The Commissioner Of Income Tax-V, New Delhi v. M/S Nalwa Investment Ltd

* IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 02.07.2020 Pronounced on: 07.08.2020 + ITA 822/2005 THE COMMISSIONER OF INCOME TAX-V, NEW DELHI ..... Appellant Through: Mr.Sunil Agarwal, Senior Standing Counsel with Mr.Tushar Gupta, Junior Standing Counsel for Income Tax Department. versus M/S NALWA INVESTMENT LTD. ..... Respondent Through: Mr.Ajay Vohra, Senior Advocate with Ms.Kavita Jha, Advocate. + ITA 853/2005 COMMISSIONER OF INCOME TAX DELHI ..... Appellant Through: Mr.Deepak Anand, Senior Standing Counsel with Mr.Vipul Agarwal, Junior Standing Counsel. versus M/S ABHUINANDAN INVESTMENTS LTD. ..... Respondent Through: Mr.Ajay Vohra, Senior Advocate with Ms.Kavita Jha, Advocate. + ITA 935/2005 COMMISSIONER OF INCOME TAX DELHI ..... Appellant Through: Mr.Ajit Sharma, Senior Standing Counsel with Ms.Adeeba Mujabhid, Junior Standing Counsel. ITA 822/2005 & connected matters Page 1 of 37 versus M/S JINDAL EQUIPMENT LEAST ..... Respondent Through: Mr.Ajay Vohra, Senior Advocate with Ms.Kavita Jha, Advocate. + ITA 961/2005 COMMISSIONER OF INCOME TAX DELHI Through: ..... Appellant Mr.Sunil Agarwal, Senior Standing Counsel with Mr.Tushar Gupta, Junior Standing Counsel for Income Tax Department. versus M/S MANSAROVAR INVESTMENTS LTD. Through: ..... Respondent Mr.Ajay Vohra, Senior Advocate with Ms.Kavita Jha, Advocate. CORAM: HON'BLE MR. JUSTICE MANMOHAN HON'BLE MR. JUSTICE SANJEEV NARULA J U D G E M E N T SANJEEV NARULA, J. 1. The present appeals under Section 260A of the Income Tax Act, 1961 (‘the Act’) filed by the Revenue are directed against the common order dated 17[th] February, 2005, (‘impugned order’) passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No.(s) 1739,1740,1742 & 1743/Del/ 2001 Assessment Year 1997-98 (‘AY’), allowing the appeals preferred by the Respondent-assessees against the order of the CIT(A). Resultantly, ITA 822/2005 & connected matters Page 2 of 37 additions made by the Assessing Officer (‘AO’) in the orders of assessment, as confirmed by CIT(A) have been set-aside. 2. The ITAT has decided all the appeals by way of a common order and furthermore since the question of law arising therefrom is identical in all the appeals, the same were heard together and are being disposed of by way of this common judgment. However, for the sake of convenience and to precisely delineate the controversy in the present appeals, factual background in ITA No. 822/2005 is being noted and discussed in detail. Facts in brief: 3. The Respondent-assessee (Nalwa Investment Limited) belongs to Jindal Group of Companies and is its promoter company. It was holding shares of Jindal Ferro Alloy Ltd. (“JFAL”). Vide amalgamation scheme sanctioned under Section 391-394 of the Companies Act, 1956, JFAL got amalgamated with Jindal Strips Ltd. (“JSL”). Consequently, the Respondent-assessee company transferred its shareholding in JFAL in lieu of receipt of shares of JSL and claimed that the transaction was exempt from capital gain tax under Section 47(vii) of the Act. The AO adopting the value of shares of JSL at the rate of Rs. 218 per share, calculated the profit on receipts of shares of JSL under the scheme of amalgamation at Rs. 5,31,28,579/-, and taxed the same as ‘business income’. Revenue contended that since the Respondent-assessee was holding JFAL shares as stock-in-trade and not as capital asset, it was not entitled to exemption under Section 47(vii) of the Act. The statutory first Appellate Authority [‘CIT(A)’] upheld the action of AO. In further appeal before ITAT at the instance of the Respondent herein, the Tribunal without recording a categorical finding as to whether the shares qualified as ‘capital ITA 822/2005 & connected matters Page 3 of 37 ITA 822/2005 & connected matters Page 3 of 37 asset’ or ‘stock- in- trade’, allowed the appeals in favour of the Respondents, holding that no profit accrues when shares of the amalgamated company are received in lieu of shares of amalgamating company. The relevant portion of the impugned order reads as under: “7. In view of the above decision, it cannot be said that the appellants were holding the shares of JFAL either by way of investment or stock in trade. However, we need not adjudicate upon this issue since the decision on this issue is not of much relevance in deciding the large issue before us. The major question for our consideration is whether any profit accrued to the appellants when they got the shares of amalgamated company in lieu of shares of amalgamating company held by them. In our opinion, no profit accrues unless the shares held by an assessee are either sold or transferred otherwise for consideration irrespective of the nature of holding.” 