COMMISSIONER OF INCOME-TAX VS M. CT. M. CORPORATION (PRIVATE) LTD., 1998 PTD-MADRAS-HIGH-COURT-INDIA 968 (1996)

(a) Income-tax---

----Capital gains---Amalgamation of companies---Shareholder of amalgamating company allotted shares and debentures in company in which it was amalgamated---No extinguishments of rights in transferor-company and no transfer for purposes of computing capital gains---Even if it were transfer capital gains from it would be exempt from tax under S.47(vii)---Indian Income Tax Act, 1961, Ss.2(47), 45 & 47(ii).

The assessee was one of the shareholders of a company, which under a scheme of amalgamation, was amalgamated with a company T. Every shareholder in the transferor-company in respect of every share of Rs.100 held by him was entitled as of right to claim and receive from the transferee-company allotment of the following: (a) 7-3/4 equity shares of the transferee-company of Rs.10 each credited as fully paid-up; and (b) one redeemable debenture of the transferee-company of Rs.100 credited as fully paid-up at the time of merger by Court. As the shareholder of the transferor- company, the assessee received 88,644 equity shares of Rs.10 each and 11,438 debentures of Rs.100 each, both of the company T. In the assessment year 1975-76, the assessee claimed that the above allotment of shares in terms of the scheme of amalgamation did not involve any transfer within the meaning of section 45 of the Income Tax Act, 1961 and hence it was not liable to any capital gains tax. The Income-tax officer accepted the contention of the assessee and did not bring to tax any capital gains The Commissioner of Income-tax, acting under section 263, held that the assessee was liable to capital gains tax as the extinguishments of the shareholding rights in the amalgamating company amounted to a "transfer" within the meaning of section 2(47) of the Act. Accepting that part of the assessee's contention that what it received by way of shares in the amalgamated company was exempt under section 47(vii), the commissioner of Income-tax directed the Income-tax Officer to determine the capital gains attributable to allotment of debentures and bring them to tax. The Tribunal held that there was. a transfer by way of extinguishments of rights within the meaning of section 2(47) of the Income Tax Act, 1961. However, the Tribunal also held that this transfer was exempted under section 47(vii) of the Income Tax Act, 1961, since the transfer in consideration of shares and debentures was a single indivisible transaction which could not be split into two transactions and hence no capital gains could be brought to tax. On a reference:

Held, (i) that the first question as framed and referred by the Tribunal related to the grant of exemption under section 47(vii) the correctness of which could not be tested without going into the question whether there was any transfer. The question whether there had been a transfer could be referred and could be Considered by the High Court;

(ii) that inasmuch as shares and debentures were allotted to the assessee on account of the amalgamation of the two companies and in view of the fact that the identity of the transferor-company got lost in the amalgamation, there was no transferor extinguishments of any right in allotting the shares and debentures in favour of the assessee under the provisions of section 2(47) of the Act. Even if there were a transfer, the gains arising therefrom were entitled to exemption under section 47(vii) of the Act.

Central India Industries Ltd. v. CIT (1975) 99 ITR 211 (Cal.); CIT v. Amin (R.M.) (1977) 106 ITR 368 (SC); CIT v. Gautam Sarabhai Trust (1988) 173 ITR 216 (Guj.); CIT v. Leena Sarabhai (N. Ch.) (1996) 221 ITR 520 (Guj.); CIT v. Master Raghuveer Trust (1985) 151 ITR 368 (Kar.); CIT v. Rasiklal Maneklal (HUF) (1974) 95 ITR 656 (Bom.); CIT v. Rasiklal Maneklal (HUF) (1989) 177 ITR 198 (SC); I. D. Parry Ltd. v. CIT (1988) 174 ITR 11 (Mad.); Leo Machodo v. CIT (1988)172 ITR 744 (Mad); Shaw Wallace & Co. Ltd. v. CIT (1979) 119 ITR 399 (Cal.) and Vania Silk Mills (P.) Ltd. v. CIT (1991)191 ITR 647 (SC) ref.

