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TMI Blog1990 (4) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... were to be adjusted from invoices raised by TMG and NEI. Under a scheme of amalgamation approved by the Bombay High Court and also by the Central Government u/s. 72A of the Income-tax Act, TMG and NEI were amalgamated with the assessee with effect from 1st July 1979. On the date of amalgamation, a sum of Rs. 1,13,16,515 was due to the assessee from TMG and another sum of Rs. 2,87,82,068 was due from NEI on advances account. As a result of the merger, all the assets and liabilities of TMG and NEI were taken over by the assessee. Since the total assets, after paying the outside liabilities, taken over from TMG and NEI were inadequate, the assessee claimed the following amounts as a deduction while computing the total income of the assessee : (i) outstanding advances a mounting to Rs. 3,66,55,647 due from TMG and NEI ; (ii) the excess liabilities of TMG amounting to Rs. 1,29,65,253. (iii) the shares and debentures of the assessee issued to the erstwhile shareholders of TMG amounting to Rs. 24,31,202. (iv) the loss of equity capital of Rs. 19,38,900 invested by the assessee in TMG. The ITO disallowed all these claims on the following grounds : (a) for the purpose of determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overable be cause of inadequate assets. --------------------------------------------------------------------------------------------------------------------------------------------------- 8.The CIT(A) did not accept the contention either for the claim of Rs. 5,39,91,007 based on W.D.V. or the alternative claim of the assessee for the claim of Rs. 2,19,74,819 by giving the following reasons thereof : (a) That in view of the purpose of the amalgamation spelt out in para 4 of the statement u/s. 393 of the Companies Act, 1956 filed before the High Court, the amalgamation had been effected with a view to safeguard the financial interest of all the creditors including the assessee whereby for the recovery of TMG and NEI in the operation of financial institutions and bank was possible with proper managerial, technical and financial assistance ; (b) That in view of clause (iv) of para 6 of the Statement, even the shareholders of TMG and NEI were to be compensated, although not fully, by the issue of shares and debentures of Voltas yet as the shareholders were to get back a part of their capital invested in the two companies by way of shares and debentures from Voltas, it cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eardsell Co. (P.) Ltd. [1981] 130 ITR 159 (Mad.) wherein the expenditure on amalgamation has been held to be revenue in nature and contended that on the same parity the loss incurred by the assessee should be allowed while computing the income. The learned departmental representative, on the other hand, submitted that the advantages of the two amalgamating companies did also pass on to the assessee including the benefit u/s. 72-A and therefore, the recoveries should not be said to be remained outstanding. There was nothing in the scheme to write off such debts. At best, it could be said to be like a payment of Rs. 14 crores, as according to him consideration for acquiring an asset worth Rs. 13 crores. It was not the loss on revenue account. It was also not shown to be irrecoverable. On amalgamation, he submitted, the liability of the two amalgamated companies became the assessee's own liability and therefore, no question of its non-recoverability from self would arise. He also referred to Explanation 7 to Sec. 43, providing for adoption of actual cost in the hands of amalgamated company at the same value as it would have been if the amalgamating company had continued to treat the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Calcutta decision, there was an amalgamation of 100% subsidiary and therefore, would have no application in the present case because the assessee was holding only a small portion of the shareholding of TMG. He drew our attention to the passages of the judgment at page 404 dealing with the contentions of the counsel of the assessee before the High Court, viz., that the assets, rights and liabilities of the amalgamating company were first transferred to and vested in the assessee and it was only thereafter that the amalgamating company stood dissolved as provided for in the scheme and as a result of such a dissolution of the rights of the assessee in the shares of the amalgamating companies stood extinguished, amounting to a transfer as a result of which the assessee suffered a capital loss. The computation of such loss was the value of the net assets vesting in the assessee from the amalgamating companies minus the cost of acquisition of the shares. He also referred to the following portion of the judgment at pages 408 and 409 : "In the instant case, under the scheme, there has been, firstly, a transfer of the capital assets of the amalgamating companies to the amalgamated company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n W.D.V. the claim of excess liability of TMG amounting to Rs. 1,29,65,253 and the claim for a sum of Rs. 24,31,202 for which the assessee issued shares and debentures to erstwhile shareholders of TMG and NEI were not raised before us. We, therefore, confine our decision only on the alternative claim of the assessee for the loss of Rs. 2,19,74,819 raised for the first time before the CIT(A) and is the only ground as per the memo of appeal filed by the assessee. 