost is to be computed with
reference to various modes of acquisition. It says, in
sub-section(2): Where the capital asset being a share or
shares in an amalgamated company which is an Indian company
became the property of the assessee in consideration of a
transfer referred to in clause (vii) of Section 47, the cost
of acquisition of the asset shall be deemed to be the cost
of acquisition to him of the share or shares in the
amalgamating company.

In Commissioner of Income-tax, Bombay v. Rasiklal
Maneklal (HUF), 177 I.T.R. 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 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 profit 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 assessee by exchange or relinquishment as provided for
under section 12B of the Act ? This Court held that no
exchange was involved in the transaction. An exchange
involved the transfer of property by one person to another
and, reciprocally, the transfer of property by that other to
the first person. There had to be a mutual transfer of
ownership of one thing for the ownership of another. In the
case before the Court the assessee could not be said to have
transferrd any property to anyone. When he was allotted
shares of the amalgamated company, he was entitled to such
allotment because of his holding 90 shares of the
amalgamating company. The holding of 90 shares in the
amalgamating company was merely a qualifying condition
entitling the assessee to the allotment of 45 shares in the
amalgamated company. The dissolution of the amalgamating
company deprived the holding of the 90 shares of that
company of all value.

Learned counsel for the assessees submitted that no
capital gains tax could be levied upon the assessees in
respect of the sale by them of their shares in the
amalgamated company because there was no provision in the
Act with regard to the manner of determination of the cost
of these shares. This was for the reason that Section 49(2)
prescribed the mode of determining the cost where the shares
in an amalgamated company had become the property of the
assessee in consideration of a transfer, as referred to in
Section 47(vii); that is to say, a transfer by a
shareholder in a scheme of amalgamation of shares held by
him in the amalgamating company if the transfer was made in
consideration of the allotment to him of shares in the
amalgamated company. The decision in Rasiklal had held that
there was no transfer of any property to any one by the
assessee in circumstances identical to those before us.

This, however, is not the end of the matter for
Section 2(47) defines transfer to include the
extinguishment of any rights in a capital asset.

In this regard, our attention was drawn by learned
counsel for the assessees to the decision of a Bench of two
learned Judges of this Court in Vania Silk Mills Pvt. Ltd.
v. C.I.T. 191 I.T.R. 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 the
account of the destruction of the machinery. The Income-tax
Officer 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 capital gain. The Appellate Tribunal held that the
insurance amount was not received by the appellant on the
transfer of a capital asset but on account of the damage to
its machinery and that Section 45 of the Act was not
attracted. On a reference, the High Court reversed the
decision of the Tribunal. This Court held in appeal
therefrom that when an asset was destroyed, there was no
question of transferring it to others. The destruction or
loss brought about the destruction of the right of the owner
of the asset in it, but it was not on account of a transfer
but on account of the disappearance of the asset. The
extinguishment of the right in an asset on account of the
extinguishment of the asset was not a transfer of the right
but its destruction. The destruction of the right on
account of the destruction of the asset could not be equated
with the extinguishment of the right on accounts of its
transfer. Section 45 of the Act was, therefore, not
attracted. The fact that while paying for the total loss or
damage to the property the insurance company took over such
property or whatever was left of it did not change the
nature of the insurance claim, which was an indemnity or
compensation for the loss. The payment of the insurance
claim was not in consideration of the property taken over by
the insurance company, for one was not consideration for the
other. This Court then, having so very rightly held that
Section 45 was not attracted, went on to consider the
definition of transfer and it said: It is true that the
definition of transfer in section 2(47) of the Act is an
inclusive definition and therefore, extends to events and
transactions which may not otherwise be transfer according
to its ordinary, popular and natural sense. It is this
aspect of the definition which has weighed with the High
Court and, therefore, the High Court has argued that, if the
words extinguishment of any rights therein are substituted
for the word transfer in section 45, the claim or
compensation received from the insurance company would
attract the said section. The High Court has, however,
missed the fact that the definition also mentions such
transactions as sale, exchange, etc., to which the word
transfer would properly apply in its popular and natural
import. Since those associated words and expressions imply
the existence 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.

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 rights on account of a
transfer and could not be extended to refer to the
extinguishment of rights independent of or otherwise than on
account of transfer.

Learned counsel for the Revenue submitted that having
held that the payment in settlement of the insurance claim
was not in consideration of the transfer to the insurer of
the damaged machinery and that, therefore, there was no
transfer within the meaning of Section 45, it was
unnecessary for this Court in Vanias case to go on to
consider the definition in Section 2(47) and the meaning to
be attached to the expression extinguishment of any rights
therein. In his submission, the decision in Vanias case
was to this extent obiter dicta. The definition in Section
2(47) of transfer included sale and exchange. In each of
those cases there was an extinguishment of the right of the
seller or exchanger in the capital asset. To restrict the
extinguishment of rights to extinguishment on account of
transfer was, in learned counsels submission, to render the
expression extinguishment of any rights therein otiose and
to nullify the effect of their use in the definition.

We have given careful thought to the definition of
transfer in Section 2(47) and to the decision of this
Court in Vanias case. In our view, the definition clearly
contemplates the extinguishment of rights in a capital asset
distinct and independent of such extinguishment consequent
upon the transfer thereof. We do not approve, respectfully,
of the limitation of the expression extinguishment of any
rights therein to such extinguishment on account of
transfers or to the view that the expression extinguishment
of any rights therein cannot be extended to mean the
extinguishment of rights independent of or otherwise than on
account of transfer. To so read the expression is to render
it ineffective and its use meaningless. As we read it,
therefore, the expression does include the extinguishment of
rights in a capital asset independent of and otherwise than
on account of transfer.

This being so, the rights of the assessees in the
capital asset, being their shares in the amalgamating
company, stood extinguished upon the amalgamation of the
amalgamating company with the amalgamated company. There
was, therefore, a transfer of the shares in the amalgamating
company within 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.

Upon this reading of the law, our answers to the
questions are: (1) In the affirmative and in favour of the
assessee. (2) Does not arise. (3) In the affirmative and
in favour of the Revenue.

We have already set out how the Income Tax Officer
computed the capital gain and see no reason to take another
view, having regard to the fact that the assessees could
have disclosed, without prejudice to their contentions, the
cost at which they had acquired their shares in the
amalgamated company. We are at a loss to understand the
reasoning of the High Court in giving to the Revenue the
liberty to consider taxing the assessees on the basis that
it was a transaction by itself whereunder a share of
Rs.100.00 each was sold as a share of Rs.107.50. We are
obliged to learned counsel for their assistance. The
appeals are allowed. The judgment and order under appeal is
set aside. The questions are answered as already indicated.
There shall be no order as to costs.

 

 

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