(b) Income-tax---

----Reference---Revenue asking for reference---Power of Tribunal to refer question not suggested by revenue---Indian Income Tax Act, 1961, S.256.

Whenever any party is aggrieved over an order passed by the Tribunal it is open to such aggrieved party to approach the Tribunal to refer a question of law said to arise out of the order of the Tribunal for the opinion of the High Court. Whether the question is to be referred or not is purely within the realm of the Tribunal. What kind of question is to be referred and in what manner it is to be framed is also purely the concern of the Tribunal. Where the assessee succeeded in an appeal before the Tribunal, it is open to the assessee to suggest a question in the reference application filed by the Department questioning some of the findings given by the Tribunal in the appeal. In such circumstances, it is open to the Tribunal to refer a question which is not suggested by the Department.

C.V. Rajan for the Commissioner.

R. Meenakshi Sundaram for the Assessee.

JUDGMENT

K. A. THANIKKACHALAM, J. ---At the instance of the Department the Tribunal referred the following two questions for the opinion of this Court under section 256(1) of the Income Tax Act, 1961:

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the transfer of shares in a scheme of amalgamation in consideration of shares and debentures is a single indivisible transaction and saved from charging of capital gains under section 45 by virtue of section 47 (vii) of the Income Tax Act, 1961?

(2)Whether in the transaction, by which the assessee received 88,644 equity shares and 11,438 debentures of Travancore Rayons Ltd., the assesses is liable to any capital gains tax?"

The assessee was one of the shareholders of the Indian Overseas Bank Limited, which under a scheme of amalgamation, was amalgamated with the Travancore Rayon Limited. Every shareholder in the transferor- company in respect of every share of Rs. 100 held by him was entitled as of right to claim and receive from the transferee-company (Travancore Rayons Ltd.) allotment of the following:

(a)7-3/4 equity shares of Travancore Rayons Ltd., of Rs. 10 each credited as fully paid-up; and

(b)One redeemable debenture of the transferee-company of Rs.100 credited as fully paid-up at the time of merger by Court.

As the shareholder of the transferor-company, the assessee received 88,644 equity shares of Rs.10 each and 11,438 debentures of Rs.100 each, both of the Travancore Rayons Limited. In the assessment year 1975-76, the assessee represented that the above allotment of shares in terms of the scheme of amalgamation did not involve any transfer within the meaning of section 45 of the Income Tax Act 1961, and hence it was not liable-to any capital gains tax. The Income-tax Officer accepted the contention of the assessee and did not bring to tax any capital gains in his assessment order, dated September 30, 1977.

The Commissioner of Income-tax, while scrutinising the order, noticed that the order passed by the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. In the order, passed under section 263 of the Act, the Commissioner of Income-tax held that the assessee was liable to capital gains as the extinguishments of the shareholding rights in the amalgamating company amounts to a "transfer" within the meaning of section 2(47) of the Act. Accepting that part of the asseessee's contention that it received by way of shares in the amalgamated company is exempt under section 47(vii), the Commissioner of Income-tax directed the Income-tax Officer to determine the capital gains attributable to allotment of debentures and bring them to tax.

Aggrieved by the order of the Commissioner of Income-tax, the assessee filed a second appeal before the Tribunal. The Tribunal, in its first part of the order, said that there was a transfer by way of extinguishments of rights within the meaning of section 2(47) of the Income Tax Act, 1961. However, the Tribunal also held that this transfer is exempted under section 47(vii) of the Income Tax Act, 1961, since the transfer in consideration of shares and debentures is a single indivisible transaction which cannot be split into two transactions and hence no capital gains could be brought to tax. The Tribunal, therefore, cancelled the order of the Commissioner of Income-tax passed under section 263 of the Act.

The Commissioner required only one question, namely, the first question to be referred. The Commissioner of Income-tax required the question only on the aspect of which the Department lost before the Tribunal. According to the Tribunal, the question required by the Commissioner of Income-tax by itself may not reflect the real controversy that was before the Tribunal. The Tribunal has rejected one aspect of the case put forward by the assessee and has accepted the other aspect, which aspect by itself extended full relief to the assessee. Hence, to bring out the real controversy, the Tribunal referred one more question. It is numbered as question No.2. .