4. The concluding remarks in the said order are as follows: “10. Before parting with this order, we would like to mention that issue, whether the appellants were holding the shares of JFAL by way of investment or stock in trade, has not been adjudicated by us since assessee has succeed on the legal issue. Accordingly, the said issue would remain open for adjudication in the year or years when such shares are sold. For the similar reasons, we need not adjudicate upon the last contention of assessee's counsel. Subject to the observations made above, appeals of assessee are allowed.” Question of law: 5. Aggrieved with the aforesaid order, Revenue filed the present appeals questioning the correctness of the reasoning given by the ITAT and raised several questions of law. Vide order dated 5[th] July, 2006, the present appeals were admitted and substantial question of law was framed as follows: ITA 822/2005 & connected matters Page 4 of 37 “Whether the ITAT was correct in holding that where the assessee gets shares of Amalgamated Company in lieu of shares of amalgamating company, no transfer takes place?” Contentions of the parties: 6. Mr. Sunil Agarwal, learned Senior Standing Counsel led the arguments on behalf of Appellant. He commenced his submissions by referring to the impugned order and contended that the Tribunal has erroneously allowed the appeals in favour of Respondent-assessees without recording a clear-cut finding of fact and resolving the crucial question whether the assessees were holding the shares as ‘capital asset’ or ‘stock-in-trade’. On this aspect he drew our attention to the observations and analysis given by ITAT in Paragraph nos. 7 and 10 of the impugned order which has been reproduced hereinabove. Mr. Agarwal argued that in absence of factual determination on the above-said vital aspect, Tribunal has grossly erred in coming to the conclusion that it did and the same is wholly irrational. He contended that the matter needs to be restored to the file of the Tribunal with a direction to first adjudicate the fundamental factual question that has been left undecided. Without prejudice to his preliminary submission, Mr. Agarwal further argued that the impugned order is unsustainable for the reason that the question of law arising out of the present appeals is entirely covered in favour of Revenue by virtue of decision of the Supreme Court in Commissioner of Income-Tax v. Mrs. Grace Collis and Ors.,[2001] 248 ITR 323 (SC). He submitted that the reasoning of the Tribunal is flawed since it is primarily based on views of the Supreme Court in its earlier decision in the case of Commissioner of Income-Tax, Bombay v. Rasiklal ITA 822/2005 & connected matters Page 5 of 37 ITA 822/2005 & connected matters Page 5 of 37 Maneklal (HUF),[1989] 177 ITR 198 (SC) which was decided in context of the Income Tax Act, 1922 ,when the relevant provision was different. Further, the issue as to whether the holding of shares was capital asset or stock-in-trade was not in controversy in the said case. In any event, subsequently, Supreme Court in Grace Collis and Others (supra) after examining the facts and circumstances in Rasiklal Maneklal(supra) and on consideration of the provisions of Section 47(vii) of the current Act, held that the receipt of shares of amalgamated company in lieu of shareholding in the amalgamating company, constitutes a ‘transfer’. 7. Mr. Agarwal further contended that ITAT should have followed the decision of the Supreme Court in the case of Orient Trading Co. Ltd. v. Commissioner of Income-Tax,(1997) 224 ITR 371 (SC), since the factual situation in the said case is similar to the one in hand. He argued that since the shares in question were stock-in-trade of the assessees, exemption under Section 47(vii) is not available and thus the transaction is taxable. The order of the ITAT should be reversed and the order of the AO as confirmed by CIT(A) ought to be restored. In the same vein, Mr. Deepak Anand and Mr. Ajit Sharma, learned Senior Standing Counsel on behalf of the Revenue argued that the reasoning of the ITAT was flawed and contrary to the law applicable in the given factual situation. It was contended that the difference between the market value of the shares received by the assessee-companies in exchange of the shares of JFAL and the book value of shares has to be treated as income of the assesses under Section 28 of the Act. The learned AO has treated the shares of JFAL as stock-in-trade and not as capital asset/investment not only in the relevant AY but in the earlier AYs as well. ITA 822/2005 & connected matters Page 6 of 37 This finding of fact has been upheld by the CIT(A). The ITAT erroneously held that there is no transfer of shares in the case of amalgamation of company. The judgment relied upon by the ITAT in the case of Rasiklal Maneklal(supra) does not deal with the issue in hand and is only in respect of exchange and relinquishment within the meaning of Section 12B of the IT Act, 1922. 