15. By virtue of the two separate orders of the High Court of Bombay both dated 3-7-1980, the schemes of amalgamation were sanctioned whereby TMG and NEI got merged with the assessee with effect from 1-7-1979 ordering the entire business and undertaking of the amalgamating companies including all its properties, moveable and other assets of whatsoever nature, including industrial and other licences and quota, rights, trade marks and other industrial property rights, leases and tenancy rights, if any, benefit of all agreements and all other interests, rights or powers of every kind, nature and description whatsoever (collectively referred to in the scheme of Amalgamation sanctioned as "the undertaking") be transferred witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,82,93,766, the unabsorbed development rebate of Rs. 7,18,432, the unabsorbed investment allowance of Rs. 6,57,430 and the capital expenditure u/s. 35(1) of Rs. 4,35,209. These are the figures mentioned in the assessment order for the year under consideration. These losses were subject to the loss to be determined for the assessment year 1977-78 which assessment was pending set aside. We agree with the CIT(A) in observing that due to amalgamation the liability of the two amalgamating companies become the liability of the assessee-company and therefore, there could arise no question of any short recovery or gain to the assessee resulting from such adjustments. The right of recovery from the two amalgamating companies was squared up by the liability of the two companies. In these circumstances, we uphold the order of the CIT(A) rejecting the claim of the assessee for the loss of Rs. 2,19,74,819. 18. We shall now deal with the revenue's appeal against the allowance of loss of Rs. 19,38,900 in respect of shares held by the assessee in TMG. To attract the liability of capital gain or in the negative sense to obtain the benefit of set off and carry forward of the losses under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll an extraordinary general meeting by requisition. (3) Participation in the capital and asset of the transferor-companies on liquidation. 21. Keeping the above legal position in view, the Calcutta High Court in the case of Shaw Wallace Co. Ltd. examined the position of a shareholder of the amalgamating company and held that none of the aforesaid rights extinguished on amalgamation. The Court held that the entire profits that might be earned by or through an undertakings, assets, rights and powers of the transferor-companies would become the profits of the assets and thus there was no extinguishment of the assessee's right to participate in the dividends of the transferor-companies rather it was an enlargement of such right of participation. It was also held that in managing its own affairs the amalgamated company would also be solely managing the entire affairs of the amalgamating company and therefore, there was no extinguishment of the right of the assessee as a shareholder to take part in the management of the transferor-companies, but again enlargement of such right. The entire capital and assets of the amalgamating company vested in the amalgamated company and thereby t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion that their concurrence of the Calcutta High Court was to a case of amalgamation of 100% subsidiary with its parent company and that should not be taken to mean that the identical position may exist in other types of amalgamation as they were not considering the question of amalgamation of a company with another company which did not own 100% of the shareholding of the transferor-company. Their Lordships left the question open by observing that that position would be examined and considered in an appropriate case and stated that different considerations might perhaps exist in such a case. In the aforesaid paragraphs we have already stated that the decision would be applicable in a case of amalgamation company with the amalgamated company where the former held even less than 100% shareholding. The decision cited by the learned counsel of the assessee, viz., Chunilal Khushaldas had no bearing to the question at issue. In that case the question was of determination of the date of acquisition of bonus shares to find out whether the capital gain earned by the assessee on the sale of bonus shares would be long term or short term and in that context, it was held that the bonus shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany in liquidation and that right was satisfied and, by satisfaction, extinguished when such moneys were received by the shareholder. Such moneys received by the shareholder did not represent any consideration received by him as a result of the extinguishment of his rights in the share. It was not the extinguishment of his rights in the shares for which consideration was received by him, it was rather because moneys representing his share in the distribution were received by him that his rights in the shares were extinguished. That decision has the approval of the Supreme Court and which is reported in R.M. Amin's case. 27. One of the reasons given by the Calcutta High Court in the case of Shaw Wallace Co. Ltd. is that there involve neither a transfer involving other person nor any consideration passing as a result thereof even though there might be an extinguishment of rights. In the decision of Karnataka High Court in Master Raghuveer Trust's, it was held that by process of amalgamation, the shares held by the assessee in the amalgamating company was struck off the register as required u/s. 394(1)(iv) of the Companies Act and that the assessee, as a member of the amalgamatin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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