2001 (2) TMI 9 - SC - Income Tax

Capital Gains- Computation - Having regard to the fact that the assessees could have disclosed, without prejudice to their contentions, the cost at which they had acquired their shares in the amalgamated company. We are at a loss to understand the reasoning of the High Court in giving to the Revenue the liberty to consider taxing the assessees on the basis that it was a transaction by itself whereunder a share of ₹ 100 each was sold as a share of ₹ 107.50 - appeal of revenue is allowed

Issues Involved:
1. Whether the Tribunal was right in holding that there was a transfer of shares upon the amalgamation of Ambassador Steamships Pvt. Ltd. with Collis Line Pvt. Ltd.
2. If the answer to the first question is affirmative, whether the Tribunal was right in holding that the transfer was made in consideration of the allotment of shares in Collis Line Pvt. Ltd.
3. Whether section 49(2) of the Income-tax Act, 1961, applied to the sale of shares in Collis Line Pvt. Ltd. obtained upon the amalgamation.

Detailed Analysis:

Issue 1: Transfer of Shares Upon Amalgamation
The High Court of Kerala had answered this question in the negative, stating there was no transfer of shares. However, the Supreme Court analyzed the relevant provisions of the Income-tax Act, 1961, particularly section 2(47) which defines "transfer" to include the extinguishment of any rights in a capital asset. The court noted that the rights of the assessees in the shares of Ambassador Steamships Pvt. Ltd. were extinguished upon the amalgamation with Collis Line Pvt. Ltd. Therefore, it concluded that there was indeed a transfer of shares within the meaning of section 2(47).

Issue 2: Consideration of Allotment of Shares
Since the Supreme Court answered the first question affirmatively, it did not need to address the second question separately. The court implicitly recognized that the transfer was made in consideration of the allotment of shares in Collis Line Pvt. Ltd., as per the sanctioned scheme of amalgamation.

Issue 3: Application of Section 49(2) of the Income-tax Act
The High Court had answered this question in the negative, but the Supreme Court disagreed. Section 49(2) specifies that the cost of acquisition of shares in the amalgamated company should be deemed to be the cost of acquisition of shares in the amalgamating company. The Supreme Court held that since there was a transfer under section 2(47), section 49(2) applied. Consequently, the cost of acquisition for the shares in Collis Line Pvt. Ltd. should be computed based on the cost of the shares in Ambassador Steamships Pvt. Ltd.

Conclusion:
1. The Supreme Court answered the first question in the affirmative, holding that there was a transfer of shares upon the amalgamation.
2. The second question did not arise due to the affirmative answer to the first question.
3. The Supreme Court answered the third question in the affirmative, holding that section 49(2) applied to the sale of shares in Collis Line Pvt. Ltd.

The Supreme Court set aside the High Court's judgment and allowed the appeals, affirming the Income-tax Officer's computation of capital gains. The court found no reason to deviate from the computation method used by the Income-tax Officer, who had multiplied the number of shares sold by their face value and divided the result by 14 to determine the cost. The Supreme Court also criticized the High Court's reasoning for allowing the Revenue to tax the assessees based on the sale price of Rs. 107.50 per share, finding it inconsistent with the applicable legal provisions.

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