8. Mr. Ajay Vohra, learned Senior Counsel on behalf of the Respondent-assessees countered the submissions of Revenue and argued that the preliminary objection/ submission of Mr. Agarwal is beyond the scope of appeal. He contended that having regard to the questions of law proposed by the Revenue and the substantial question of law admitted vide order dated 5[th]July, 2006, Revenue is seeking to expand the scope of appeal by contending that matter has to be sent back to the Tribunal, which is impermissible in terms of Section 260A of the Act. 9. On merits, Mr. Vohra argued that the Respondent-assessees are investment companies of the Jindal Group. The shares of the operating company i.e. JFAL and/or JSL are held as part of the promoter holding, representing controlling interest; the Respondent-assessees had furnished non-disposal undertaking to financial institution and lenders who had lent money to the operating company. Further such shares were reflected as investment in balance-sheet. He argued that irrespective of the fact whether the shares were held as stock-in-trade or capital asset, there is no taxable income arising in the year under consideration on the Respondent-assessees receiving shares in JSL in lieu of shares held in JFAL under the scheme of ITA 822/2005 & connected matters Page 7 of 37 ITA 822/2005 & connected matters Page 7 of 37 amalgamation. On demurrer, he submitted that if it is assumed that shares are held in stock-in-trade as alleged by Revenue, the receipt of shares of JSL, without anything more, could not lead to any addition to the income of the Respondent-assessees since there can be no addition of any notional accretion/notional profit under the head ‘profit and gain of business or profession’ under Section 28 of the Act. Only profit on realisation of stock-in-trade by way of sale thereof can be brought to tax under that head. The shares received in JSL on amalgamation were not sold during the relevant previous year and therefore there can be no addition for business profit in the hands of Respondent-assessees, even assuming that there was notional accretion in the value of shares of JSL vis-a-vis value of shares held in JFAL. Mr. Vohra differentiated the judgments relied upon by the Revenue and argued that the decision in the case Orient Trading Co. (supra) has no application to the facts of the present case. In the said case it was held that the accretion in value of shares received in exchange amounted to realisation of profit and was therefore, taxable as business income. No such situation has arisen in the present case. Mr. Vohra also relied upon the observations made by the Supreme Court in Para 7 in Rasiklal Maneklal(supra),reproduced hereinabove, to contend that the aforesaid reasoning of the Supreme Court continues to hold the field and the Court correctly laid down the proposition that the amalgamation does not amount to ‘exchange’. Without prejudice to the aforenoted contentions, he further argued that the AO has erred in taking the value of shares of JSL at the rate of Rs.218 per share instead of Rs.76 being market price of shares of JSL on 23[rd]December, 1996 [record date under the scheme of amalgamation] and even ITA 822/2005 & connected matters Page 8 of 37 if the value of Rs.76 per share is adopted, the same will result in business loss instead of business profit as worked out by the AO. 10. Mr. Vohra strenuously urged that there is no necessity for determining the nature and character of the shareholding of the assessees i.e. whether it is a capital asset or stock-in-trade. The Tribunal correctly did not go into this controversy and aptly decided the appeals in favour of the Respondent-assessees, on the correct reading of the legal position with respect to the concept of transfer of shares in amalgamation of companies. He submitted that there could be no income of the Respondent-assessees on mere receipt of shares of JSL (in lieu of extinguishment of shares held in JFAL). In the event the shares were held as capital asset, no capital gain would be liable to tax on receipt of shares of JSL in lieu of shares held in JFAL. He referred to Section 45 of the Act which deals with taxing profits and gains arising from ‘transfer’ of ‘capital asset’ effected during the relevant year under the head ‘capital gain’ and further contended that the assessees would be entitled to the exemption under Section 47(vii) of the Act. He also argued that the decision of Grace Collis and Ors. (supra) has no application to the facts of the present case. He further relied upon the CBDT Circular No.6/2016 dated 29[th] February, 2016 and argued that although the Tribunal has left the aforesaid issue open for adjudication in the year of subsequent sale of shares, the issue is today no longer res integra as in the aforenoted circular, CBDT has clarified as under: “CIRCULAR NO.6/2016 [F.NO.225/12/2016-ITA-lI], DATED 29-2- 2016 Sub-section (14) of section 2 of the Income-tax Act, 1961 (Act) defines the term "capital asset" to include property of ITA 822/2005 & connected matters Page 9 of 37 “CIRCULAR NO.6/2016 [F.NO.225/12/2016-ITA-lI], DATED 29-2- 2016 Sub-section (14) of section 2 of the Income-tax Act, 1961 (Act) defines the term "capital asset" to include property of ITA 822/2005 & connected matters Page 9 of 37 any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-in-trade/trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past. 2. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The Central Board of Direct Taxes ('CBDT') has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15 2007, summarized the said principles for guidance of the field formations. 