PETITIONER:
COMMISSIONER OF INCOME TAX, BOMBAY
Vs.
RESPONDENT:
RASIKLAL MANEKLAL (H.U.F.) & ORS.
DATE OF JUDGMENT29/03/1989
BENCH:
PATHAK, R.S. (CJ)
BENCH:
PATHAK, R.S. (CJ)
MISRA RANGNATH
CITATION:
1989 AIR 1333 1989 SCR (2) 179
1989 SCC (2) 454 JT 1989 (2) 16
1989 SCALE (1)719
ACT:
Indian Income Tax Act, 1922--Sub-s. (1) of s. 12B--Amal-
gamation of two companies resulting in dissolution of one of
them and allotment of shares of the surviving company to the
shareholders of the dissolved company--Whether amounts to
'exchange' or 'relinquishment' within the meaning of the
sub-section.
Words and Phrases--Meanings of 'exchange' and 'relin-
quishment'.
HEADNOTE:
Sub-s. (1) of s. 12B of the Indian Income Tax Act, 1922
provides that 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.
The respondent-assessee who owned 90 shares in the
Shorrock Co. which stood dissolved under a scheme of amalga-
mation with another company known as New Shorrock Co., which
was sanctioned by the High Court, was aborted 45 shares of
the New Shorrock Co. in terms of the provisions of the said
scheme. During the assessment proceedings for the assessment
year 1961-62, the Income Tax Officer omitted to consider the
applicability of s. 12B 10 the case of the assessee. Later
on, the Commissioner issued a notice under s. 33B 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. had resulted in an assessable
profit, and passed an order 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. On appeal by the assessee the Appellate Tribu-
nal held that the transaction represented neither an ex-
change nor a relinquishment and, therefore, s. 12B of the
Act was not attracted. However, at the instance of the
Revenue the Tribunal referred the question to the High Court
which answered it in favour of the assessee.
Dismissing the appeals,
180
HELD: The sole question is whether the receipt of the 45
shares of the New Shorrock Co. upon amalgamation by reason
of the share holding of 90 shares of the Shorrock Co. can be
described as an "exchange" or a "relinquishment" within the
meaning of s. 12B. It seems plain to us that no exchange is
involved in the transaction. An exchange involves the trans-
fer 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
any one. 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 enti-
tling the assessee to the allotment of the 45 shares of the
New Shorrock Co. The dissolution of the Shorrock Co. de-
prived the holding of the 90 shares of that company of all
value. [183B-E]
On the question whether there was any relinquishment,
the decision must again be against the Revenue. A relin-
quishment takes place when the owner withdraws himself from
the property and abandons his rights thereto. It presumes
that the property continues to exist after the relinquish-
ment. Upon amalgamation, the shares of the Shorrock Co. lost
all value as that company stood dissolved. [183E-F]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1905-06
(NT) of 1974 and 3414 of 1984.
From the Judgment and Order dated 24.7.73 and 7.9.81 of
the Bombay High Court in I.T.R. No. 19 of 1967, 66 of 1964
and 27 of 1972 respectively.
B. Datta, Additional Solicitor General, M.B. Rao and Ms.
A. Subhashini for the Appellant.
Soli J. Sorabji, Harish Salve, Mrs. A.K. Verma and Jeel
Peres for the Respondents.
The Judgment of the Court was delivered by
PATHAK, CJ. The assessee is a Hindu Undivided Family
deriving income from interest on securities, dividends,
property and dealing in shares. In 1941 the assessee pur-
chased a share of the Shorrock Spinning and Manufacturing
Co. Ltd., hereinafter referred to as
181
“the Shorrock Co.”, of the face value of Rs. 1,000 for
Rs.3,307. Later this share was split into 10 shares of Rs.
100 each, and from time to time a total of 80 shares of the
face value of Rs. 100 each was issued to the assessee by way
of bonus shares. In consequence, on 31 December, 1959 the
assessee owned 90 shares in the Shorrock Co. of the face
value of Rs. 100 each.
There is another company called the New Shorrock Spin-
ning and Manufacturing Co. Ltd. to which reference may be
made as “the New Shorrock Co.”. It was decided to amalgamate
the Shorrock Co. with the New Shorrock Co., and upon peti-
tions filed under s. 39 1 and s. 394 of the Companies Act,
1956 the Gujarat High Court made an order dated 23 Septem-
ber, 1960 directing meetings of the share holders of both
the companies. The meetings were held on 27 October, 1960
and the scheme of amalgamation was approved. On 25 November,
1960 the High Court sanctioned the scheme of amalgamation
and declared that the scheme would be binding on members of
both the Companies.
Under the scheme of amalgamation, the undertaking and
all the property rights and powers as well as all liabili-
ties and duties of the Shorrock Co. were to stand trans-
ferred and vest with effect from 1 January, 1960 in the New
Shorrock Co. The scheme of amalgamation provided further for
an increase in the share capital of the New Shorrock Co. and
it permitted the creation of 14,625 new ordinary shares of
the face value of Rs. 125 each of the transferee company.
The newly created shares were to rank pari passu with the
existing shares of the transferee company in all respects.
Under the scheme the New Shorrock Co., as the transferee
company, was directed to allot to members of the Shorrock
Co., the transferor company, one share in the transferee
company for every two shares of the transferor company held
by them. The order of the Court directed that the Shorrock
Co. should file a certified copy of the order with the
Registrar of Companies within 14 days for registration, and
on such certified copy being delivered the transferor compa-
ny would stand dissolved and the Registrar of Companies was
to place all documents relating to the transferor company on
the file relating to the transferee company and the folios
relating to the two companies were to be consolidated ac-
cordingly.
During the assessment proceedings for the assessment
year 1961-62, the previous year being the financial year
ended 31 March, 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
182
New Shorrock Co. omitted to consider the applicability of s.
12B of the Indian Income Tax Act, 1922. On 21 January, 1964
the Commissioner of Income-tax issued a notice under s. 33B
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 heating the assessee, the Commis-
sioner of Income Tax passed an order dated 29 January, 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 acquisi-
tion 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, s. 12B of the Act was
not attracted.
At the instance of the Revenue the Appel-
late Tribunal referred the following questions
to the High Court for its opinion:
“1. 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 ac-
crued to the assessee by exchange or relin-
quishment as provided for under section 12B of
the Act?
2. If the answer to the above question is
in the affirmative, whether the said sum of
Rs.49,350 was assessable in the year 1961-62?”
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 trans-
action represented an exchange or a relinquishment for the
purposes of s. 12B. 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.
The relevant portion of s. 12B of the Act
provides:
183
S. 12B(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, relinquish-
ment 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, ex-
change, relinquishment or transfer took place.
The sole question is whether the receipt of the 45
shares of the New Shorrock Co. upon amalgamation by reason
of the share holding of 90 shares of the Shorrock Co. can be
described as an “exchange” or a “relinquishment” within the
meaning of s. 12B of the Act. It seems plain to us that no
exchange is involved in the transaction. An exchange in-
volves 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 any one. 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 Shor-
rock Co. deprived the holding of the 90 shares of that
company of all value.
On the question whether there was any relinquishment,
the decision must again be against the Revenue. A relin-
quishment takes place when the owner withdraws himself from
the property and abandons his rights thereto. It presumes
that the property continues to exist after the relinquish-
ment. Upon amalgamation, the shares of the Shorrock Co., as
has been mentioned earlier, lost all value as that company
stood dissolved. There is no relinquishment.
The connected cases raise similar questions, and are
dealt with accordingly.
In the result, we agree with the view taken by the High
Court, and dismiss these appeals with costs.
H.L.C. Appeals dis-
missed.
184