Extinguishment of shareholder rights in an amalgamation, without transfer or consideration, does not result in capital gain or loss under Sections 45 and 47 of the Income-tax Act, 1961.

( 1 ) THE facts and the proceedings leading up to this reference are, inter alia, as follows. Shaw Wallace and Co. Ltd. , the assessee, was at the material time the holding company in respect of the following subsidiary companies holding 100% of the shares of the later : (a) Atlas Fertilisers Ltd. ; (b) Bengal Distilleries Co. Ltd. , and (c) Indo-Agri. Ltd. Under schemes of arrangement arrived at by and between the assessee on the one hand and each of the said subsidiary companies on the other which were duly sanctioned respectively by this court in respect of Atlas Fetilisers Ltd. and Bengal Distilleries Co. Ltd. and by the Madras High Court in respect of Indo-Agri. Ltd. , the said subsidiary companies were amalgamated with the assessee on the following terms and conditions : (a) All the property, rights and powers of the subsidiary companies would be transferred to the assessee as from the 1st January, 1966, and vest in the assessee under Section 394 (2) of the Companies Act, 1956, (b) All liabilities and debts of the subsidiary companies would as from the said date be transferred to and become the liabilities and debts of the assessee. (a) The assessee being the beneficial owner of the entire issued share capital there would be no issue of shares to the assessee. (d) The subsidiary companies would within 21 days after the date of the order to be passed by the court cause a certified copy of the court's order to be delivered to the Registrar of Companies, West Bengal, for registration and on such certified copy being so delivered the subsidiary companies would be dissolved without winding up.

( 2 ) IN the assessment year 1967-68, the previous year havingended on the 31st December, 1966, the assessee claimed a capital loss of Rs. 19,43,551 alleging that such loss had occurred on amalgamation of the said subsidiary companies with the assessee. The ITO held that the said claim was inadmissible under Section 47 (vi) of the I. T. Act, 1961.

( 3 ) BEING aggrieved, the assessee preferred an appeal to the AAC. The AAC held that no details of the said loss had been produced either before the ITO or in the appeal and that the claim was not substantiated. Accordingly, he confirmed the order of the ITO and disallowed the assessee's claim. He also held that the claim, in any event, was not admissible under Section 47 of the Act.

( 4 ) THE assessee preferred a further appeal to the Tribunal. The assessee's contention before the Tribunal was that it was not correct that evidence substantiating the loss had not been produced in the assessment proceedings or before the AAC. It was contended further that in the instant case Section 47 (vi) of the Act was not applicable inasmuch as the capital loss had occurred on the extinguishment of the rights of the assessee in the shares of the subsidiary companies as a result of the amalgamation. The extinguishment of such rights was for a consideration, being the net assets transferred to the assessee from the amalgamating companies. It was, therefore, contended that there was a transfer in the artificial and extended sense within the meaning of Section 2 (47) of the Act and there was a consequent capital loss within the meaning of Section 45 of the Act inasmuch as the net assets of the amalgamating companies transferred to the assessee were much less in value than the value of their shares held by the assessee.

( 5 ) IT was contended on behalf of the revenue on the other hand that there was no question of any capital gain or loss inasmuch as there was no transfer involved in the amalgamation and even if it be held that there was a transfer, the same came within the purview of Section 47.

( 6 ) THE Tribunal, after consideration of the respective submissions and of the authorities cited, held that as a result of the scheme of amalgamation. the rights and liabilities of the amalgamating companies vested in the amalgamated company and there was extinction of the rights of the assessee in the s