KUMARARATNE

Vs.

COMMISSIONER GENERAL OF INLAND REVENUE

COURT OF APPEAL
OBEYESEKERE, J.(P/CA)
COREA. J.
CA/TAX/APPEAL/1/2007
FEBRUARY 23, 2021

Inland Revenue Act, No. 28 of 1979, sections 7(1)(a), 7(1)(g), 7(2)(a), 7(2)(f) Income tax on capital gains-Corporate merger or amalgamation Issuing of new shares in exchange for shares of the company being acquired-Companies Act, No. 17 of 1982-Companies Act, No. 7 of 2007, Part VIII

The appellant was a director and shareholder of FWL. FWL merged with another company, TOC, and the appellant and the other shareholders of FWL were issued new shares and share warrants in TOC in exchange for their shares in FWL. The appellant submitted his tax return where he stated that he was not liable to income tax on capital gains since he received no money in exchange for his shares. The return was rejected by the assessor and the appellant was directed to pay income tax assessed on the capital gains and a further sum as surcharge. The appellant appealed to the Commissioner General of Inland Revenue, who referred the appeal directly to the Board of Review which confirmed the assessment. The Board of Review referred the matter by way of a case stated to the Court of Appeal. The appellant argued that the transaction was an amalgamation or merger within the meaning of section 7(1) (g) of the Inland Revenue Act, No. 28 of 1979, as amended, and is therefore

not liable to income tax on capital gains in view of section 7(2) (f), as no money was received by the appellant. The Commissioner General argued that the transaction was a change of ownership in the shares covered by section 7(1) (a) and was accordingly liable to income tax on capital gains on the increase in the value of the shares in terms of section 7(2) (a) of the Act.

Held:

1. The terms 'amalgamation' or 'merger' are not defined in the Inland Revenue Act, No. 28 of 1979 or in the Companies Act, No. 17 of 1982. Based on textual and judicial authorities, a mere share swap or exchange of shares does not qualify a transaction to be an amalgamation of two companies. There must be a blending of the two companies into one, usually as a result of a corporate decision taken on behalf of each company in consultation with its shareholders.

2. The legal regime governing the amalgamation of companies is a complex procedure and not one which could be inferred from a mere exchange of shares between the parties. The appellant has failed to produce any factual and substantial evidence to support the purported amalgamation by way of board resolutions, annual reports, amendments to the articles of association or other official documents. The appellant's contention that the transaction is an amalgamation cannot be accepted.

3. The transaction between TOC, FWL and the appellant resulted in a change of ownership in the shares held by the appellant in FWL in favour of TOC. The said transaction therefore falls within section 7(1)(a) read TOCether with section 7(2)(a) of the Act. As profits and income arose on the said transaction, the appellant is liable to pay income tax arising from the capital gains derived from the transaction.

Cases referred to:

1. Saraswati Industrial Syndicate Ltd v. C.I.T. Haryana, Himachal Pradesh, Delhi-Ill, 1991 AIR SC 70 at 72

2. Re Walker's Settlement CA 1935 Ch. D 567

3. Crane-Fruehauf v. Inland Revenue Commissioners [1975] 1 All ER 429

APPLICATION for an Opinion on a Case Stated by the Board of Review.

Maithri Wickremasinghe, P.C., with S. Nadana Civa and Rakitha Jayatunga for the Appellant.

Suranga Wimalasena, S.S.C., for the Respondent.

cur. adv. vult.

June 11, 2021

OBEYESEKERE, J. (P/CA)

The three questions of law that arise for the determination of this Court, which I will advert to in due course, revolve around the shares held by the Appellant in Forbes & Walker Limited (FWL) and whether the Appellant is liable for the payment of income tax that arises from the capital gains derived from a