3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from, sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following— (a)Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, (b)In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; (c)In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. (c)In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. 4. It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham transactions. 5. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities.” 11. He summed up his submissions by contending that there is no error in the order passed by the Tribunal and the same deserves to be upheld and the appeals of the Revenue should be dismissed. ITA 822/2005 & connected matters Page 11 of 37 Analysis: 12. We have given our thoughtful consideration to the contentions of the parties. During the course of final hearing, as the Learned counsel forged ahead with their arguments, the controversy in the present case got streamlined which we shall hereinafter crystalize and then comprehensively deliberate upon the same. However, before we proceed to do that, in order to fully comprehend the controversy, we first need to delve into the facts and note the analysis and findings of the ITAT in the impugned order. The Controversy and the proceedings before the ITAT: 13. The assessee was holding shares of JFAL. Consequent to the scheme of amalgamation sanctioned under Section 391 to 394 of the Companies Act, 1956, JFAL got amalgamated with JSL and the assessee [Nalwa Investment Limited] received shares of JSL. In terms of the scheme of amalgamation, the shareholders of JFAL were to be allotted 45 shares of JSL in lieu 100 shares of JFAL. The value of shares of JFAL as per assessee’s book was Rs. 35/- per share as against which the assessee company got shares of JSL whose market value was Rs. 395/- per share on the date of allotment. Taking note of the above position, the AO issued a show cause notice under Section 143(3) of the Act for AY 1997-98 and observed that as a result of realisation, the assessee-company earned a profit of Rs. 395 - (35 * 2.2) i.e. Rs.318 for each share of JSL. The Respondent-assessee was issued show cause as to why the same should not be treated as income for Financial Year 1996-97. In response thereto, the Respondent-company vide letter dated 16[th]February, 2000 inter alia contented that the assessee has not transferred any share for consideration and drew support from the views of the Supreme ITA 822/2005 & connected matters Page 12 of 37 Court in Rasiklal Maneklal(supra). Respondent-company also contended that nothing in Section 45 of the Act would apply as it is a transfer of a capital asset being the shares held in the amalgamating company and the assessee was entitled to avail benefit of section 47 (vii) of the Act. The Respondent-assessees further contended that if the shares were to be considered as ‘stock-in-trade’, assessees should be allowed benefit of fall in value of shares after valuing them at cost or market value, whichever is less. ITA 822/2005 & connected matters Page 12 of 37 Court in Rasiklal Maneklal(supra). Respondent-company also contended that nothing in Section 45 of the Act would apply as it is a transfer of a capital asset being the shares held in the amalgamating company and the assessee was entitled to avail benefit of section 47 (vii) of the Act. The Respondent-assessees further contended that if the shares were to be considered as ‘stock-in-trade’, assessees should be allowed benefit of fall in value of shares after valuing them at cost or market value, whichever is less. 14. The AO considered all contentions raised by the assessees but did not agree with any of them. He relied upon the decision of the Supreme Court in Orient Trading Co. Ltd. (supra) and held that the Respondent-assessees had earned profit by realising the shares of JSL in exchange for its own shareholding in a planned scheme of amalgamation. With respect to the contentions raised by the assessees regarding applicability of Section 47 of the Act, the AO observed that reliance on aforesaid provision was misplaced as the same related to transfer of capital asset and not to stock held as stock-in-trade. During income tax assessment proceedings for the preceding year, holding of shares were treated as stock-in-trade and not as capital asset. Further relying upon the decision of the Supreme Court in G.Venkataswami Naidu Co. v. CIT, (1959) 35 ITR 594, (SC), it was concluded that Section 45 has no applicability to the case of the Respondent-assessees. The appeal before CIT(A) also was rejected and the assessment order passed by the AO was confirmed. When the matter travelled to the Tribunal, the Respondent-assesees assailed the common order of CIT(A) by raising several contentions; the foremost being that shares of JFAL were acquired by way of investment and not as stock-in-trade and that the said issue stands covered ITA 822/2005 & connected matters Page 13 of 37 by various decisions of the Tribunal. The Tribunal did not agree with