By way of preliminary objection, learned standing counsel for the Department submitted that the Tribunal has no jurisdiction to refer question No.2, which was not sought to be referred by the Department. According to learned standing counsel, the Tribunal has already decided that there is a transfer according to the facts arising in this case and, therefore, no question need be referred raising the issue whether there is a transfer or not in the case of the assessee. Learned standing counsel, in order to support his case that the Tribunal has no jurisdiction to refer the question which was not sought for, relied upon a decision of this Court rendered in E. I. D. Parry Ltd. v. CIT (1988) 174 ITR 11. In the abovesaid decision, this Court held that the Tribunal was not competent to refer suo motu the question as to whether the surplus amounts in question were taxable as revenue receipts inasmuch as the Department had not sought for reference on that question which wasdecided against them. It remains to be seen that whenever any party is aggrieved over an order passed by the Tribunal, it is open to such aggrieved party to approach the Tribunal to refer a question of law said to arise out of the order of the Tribunal for the opinion of this Court. Whether the question is to be referred or not is purely within the realm of the Tribunal. What kind of question is to be referred and in what manner it is to be framed is also purely the concern of the Tribunal. In the present case, the Department has filed a reference application requesting the Tribunal to refer the first question which, according to the Department, relates to exemption contemplated under section 47(ii) of the Act. Where the assessee succeeded in an appeal before the Tribunal, it is open to the assessee to suggest a question in the reference application filed by the Department questioning some of the findings given by the Tribunal in the appeal. In such circumstances, it is open to the Tribunal to refer a question which is not suggested by the Department. According to the Department, the question whether there was a transfer in the case of the assessee was already decided in the appeal and, therefore, the Department was not aggrieved over that part of the order. Therefore, it is the case of the Department that the Tribunal ought not to have referred the second question for the opinion of this Court, even though it arises out of the order of the Tribunal. According to us, even the first question as framed and referred by the Tribunal relates to the grant of exemption under section 47(ii), the correctness of which cannot be tested without going into the question whether there is any transfer in the case of the assessee. Therefore, even it question No.2 is out of context, while answering question No. 1, it is for the Court to find out whether the disputed item is chargeable to tax and then only it has got to be considered whether any exemption can be granted under the relevant provisions. It is on this background, we are proceeding to answer the questions referred to us, even though, according to learned standing counsel, the second question cannot be taken into consideration in the matter of expressing out opinion.

We have already set out the facts in detail. Section 45(l) of the Income-tax Act, 1961, states as under:

"Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54-B, 54-C and 54-D be chargeable to income-tax under the head Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place. "

Section 47(vii) states that any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company shall be exempted if---

(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and

(b) the amalgamated company is an Indian company.

The Tribunal following the decision of the Calcutta High Court in the case of Central India Industries Ltd. v. CIT (1975) 99 ITR 211 held that there is a transfer of capital asset in the case of the assessee. According to the Tribunal, the decisions in the case of CIT v. R. M. Amin (1977) 106 ITR 368 (SC) and in the case of Show Wallace & `Co. Ltd. v. CIT (1979) 119 ITR 399 (Cal) and in the case of CIT v. Rasiklal Maneklal (HUF) (1974) 95 ITR 656 (Bom) are not applicable to the facts of the case. Our attention was drawm to a decision of the Supreme Court in the case of CIT v. Rasiklal Maneklal (HUF) (1989) 177 ITR 198. According to the facts arising in that case, on December 31, 1959, the respondent held 90 shares in one S Co. of the face value of Rs. 100 each. Pursuant to a scheme of amalgamation sanctioned by the High Court on November 25, 1960, whereunder, the holders of shares in the S Co. were to be allotted in the N.S. Co. One share of Rs. 125 each for two shares in the S Co. and the S Co. was to be dissolved, the respondent was allotted 45 shares in the N.S. Co. In the proceedings for the assessment of the respondent for the assessment year 1961-62, the Income-tax Officer omitted to consider the applicability or otherwise of section 12-B of the Indian Income-tax Act, 1922. In revision proceedings, the Commissioner held that capital gains arose from the acquisition of 45 shares in the N.S. Co. and directed the officer to revise the assessment. On these facts, while answering the question whether, on the facts and in the circumstances of the case, the sum of Rs.49,350 could be assessed in the hands of the assessee by exchange of relinquishment as provided for under section 12-B of the Act, it was held that there was neither an exchange nor a relinquishment and no capital gains arose from the transaction.

