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TMI Blog1984 (1) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... rporated in 1960. This was as per the orders of the Kerala High Court dated 2-4-1969. Under the scheme of amalgamation, the assets and liabilities of the Ambassador Steamships (P.) Ltd. were taken over by Collis Line (P.) Ltd. The face value of the shares of Ambassador Steamships (P.) Ltd., which were fully paid up, was Rs. 100 per share. Under the scheme of amalgamation, the shareholders of Ambassador Steamships (P.) Ltd. were allotted 14 shares in the amalgamated company, namely, Collis Line (P.) Ltd. for every share of the face value of Rs. 100 in Ambassador Steamships (P.) Ltd. Thus, the assessees in the appeals acquired 45,318 shares of the face value of Rs. 100 each in Collis Line (P.) Ltd. The assessee in Appeal No. 368 (Coch.) of 1980 had 1979 shares, the assessee in IT Appeal No. 369 (Coch.) of 1980 had 2890 shares, the assessee in IT Appeal No. 376 (Coch.) of 1980 had 10,113 shares and the assessees in the remaining appeals had 5.056 shares each. All the 45,318 shares were transferred to Shri B K. Chatterji and his group on 29-2-1976 for a consideration of Rs. 48,72,523. This works out at the rate of Rs. 107.50 per share. The ITO held that sections 49(2) and 47(vii) will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in any case, the cost of the shares should be determined on the basis of the market value as on 1-1-1954. This was for the reason that the necessary particulars for working out the cost on this basis were not furnished by the assessee. With regard to this aspect, the ITO stated in his order that the cost can be worked out as on 1-1-1954 as and when the assessees furnished the requisite details. 5. Before narrating the arguments advanced by Shri Soli Dastur, the learned counsel for the assessees, it would be useful to refer to the relevant provisions of the Act. Section 45 of the Act provides that any profits or gains arising out of the transfer of a capital asset shall be chargeable to income-tax as income of the previous year, subject to the exemptions contained in sections 53 and 54 of the Act, with which we are not concerned. Section 2(47) of the Act defines ' transfer ' in relation to a capital asset as inclusive of the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. Section 47 provides that nothing contained in section 45 shall apply to the transactions set out in clauses (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer. By amalgamation, there was no transfer of the shares of the amalgamating company. Even if there was such a transfer of the shares, it was not by the shareholders. Section 47 mentions many instances which are not transfers in law. For instance, it had been held by the Supreme Court in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 that no sale or transfer of capital assets is involved in the dissolution of a firm. In CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 it had been held by the Supreme Court that no transfer is involved in the distribution of assets of a company in liquidation. Still these have been mentioned in section 47 for clarifying that they are not transfers. It is, therefore, clear that the various transactions have been listed in section 47 only by way of abundant caution and not because they would have been transfers but for the section. Two parties are necessary for effecting a transfer. In the present case, there had been no transfers of the shares of the amalgamating company by the shareholders of that company. Resolutions were passed separately by the shareholders of the two companies agreeing to the scheme of amalgamation. There was no document inter par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al gains arose to the assessee as a result of the transaction under section 12B of the Indian Income-tax Act, 1922 (' the 1922 Act '). Similarly, in CIT v. R.M. Amin [1971] 82 ITR 194 it was held by the Gujarat High Court that the distribution of assets to the shareholders in the course of liquidation of the company does not involve transfer and that it does not attract tax on capital gains. This was affirmed by the Supreme Court in CIT v. R.M. Amin [1977] 106 ITR 368. It is true that the Calcutta High Court in the case of Central India Industries Ltd. v. CIT [1975] 99 ITR 211 held that amalgamation can be a basis for claiming capital loss. In that case, the shares in the amalgamated company were allotted in exchange for the shares of the assessees in the amalgamating company. It was a case of amalgamation of two companies into another company. The position in this case was quite different. The above ruling was distinguished by the Calcutta High IV Court in Shaw Wallace Co. Ltd. v. CIT [1979] 119 ITR 399 where it was held that no tax on capital gains can be levied on allotment of shares following the amalgamation of companies as no transfer was involved in such case. Even if it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruction which imputes to the Legislature tautology or superfluity in the use of language must, as far as possible, be avoided and the Court should always prefer a construction which will give some meaning and effect to the words used by the Legislature rather than that which will reduce it to futility vide the Gujarat High Court and the Supreme Court decisions in R.M. Amin's case. The construction given to the statute should be to give effect to its manifest intention vide Poppatlal Shah v. State of Madras AIR 1953 SC 274 and Sri Krishna Coconut Co. v. East Godavari Coconut Tobacco Market Committee AIR 1967 SC 973. The marginal note to a section can be relied upon as indicating the drift of the section