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TMI Blog2014 (12) TMI 937X X X X Extracts X X X X X X X X Extracts X X X X ..... s 391 and 394 of the Companies Act, 1956 which came into effect on 1st April, 1990, 9 out of 13 industrial units held by the respondent company were transferred to three newly formed companies, namely, M/s DCM Shriram Industries Limited, M/s DCM Shriram Consolidated Limited and M/s DCM Shriram Industrial Enterprises Limited. Relying upon sub-section (5) to Section 32A and treating transfer of assets and liabilities, including plant and machinery as "sale or otherwise transfer", the Assessing Officer passed an order under Section 32A(5) read with Section 155(4A) and 154 of the Act withdrawing benefit of investment allowance or carried forward of investment allowance. First appeals were dismissed by two separate orders, passed by the Commissioner of Income Tax (Appeals) dated 19th September, 1994 in relation to Assessment Years 1987-88, 1988-89, 1989-99 and 1990-91 and order dated 21st October, 1994 in respect of Assessment Years 1983-84, 1984-85 and 1985-86. The assessee, however, succeeded by the impugned order passed by the Income Tax Appellate Tribunal ("Tribunal", for short) dated 1st August, 2001, inter alia, holding that scheme of arrangement did not result in "transfer" under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the ship, aircraft, machinery or plant to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee under sub-section (6) of section 32AB. xxx (5) Any allowance made under this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act- (a) if the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed; or (b) if at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant as installed, the assessee does not utilise the amount credited to the reserve account under sub-section (4) for the purposes of acquiring a new ship or a new aircraft or new machinery or plant [other than machinery or plant of the nature referred to in clauses (a), (b) and (d) of the second proviso to sub-section (1)] for the purposes of the business of the undertaking; or (c) if at any time before the expiry of the ten years aforesaid, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business carried on by it as a result of which the firm sells or otherwise transfers to the company any ship, aircraft, machinery or plant, the provisions of clauses (a) and (b) of sub-section (6) shall, so far as may be, apply to the firm and the company. Explanation : The provisions of this sub-section shall apply only where- (i) all the property of the firm relating to the business immediately before the succession becomes the property of the company; (ii) all the liabilities of the firm relating to the business immediately before the succession become the liabilities of the company; and (iii) all the shareholders of the company were partners of the firm immediately before the succession. xxx" 5. At this stage, we would also like to reproduce the definition of the term "transfer" in Section 2(47) of the Act. The said clause, it must be noted, is in relation to capital asset and reads:- "2. In this Act, unless the context otherwise requires,- xxx (47) "transfer", in relation to a capital asset, includes,- (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be unacceptable. 7. The word "transfer" and its purport was examined by the Supreme Court in the Commissioner of Income Tax, Lucknow versus Narang Dairy Products, Lucknow, [1996] 219 ITR 478 (SC) with reference to Sections 33 and 34 of the Act in the following words:- "Even assuming that the transaction may not be a "transfer" as defined under Section 2(47) of the Act, in our view, the definition section is an inclusive one and does not exclude the contextual or the ordinary meaning of the word, "transfer". There are different shades of meaning to the word "transfer", vis-., "to make over possession of to another", "a delivery of title or property from one person to another", "to displace from one surface to another", "removal", "handover", "make over possession of property to another", "change", "displace", etc." In the said case, the assessee, a partnership firm had transferred by way of lease, possession and enjoyment of machinery or plant to a third person. It was held that the grant of lease by itself would be covered by the expression "otherwise transferred for the purpose of Sections 33 and 34 of the Act". The said decision, however, did not examine or answer whether a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion has its genesis in an agreement between the prescribed majority of shareholders and creditors of the transferor company with the prescribed majority of shareholders and creditors of the transferee company. The intended transfer is a voluntary act of the contracting parties. The transfer has all the trappings of a sale. The transfer is effected by an order of the court. The proposed compromise or arrangement is subject to verification by the court as provided therein. First is that the scheme of compromise or arrangement proposed for the purposes of amalgamation or in connection therewith, shall not be sanctioned unless the court has received a report from the Company Law Board or the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or to public interest; and secondly, that the order of resolution of transfer of the company shall not be made unless official liquidator on scrutiny of the books and papers of the company makes a report to the court that the affairs of the company had not been conducted in a manner prejudicial to the interest of its members or to public interest." 11. Similar view was taken ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ader than even its ordinary, common and natural meaning. The word "transfer" as defined in Section 2(47) includes extinguishment of any right and it was further observed that the said expression i.e. "extinguishment of any right" would include extinguishment of a right in a capital asset, independent of and otherwise than on account of transfer." 