There is also a decision of the Karnataka High Court in the case of CIT v. Master Raghuveer Trust (1985) 151 ITR 368. According to the facts arising in that case, the assessee trust was a shareholder in the Syndicate Bank Limited (S. B. Ltd.). After the nationalisation of bunks, the Syndicate Bank Limited was amalgamated with the Industrial Credit and Development Syndicate (I.C.D.S.) as per the scheme approved by the Court under section 394 of the Companies Act, 1956. Consequently, the assessee received equity shares, bonds, debentures, etc., in the I.C.D.S. for the shares held by the assessee in the Syndicate Bank Ltd. For the assessment year 1974-75, the assessee claimed exemption of the capital gains realised from the said scheme of amalgamation on two grounds: (i) that there was no transfer involved as required under section 2(47) of the Act; and (ii) even if there was a transfer, the sum realised therefrom was exempt under section 47 (vii) of the Act. On these facts, while answering the question whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that no transfer was involved within the meaning of section 2(47) on the amalgamation of Syndicate Bank Ltd. with the Industrial Credit and Development Syndicate in spite of the provisions of section 47(vii) so as to attract the capital gains tax, held as under (headnote):

"Firstly, the assessee was not an nominee patty to the amalgamation or to any transaction by which its assets were transferred to the I.C.D.S. Secondly, by the process of amalgamation, the shares held by the assessee in the Syndicate Bank Ltd., had become useless or valueless and the Syndicate Bank Ltd. was struck off the register as required under section 394(1)(iv) of the Companies Act. And, thirdly, the assessee, as a member of the amalgamating company, the Syndicate Bank Ltd. was entitled to some shares, bonds, etc., from the I.C.D.S. which were neither in satisfaction of its rights nor as a consideration for the transfer.

Therefore, the amalgamation of the Syndicate Bank Ltd. with the I.C.D.S. and the consequent allotment of shares, etc., by the I.C.D.S. to the shareholders of the Syndicate Bank Ltd. did not result in a transfer of a capital asset of the assessee for consideration within the meaning of section 2(47) so as to be chargeable to income-tax under the head 'Capital gains'."

The special leave petition filed against the abovesaid decisi6on in CIT v. Master Raghuveer Trust (1985) 151 ITR 368 (Kar) was dismissed by the Supreme Court in Special Leave Petition (Civil) Nos. 4570 and 4571 of 1984, dated November 26, 1990 (see (1991) 187 ITR (St.)45).

In the case of C. Leo Machodo v. CIT (1988)172 ITR 744 (Mad) while considering the provisions of sections 2(47), 45 and 48 of the Income Tax Act , 1961, this Court held, that (headnote):

"as the ship sank in the high seas without any act on the part of any person, the provisions of section 45 will not be attracted. Where moneys were paid by an insurance company consequent upon total destruction of the property and no transfer results from such destruction or extinguishment of all rights in the capital asset, the amount paid by the insurance company could not be described as a consideration as a result of the transfer of the capital asset. Therefore, the assessee was not liable to ire assessed to capital gains tax in respect of the sum of Rs.1,00.000 received from the insurance company. "

In a decision in the case of Vania Silk Mills (P.) Ltd. v. CIT (1991) 191 ITR 647 (SC), the Supreme Court approved the decision in C. Leo Machodo v. CIT (1988) 172 ITR 744 (Mad.) According to the Supreme Court, when an asset is destroyed there is no question of transferring it to others. The destruction or loss of the asset, no doubt, brings about the destruction of the right of the owner or possessor of the asset, in it. But it is not on account of transfer. It is on account of the disappearance of the asset. The extinguishment of right in the asset on account of extinguishment of the asset itself is not a transfer of the right but its destruction. By no stretch of imagination can the destruction of the right on account of the destruction of the asset be equated with the extinguishment of right on account of its transfer.