or to show what the section is dealing with vide K.P. Varghese v. ITO [1981] 131 ITR 597 (SC). Applying the above principles to the construction of sections 47(vii) and 49(2), it will be found that section 47 deals with various transactions in spite of the fact that the word ' transfer ' has been used in the various clauses. Reading section 49(2) with section 47(vii), the intention of the Legislature in enacting section 47(vii) was to say that there will be no transfer giving rise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company in spite of the fact that the amalgamating company itself ceased to exist. It has been held in the case of Mangalore Electric Supply Co. Ltd. that there is a transfer when an existing title in a capital asset is extinguished and a new one is created. It has been held in CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 (Guj.) that there was an extinguishment of rights in a capital asset in spite of the fact that the capital asset in the case, namely, the machinery was destroyed by fire. This position is supported by the rulings in CIT v. Minor Bababhai alias Lavkumar Kantilal [1981] 128 ITR 1 (Guj.) and Marybong Kyel Tea Estates Ltd. v. CIT [1981] 129 ITR 661 (Cal.). The purpose and meaning of section 49(2) will be quite clear if it is read by substituting the word ' extinguishment ' for the word ' transfer ' occurring in the section. The definition of the term ' transfer ' in section 2(47) is not exhaustive but is only inclusive unlike in the case of the definition of the term occurring in section 2(xxiv) of the 1958 Act. A settlement or an arrangement can also be a transfer. The Companies Act, 1956, refers to compromise or arrangement and both will amount to a transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature declared that any transfer of the assets or shares involved in the amalgamation of companies will not be treated as a transfer and will not attract tax on capital gains. Any profits or gains arising out of the amalgamation will not, therefore, be exigible to tax on capital gains. Thus, the amalgamation is not a reckoning event or point for the purpose of capital gains. But when subsequently the shares in the amalgamated company are sold, the profits or gains arising therefrom will be exigible to tax under section 45. 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 is consistent with the position that amalgamation was not a reckoning point as far as tax on capital gains was concerned and the profits or gains arising out of amalgamation has not been brought to tax. In the present case, for a share of the face value of Rs. 100 in the amalgamating company, the assessees, at the time of amalgamation, obtained 14 shares of the face value of Rs. 100 each in the amalgamated company. Thus, they had made a profit or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated, the purpose of section 49(2) is to take the cost of acquisition of the shares in the amalgamating company as the cost of the shares. It is not, therefore, necessary to examine the present case to find out whether there is a transfer attracting the provisions of section 45. The only dispute is whether the case of the assessees can be brought within the four corners of section 49(2) because only by applying this provision, the revenue can treat the cost of the shares of the amalgamated company as the cost of the shares of the amalgamating company. If the revenue fails in this attempt, as fairly conceded by the learned representative for the assessees, the cost of the shares has to be treated as the market price of the shares when the assessees got the same as a result of the amalgamation. 10. Section 49(2) and section 47(vii) refer to the shares in the amalgamated company as those which became the property of the assessee in consideration of a transfer made by the assessees, at the time of amalgamation, in consideration of the allotment to him of shares in the amalgamated company. The argument of the learned counsel for the assessees, in short is that the assessees did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... condition precedent for the issue of shares in the amalgamated company will be an empty formality. The shareholders of both the companies had approved identical schemes by which the assets of the amalgamating company were transferred to the amalgamated company and the shareholders of the amalgamating company were to be issued shares in the amalgamated company. It would be too much to say that the shares in the amalgamated company were issued to the assessees without consideration. It is true that in the case of United India Life Assurance Co. Ltd. relied upon by the learned counsel for the assessee, it has been held that the compromise or arrangement for the amalgamation of the company takes effect on the date on which the Court sanctions the scheme under the relevant provisions of the Companies Act and that the sanction has no retrospective operation and does not make the transfer effective from the date of agreement or resolution. But this does not mean that the shareholders were not in the picture at all and that the entire scheme should be treated as one propounded and enforced by the Court. If the contention of the assessees that when a Court approves a scheme of the present n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived by the assessee as a result of such extinguishment, there was a transfer within the meaning of section 2(47). To the same effect is the decision in the case of Minor Bababhai alias Lavkumar Kantilal. In the present case, even if it be by the order of the Court, there was an extinguishment of the rights of the assessees in the shares of the amalgamating company as the