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CASE NO.: Appeal (civil) 4437-4445  of  1997

PETITIONER: COMMISSIONER OF INCOME TAX, COCHIN

       Vs.

RESPONDENT: MRS.  GRACE COLLIS AND ORS.

DATE OF JUDGMENT:       23/02/2001

BENCH: Y.K.Sabharwal, S.N.Hegde, S.P.Bharucha

JUDGMENT:

Bharucha, J. L.....I.........T.......T.......T.......T.......T.......T..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. ?

     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. 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.

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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

     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.

     The  order of the Income Tax Officer was confirmed  by the C.I.T.(Appeals).  The matter went up before the Tribunal and  the  Tribunal upheld the appellate order.  From out  of the  order  of the Tribunal, the questions aforestated  were referred to the High Court and answered as set out above.

     For  the  purposes of appreciating the controversy  in this  appeal,  it  is  necessary to  set  out  the  relevant provisions of the Act as they obtained at the relevant time.

     Section  2(47)  defines transfer, in relation  to  a capital   asset,   to   include   the  sale,   exchange   or relinquishment  of  the asset or the extinguishment  of  any

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rights  therein or the compulsory acquisition thereof  under any  law.   Section  45  states that any  profits  or  gains arising from the transfer of a capital asset effected in the previous  year  shall 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  states  which  transactions are not to  be  regarded  as transfers.   Nothing  contained  in Section 45  applies,  by reason  thereof, to:  (vii) 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 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.

     Section  49  sets out how cost is to be computed  with reference  to  various  modes of acquisition.  It  says,  in sub-section(2):   Where the capital asset being a share  or shares  in an amalgamated company which is an Indian company became  the  property of the assessee in consideration of  a transfer referred to in clause (vii) of Section 47, the cost of  acquisition of the asset shall be deemed to be the  cost of  acquisition  to  him  of  the share  or  shares  in  the amalgamating company.

     In  Commissioner  of Income-tax, Bombay  v.   Rasiklal Maneklal  (HUF),  177 I.T.R.  198, this Court was  concerned with  a  case  of acquisition of shares  consequent  upon  a scheme  of  amalgamation virtually identical to  the  Scheme before  us.   At that time capital gains were chargeable  to tax  by  reason of Section 12B of the Income Tax Act,  1922, which  stated  thus  :  12B.  Capital gains.- (1)  The  tax shall  be  payable  by an assessee under the  head  Capital gains  in  respect of any profit or gains arising from  the sale,  exchange,  relinquishment  or transfer of  a  capital asset  effected after the 31st day of March, 1956, and  such profits  and  gains  shall  be deemed to be  income  of  the previous year in which the sale, exchange, relinquishment or transfer took place.

     The  question  this Court was called upon to  consider read  thus:  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 as capital gains as having accrued to the  assessee by exchange or relinquishment as provided  for under  section  12B  of the Act ? This Court held  that  no exchange  was  involved  in the  transaction.   An  exchange involved  the transfer of property by one person to  another and, reciprocally, the transfer of property by that other to the  first  person.   There had to be a mutual  transfer  of ownership of one thing for the ownership of another.  In the case before the Court the assessee could not be said to have transferrd  any  property to anyone.  When he  was  allotted shares  of the amalgamated company, he was entitled to  such allotment   because  of  his  holding   90  shares  of   the amalgamating  company.   The  holding of 90  shares  in  the amalgamating  company  was  merely  a  qualifying  condition entitling  the assessee to the allotment of 45 shares in the amalgamated  company.   The dissolution of the  amalgamating company  deprived  the  holding  of the 90  shares  of  that company of all value.

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     Learned  counsel  for the assessees submitted that  no capital  gains  tax  could be levied upon the  assessees  in respect  of  the  sale  by  them  of  their  shares  in  the amalgamated  company  because there was no provision in  the Act  with regard to the manner of determination of the  cost of these shares.  This was for the reason that Section 49(2) prescribed the mode of determining the cost where the shares in  an  amalgamated company had become the property  of  the assessee  in consideration of a transfer, as referred to  in Section   47(vii);   that  is  to   say,  a  transfer  by  a shareholder  in  a scheme of amalgamation of shares held  by him  in the amalgamating company if the transfer was made in consideration  of  the  allotment to him of  shares  in  the amalgamated company.  The decision in Rasiklal had held that there  was  no  transfer of any property to any one  by  the assessee in circumstances identical to those before us.

     This,  however,  is  not  the end of  the  matter  for Section   2(47)   defines  transfer    to   include   the extinguishment of any rights in a capital asset.

