2014 (12) TMI 937 - HC - Income Tax

Transfer u/s 32A(5) - Investment allowance granted earlier u/s 155(4A) withdrawn by AO - Whether the scheme of arrangement/reconstruction can be regarded as amalgamation and protected under sub-section (6) to Section 32A - Held that - The word transfer and its purport was examined in the Commissioner of Income Tax, Lucknow versus Narang Dairy Products, Lucknow, 1996 (2) TMI 6 - SUPREME Court - the transaction may not be a transfer as defined u/s 2(47), the definition section is an inclusive one and does not exclude the contextual or the ordinary meaning of the word, transfer - the contention of assessee cannot be accepted that the scheme of arrangement or reconstruction did not result in transfer of the 9 units of the assessee to the three newly formed companies - The three companies were in fact separate juristic entities in law - The expression otherwise transfer cannot be given a narrow meaning to exclude all transfers as a result of merger, amalgamation, etc. Amalgamation as a term can include transfer of one or more undertakings to another company without really blending of one or more existing companies into the transferee/amalgamated company - all assets of the transferor/amalgamating company need not be transferred to the new or other company - The purpose and objective behind sub-section (6) to Section 32A is to facilitate reconstruction and amalgamation and not to obstruct genuine transactions of such nature - The emphasis in sub-section (6) to Section 32A is on sale or transfer of the ship, aircraft, machinery or plant, subject matter of investment allowance in connection with amalgamation or reconstruction - There is also reference to reserves - The emphasis in sub-section (6) is not upon the blending or merger of the existing company, which has availed of benefit under Section 32A into another or new company - At the same time, appropriate and required conditions have been incorporated in sub-section (6) to Section 32A to ensure that there is no abuse of the conditions applicable to the amalgamating company, both with regard to the reserve and the time stipulation on sale or otherwise transfer of assets is applied and adhered to - Violation would cause and result in negative and penal consequences. 9 out of 13 undertakings of the assessee were taken over by the three new companies, while the earlier company, i.e. continues to exist - Revenue contended that in case assessee had ceased to exist and had merged, conditions mentioned in Section 2(1B) of the Act would be satisfied - it is a matter of not selecting a correct taxable event, possibly due to inability and lack of foresight in comprehending the objection that could be raised - This would not be in consonance with the object, aim and purpose behind Sub-Section (6) to Section 32A - the principle of updating construction is premised on the doctrine that Acts are always speaking and are intended to apply over a period of time - There is, therefore, need to interpret and construct them with reference to contemporary understanding - The construction should be continuously updated to allow for changes, after the Act was written - This would be an intention of the Legislature, as it is not expected that the Legislature will intervene every now and then, when the Act is intended to apply over a long time - The Act is a living Act and not a relic - Therefore, it may not be true and correct that the language of statute must always be understood in the sense it was understood when it was passed. When purposive interpretation is applied for the benefit of the assessee, it is equally important to ensure that the assessee complies and does not negate the purpose of the Legislation, be it in the form of conditions stipulated in Section 2(1B) and specific stipulations of Section 32A sub-section (6) - the assessee should be able to show and establish that the liabilities associated with the plant, machinery, ship or aircraft were transferred to the amalgamated company by virtue of amalgamation (Clause (ii) of Section 2(1B) of the Act) as also the condition that the shareholders not holding less than nine-tenth in value of the shares (Clause (iii) of Section 2(1B) of the Act) was satisfied - the stipulations of sub-section (6) to Section 32A must be met and satisfied - As these aspects have not been examined, the matter is to be remitted back to the Tribunal for examination of the aspects - there was transfer within the meaning of Section 32A(5) of the Act Decided partly in favour of revenue.

Summary

Issues Involved:
1. Whether there was a transfer within the meaning of Section 32A(5) of the Income Tax Act, 1961 under the Scheme of Arrangement of the assessee company.
2. Whether the scheme of arrangement/reconstruction can be regarded as amalgamation and protected under sub-section (6) to Section 32A of the Income Tax Act, 1961.

Detailed Analysis:

Transfer Under Section 32A(5):
The primary issue was to determine whether the transfer of assets under a scheme of arrangement constituted a "transfer" under Section 32A(5) of the Income Tax Act, 1961. The Tribunal had previously ruled that the scheme of arrangement did not result in a "transfer" as per Section 32A(5), interpreting the term "otherwise transfer" in a purposive manner to exclude such schemes. However, the High Court disagreed with this interpretation, stating that the scheme of amalgamation or reconstruction under Sections 391 and 394 of the Companies Act, 1956, whereby assets or units/undertakings were transferred, would indeed be covered by the expression "otherwise transferred" in sub-section (5). The Court emphasized that adopting a purposive interpretation to exclude such transfers would render sub-section (6) of Section 32A redundant. The Court held that the scheme did result in a transfer of assets, and thus, the Tribunal's decision was incorrect to that extent.

Protection Under Sub-section (6) to Section 32A:
The second issue was whether the scheme of arrangement/reconstruction could be regarded as amalgamation and thus be protected under sub-section (6) to Section 32A. The High Court noted that sub-section (6) provides an exception to sub-section (5) for cases of amalgamation, provided certain conditions are met. The Court analyzed the statutory definition of "amalgamation" under Section 2(1B) of the Act, which involves the merger of one or more companies into another, resulting in the transfer of all properties and liabilities of the amalgamating company to the amalgamated company, and the shareholders of the amalgamating company becoming shareholders of the amalgamated company.

The Court observed that while the term "amalgamation" typically implies the complete merger and extinction of the amalgamating company, sub-section (6) of Section 32A does not explicitly require the amalgamating company to cease to exist. The Court highlighted that the legislative intent behind sub-section (6) was to facilitate genuine business reorganizations without obstructing them, provided the conditions regarding the transfer of specific assets and reserves are met.

Interpretation and Remand:
The Court emphasized the need for a purposive interpretation of sub-section (6) to include schemes of partial merger or reconstruction where the amalgamating company does not necessarily cease to exist. The Court concluded that the term "amalgamation" in sub-section (6) should be interpreted broadly to include such schemes, provided the legislative conditions are satisfied. The Court remanded the case to the Tribunal to examine whether the specific conditions under sub-section (6) to Section 32A and clauses (ii) and (iii) of Section 2(1B) were met by the assessee.

Conclusion:
The High Court held that there was a transfer within the meaning of Section 32A(5) of the Act. However, the scheme of arrangement could be protected under sub-section (6) to Section 32A if the conditions specified therein, as well as those in clauses (ii) and (iii) of Section 2(1B), were satisfied. The matter was remanded to the Tribunal for further examination of these aspects. The parties were directed to appear before the Tribunal on a specified date for further proceedings.