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Petitioner: Mrs. GRACE COLLIS and others VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Kerala High Court Judge(s): V. V. Kamat, P. A. Mohammad Title: Mrs. GRACE COLLIS and others vs COMMISSIONER OF INCOME-TAX Case No.: Income-tax References Nos. 269 to 277 of 1985 Date of Judgment:1996-06-03 Reported As: 1999 PTD 1188 Result: Order accordingly
JUDGMENT
JUDGMENT V. V . KAMAT, J.---These are different references. The assessees of equal number who are close relations inter se are concerned for the assessment year 1976-77. The previous year ended on March 31, 1976. The returns for all these years have been filed on May 6, 1977. Although in the application for reference as far as eight questions are sought to be referred by them in their application for reference before the Tribunal and although the Tribunal by the order, dated September 29, 1984, referred only seven out of them, learned counsel appearing for the assessees restricted submissions only to three questions, candidly stating that with regard to other four questions it may be taken that no submissions are made in regard thereto and these references should be considered and decided as confined only to three questions. Therefore, for the purpose of consideration, the questions to be considered and answered would be as follows: "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that on the amalgamation of Ambassador Steamships (Pvt.) Ltd. with Collis Line (Pvt.) Ltd., there was a transfer by the assessees of their shares in Ambassador Steamships (Pvt.) Ltd.? (2) In case the answer to question No,1 above is in the affirmative, whether the Tribunal was right in holding that the transfer was made in consideration of the allotment to the assessees of shares in Collis Line (Pvt.) Ltd.? (3)Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that section 49(2) of the Income Tax Act, 1961, applied to the sale of the shares of the assessees in Collis Line Pvt. Ltd. which were obtained by the assessees on the amalgamation of Ambassador Steamships (Pvt.) Ltd. with Collis Line (Pvt.) Ltd?" Since all these questions are common and identical in all these references, common judgment
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would be the requirement to avoid duplication. This is the one. The Income-tax Appellate Tribunal also has followed the same course. As stated above, the assessee submitted returns as belonging to the same family stating that they own all the shares in the company known as Collis Line (Pvt.) Ltd. This company came to be incorporated in November, 1968. In pursuance of the order, dated April 2, 1969, in Company Application No,19 of 1969 under section 394 appearing in Chapter V of the Companies Act, common powers to compromise or make arrangement otherwise known in common parlance as "amalgamation proceedings", were recorded. The original company petition and the order of this Court are at Annexures "E" and "F" of the compilation. As far as the assessees are concerned, it would be found from clause (5) of the schedule referring to compromise or arrangement that as the residue of the consideration for the aid transfer, as the assessees were the shareholders of Ambassador steamships (Pvt.) Ltd. (hereinafter referred to as "the amalgamating company"), Collis Line (Pvt.) Ltd. (hereinafter called "the amalgamated company") was ordered to issue to the members of the transferee company 14 equity shares of Rs,100 each in the transferee company credited as fully paid in respect of such share held by him or her in the transferor company including the 300 equity shares of Rs,100 each subscribed for by those members of the transferor company who are signatories to the memorandum and articles of association of the transferee company. It would be more appropriate to reproduce the said clause which is as follows: "As the residue of the consideration for the said transfer, the transferee company shall issue to the members of the transferor company 14 equity shares of Rs,100 each in the transferee company credited as fully paid-up in respect of such share held by him or her in the transferor company including the 300 equity shares of Rs,100 each subscribed for by those members of the transferor company who are signatories to the memorandum and articles of association of the transferee company." For convenience for subsequent reference in regard thereto it would be obvious that these terms "the transferee company" and the "transferor company" would have to be understood as the "amalgamated company" and the "amalgamating company", respectively. There is no dispute that in accordance with the order passed by this Court in the proceedings of amalgamation, as stated above, the assessees were issued shares of Rs,100 each in accordance with the compromise or arrangement as the residue of the consideration for the said transfer in the process of amalgamation. Therefore, it is obvious that the assets and liabilities of the amalgamating company were taken over by the