     In  this  regard, our attention was drawn  by  learned counsel  for the assessees to the decision of a Bench of two learned  Judges of this Court in Vania Silk Mills Pvt.  Ltd. v.   C.I.T.  191 I.T.R.  647.  This was a case in which  the appellant company carried on the business of manufacture and sale  of art-silk cloth.  It purchased during the year  1957 machinery  and gave it on hire to Jasmine Mills at an annual rent.  Jasmine Mills, as bailee of the machinery, insured it against  fire  along with its own machinery.  The  insurance policy  contained  a  reinstatement   clause  requiring  the insurer  to pay the cost of the machinery as on the date  of the  fire in case of destruction or loss.  A fire did  break out  in  the  premises of Jasmine  Mills  causing  extensive damage, inter alia, to the machinery which became useless as a  result.   On settlement of the insurance  claim,  Jasmine Mills  received an amount from the insurance company.   From out  of  it  it paid Rs.  6,32,533 to the appellant  on  the account of the destruction of the machinery.  The Income-tax Officer  brought to tax the sum of Rs.  3,50,792, being  the difference  between  the  insurance amount received  by  the appellant  for the machinery and the original cost  thereof, as  a  capital gain.  The Appellate Tribunal held  that  the insurance  amount  was not received by the appellant on  the transfer  of a capital asset but on account of the damage to its  machinery  and  that  Section 45 of  the  Act  was  not attracted.   On  a  reference, the High Court  reversed  the decision  of  the  Tribunal.   This  Court  held  in  appeal therefrom  that  when an asset was destroyed, there  was  no question  of transferring it to others.  The destruction  or loss brought about the destruction of the right of the owner of  the asset in it, but it was not on account of a transfer but  on  account  of the disappearance of  the  asset.   The extinguishment  of  the right in an asset on account of  the extinguishment  of the asset was not a transfer of the right but  its  destruction.   The  destruction of  the  right  on account of the destruction of the asset could not be equated with  the  extinguishment  of the right on accounts  of  its transfer.   Section  45  of  the  Act  was,  therefore,  not attracted.  The fact that while paying for the total loss or damage  to the property the insurance company took over such property  or  whatever  was left of it did  not  change  the nature  of  the insurance claim, which was an  indemnity  or compensation  for  the loss.  The payment of  the  insurance claim was not in consideration of the property taken over by

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the insurance company, for one was not consideration for the other.   This  Court then, having so very rightly held  that Section  45  was  not  attracted, went on  to  consider  the definition  of transfer and it said:  It is true that the definition  of transfer in section 2(47) of the Act is  an inclusive  definition and therefore, extends to events and transactions which may not otherwise be transfer according to  its  ordinary,  popular and natural sense.  It  is  this aspect  of  the definition which has weighed with  the  High Court and, therefore, the High Court has argued that, if the words extinguishment of any rights therein are substituted for  the  word  transfer  in  section  45,  the  claim  or compensation  received  from  the  insurance  company  would attract  the  said  section.  The High Court  has,  however, missed  the  fact  that the definition  also  mentions  such transactions  as  sale,  exchange, etc., to which  the  word transfer  would properly apply in its popular and  natural import.   Since those associated words and expressions imply the  existence of the asset and of the transferee, according to   the  rule  of  noscitur   a  sociis,   the   expression extinguishment of any right therein would take colour from the  said associated words and expressions and will have  to be  restricted  to  the  sense analogous to  them.   If  the Legislature  intended  to  extend   the  definition  to  any extinguishment  of  right,  it would not have  included  the obvious  instances  of transfer, viz., sale, exchange,  etc. Hence, the expression extinguishment of any rights therein will  have to be confined to the extinguishment of rights on account  of  transfer  and cannot be extended  to  mean  any extinguishment  of right independent of or otherwise than on account of transfer.

     Learned  counsel  for the assessees relied  upon  this decision  to contend, again, that there had been no transfer by the assessees of their shares in the amalgamating company and  that,  therefore, the case would still not fall  within the  meaning of the expression extinguishment of any rights therein  in Section 2(47).  By reason of the decision,  the expression  extinguishment of any rights therein had to be confined  to  the extinguishment of rights on account  of  a transfer  and  could  not  be   extended  to  refer  to  the extinguishment of rights independent of or otherwise than on account of transfer.

     Learned  counsel for the Revenue submitted that having held  that the payment in settlement of the insurance  claim was  not in consideration of the transfer to the insurer  of the  damaged  machinery  and that, therefore, there  was  no transfer   within  the  meaning  of   Section  45,  it   was unnecessary  for  this  Court in Vanias case to  go  on  to consider  the definition in Section 2(47) and the meaning to be  attached to the expression extinguishment of any rights therein.   In his submission, the decision in Vanias  case was  to this extent obiter dicta.  The definition in Section 2(47)  of transfer included sale and exchange.  In each of those  cases there was an extinguishment of the right of the seller  or exchanger in the capital asset.  To restrict  the extinguishment  of  rights to extinguishment on  account  of transfer was, in learned counsels submission, to render the expression extinguishment of any rights therein otiose and to nullify the effect of their use in the definition.

     We  have  given careful thought to the  definition  of transfer  in  Section  2(47) and to the decision  of  this Court  in Vanias case.  In our view, the definition clearly

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contemplates the extinguishment of rights in a capital asset distinct  and independent of such extinguishment  consequent upon the transfer thereof.  We do not approve, respectfully, of  the limitation of the expression extinguishment of  any rights  therein  to  such   extinguishment  on  account  of transfers or to the view that the expression extinguishment of  any  rights  therein  cannot be extended  to  mean  the extinguishment of rights independent of or otherwise than on account of transfer.  To so read the expression is to render it  ineffective  and  its use meaningless.  As we  read  it, therefore, the expression does include the extinguishment of rights  in a capital asset independent of and otherwise than on account of transfer.

     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.