8. The aforesaid ratio is apposite and would negate the contention raised by the assessee and the finding recorded by the Tribunal to the contrary, that a scheme of arrangement or amalgamation would not result in transfer of the assets from the earlier owner to the new or the amalgamated company. "Transfer" in law upon amalgamation can take place. In Section 32A, the Legislature has not used the term "sale", i.e. "conveyance" alone, but consciously and deliberately used the expression "otherwise transferred". Unlike 1922 Act, the expression "transfer" is now defined in sub-section (47) to Section 2 which specifically refers to sale, exchange, relinquishment, extinguishment of any right in an asset, compulsory acquisition, conversion by the owner of an asset into stock in trade etc. The term "transfer" is defined in Section 2(47) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being covered under sub-section (6) to Section 32A. We may record that after arguments were heard on 2nd September, 2014, the appeal was re-listed for hearing on the said aspect on 8th September, 2014, when the counsel for the parties were heard on whether the scheme of arrangement would be covered under sub-section (6) to Section 32A of the Act. Accordingly, we deem it appropriate to frame the following additional substantial question of law: "Whether the scheme of arrangement/reconstruction can be regarded as amalgamation and protected under sub-section (6) to Section 32A of the Income Tax Act, 1961?" 13. We have already quoted sub-section (6) to Section 32A, but at this stage would like to reproduce the term "amalgamation" as defined in Section 2(1B) of the Act (as on 1st April, 1990) which reads:- "2. In this Act, unless the context otherwise requires,- xxx (1B) "amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities of the amalgamating company should become liabilities of the amalgamated company. There should be complete and absolute merger and integration of the amalgamating company with the amalgamated company. In clause (iii), shareholders not less than nine-tenth in value in the amalgamating company subject to certain other conditions, should become shareholders of the amalgamated company by virtue of amalgamation. 16. Section 2(1B) seeks to define the word "amalgamation" for the purpose of the Act and the statutory definition stands enacted should be applied when interpreting the word in a section. However, this rule is subject to the qualification mentioned in the beginning of the definition section - "unless the context otherwise requires". Repugnancy of the definition would be accepted if the statutory definition is not in agreement with the subject or context. Statutory definitions or abbreviations must necessarily be read subject to this qualification expressed in the definition clause itself. It is possible that the word defined in the definition clause could have a somewhat different meaning in different sections of the Act, depending upon the subject or context. Thus, the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat enactment." But where the context makes the definition given in the interpretation clause inapplicable, a defined word when used in the body of the statute may have to be given a meaning different from that contained in the interpretation clause" all definitions given in an interpretation clause; all definitions given in an interpretation clause are therefore normally enacted subjected to the qualification - "unless there is anything repugnant in the subject or context", or "unless the context otherwise requires". Even in the absence of an express qualification to that effect such a qualification is always implied. However, it is incumbent on those who contend that the definition given in the interpretation clause does not apply to a particular section to show that the context in fact so requires. An argument based on contrary context which will make the inclusive definition inapplicable to any provision in the Act cannot be accepted as it would make the definition entirely useless. Repugnancy of a definition arises only when the definition does not agree with the subject or context; any action not in conformity with the definition will not obviously make it repugnant to subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eak of complete merger, extinction or absorption of the amalgamating company into the amalgamated company. Clause (b) of sub-section (6) stipulates that balance of investment allowance, if any, still standing to the amalgamating company in respect of such ship, aircraft or machinery shall be allowed to the amalgamated company in accordance with the provisions of sub-section (3) for the total period for which the balance investment allowance shall be carried forward. Clause (b) clearly supports the view that the amalgamating company need not extinguish or cease to exist pursuant to the scheme of amalgamation. Sub-Section (6) to Section 32A does not, therefore, refer to taking over of all assets and liabilities. In these circumstances, we do not think it would be appropriate and proper to fully apply Section 2(1B) of the Act, when we interpret sub-section (6) to Section 32A. The legislative intent of Sections 32A(5) and 32A(6) of the Act is to the contrary. 19. The word amalgamation is used in Sections 32A, 33(3), 33A(4) & (5), 34(3)(b), proviso, 35(5), 35A(6), 35D(5), 35DD, 35E(7), 41(2), 41(4) (Explanation 2), 43(1) (Explanation 7), 43(6) (Explanation 2), 43C, 47(vi) and (vii), 49 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or that purpose. (Refer Heavy Head & Co. versus Ropre Holding Ltd., 1952 CH 154). Therefore, the term "amalgamation" contemplates a state of things under which two companies are joined so as to form a third entity or one company is absorbed or blended with the other company. Amalgamating company, thereupon, loses its entity and ceases to exist. But there are instances or arrangements under which there is transfer of one or more undertakings to a new company or to another existing company. In these cases, the amalgamating company continues to exist and is not dissolved as it does not get fully merged. Such arrangements are also treated as amalgamation. Halsbury"s Laws of England (5th Edition, Volume 15, at p.700) reads as under:- "1435. Meanings of "reconstruction' and "amalgamation'. Neither "reconstruction" nor "amalgamation" has precise legal meaning. Where an undertaking is being carried on by a company and is in substance transferred, no to an outsider, but to another company consisting substantially of the same shareholders with a view to its being continued by the transferee company, there is reconstruction. It is nonetheless a reconstruction because all the assets do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sub-section (6) is not upon the blending or merger of the existing company, which has availed of benefit under Section 32A into another or new company. At the same time, appropriate and required conditions have been incorporated in sub-section (6) to Section 32A to ensure that there is no abuse of the conditions applicable to the amalgamating company, both with regard to the reserve and the time stipulation on sale or "otherwise transfer" of assets is applied and adhered to. Violation thereof would cause and result in negative and penal consequences. 