amalgamated company in accordance with- the change in the proportional equivalence in accordance with clause (5) as stated above. The assessees, in pursuance thereof, were allotted 14 shares in the amalgamated company for every share of the face value of Rs,100 each in pursuance of the order of amalgamation. To be precise arithmetically, these assessees acquired 45,318 shares each of the face value of Rs,100 in the amalgamated company--Collis Line (Pvt.) Ltd. There is no dispute that all this took place in 1969 in pursuance of the order of this Court referred to above, on and from August 1, 1969. Incidentally, Collis Line (Pvt.) Ltd. came into existence on November 11, 1968. It would be seen that these shares came to be transferred in favour of one Sri B.K. Chatterji and his group long thereafter, on February 29, 1976, for a total consideration of Rs,48,72,523 and this was at the rate of Rs,107.50 per share. In regard to the assessm ent of these assessees, it would be seen from the assessment order, and it is necessary to emphasize, that the questions requiring consideration are referable to the second submission considered by the Income-tax Officer in regard thereto. It was submitted before the Income-tax Officer, as can be found from the order, that various provisions of the Income-tax Act would require consideration differently, one in a situation where a shareholder in the amalgamating company has transferred his shares in that company in consideration of allotment
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to him of shares in the amalgamated company. It is contended that in such a situation because there was a transfer of shares at the time of amalgamation, the consequence of the provisions would be different. It was contended that in the event in the proceedings of amalgamation it is revealed that there is no transfer, the provisions will have no application at the time of their sales subsequently in the amalgamated company. Before the authority reliance was placed strongly on the decision of the Bombay High Court in CIT v. Rasiklal Maneklal (HUF) (1974) 95 ITR 656. Reliance was also placed on the careful and cautious discussion of the question in the standard treatise in the commentary of Income-tax Law and Practice by Kanga and Palkhivala, Seventh edition, at pages 553 and 554. We will have an occasion to consider the aspect in great details. Suffice it to state at this stage that the Income-tax Officer brushed aside this aspect by stating that to prove that the transaction of the nature referred to in section 47(vii) is not a. transfer for the purpose of capital gains taxation, no other authority is needed. The Income-tax Officer, it must be stated, observed that the provisions of section 47(vii) in no uncertain terms enacts that a transaction of the nature referred to is not a transfer. It is further observed that where the shares in an amalgamated Indian company became the property of the assessee as a result of the transaction of the nature referred to in section 47(vii), the cost of acquisition of the assets shall be deemed to be the cost of acquisition to him, of the shares in the amalgamating company. A reasonable construction is sought to be put on section 49(2) to hold as a consequence that section 49(2) has application to the facts of the case. The resultant process adopted by the Income-tax Officer would show from the order that in the amalgamating company each shareholder purchased a share of the face value of Rs,100 and in lieu thereof became purchaser of 14 shares of equal denomination of Rs,100 in the amalgamated company. As a result the Income-tax Officer divided the figure 100 by 14 to reach a conclusion that the original cost of each share would have to be understood as Rs,7.50 in the context and proceeded with the consequential assessment. The appeals of the assessees before the office of the Commissioner of Income-tax (Appeals), Kerala, Ernakulam, came to be dismissed by separate orders, dated March 20, 1980. Before the first appellate authority the same contention that section 49(2) would not apply since that section would apply only where there was a transfer within the meaning of section 47(vii) of the Act. Reliance was placed on the commentary referred to above which was also placed for consideration of the Income-tax Officer. In addition thereto it was urged before the first appellate authority that the first and primary rule of interpretation, the understanding of the language of the section has to suit the legislation in question to be understood. This was specified by referring to the decision of the Supreme Court in K.S. Venkataraman & Co. (P.) Ltd. v. State of Madras (1966) 60 ITR 112 to emphasize that the primary rule of interpretation that words should be taken as used in the context of their technical meaning and, of not, in their ordinary meaning. The decision of the Bombay High Court in CIT v. Rasiklal Maneklal (HUF) (1974) 95 ITR 656 was also relied upon before the first appellate authority. It is observed in the