shares held by them were rendered worthless. Similarly, new rights or assets were created in the form of shares in the amalgamated company. The case of Rasiklal Maneklal (HUF), relied upon by the assessees, was one arising under the 1922 Act, and the effect of the word ' extinguishment ' occurring in section 2(47) of the 1961 Act had not been considered in that case. Only the scope of the word ' exchange ' or ' relinquishment ' was considered in that case. The ruling in the case of Goli Eswariah, relied upon by the learned counsel for the assessees is one arising under the gift-tax and relating to the throwing of self-acquired property into the common stock of the HUF. It is not applicable to the facts of the present case. The ruling of the Gujarat High Court in the case of R.M. Amin as affirmed by the Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been held that all transactions encompassed by section 45 must fall under the governance of its computation provisions, that a transaction to which these provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge, that what is contemplated by section 48(ii) of the Act is an asset in the acquisition of which it is possible to envisage a cost or, in other words, it must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it and that none of the provisions pertaining to the head ' Capital gains ' suggests that they include an asset in the acquisition of which no cost at all can be conceived. The contention of the learned counsel for the assessee, as set out while dealing with ground Nos. 1 to 3, is that there is no consideration for the issue of the shares in the amalgamated company. It is, therefore, claimed that there is no cost of acquisition with regard to those shares. This contention, in our view, is not sustainable even on the ruling of the Supreme Court referred to above. The observations of the Supreme Court were with regard to an asset, in the acqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court in the case of B.C. Srinivasa Setty were only with regard to a self-generating asset like goodwill. In this connection the learned standing counsel also relied upon the observations of the Madhya Pradesh High Court in CIT v. Hukumchand Mannalal Co. [1965] 57 ITR 213, 224 that the generality of the expressions found in a judgment are not intended to be expositions of the whole law but are governed and qualified by the particular facts of the case. 16. We have considered the matter. The decision of the Supreme Court in the case B.C. Srinivasa Setty was entirely with reference to the cost of acquisition of the capital asset and not with reference to the cost of improvement. Further, the decision of the Supreme Court was with reference to goodwill and particularly with regard to self-generated goodwill. This is clear from the following findings of the Supreme Court : " We are of opinion that the goodwill generated in a newly commenced business cannot be described as an ' asset ' within the terms of section 45 and, therefore, its transfer is not subject to income-tax under the head ' Capital gains '. . . . It is apparent that the preponderance of judicial opinion fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the cases of E.C. Jacob, CIT v. Chunilal Prabhudas Co. [1970] 76 ITR 566 (Cal.) and CIT v. Jaswantlal Dayabhai [1978] 114 ITR 798 (MP), But it has to be noted that all those cases related to self-generated goodwill. With regard to self-generated goodwill, the cost of acquisition cannot be envisaged with regard to goodwill acquired at a cost, the cost of acquisition can be envisaged. But with regard to both, it is possible to improve the same. What has been pointed out is that the improvement will be by the personal effort of the owner of the asset and that it will be impossible to evaluate the same. The difference between goodwill and shares has been brought out and emphasised by the Bombay High Court in the case of Evans Fraser Co. Ltd. It was observed : " ... Goodwill differs from a tangible asset such an immovable property or a share in a joint stock company which retains its shape and form but of which the market value fluctuates. The market value of goodwill also fluctuates, but it fluctuates because of the fluid nature of goodwill . . ." The High Court pointed out that it is not possible to ascertain in terms of money the cost of addition or alteration to the qual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o decided against the assessee. 18. Ground No. 5 : This is also without prejudice to the earlier contentions and is to the effect that, in any case, the market value as on 1-1-1954 should have been substituted for the cost price adopted by the ITO. This claim was rejected by the ITO only for the reason that the necessary particulars for working out the market value as on 1-1-1954 were not furnished by the assessee. In fact, the ITO had even observed in para 8 of the assessment order that the question will be considered as and when the assessee furnishes the requisite details. No details were furnished before the Commissioner (Appeals) also. Before us, the learned counsel for the assessee submitted that he is not pressing the ground. It is, therefore, decided against the assessee. 19. Ground No. 6 : This is to the effect that the levy of interest under section 139(8) and under section 216 of the Act was not justified. Before the Commissioner (Appeals) no specific arguments were addressed with regard to the levy of interest under section 216. With regard to the interest under section 139, it was held by the Commissioner (Appeals) that no appeal was maintainable with regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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