Respondent-assessees on this count and held that reliance on the decisions cited by them was misplaced. Nevertheless, in paragraph 7 of the impugned order, the ITAT concluded that “in view of the above decision it cannot besaid that the appellants were holding the shares of JFAL either by way of investment or stock-in-trade”. At this stage, the dispute assumed a new dimension. The Tribunal perceived that it need not adjudicate upon this vexed question since the decision on the same is not of much relevance in deciding the larger issue before it. This became the focal point and the principal question for determination was formulated in the following words: “whether any profit accrued to the appellant when they got the shares ofamalgamated company in lieu of shares of amalgamating company held bythem?”(See paragraph 7 of the impugned order of the ITAT). Answering this question, the ITAT observed that “in our opinion, no profit accrued unless the shares held by assessee are either sold or transferred otherwise for consideration irrespective of the nature of holding”. It was also observed that since there was no sale of shares in the present case, the only question that arose for consideration was whether it can be said that “there is transfer of shares where the assessee gets the shares of amalgamated company inlieu of shares of amalgamating company”. This critical question was answered by relying upon the decision of the Supreme Court in Rasiklal Maneklal(supra) by decisively concluding that “there was no transfer ofshares and consequently, question of accruing any profit to the appellants would not arise” (Paragraph 8 of the impugned order). ITA 822/2005 & connected matters Page 14 of 37 ITA 822/2005 & connected matters Page 14 of 37 15. Therefore, before us, there is indeed no factual determination as to whether the shares in questions were being held by the Respondent-assessees as capital asset or stock-in-trade. Nonetheless, even in absence of this factual determination, the legal proposition vis-a-vis the applicability of Section 45 and 47(vii) of the Act is beyond controversy. We shall elaborate why we say this. If the Shares are held to be Capital Asset – Effect of Section 45 and exception thereto under section 47(vii) of the Act; 16. Mr. Ajay Vohra submitted that if shares were held as capital asset, the assessees are entitled to the benefit of the exemption provided under Section 47(vii) of the Act. At this juncture, let us first take note of Section 45 of the Act, relevant portion whereof is extracted as under: “Capital gains. 45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, 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. XXXXX” [Emphasis Supplied] 17. The aforesaid Section is under the head of ‘capital gains’. Any profit or gain arising from “transfer” of a “capital asset” effected in the previous year shall, save as otherwise provided in the Section, 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 of the Act enumerates the transactions which are not regarded as ‘transfer’. In this provision, we are concerned with sub-section (vii) which read as under: “47.Nothing contained insection 45 shall apply to the following transfers :— XXXX (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— 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 except where the shareholder itself is the amalgamated company, and to him of any share or shares in the amalgamated company except where the shareholder itself is the amalgamated company, and (b) the amalgamated company is an Indian company; XXXX” [Emphasis Supplied] 18. The opening words “nothing contained in Section 45 shall apply to the following transfers” signifies that the said provision is as an exception to Section 45. Meaning thereby that transfers which are enumerated in sub clauses (i) to (xix) as stipulated in Section 47, are exempted from the applicability of Section 45. It also manifests that transfers exempted from applicability of Section 45, nevertheless qualify to be ‘transfer’. This is evident from the opening words of Section 47 which stipulate that Section 45 shall not apply to “following transfers”. Thus, if the assessees were to contend that the shares in question were held as capital asset, in order to take ITA 822/2005 & connected matters Page 16 of 37 18. The opening words “nothing contained in Section 45 shall apply to the following transfers” signifies that the said provision is as an exception to Section 45. Meaning thereby that transfers which are enumerated in sub clauses (i) to (xix) as stipulated in Section 47, are exempted from the applicability of Section 45. It also manifests that transfers exempted from applicability of Section 45, nevertheless qualify to be ‘transfer’. This is evident from the opening words of Section 47 which stipulate that Section 45 shall not apply to “following transfers”. Thus, if the assessees were to contend that the shares in question were held as capital asset, in order to take ITA 822/2005 & connected matters Page 16 of 37 benefit of the exemption, the receipt of the shares of the amalgamated company in lieu