context of the above submissions, as would be found in the discussion at page 57 of the print, firstly that the exemption under section 47(vii) was patent upon the very face of the statute and, therefore, it would be unnecessary to consider the ratio of the Bombay High Court judgment (see (1974) 95 ITR 656). It is further observed that the factual position would be essentially dissimilar because in the case of sale of shares subsequent to their allotment upon merger or amalgamation and the consequent computation of the cost of the shares thereafter, would make all the difference. The first appellate authority proceeded further to consider the section 49(2) as well as section 47(vii) after quoting the relevant portions from the statutory provisions. It is held that the statutory provisions display the well-defined intent and design of the Legislature to hold the transaction under section 47(vii) as a transfer and to exempt it from the charge of capital gains and, moreover,
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while computing the cost with reference to any future sale of the shares as allotted in the context of amalgamation further to compute the cost of such share as equal to such shares in the amalgamating company. In the process emphasis is shown on the words "transfer" referred to in clause (vii) of section 47 contained in section 49(2) should necessarily mean and imply a transaction which the Legislature has chosen to describe as a transfer quite regardless of--and by varying and modifying if need be--the general concept of "transfer" in common parlance or in connected or parallel legislations. It is observed as a process of logic thereafter, that the provisions of section 47(vii) and section 49(2) would deprive the assessees as such a construction sought to be placed in the submissions cannot be entertained except by repugnance to all accepted rules of interpretation of statutes. It was further submitted before the authority that in the absence of any cost incurred for the shares, it would have to be stated that such a process overlooks the fact that the assesses had shares in the amalgamating company and in their situation the shares in the new company---the amalgamated company---would be as a result of the consideration of the amalgamation taken into consideration by the company Court. In the context, the contention was rejected. The assessee took up the matter before the Income-tax Appellate Tribunal. It was emphasized by the assessees before the Tribunal that the issue price of the shares of Collis Line (Pv4.) Ltd. should have been taken as the cost price in arriving at the capital gains. It was urged before the Tribunal that the provisions of section 49(2) and section 47(vii) would be inapplicable. It was further urged that the decision of the Bombay High Court in CIT v. Rasiklal Maneklal (HIM) (1974) 95 ITR 656 has not been properly appreciated. It was specifically urged that as far as the assessees are concerned, there has been no transfer as such and it cannot be said from the material on record that there was any transfer "by a shareholder" of any capital asset. Needless to state that it was also urged before the Tribunal that the cost of acquisition of the shares sold--sold by the assessee to Mr. Chatterji would have to be understood as "nil" in the context of the situation. On the facts and circumstances in the situation, the process resulting into the order of the Court in the company petition as far back as in 1969 would not be germane in the process of accountability to the capital gains liable to tax in the proceedings. The rival contentions, it must be stated, neatly introduced in the impugned order of the Tribunal. At the outset it has to be emphasized and it is so recorded by the Tribunal that the Revenue accepted the position that no tax on capital gains is leviable with regard to the allotment of shares in the amalgamated company at the time of amalgamation on August 1, 1969. This being the accepted position, the Tribunal has further recorded that the authorities sought to tax only the capital gains arising out of the subsequent transfer of shares by the assessees on February 29, 1976, in favour of Mr. B.K. Chatterji and others. After recording the above situation on the basis of acceptance, the Tribunal has proceeded to consider the statutory provisions. After reproducing section 49(2), the Tribunal has observed that if section 49(2) is attracted, the cost of the shares will be the cost of acquiring the shares in the amalgamated company. The submissions for and on behalf of the assessees which are even otherwise crystal clear, as recorded by the Tribunal, should be summarized. It was contended before the Tribunal that it has to be shown and found consequently that the shares of the amalgamated company should have become the property of the assessees in consideration of the transfer as referred to in section 47(vii) and it is then and only then that section 49(2) would become applicable. Referring to section 47(vii) it was submitted that where in working out the scheme of amalgamation there is a transfer by a shareholder of the shares held by him in the amalgamating company in consideration of the allotment to him of the shares in the amalgamated company, the position would be different. It was submitted that in the present factual situation, there has been no transfer
