1984 (1) TMI 122 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Sections 49(2) and 47(vii) of the Income-tax Act, 1961.
2. Determination of the cost of acquisition of shares.
3. Taxability of capital gains arising from the transfer of shares.
4. Consideration for the issue of shares in the amalgamated company.
5. Levy of interest under Sections 139(8) and 216 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Applicability of Sections 49(2) and 47(vii) of the Income-tax Act, 1961:
The primary issue was whether Sections 49(2) and 47(vii) were applicable in computing the capital gains arising from the transfer of shares. The assessees contended that these sections were not applicable as they did not become owners of the shares in the amalgamated company in consideration of a transfer of their shares in the amalgamating company, but rather through a scheme of amalgamation approved by the court. The ITO and the Commissioner (Appeals) held that the assessees became owners of the shares by amalgamation, which is a transaction of the nature referred to in Section 47(vii). The Tribunal concluded that the intention of the Legislature in enacting Section 49(2) was to treat the cost of acquisition of shares in the amalgamating company as the cost of the shares in the amalgamated company for future transactions.

2. Determination of the Cost of Acquisition of Shares:
The ITO computed the cost of acquisition by multiplying the number of shares by Rs. 100 and dividing the same by 14, as the assessees received 14 shares of Rs. 100 each in the amalgamated company for every share of Rs. 100 in the amalgamating company. The assessees argued that there was no consideration for the issue of shares in the amalgamated company, and hence no cost of acquisition. The Tribunal rejected this argument, holding that the shares in the amalgamated company were allotted in lieu of the shares in the amalgamating company, and thus, there was a cost of acquisition.

3. Taxability of Capital Gains Arising from the Transfer of Shares:
The revenue sought to tax the capital gains arising from the transfer of shares on 29-2-1976. The Tribunal held that the purpose of Section 49(2) is to provide that when shares obtained during amalgamation in an amalgamated company are sold, their cost shall be taken as the cost of acquiring the shares in the amalgamating company. This was consistent with the intention that amalgamation was not a reckoning point for capital gains tax, and the profits or gains arising out of amalgamation were not subjected to tax.

4. Consideration for the Issue of Shares in the Amalgamated Company:
The assessees argued that there was no consideration for the issue of shares in the amalgamated company. The Tribunal rejected this contention, stating that the shares in the amalgamated company were issued in lieu of the shares in the amalgamating company, and thus, there was consideration. The Tribunal also held that the transfer of assets during amalgamation involved the extinguishment of the rights of the shareholders in the amalgamating company, which constituted a transfer.

5. Levy of Interest under Sections 139(8) and 216 of the Income-tax Act:
The assessees contended that the levy of interest under Sections 139(8) and 216 was not justified. The Commissioner (Appeals) held that no appeal was maintainable regarding the levy of interest under Section 139 in light of the ruling of the Kerala High Court. The Tribunal followed the decision of the Kerala High Court and decided this ground against the assessees.

Conclusion:
The Tribunal dismissed the appeals, holding that Sections 49(2) and 47(vii) were applicable, the cost of acquisition should be the cost of acquiring shares in the amalgamating company, and the levy of interest under Sections 139(8) and 216 was justified. The Tribunal confirmed the order of the Commissioner (Appeals) and decided all grounds against the assessees.