In the case of CIT v. Leena Sarabhai (N.Ch.) (1996) 221 ITR 520 (Guj), the assessee was a holder of shares in an amalgamating company. By a scheme of amalgamation, the assets of the amalgamating company as also its liabilities were transferred to the amalgamated company, which in turn, was obliged to issue and allot to the shareholders of the amalgamating company one equity share of the face value of Rs.100 and two fractional certificates, each representing entitlement of 1/10th of one equity share and one 11 per cent redeemable bond of the face value of Rs.100 in respect of one equity share of the amalgamating company. On these facts on a reference, the Gujarat High Court was requested to render its opinion on the question whether on amalgamation of a company, when the assessee received shares and bonds of the amalgamated company in lieu of her shareholding in the amalgamating company, it was a transfer as contemplated under section 2(47). In view of a letter from the Commissioner of Income-tax stating that the Department in a similar case belonging to the same group had accepted that where the assessees had received shares and bonds because of amalgamation there was no transfer within the meaning of section 2(47), it was held that in the present case also there is no transfer as contemplated under section 2(47) of the Act. Thus, according to the facts arising in that case, the Department accepted that whenever there is amalgamation of the two companies, there is no transfer and the question of levying capital gain tax does not arise. Thus, considering the facts arising in this case and the law on this aspect, we are of the opinion that the decision rendered by the Tribunal on the basis of the decision reported in Central India Industries Ltd. v. CIT (1975) 99 ITR 211 (Cal), is not sustainable. In the present case, inasmuch as shares and debentures were allotted to the assessee on account of the amalgamation of the two companies, it remains to be seen that there is no transfer or extinguishment of any right in allotting the shares and debentures in favour of the assessee as per the provisions of section 2(47) of the Act.

In the matter of granting exemption under section 47(vii) of the Act, learned standing counsel for the Department relied upon a decision of the Gujarat High Court in the case of CIT v. Gautam Sarabhai Trust (1988) 173 ITR 216, wherein the Gujarat High Court held (at page 233):

......that the consideration which is contemplated under section 47(vii) is a share or shares of the amalgamated company and nothing more. It was further held that if besides the share or shares in the amalgamated company, the shareholder of the amalgamating company is allotted something more, namely, bonds and debentures, in consideration of the transfer of the share, or shares in the amalgamating company, he cannot get the benefit of section 47(vii)."

Therefore, according to learned standing counsel in the amalgamation if the bonds and debentures are transferred, the assessee cannot get benefit under section 47(vii) of the Act. Inasmuch as we came to the conclusion that there is no transfer in the case of the assessee while shares and debentures were allotted to the assessee while two companies were amalgamated and inasmuch as the identity of the transferor-company get lost in amalgamation, there is no question of transfer or extinguishment of any right belonging to the assessee in the transferor-company. Therefore, it is not necessary to go into the question of considering the exemption provided under section 47(vii) of the Act in the matter of levying capital gains tax on the allotment of debentures along with shares in favour of the assessee. While referring the question suggested by the Department, the Tribunal has also referred another question so as to enable this Court to give its opinion comprehensively on the dispute arising between the assessee and the Department. For the purpose of rendering comprehensive answer, we would reframe the questions referred by the Tribunal in the following manner:

"(1)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the transfer of shares in a scheme of amalgamation in consideration of shares and debentures is transfer as contemplated under section 45 of the Act liable to capital gains tax?

(2)If there is transfer, whether the assessee is entitled to exemption under section 47(vii) of the Act in respect of allotment of debentures in favour of the assessee?"

Accordingly, we answer the abovesaid question No. 1 in the negative and against the Department. Even if there is transfer that would be exempted under section 47(vii). Accordingly, we answer question No.2 in the affirmative and against the Department. There will be no order as to costs.

M . B. A. / 1286/FCReference answered.