24. There is another way of looking sub-section (6) to Section 32A as it uses the expression "in a scheme of amalgamation". The expression "scheme of amalgamation" can be interpreted as is commercially and legally understood in terms of Sections 391 to 394 of the Companies Act, 1956. Section 394 of the Companies Act, 1956 in the heading uses the phrase "provisions for facilitating reconstruction and amalgamation of companies". Under Section 394(1)(b), the Legislature besets and includes a scheme which refers to transfer of whole or part of an undertaking, property or liabilities of a company concerned between the transferor/amalgam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... context of their setting and to help the interpreter to arrive at the meaning intended. 27. There is another reason why we feel that this interpretation given to sub-section (6) to Section 32A of the Act. In the present case, 9 out of 13 undertakings of the respondent assessee were taken over by the three new companies, while the earlier company, i.e. the present assessee, continues to exist. The case set up by the Revenue is that in case assessee had ceased to exist and had merged, conditions mentioned in Section 2(1B) of the Act would be satisfied. In other words, in case the scheme of arrangement had postulated creation of a fourth company to which four units which continued to remain with the respondent-assessee had been transferred, requirement of Section 2(1B) of the Act would have been satisfied. Thus, it is a matter of not selecting a correct taxable event, possibly due to inability and lack of foresight in comprehending the objection that could be raised. This would not be in consonance with the object, aim and purpose behind Sub-Section (6) to Section 32A of the Act. In our decision in ITA No.41 of 2002, dated 22nd December, 2014, titled Commissioner of Income Tax versu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el in the context of Section 32A and specially sub-section (6) thereof, should not be accepted because it does not promote the object, aim and purpose behind Section 32A and the restriction or the bar created in sub-section (5) and the exception which has been carved out in sub-section (6). The object and purpose of the provision as is discernible is to promote and encourage industrialization. The restriction of the sale or transfer is to ensure that an assessee who avails of investment allowance does not sell or otherwise transfer the plant and equipment after obtaining tax benefit as it would be contrary to the intention and the purpose behind the enactment of the Section. Sub-section (6) is an exception to sub-section (5) as the legislature did not want to obstruct and withdraw benefit of investment allowance in cases of genuine arrangements required and necessary for business and commercial expediency and good reasons. The intention was not to control and put unnecessary fetters on the manner and method of conducting business but to ensure that the investment allowance provisions are not misused by first claiming tax benefit and then selling or transferring the plant and machin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the wording. An enactment of former days is thus to be read today, in the light of dynamic processing received over the years, with such modification of the current meaning of its language as will now give effect to the original legislative intention. The reality and effect of dynamic processing provides the gradual adjustment. It is constituted by judicial interpretation, year in and year out. It also comprises processing by executive officials"." (emphasis supplied) 29. The principle of updating construction is premised on the doctrine that Acts are always speaking and are intended to apply over a period of time. There is, therefore, need to interpret and construct them with reference to contemporary understanding. The construction should be continuously updated to allow for changes, after the Act was written. This would be an intention of the Legislature, as it is not expected that the Legislature will intervene every now and then, when the Act is intended to apply over a long time. The Act is a living Act and not a relic. Therefore, it may not be true and correct that the language of statute must always be understood in the sense it was understood when it was passed. 30. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning." We must not adopt a strictly literal interpretation of s. 52, sub-s. (2), but we must construe its language having regard to the object and purpose which the Legislature had in view in enacting that provision and in thecontext of the setting in which it occurs. We cannot ignore the contextand the collocation of the provisions in which s. 52, sub-s. (2), appears,because, as pointed out by judge Learned Hand in the most felicitous language: "... the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create." " 32. Therefore, when we examine, read and interpret sub-section (6) to Section 32A, we do not think that it would be proper to assert and hold that the legislature intentionally ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d aspects. We would request the Tribunal to go into the said aspects and if facts are required to be clarified, ask the respondent-assessee to furnish relevant data and details and seek report from the Assessing Officer. Only if it is not possible on the basis of the said exercise to decipher and decide the correct factual position, appropriate orders for further remand may be passed. We have made this request as the present appeal pertains to Assessment Year 1990-91 and if possible, another round of litigation from the first stage should be avoided. 34. The substantial question of law framed on 24th September, 2002 is accordingly answered holding that there was transfer within the meaning of Section 32A(5) of the Act. The substantial question of law framed in paragraph 12 above is partly decided in favour of the respondent assessee and against the appellant Revenue. The assessee would be entitled to protection under sub-section (6) to Section 32A of the Act if the conditions specified in the said sub-section as well as clauses (ii) and (iii) of Section 2(1B) of the Act are satisfied. Stipulations under Section 32A(6) of the Act should also be satisfied. For examination of these t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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