of the shares held in amalgamating company would have to be regarded as a transfer. Mr. Agarwal, learned Senior Standing Counsel for the Revenue agrees to the aforenoted legal proposition and submits that if the shares were held as capital asset, the transfer would be exempt from the capital gain taxation under Section 47(vii) of the Act and ‘Revenue would have no case to argue’. These precise words are captured from rejoinder written submission of the Revenue filed before this Court. Thus, if the shares in question are a capital asset, there is no disagreement between the parties that the assessees would be entitled to take benefit of exemption under Section 47(vii) of the Act, provided of course, if they fulfil the requirements enumerated therein. This stand of the parties substantially narrows down the gamut of controversy as far as the legal propositions are concerned. Nevertheless, this concurrence between the parties does not resolve the dispute before us since Revenue strongly refutes the factual assertion of the assessees and zealously argues that the shares are ‘stock-in-trade’. This contentious fact coupled with the lack of factual determination by the ITAT leaves things in the state of uncertainty. In this backdrop we shall now deal with the analysis of ITAT holding the factual determination vis-a-vis the holding of shares as capital asset or stock-in-trade to be a non-issue for taxation, for the reason that there is no transfer of shares in the scheme of amalgamation. 19. Let’s now proceed to examine the correctness of the aforenoted conclusion. Section 2(47) defines the concept of ‘transfer’ in the context of ITA 822/2005 & connected matters Page 17 of 37 capital asset by enumerating several sub-sets. The said provision read as under: "“(47) "transfer, in relation to a capital asset, includes, — (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation 1.—For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA. of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation 1.—For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA. Explanation 2.—For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or ITA 822/2005 & connected matters Page 18 of 37 flowing from the transfer of a share or shares of a company registered or incorporated outside India;” 20. The aforesaid inclusive definition clearly demonstrates that the concept of transfer in relation to capital asset is very wide. Transfer takes within its sweep the concept of sale, exchange or relinquishment of the asset as well as extinguishment of any right therein. In fact, under subsection (iv) of Section 2(47) even if an asset is converted by the owner thereof into or treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment would amount to transfer in relation to capital asset. This shows that the transfer of a capital asset is not confined only to sale or exchange but is a concept that would cover several other situations which may not be understood as ‘transfer’ in common parlance. 20. The aforesaid inclusive definition clearly demonstrates that the concept of transfer in relation to capital asset is very wide. Transfer takes within its sweep the concept of sale, exchange or relinquishment of the asset as well as extinguishment of any right therein. In fact, under subsection (iv) of Section 2(47) even if an asset is converted by the owner thereof into or treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment would amount to transfer in relation to capital asset. This shows that the transfer of a capital asset is not confined only to sale or exchange but is a concept that would cover several other situations which may not be understood as ‘transfer’ in common parlance. 21. In the present case, the Tribunal has come to a conclusion that there is no transfer of shares and has primarily relied upon the case of the Rasiklal Maneklal(supra). First and foremost, the said case does not deal with the issue as to whether amalgamation of company leads to transfer of shares. In the said case, the assessee which was an HUF derived income from interest on security. The assessee purchased shares of Shorrock SPG and MSG.Co Ltd. and later the share was split into 10 shares of Rs. 100/- each and from time to time a total of 80 shares of face value of Rs. 100/- each was issued to the assessee by way of bonus shares. As a consequence, the assessee owned 90 shares in the Shorrock Co. on the face value of Rs. 100/-. It was decided to amalgamate the Shorrock Co. with the New Shorrock Co. and upon petitions filed under Section 391 - 394 of the Companies Act, the Gujarat High Court approved the scheme of amalgamation. Under the scheme of ITA 822/2005 & connected matters Page 19 of 37 amalgamation, the undertaking and all the property rights and powers as well as all liabilities and duties of Shorrock Co. were to stand transferred and vest in the New Shorrock Co. Under the scheme of amalgamation, the New Shorrock Co., as the transferee company was directed to allot to the members of Shorrock Co. the transferor company one share in transferee company for every two shares of transferor