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TMI Blog1988 (4) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... ificate representing a fractional entitlement of 1/10th of one share of Rs. 100 of Alkapuri credited as fully paid-up ; and (ii) One 11% Redeemable Bond of face value of Rs. 100 of Alkapuri credited as fully paid-up. The assessee, therefore, received 1,815 shares and 1,512 11% redeemable bonds (" bonds " for short) of Alkapuri of Rs. 100 each. In the return of income for the assessment year 1982-83, the assessee claimed that it was not liable to pay any tax on account of capital gains arising from the transfer of 1,512 shares of SEPL held by it in consideration for 1,812 shares and 1,512 bonds of Alkapuri under the scheme of amalgamation. According to the assessee, the aforesaid transaction did not amount to transfer of a capital asset within the meaning of section 2(47) of the Income-tax Act, 1961 (" the Act " for short). It was further contended that even if it was a transfer within the meaning of section 2(47), it was not to be regarded as a transfer under section 47(vii) and nothing contained in section 45 of the Act would apply to such transfer. The assessee, therefore, contended that it was not liable to pay tax on profits or gains arising from the transfer of shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not entitled to claim exemption under section 47(vii). The Tribunal took the view to the effect that there was nothing in section 47(vii) to indicate that there was any restriction to receive anything else besides shares from the amalgamated company. In other words, according to the Tribunal, merely because the assessee had, in addition to the shares, received bonds from the amalgamated company (Alkapuri), it could not be denied exemption under section 47(vii). It was urged by the Revenue before the Tribunal that if the above view was taken, there would be difficulty in working out the cost of the acquisition of the shares under section 49(2) and determining the period during which the shares and bonds of Alkapuri were held in the context of section 2(42A). The Tribunal was of the view that it was not called upon to decide as to what would happen in future when the assessee sold or transferred shares and/or bonds of Alkapuri held by it under the scheme of amalgamation and, therefore, it was not necessary for it to deal with the situation where the shares of the amalgamated company are sold by a previous shareholder of the amalgamating company. The Tribunal observed that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in the circumstances of the case, the assessee was entitled to exemption under section 47(vii) of the Income-tax Act, 1961 ? " The question which has been referred to us has to be decided on the assumption that the transaction, as a result of which the assessee acquired shares and bonds of Alkapuri for the shares of SEPL held by it under the scheme of amalgamation, amounts to transfer of a capital asset within the meaning of section 2(47) of the Act and the profits and gains arising from such transfer are exigible to tax under the head " Capital gains ". As before the Tribunal, learned counsel for the assessee made it clear before us that he was not conceding that the transaction amounted to such transfer, but it was only for the purpose of section 47(vii) that he was assuming that there was such a transfer. He submitted that in case the question which is referred to us is answered in the negative and against the assessee, the Tribunal will have to decide the question whether the transaction amounted to transfer of a capital asset within the meaning of section 2(47) so as to attract exigibility to tax under section 45. This position was not disputed by learned counsel f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns will be computed by taking the 'cost of acquisition' thereof to be the cost of acquisition of the shares in the amalgamating company ...... The abovementioned provisions will apply only in a case where the amalgamated company is an Indian company. These provisions are sought to be given effect to for and from the assessment year 1967-68." It is apparent from the " Objects and Reasons " that it was for the purpose of facilitating merger of uneconomical company units with other financially sound Indian companies in the interests of increased efficiency and productivity, that certain provisions including section 47(vii) were inserted in the Act. In the context of clause (vii) of section 47, it is stated that the shareholders in the amalgamating company receiving shares in the amalgamated company in lieu of their original shareholdings will be liable to tax on capital gains only at the stage when they sell or otherwise transfer the shares in the amalgamated company and realise any capital gains thereon. It was further stated that such capital gains will be computed by taking the " cost of acquisition " thereof to be the cost of acquisition of the shares in the amalgamating compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares only and nothing more to get the benefit of the said clause (vii). Learned counsel for the Revenue submitted that the interpretation of section 47(vii) suggested by the assessee and accepted by the Tribunal, cannot be accepted, because (a) it would create anomalies and absurdities; (b) it is against the intention of the Legislature; (c) it would make the whole scheme underlying section 47(vii) and section 49(2) unworkable; and (d) mechanical interpretation should be avoided. Explaining as to how the assessee's interpretation would create anomalies, learned counsel gave the following example: In a scheme of amalgamation, the shares of an amalgamating company whose cost is Rs. 10,000 and the market value Rs. 1,00,000, are transferred in consideration of the shares of the value Rs. 1,000 and cash of Rs. 99,000 of the amalgamated company, the shareholder of the amalgamating company will pay no tax on the cash receipt of Rs. 99,000 and will claim, at the time of the sale of shares of Rs. 1,000 of the amalgamated company, that their cost of acquisition should be taken to be Rs. 10,000 under section 49(2). It was further submitted that the worth or value of something which a shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The thrust of the argument of learned counsel for the assessee was that if section 47(vii) is interpreted in the manner suggested by the Revenue, it would result in injustice and would defeat the very Purpose and object for which the Legislature introduced it in the Act. He submitted that there was no economical or legal reason or reason in equity, justice or fairplay as to why a shareholder getting a share and bond of the amalgamated company in consideration of the transfer of shares held by him in the amalgamating company under a scheme of amalgamation would be disentitled to the benefit of section 47(vii). It was contended that the interpretation suggested by the assessee would not lead to any anomalies or absurdities as contended on behalf of the Revenue. It was urged that if a cash amount along with the shares of the amalgamated company was given in consideration of the transfer of shares of the amalgamating company under a scheme of amalgamation, such amalgamation would not amount to an amalgamation within the meaning of section 2(1A) of the Act. Therefore, submitted learned counsel for the assessee, the example which learned counsel for the Revenue gave was not an apt examp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 967 were unaware of it. Therefore, when the