IMPORTANT POINT
There was a transfer of the shares in the amalgamating Company u/s 2(47) of the Income Tax Act, 1961 as transfer includes "the extinguishment of any right" in a capital asset. It was, therefore, a transaction to which Section 47(vii) applies and its cost was rightly calculated by I.T.O. in accordance with Section 49(2) for computing capital gains. High Court was wrong in its contrary view.

Headnote:Income Tax Act, 1961-Section 2(47)-Meaning of Transfer-Section 49(2) r/w Section 47(viii)-Capital gains on transfer of shares-Assessee sold 45318 shares of amalgamated Company of the face value of 100/- @ 107/50-Whether liable to capital gains tax as computed on the basis of cost of acquisition by I.T.O.?(Yes)-Whether High Court was right in holding that taxing authority could consider taxing the assessee on the basis of difference between face value and market value of 7.50 per share of amalgamated Company? (No)-Appeals allowed - Questions answered.
       These are the appeals by the Revenue against the decision of a Division Bench of the High Court of Kerala on a reference application at the instance of the assessees under Section 256(1) of the Income Tax Act, 1961. The High Court was called upon to answer the following three questions :
       "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 assessee 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 for 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 I.T. 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 Steamship Pvt. Ltd. with Collis Line Pvt. Ltd.?" (Para 1)
       Held : The assessees sold the 45318 shares of the amalgamated company of the face value of Rs. 100/- each which they had acquired under the Scheme to one B.K. Chatterji and his associates on 29th February, 1976 for the aggregate sum of Rs. 48,72,523/-. This meant that they had sold each share for Rs. 107.50. For the Assessment Year 1976-77, the previous year whereof ended on 31st March, 1976, the Income Tax Officer levied capital gains tax upon the assessees in respect of the sale to Chatterji and others. The Income Tax Officer applied the provisions of Section 49(2) read with Section 47(vii) for the purposes of computing the capital gain. Thereunder the cost of the shares of the amalgamating company is the cost of the shares of the amalgamated company that the assessee surrendered in exchange under a scheme of arrangement. The assessees had not furnished to the Income Tax Officer information as to the cost at which they had acquired the shares of the amalgamating company. Accordingly, the Income Tax Officer noted that under the Scheme the assessees had received 14 shares of the face value of Rs. 100/- each in the amalgamated company for one share of the face value of Rs. 100/- in the amalgamating company. He multiplied the number of shares of the amalgamated company that the assessees had sold by their face value of Rs. 100/- and divided the result by 14 to arrive at their cost. The price at which the assessees had sold the shares less their cost as aforesaid was the capital gain that the Income Tax Officer subjected to tax. The Income Tax Officer rejected the contention of the assessees that Sections 49(2) and 47(vii) were not attracted as the assessees had not become the owners of the shares of the amalgamated company in consideration of the transfer of their shares in the amalgamating company. (Paras 4 & 5)
       This being so, the rights of the assessees in the capital asset, being their shares in the amalgamating company, stood extinguished upon the amalgamation of the amalgamating company with the amalgamated company. There was, therefore, a transfer of the shares in the amalgamating company within the meaning of Section 2(47). It was, therefore, a transaction to which Section 47(vii) applied and, consequently, the cost to the assessees of the acquisition of the shares of the amalgamated company had to be determined in accordance with the provision of Section 49(2), that is to say, the cost was deemed to be the cost of the acquisition by the assessees of their shares in the amalgamating company. Upon this reading of the law, our answers to the questions are :
        (1) In the affirmative and in favour of the assessee.
        (2) Does not arise.
        (3) In the affirmative and in favour of the Revenue.
       We have already set out how the Income Tax Officer computed the capital gain and see no reason to take another view, having regard to the fact that the assessees could have disclosed, without prejudice to their contentions, the cost at which they had acquired their shares in the amalgamated company. We are at a loss to understand the reasoning of the High Court in giving to the Revenue the liberty to consider taxing the assessees on the basis that it was "a transaction by itself whereunder a share of Rs. 100.00 each was sold as a share of Rs. 107.50". We are obliged to learned counsel for their assistance. The appeals are allowed. The judgment and order under appeal is set aside. The questions are answered as already indicated. There shall be no order as to costs. (Paras 16 to 21)

JUDGMENT

Bharucha, J.-These are the appeals by the Revenue against the decision of a Division Bench of the High Court of Kerala on a reference application at the instance of the assessees under Section 256(1) of the Income Tax Act, 1961. The High Court was called upon to answer the following three questions :

"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 assessee 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 for 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 I.T. 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 Steamship Pvt. Ltd. with Collis Line Pvt. Ltd.?"

2. The High Court answered the first question in the negative and in favour of the assessees, namely, that there was no transfer. In view of this answer, it held that the second question did not arise. It answered the third question in the negative and in favour of the assessees. Even so, it held that the taxing authorities could consider taxing the assessees on the basis of the transaction whereunder the share of Rs. 100/- was sold for Rs. 107.50.

3. The assessees were shareholders of Ambassador Steamship Pvt. Ltd. The High Court of Kerala sanctioned a Scheme of Arrangement under Section 391(2) and 394 of the Companies Act whereby Ambassador Steamship Pvt. Ltd. ("the amalgamating company") was amalgamated with Collis Line Pvt. Ltd. ("the amalgamated company"). The Scheme contemplated the transfer by way of amalgamation of all assets and liabilities of the amalgamating company to the amalgamated company in consideration of the amalgamated company issuing to the members of the amalgamating company 14 equity shares of Rs. 100/- each, credited as fully paid up, in the amalgamated company for each share held in the amalgamating company. Upon amalgamation, the amalgamating company would cease to function and the amalgamated company would take over all its business, assets and liabilities and carry on its business. The sanctioned Scheme stated : "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 each share held by him or her in the Transferor Company...."

4. The assessees sold the 45318 shares of the amalgamated company of the face value of Rs. 100/- each which they had acquired under the Scheme to one B.K. Chatterji and his associates on 29th February, 1976 for the aggregate sum of Rs. 48,72,523/-. This meant that they had sold each share for Rs. 107.50.

5. For the Assessment Year 1976-77, the previous year whereof ended on 31st March, 1976, the Income Tax Officer levied capital gains tax upon the assessees in respect of the sale to Chatterji and others. The Income Tax Officer applied the provisions of Section 49(2) read with Section 47(vii) for the purposes of computing the capital gain. Thereunder the cost of the shares of the amalgamating company is the cost of the shares of the amalgamated company that the assessee surrendered in exchange under a scheme of arrangement. The assessees had not furnished to the Income Tax Officer information as to the cost at which they had acquired the shares of the amalgamating company. Accordingly, the Income Tax Officer noted that under the Scheme the assessees had received 14 shares of the face value of Rs. 100/- each in the amalgamated company

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