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by the assessees of their shares in the amalgamating company---Ambassador Steamships (Pvt.) Ltd.--and the amalgamated company--Collis Line (Pvt.) Ltd. It is further clarified that it cannot be said that the shares of the amalgamated company were acquired by the concerned assessees in consideration of a transfer. Obviously referring to the order on compromise or arrangement by the Court, it was further submitted that there was no transfer of the shares of the Ambassador Steamships (Pvt.) Ltd. to Collis Line (Pvt.) Ltd. and it was certainly not by the shareholders. In the context reliance was placed on the decision of the Supreme Court in CIT v. Bankey Lal Vaidya (1971) 79 ITR 594 and also another decision in CIT v. Madurai Mills Co. Ltd. (1973) 89 ITR 45 (SC), the first dealing with two similar situations with reference to the dissolution of a firm and the company going in liquidation declaring the law in regard thereto clarifying the situation in section 47 of the Act pointedly to the conclusion that they are not transfers. Placing reliance on the above decisions, it was further submitted as a consequence that the transactions listed in section 47 would have to be understood as only by way of abundant caution and not because they would have been transfers but for the section. It was submitted that the factual matrix reveals that there had been no transfers of the shares of Ambassador Steamships (Pvt.) Ltd. by the shareholders thereof. Reliance was placed on the factual record pointing out the resolutions passed separately by the shareholders of the two companies agreeing to the scheme of amalgamation and complete absence of any documentary material inter parties between the two sets of shareholders of the two companies. It was emphasized that the process was only by an order of the Court approving the scheme of amalgamation and thereby directing the allotment of 14 shares in the amalgamated company to each share of the amalgamating company. On behalf of the assessees reliance was placed on the decision of the Madras High Court in United India Life Assurance Co. Ltd. v. CIT (1963) 49 ITR 965, with regard to the consequence in regard to a compromise or arrangement of amalgamation of companies. For and in support of a submission that it involves an agreement in regard to transfer of assets of one company in favour of the other and it is the Court that sanctions the scheme and thereby the Court does not make a transfer. All this was submitted to show that the amalgamation cannot be understood as action of the parties but by the order of the Court. Precisely, it was submitted that the provisions of section 49(2) of the Act do not refer to a transfer during amalgamation, but it refers to a transfer by the shareholders. In the context, it is emphasized that the proceedings of the company petition would show that the Court issued no orders in any manner to the shareholders of Ambassador Steamships (Pvt.) Ltd. in any manner. Again relying on the decision of the Bombay High Court, pari materia, it was submitted that even factually there was no provision in the scheme of amalgamation in the case before the Bombay High Court which could be understood as a direction to the assessee shareholder to transfer the share to the new company or anyone else. Apart from strongly relying on the decision of the Bombay High Court reliance was also placed on the decision of the Gujarat High Court in CIT v. R.M. Amin (1971) 82 ITR 194 where there was a question relating to the consequence of the course of liquidation in regard to the distribution of the assets of the liquidated company. It was also emphasized that the observations of the Gujarat High Court are confirmed by the Supreme Court in CIT v. R.M. Amin (1977) 106 ITR 368. Incidentally, although the Tribunal was justifiably unaware of the position, the decision of the Bombay High Court in CIT v. Rasiklal Maneklal (HUF) (1974) 95 ITR 656 has been also confirmed by the Supreme Court in CIT v. Rasiklal Maneklal (HUF) (1989) 177 ITR 198 obviously because this was long after the Tribunal decided the appeals in 1984. Be that as it may, even otherwise it was submitted that the peculiar situation that there is no material on record to show that the shares in the Ambassador Steamships (Pvt.) Ltd.--the amalgamating company--were allotted in exchange for the shares in Collis Line (Pvt.) Ltd.-the amalgamated company-by way of an exchange, but it was by an order of the Court precisely by