company held by them. During assessment proceedings, although ITO was apprised of the scheme of amalgamation and the acquisition of 45 shares of New Shorrock Co. but he omitted to consider applicability of section 12B of the Income Tax Act, 1922 (the relevant provision under the said Act dealing with capital gains). The question arose whether in the facts and circumstances of the case the amount representing the capital gain resulting from transaction of acquiring 45 shares of New Shorrock Co. in place of 90 shares held in Shorrock Co. could be assessed in the hands of the assessee as capital gain since it has been accrued by exchange or relinquishment as provided for under Section 12B of the Income Tax Act, 1922. The Supreme Court considered the relevant provision as reproduced in the said judgment and observed as under: “4. During the assessment proceedings for the assessment year 1961-62, the previous year being the financial year ending 31-3-1961, the Income Tax Officer, although apprised of the fact of the scheme of amalgamation and of the acquisition by the assessee of 45 shares of the New Shorrock Co. omitted to consider the applicability of Section 12-B of the Indian Income Tax Act, 1922. On 21-1-1964 the Commissioner of Income Tax issued a notice under Section 33-B of the Act to the assessee stating that the receipt of 45 shares of the New Shorrock Co. “in exchange” of his original holding of 90 shares in the Shorrock Co. in December 1960 had resulted in an assessable profit, and this aspect had been overlooked by the Income Tax Officer when making the regular assessment, and, therefore, he proposed a revision of the assessment. After hearing the assessee, the Commissioner of ITA 822/2005 & connected matters Page 20 of 37 ITA 822/2005 & connected matters Page 20 of 37 Income Tax passed an order dated 29-1-1964 directing the Income Tax Officer to revise the assessment and to include an amount of Rs 49,350 representing the capital gain resulting from the transaction of the acquisition of 45 shares of New Shorrock Co. in place of the 90 shares held in Shorrock Co. On appeal by the assessee before the Income Tax Appellate Tribunal, the Appellate Tribunal held that the transaction represented neither an exchange nor a relinquishment and, therefore, Section 12-B of the Act was not attracted. XXXXX 6. Before the High Court the Revenue did not contend that the transaction constituted a sale or a transfer, and the parties confined themselves to the point whether the transaction represented an exchange or a relinquishment for the purposes of Section 12-B. The High Court took the view that no exchange can be said to have taken place on the allotment of the 45 shares of the New Shorrock Co. under the scheme of amalgamation. Nor, in the opinion of the High Court, did it constitute a relinquishment. In the result, the High Court answered both questions in favour of the assessee and against the Revenue. 7. The relevant portion of Section 12-B of the Act provides: “12-B. (1) Capital gains.— The tax shall be payable by an assessee under the head ‘capital gains’ in respect of any profits 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.” 8. The sole question is whether the receipt of the 45 shares of the New Shorrock Co. upon amalgamation by reason of the shareholding of 90 shares of the Shorrock Co. can be described as an “exchange” or a “relinquishment” within the meaning of Section 12-B of the Act. It seems plain to us that no exchange is involved in the transaction. An exchange involves the transfer of property by one person to another and reciprocally the transfer of property by that other to the first person. There must be a mutual transfer of ownership of one thing for the ownership of another. In the present case, the assessee cannot be said to have transferred any property to anyone. When he was allotted the shares of the New Shorrock Co. he was entitled to such allotment because of his holding the 90 shares of Shorrock Co. The holding of the 90 shares in the Shorrock Co. was merely a qualifying condition entitling the assessee to the allotment of the 45 shares of the New Shorrock Co. The dissolution of the Shorrock Co. deprived the holding of the 90 shares of that company of all value.” [Emphasis Supplied] 22. It is clear from above observations that sole question decided by the Supreme Court related to receipt of shares upon amalgamation in context of “exchange” or a “relinquishment” within the meaning of Section 12B of the Income Tax Act, 1922. In this context, it was observed that no exchange is involved in the transaction and it was further observed that an exchange involves the transfer of property by one person to another and reciprocally the transfer of property by that other to the first person. In essence the Court felt that there must be a mutual transfer of ownership for one thing for the ownership of another. 23. The aforenoted judgment subsequently came up for consideration in a later decision of Grace Collis and Ors. (supra) [Bench strength: 3] where the Supreme Court again dealt with the proposition of transfer of sha