[2001] 115 Taxman 326 (SC)

SUPREME COURT OF INDIA

Commissioner of Income-tax
v.
Grace Collis*
S.P. BHARUCHA, N. SANTOSH HEGDE AND Y.K. SABHARWAL, JJ.
CIVIL APPEAL NOS. 4437-45 OF 1997
FEBRUARY  23, 2001 

Section 49, read with section 2(47), of the Income-tax Act, 1961 - Capital gains - Cost
with reference to certain modes of acquisition - Assessees were shareholders of
amalgamating company - Under scheme of arrangement, assessees had received 14
shares of amalgamated company for one share in amalgamating company - Assessee
sold certain shares of amalgamated company - Whether there was transfer of shares of
amalgamating company within meaning of section 2(47), read with section 47(vii) - Held,
yes - Whether, therefore, cost to assessee of acquisition of shares of amalgamated
company would have to be determined in accordance with provision of section 49(2) -
Held, yes
Section 2(47), read with section 47(vii), of the Income-tax Act, 1961 - Capital gains -
Transfer - Whether expression 'extinguishment of any rights therein' in section 2(47) (ii)
is limited to such extinguishment on account of transfer - Held, no - Whether expression
'extinguishment of any rights therein' extends to mean extinguishment of rights
independent of or otherwise than on account of transfer - Held, yes
Words & phrases - 'extinguishment of any rights therein' occurring in section 2(47) (ii)
of the Income-tax Act, 1961
FACTS
 
The assessees were shareholders of a company which was amalgamated with another company. The
scheme of arrangement 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 assessees sold certain shares of the amalgamated company of the face value of Rs. 100 each, which
they had acquired under the scheme, at the rate of Rs. 107.50 per share. The ITO applied section 49(2),
read with section 47(vii) for the purpose of computing the capital gains. As the assessees had not
furnished to the Assessing Officer information as to the cost at which they had acquired the shares of the
amalgamating company, the Assessing Officer, noting 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, 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 assessee had sold the shares less their cost as aforesaid was the capital gain
that the Assessing Officer subjected to tax. The order of the Assessing Officer was confirmed by the
Commissioner (Appeals) and the Tribunal. On reference, the High Court held that on the amalgamation
there was no transfer by the assessees of their shares in the amalgamating company and section 49(2)
did not apply to the sale of the shares of the assessees in the amalgamated company which were obtained
by the assessees on the amalgamation.
On appeal to the Supreme Court :
HELD
 
The definition of 'transfer' in section 2(47) clearly contemplates the extinguishment of rights in a capital
asset distinct and independent of such extinguishment consequent upon the transfer thereof. One should
not approve the limitation of the expression 'extinguishment of any rights therein' to such extinguishment
on account of transfers, nor can one approve the view that the expression 'extinguishment of any rights
therein' cannot be extended to mean 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.
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 was to say, the cost was to
be deemed to be the cost of the acquisition to the assessees of their shares in the amalgamating
company. Therefore, there was no reason to interfere with the order of the Assessing Officer.
CASE REVIEW
 
Grace Collis v. CIT [1996] 135 CTR (Ker.) 25 set aside.
Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 647 (SC) and Mrs. Grace Collis v. CIT [1997] 226 ITR
55 reversed.
CASES REFERRED TO
 
CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198 / 43 Taxman 259 (SC) and Vania Silk Mills (P.)
Ltd. v. CIT [1991] 191 ITR 647 / 59 Taxman 3 (SC) .
M.L. Verma, P.S. Narasimha and Ms. Sushma Suri for the Appellant. Joseph Vellapally, S. Rajappa,
V. Balaji and P.N. Ramalingam for the Respondent.
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 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 (P.) Ltd. The High Court of Kerala
sanctioned a Scheme of Arrangement under sections 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 45, 318 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 29-2-1976 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 31-3-1976, the ITO levied
capital gains tax upon the assessees in respect of the sale to Chatterji and others. The ITO 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 ITO information as to the cost at which they had acquired the shares
of the amalgamating company. Accordingly, the ITO 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 ITO subjected to tax. The ITO 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.
6. The order of the ITO was confirmed by the Commissioner (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.
7. 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.
8. 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 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."
9. In CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 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 Indian
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 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."
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 transferred 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.
10. The 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 Maneklal (HUF) 's case (supra)
had held that there was no transfer of any property to anyone by the assessee in circumstances identical
to those before us.
11. 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.
12. In this regard, our attention was drawn by the learned counsel for the assessees to the decision of a
Bench of two learned judges of this Court in Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 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 account of the destruction of the machinery. The ITO
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 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
account 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 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." (p. 653)
13. The 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 accounting of a transfer and could not be extended to refer to
the extinguishment of rights independent of or otherwise than on account of transfer.
14. The 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 Vania Silk Mills (P.) Ltd.'s case (supra) 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 Vania Silk Mills (P.) Ltd.'s case (supra) 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 the learned counsel's submission, to render the
expression 'extinguishment of any rights therein' otiose and to nullify the effect of their use in the
definition.
15. We have given careful thought to the definition of 'transfer' in section 2(47) and to the decision of
this Court in Vania Silk Mills (P.) Ltd.'s case (supra) . In our view, the definition clearly 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.
16. 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 with
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.
17. 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.
18. We have already set out how the ITO 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 each was sold
as a share of Rs. 107.50'.
19. We are obliged to learned counsels for their assistance.
20. The appeals are allowed. The judgment and order under appeal is set aside. The questions are
answered as already indicated.
21. There shall be no order as to costs.
■■

*Partly in favour of revenue.