1973 (7) TMI 15 - HC - Income Tax

Capital Gains - assessee is a Hindu undivided family deriving income from interest on securities, dividends, property and dealing in shares, both ready and forward - Shares in the new company received by the assessee on the basis of his share holdings in the old company. Whether it amounts to exchange or relinquishment for the purpose of capital gains - as a result of allotment of 45 shares of New Shorrock company under the scheme of amalgamation to the assessee by reason of his holding of 90 shares of Shorrock company, neither a transaction of exchange nor relinquishment has taken place

Summary

Issues Involved:
1. Whether the sum of Rs. 49,350 could be assessed as capital gains under section 12B of the Indian Income-tax Act, 1922, as having accrued by exchange or relinquishment.
2. If affirmative, whether the sum of Rs. 49,350 was assessable in the assessment year 1961-62.

Issue-wise Detailed Analysis:

Issue 1: Assessment of Rs. 49,350 as Capital Gains
The primary issue is whether the sum of Rs. 49,350 could be assessed as capital gains under section 12B of the Indian Income-tax Act, 1922, due to exchange or relinquishment. The assessee, a Hindu undivided family, held 90 shares in Shorrock Spinning and Manufacturing Co. Ltd., which were exchanged for 45 shares in New Shorrock Spinning & Manufacturing Co. Ltd. following a scheme of amalgamation sanctioned by the Gujarat High Court.

The Tribunal held that for section 12B to apply, there must be a sale, exchange, transfer, or relinquishment of a capital asset. They concluded there was no sale or transfer, and an exchange connotes the existence of a person with whom one could exchange. Since the assessee did not exchange shares with any particular person, it did not constitute an exchange. Additionally, relinquishment implies the continued existence of the property relinquished, which was not the case here as the shares in Shorrock company ceased to exist.

The revenue argued that the transaction was an exchange, as the assessee received 45 shares of New Shorrock company in lieu of 90 shares of Shorrock company. Alternatively, they contended that it was a relinquishment since the assessee gave up interest in the 90 shares of Shorrock company.

The court examined the definitions and common understanding of "exchange" and "relinquishment." An exchange requires the existence of different properties owned by different persons, which continue to exist and be owned by different parties post-exchange. In this case, the shares of Shorrock company ceased to exist upon amalgamation, and there was no transfer of ownership to New Shorrock company or anyone else. Hence, the transaction did not qualify as an exchange.

Regarding relinquishment, the court noted that it involves giving up, abandoning, or surrendering interest in a property that continues to exist. Since the shares of Shorrock company became worthless upon the company's dissolution, there was no relinquishment.

The court concluded that neither an exchange nor relinquishment occurred, and thus, the sum of Rs. 49,350 could not be assessed as capital gains under section 12B.

Issue 2: Assessability in Assessment Year 1961-62
Given the negative answer to the first issue, the second issue regarding the assessability of Rs. 49,350 in the assessment year 1961-62 did not survive for determination.

Conclusion:
The court held that the sum of Rs. 49,350 could not be assessed as capital gains under section 12B of the Indian Income-tax Act, 1922, as neither an exchange nor relinquishment took place. Consequently, the second issue regarding the assessment year became irrelevant. The revenue was directed to pay the costs of the assessee.