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1974 (4) TMI 25

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..... and the High Court of Rajasthan by orders dated May 20, 1960, and April 22, 1960, respectively. As a result of the amalgamation the shareholders in Merchandise Stores Ltd. got one ordinary share of Rs. 10 each in Birla Cotton Spinning and Weaving Mills Ltd. for every 4.75 ordinary shares of Rs. 10 each fully paid up held by them in Merchandise and Stores Ltd. Similarly, every shareholder in Rajputana General Dealers Ltd. got one ordinary share of Rs. 10 in Birla Cotton Spinning and Weaving Mills Ltd. for every 2.58 ordinary shares of Rs. 10 each in Rajputana General Dealers Ltd. on the date of the order approving the scheme. The assessee claimed that in the said transaction of amalgamation it sustained a capital loss. The shares of Rajputana General Dealers Ltd. and Merchandise and Stores Ltd. were not quoted on any stock-exchange whereas the shares of Birla Cotton Spinning and Weaving Mills Ltd. were quoted on the Calcutta Stock Exchange. The face value of shares of Rajputana General Dealers Ltd. and Merchandise and Stores Ltd. as represented by the break-up value of shares of the two companies on the date of amalgamation was much more than the market value of the equivalent sha .....

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..... rs of one or both of the amalgamating companies exchanging their shares (either voluntarily or as the result of a legal operation) for shares in the other or a third company. The arrangement is frequently effected by means of a take-over bid by one of the companies for the shares of the other, or of a take-over bid by a third company for the shares of both (see Weinberg on Take-overs and Amalgamations, 2nd edition, page 3, article 103). In the case of Royal Insurance Company Ltd. v. Stephen (H. M. Inspector of Taxes) the question for consideration was whether the surrender of the old stocks enabled the result of the company's holding of those investments to be definitely ascertained and was equivalent to a realisation. In that case the appellant-company held large investments including a variety of British railway stocks. The company admitted that any profit made on the realisation of investment was part of its profits for income-tax purposes, and the Crown admitted that any loss was an admissible deduction from the company's profits. Under the Railways Act, 1921, the company was required to accept new stocks in the amalgamated company in exchange for the stocks previously held in .....

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..... ll be allotted to the transferor. In that case there are in truth two transactions--one a transaction of sale and the other a contract under which shares are accepted in satisfaction of the liability to pay the price. " This view was affirmed in Commissioner of Income-tax v. B.M. Kharwar. In the present case it will be seen that as soon as the petitioner surrenders its shares, Birla Cotton Spinning and Weaving Mills Ltd. got those shares. The petitioner, therefore, is parting with its shares held by it in Merchandise and Stores Ltd. and Rajputana General Dealers Ltd. The petitioner is obviously parting with its shares in the said two companies in favour of Birla Cotton Spinning and Weaving Mills Ltd. who in return for those shares is allotting certain shares to the petitioner in the proportion mentioned in the scheme of amalgamation. Learned counsel for the assessee contended before us that even assuming that the shares held by the petitioner in Merchandise and Stores Ltd. and Rajputana General Dealers Ltd. were worth nothing if Birla Cotton Spinning and Weaving Mill Ltd. were agreeable to accept those shares and in lieu thereof offers its shares to the petitioner, there was .....

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..... e what has happened is that certain shares in the Birla Cotton Spinning and Weaving Mills Ltd. have been allotted to the assessee on the basis of the scheme for amalgamation, and, therefore, there is no exchange. Mr. Pal strongly relies upon the decision in In re V. G. M. Holdings Ltd. In that case the sole question for decision was whether or not the word "purchase" in section 45 of the Companies Act, 1929, covers a case where the money which the company provides is used as a subscription for the company's own shares. Lord Greene M.R., delivering the judgment of the Court of Appeal, observed as follows : " Quite apart from those considerations relating merely to the language of the Act, it seems to me that the word 'purchase' cannot, with propriety be applied to the legal transaction under which a person, by the machinery of application and allotment, becomes a shareholder in the company; he does not purchase anything when he does that. Counsel for the appellant endeavoured heroically to establish the proposition that a share before issue was an existing article of property, that it was an existing bundle of rights which a shareholder could properly be said to be purchasing whe .....

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..... 48, only the word "purchase" was there. The word "subscription" was introduced by amendment in 1948. So, at the time when the case referred to above was decided, the word "subscription" was not there in the Companies Act. Counsel for the department next relied upon J. P. Coals Ltd. v. Commissioners of Inland Revenue . In that case it was held that where by an instrument entered into in pursuance of an agreement a shareholder in one company transferred his shares to another company in exchange for certain shares in the latter company the transaction amounted to a conveyance on sale of the shares within sections 54 and 55 of the Stamp Act and were chargeable with ad valorem stamp. Lord Esher M. R. quoted with approval the observations of Lindley L.J. in the case of John Foster Sons Ltd. v. Inland Revenue Commissioners which are as follows: " 'The consideration for the transfer of this property is, I agree, not money, but it is stocks and securities,....... which for the purpose are to be regarded as equivalent to money.... by reason of section 71 of the Act.' " It is therefore, clear that the decision in that case was with reference to the stamp duty chargeable on the in .....

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..... d Weaving Mills Ltd. in exchange for ordinary shares of the two amalgamating companies in a certain proportion as specified in the order. It further provides that as regards the holders of preference shares in Rajputana General Dealers Ltd., they will be paid by the Birla Cotton Spinning and Weaving Mills Ltd. at the rate of Rs. 50 per share held by them. This certainly amounts to a transfer of the shares held by the assessee in favour of Birla Cotton Spinning and Weaving Mills Ltd. In Commissioner of Income-tax v. Smt. Anusuya Devi, the Supreme Court pointed out that the power to reframe a question may be exercised to clarify or to pinpoint the real issue between the taxpayer and the department or for similar other reasons; it cannot be exercised for reopening an enquiry or questions of fact or law which is closed by the order of the Tribunal. In the present case the principal question for decision is not whether there has been an exchange or not but whether there has been a capital loss or not because of a transfer of the capital assets of the assessee. No fresh investigation into facts is necessary. Mr. Pal appearing on behalf of the department has fairly contended that he canno .....

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