1974 (4) TMI 25 - HC - Income Tax

Summary

Issues Involved:
1. Whether there was an exchange within the meaning of section 12B of the Indian Income-tax Act, 1922, when the assessee was allotted shares in Birla Cotton Spinning and Weaving Mills Ltd. as a result of the amalgamation of Rajputana General Dealers Ltd. and Merchandise & Stores Ltd.
2. Whether the transaction resulted in any capital loss for the assessment year 1961-62 under section 12B of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Exchange within the Meaning of Section 12B:
The court examined whether the amalgamation of Rajputana General Dealers Ltd. and Merchandise & Stores Ltd. with Birla Cotton Spinning and Weaving Mills Ltd. constituted an "exchange" under section 12B. The assessee held shares in the two amalgamating companies and received shares in Birla Cotton Spinning and Weaving Mills Ltd. in specified ratios as a result of the amalgamation. The court referred to various legal precedents and definitions to determine if this constituted an exchange. It was noted that an amalgamation typically involves the shareholders of the amalgamating companies exchanging their shares for shares in the amalgamated company. The court concluded that the assessee parted with its shares in the amalgamating companies in favor of Birla Cotton Spinning and Weaving Mills Ltd., which allotted new shares to the assessee. Therefore, the transaction was considered a valid exchange under section 12B.

2. Resulting in Capital Loss:
The assessee claimed a capital loss under section 12B, arguing that the market value of the shares received was less than the break-up value of the shares held in the amalgamating companies. The Income-tax Officer, Appellate Assistant Commissioner, and the Appellate Tribunal had rejected this claim. The court analyzed whether the transaction resulted in a transfer of a capital asset, which could lead to a capital loss. It was highlighted that the shares of the amalgamating companies were not quoted on any stock exchange, whereas the shares of Birla Cotton Spinning and Weaving Mills Ltd. were quoted on the Calcutta Stock Exchange. The court cited several judgments to support the view that the transfer of shares in an amalgamation could result in a capital gain or loss. Ultimately, the court reframed the question to focus on whether there was a transfer of shares resulting in a capital loss. The court concluded that there was indeed a transfer of shares, and the assessee sustained a capital loss as a result of the amalgamation.

Conclusion:
The court answered the reframed question in the affirmative, ruling in favor of the assessee and against the department. The assessee was entitled to its costs of the reference from the department.