2020 (8) TMI 178 - HC - Income Tax

Capital gain - Transfer of shares u/s 2(47) - assessee gets shares of Amalgamated Company in lieu of shares of amalgamating company - whether in the scheme of amalgamation, shares of amalgamated company received in lieu of amalgamating company which were held as stock-in-trade, would result in income chargeable to tax under the head Profits and gain of business or profession ? - HELD THAT - 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 assessee 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 assessee. Under the Companies Act, the shareholders who dissent to the scheme of the amalgamation dissenting shareholders are given the option of receiving cash or equivalent kind as the price for the shares on the basis of exchange ratio. The dissenting shareholders receive the value of their shareholding while the approving shareholders receive the same value in the form of shares of the amalgamated company. The process of amalgamation in its legal effect from the taxation viewpoint would apply equally, irrespective of the status of the shareholder. The taxable event is not just a matter of entries made in the account books of the assessee but is essentially one of substance and of the real nature of what transpired in the transaction. The income generated from the transaction has to be charged to Income tax as per provisions of law.The fundamental principle to be followed is that the basic substance for the transaction has to be separated from the form and the taxing statue has to be applied accordingly. In light of the above discussion, the findings of the Tribunal are plainly erroneous. Thus, question of law formulated before us is answered in favour of the Revenue and against the assessee. Having answered the question of law in the above terms, we are of the view that the matter needs to be remanded back to ITAT since the factual dispute between the parties has not been decided. Accordingly, we restore the matter back to the file of ITAT for fresh adjudication.

Issues Involved:
1. Whether the ITAT was correct in holding that where the assessee gets shares of the Amalgamated Company in lieu of shares of the amalgamating company, no transfer takes place.
2. Determination of whether the shares were held as capital assets or stock-in-trade.
3. Applicability of Section 47(vii) of the Income Tax Act, 1961.
4. Taxability of shares received in the amalgamated company under the head "profits and gains of business or profession."

Issue-wise Detailed Analysis:

1. Whether the ITAT was correct in holding that where the assessee gets shares of the Amalgamated Company in lieu of shares of the amalgamating company, no transfer takes place:
The ITAT concluded that no profit accrues unless the shares held by the assessee are sold or transferred for consideration, irrespective of the nature of holding. The Tribunal relied on the Supreme Court's decision in Rasiklal Maneklal (HUF) which held that the receipt of shares in an amalgamated company does not constitute a transfer. However, the High Court found this reliance misplaced, noting that the Supreme Court in Grace Collis and Ors. overruled Rasiklal Maneklal, holding that the extinguishment of rights in shares of the amalgamating company constitutes a transfer under Section 2(47) of the Income Tax Act, 1961.

2. Determination of whether the shares were held as capital assets or stock-in-trade:
The ITAT did not record a categorical finding on whether the shares were held as capital assets or stock-in-trade, considering it irrelevant for deciding the larger issue. The High Court, however, emphasized the necessity of this determination, as it affects the applicability of Section 47(vii) and the taxability under Section 28 of the Act. The Revenue argued that the shares were held as stock-in-trade, while the assessee contended they were investments.

3. Applicability of Section 47(vii) of the Income Tax Act, 1961:
Section 47(vii) exempts transfers in a scheme of amalgamation from capital gains tax if the shares are held as capital assets. The High Court noted that if the shares were capital assets, the transaction would be exempt under Section 47(vii). However, if the shares were stock-in-trade, the exemption would not apply, and the transaction would be taxable under Section 28. The Court highlighted that the ITAT's failure to determine the nature of the shares left this crucial issue unresolved.

4. Taxability of shares received in the amalgamated company under the head "profits and gains of business or profession":
The High Court examined whether the receipt of shares in the amalgamated company, held as stock-in-trade, results in taxable business income. The Court referred to the Supreme Court's decision in Orient Trading Co. Ltd., which held that exchanging shares in one company for shares in another constitutes a realization of the security, and the difference in value is taxable as business income. The Court concluded that the ITAT erred in holding that no transfer occurred and remanded the matter back to the ITAT for factual determination and fresh adjudication.

Conclusion:
The High Court set aside the ITAT's decision, holding that the receipt of shares in the amalgamated company constitutes a transfer under Section 2(47) and is taxable if the shares are held as stock-in-trade. The matter was remanded to the ITAT for fresh adjudication, directing it to determine whether the shares were held as capital assets or stock-in-trade and decide the appeals accordingly. The judgment clarified the legal position on the taxability of shares received in an amalgamation scheme, emphasizing the need for factual determination in such cases.

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