Legislature enacted section 47(vii), it did not intend to make it inapplicable where the consideration is composite consisting of shares and bonds or debentures of the amalgamated company. The consideration must, no doubt, consist of any share or shares of the amalgamated company, but if in addition to the share or shares, the shareholder of the amalgamating company is allotted bonds or debentures of the amalgamated company, he would not be deprived of the benefit of section 47(vii). Learned counsel for the assessee argued that the object of section 47(vii) is to encourage amalgamation and, therefore, it should be so interpreted as to advance that object. He submitted that the interpretation which is sought to be placed on that provision on behalf of the assessee is the correct interpretation and such interpretation would advance the legislative object. In support of his arguments, he also placed reliance upon the principles of interpretation of statutes laid down in the authorities which were cited on behalf of the Revenue. Learned counsel for the assessee further urged that in order to resolve the controversy involved in this reference, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel. In Girdharilal Sons v. Balbir Nath, AIR 1986 SC 1499, the Supreme Court has observed (p. 1503): "Parliamentary intention may be gathered from several sources. First, of course, it must be gathered from the statute itself, next from the preamble to the statute, next from the Statement of Objects and Reasons, thereafter from Parliamentary debates, reports of Committees and Commissions which preceded the legislation and finally from all legitimate and admissible sources from where there may be light. Regard must be had to legislative history too. Once the Parliamentary intention, is ascertained and the object and purpose of the legislation is known, it then becomes the duty of the court to give the statute a purposeful or a functional interpretation. This is what is meant when, for example, it is said that measures aimed at social amelioration should receive liberal or beneficent construction. Again, the words of a statute may not be designed to meet the several uncontemplated forensic situations that may arise. The draftsman may have designed his words to meet what Lord Simon of Glaisdale calls the 'primary situation'. It will then become necessary for the court t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be 'drafted with divine prescience and perfect clarity'. We can do no better than repeat the famous words of judge Learned Hand when he said : "... it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing: 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 '" In CIT v. Natu Hansraj [1976] 105 ITR 43, 49, this court observed as follows : " It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Lords in Warburton v. Loveland [1832] 2 D C1 480, 500, 'no rule of construction can require that when the words of one part of statute convey a clear meaning it shall be necessary to introduce another part of a statute for the purpose of controlling or diminishing the efficacy of the first part'. 'It is not the duty of a court of law,' said Selwyn L.J. in Smith's case [1869] LR 4 Ch. App. 611, 614, 'to be astute to find out ways in which the object of an Act of the Legislature may be defeated'. " It is a well-settled rule of construction that in the first instance, the grammatical sense of the words is to be adhered to. If that is contrary to or inconsistent with any expressed intention, or declared purpose of the statute, or if it would involve any absurdity, repugnance or inconsistency, the grammatical sense must then be modified or extended or abridged so far as to avoid such inconvenience, but no further. The elementary rule is that the words used in a section must be given their plain grammatical meaning. As held by the Supreme Court in New Piece Goods Bazaar Co. Ltd. v. CIT, [1950] 18 ITR 516, it is an elementary duty of a court to give effect to the intention of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary to call in aid any outside consideration to gather its meaning. Even if the above provision is construed keeping in mind the object with which it was enacted, no other construction can be placed on it. We have already referred to the object of the Legislature in enacting the above provision. The object was to facilitate merger of uneconomic company units with other financially sound Indian companies in the interest of increased efficiency and productivity. The object was not to encourage amalgamation of companies in general, but to facilitate amalgamation of uneconomic company units with financially sound Indian companies. It was with a view to achieving this object that the Legislature provided that in the case of amalgamation of companies, where the transfer by a shareholder of the amalgamating company of the share or shares held by him in the amalgamating company is in consideration of a share or shares in the amalgamated company, the shareholder of the amalgamating company would be entitled to the benefit of section 47(vii). In the case of such transfer, even if it is covered by section 45, profits and gains from such transfer would not be exigible to tax. The Legisl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of sale of shares in the amalgamated company by a shareholder of the amalgamating company: (i) whether the asset sold is a short-term capital asset; and (ii) what is the cost of acquisition of the shares. It is in the context of such sale or transfer that section 2(42A) and section 49(2) have been enacted. Explanation (i) (c) to section 2(42A) provides that in determining the period for which any capital asset is held by the assessee, in the case of a capital asset being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee. Thus, for the purpose of deciding whether the share in the amalgamated company held by the shareholder of the amalgamating company is a short-term capital asset or not, the period for which the share in the amalgamating company is held by the shareholder has to be taken into account. However, the question of clubbing of the two periods would arise only in case where the share or shares in the amalgamated company has or have become the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (vii) of section 47 and that such composite consideration would advance the object for which the Legislature has inserted that provision. It may be that issue of bonds/debentures with shares is a usage known for decades, but that is not relevant for the purpose of deciding whether the transaction in question comes within the purview of section 47(vii). Unless the transaction falls within the four corners of section 47(vii), it cannot be excluded from the application of section 45. There is also no question of justice, equity or fairplay involved in interpreting section 47(vii). It was for the law-making body to decide to which category of transfers the provisions of section 45 should not be made applicable. If that body, in its wisdom, decides not to apply section 45 only in case of transfer of shares by a shareholder in the amalgamating company in consideration of any share or shares in the amalgamated company, we fail to see how the principles of justice, equity and fairplay come into play. The law-making body, even though aware of the long-standing usage of issue of bonds/ debentures with shares, has thought it fit to confine the consideration only to a share or shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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