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way of a transfer in the process of amalgamation. It was alternatively submitted on the assumption that the transaction is understood as transfer, still it cannot be said that the shares became the property of the assessees in consideration of the transfer which is an essential requirement of section 49(2) of the Act. It was in this connection pointed attention was invited to the text of the orders of this Court in the company petitions to show that it was an amalgamation of the two companies by way of a compromise or arrangement agreed at a separate meeting of the shareholders of the two companies. Precise emphasis was given to show that the amalgamated company took over all the assets of the amalgamating company or the purpose of discharging debts, liabilities and the obligations of the amalgamated company.. After referring to the earlier clauses, attention was arrested with regard to the provisions of paragraph 5 reproduced hereinbefore and it was stressed that there was no provision by which the shareholders of the amalgamating company were required to transfer the shares in the amalgamating company to the amalgamated company. Factually, it was submitted as a consequence that if section 49(2) of the Act is taken into consideration, the conclusion will be that the provisions do not apply. As a consequence, it was submitted that in such a situation the cost of the shares of the assessees in the amalgamated company would have to be deemed to be the market value of such share on the day on which they were issued to them. In the background of the accepted position taken up by the Revenue specified hereinbefore, what was submitted on behalf of the Revenue before the Tribunal needs also to be summarized. It was submitted that a taxing provision should receive a reasonable consideration if the intention of the Legislature is clear and beyond doubt. It was submitted that sometimes the expectation is that the provision is expected to be more artistically drafted. This cannot be a ground since the intention is clear and beyond doubt. It was submitted that any construction bringing on the surface any kind of tautology or superfluity, it must as far as possible be understood by the Court to prefer a construction giving some meaning and effect to the words of the Legislature to reduce the futility. Reliance was placed on three decisions in CIT v. R.M. Amin (1971) 82 ITR 194 (Guj); CIT v. R.M. Amin (1977) 106 ITR 368 (SC) and CWT v. Kripashankar Dayashankar Worah (1971) 81 ITR 763 (SC) in support of the above submissions. It was for the submission that the manifest intention of a legislation in question should be of paramount consideration in understanding and interpreting the legislative provisions---the words and phrases in the context. Carrying the submission further it was submitted that the intention in enacting section 49(2) would be, where the shares in the amalgamated company are subsequently transferred and the capital gains on the same have to be computed, the cost of such shares should be taken as the cost of acquiring shares in the amalgamating company. The Revenue contended that the requirements of section 47(vii) and section 49(2) would have to be understood as satisfied in the present case. It was submitted that before the shares in the amalgamated company were issued to the assessees, there was an extinguishment of the rights of the assessees in the shares of the amalgamating company. It was submitted that when an existing right is extinguished and a new right is created, such extinguishment could not be considered and understood otherwise than as a transfer. Amalgamation is only an arrangement whereby the assets of the two companies become vested in and under the control of one of them. Substantially all the shareholders of the two companies in the process of amalgamation would have to be understood as exchanging their shares for the shares in the other or the amalgamated company. It was submitted that by the order of the Court there was an extinguishment of the rights of the assessees in regard to the shares of Ambassador Steamships (Pvt.) Ltd. Reliance was placed for the submission that when the existing right in the capital asset is extinguished and a new one is created, it could not be understood as anything other than a transfer and this reliance was on the decision of the Supreme Court in Mangalore Electric Supply Co. Ltd. v. CIT (1978) 113 ITR 655 as well as another decision of the Gujarat High Court
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in CIT v. Vania Silk Mills (P.) Ltd. (1977) 107 ITR 300. It needs to be mentioned that thereafter the said decision of the Gujarat High Court was also taken up before the Supreme Court in Vania Silk Mills (Pvt.) Ltd. v. CIT (1991) 191 ITR 647 and it was decided therein that the situation of extinguishment of rights would have to be understood and confined to the extinguishment of right on account of a transfer and cannot be extended to mean any extinguishment of right independent or otherwise than on account of transfer. In other words, the decision came to be reversed on the…
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