Income Tax Appellate Tribunal - Ahmedabad
Alembic Chemical Works Co. Ltd. vs Deputy Commissioner Of Income-Tax. on 10 March, 1999
ORDER
Shri T. N. Chopra, A.M.
1. These two appeals being ITA Nos. 4544 & 512/Ahd. 1991 filed by the assessee-company were earlier disposed off by the Tribunal vide a common order dated 2-9-1996. The said order was subsequently partially recalled by the Tribunal vide its order dated 7-1-1998 in relation to the ground regarding the claim of deduction of Rs. 28,13,180 being the amount written off in the books on amalgamation of Neomer Ltd. with the assessee-company for reconsideration. In pursuance to the said order, the present order is being passed for adjudicating upon the claim of deduction relating to the said amount of Rs. 28,13,180.
2. We have heard Shri K. H. Kaji, the ld. counsel for the assessee-company as well as Shri Dilip Shivpuri, the ld. Sr. DR. The written submissions have been filed by the representatives of both the sides and the same have been considered. A few facts having a bearing on the point in issue may be briefly indicated at the outset.
2.1 The assessee-company was holding 2,81,400 equity shares of Rs. 10 each in M/s. Neomer Ltd. (herein after referred to as Neomer). Neomer got amalgamated with the assessee-company under a scheme of amalgamation approved and sanctioned by the High Court under sections 391 and 394 of the Companies Act with effect from 1-1-1983. Under the scheme, the assessee as the amalgamated company allotted its shares to the shareholders of Neomer in the ratio of 1 equity share of Rs. 100 each credited as fully paid up in respect of 40 shares of Rs. 10. Forty shares of Neomer of face value of Rs. 10 exchange ratio has been arrived at on the basis of valuation report of M/s. Dalal & Shah, C.As. While valuing the intrinsic worth of the shares of the two companies namely, Alembic and Neomer for the purpose of amalgamation, it has been pointed out by the C.As. that the Neomer has been making losses and accumulated losses as on 31st December, 1982 under the head 'Miscellaneous Expenditure' to the extent not written off aggregate to Rs. 368 lacs, which would enable Alembic to secure substantial tax benefits as per the provisions of section 72A of the Income-tax Act. It is further mentioned in the valuation report that there will be some resulting benefit out of the likely waiver of penal, interest etc. as a result of negotiation with financial institutions and banks for the purpose of revival of the unit. The scheme of amalgamation has been sanctioned by the High Court vide order dated 12-9-1986. Under the amalgamation scheme, the undertaking of Neomer as well as the property rights and powers as also the liabilities and dues of Neomer were to transfer and vest with effect from 1-1-1983 in the Alembic leading to dissolution of Neomer without winding up. The assessee-company claimed deduction for an amount of Rs. 28,13,180 on the ground that business loss has been incurred on the cancellation of its investment in the shares of Neomer. The deduction has been claimed in the assessment year 1984-85 on the ground that date of confirmation being first January, 1983 falls in the said assessment order. Alternatively, deduction has been claimed in the assessment year 1987-88 on the ground that the requisite formalities for amalgamation as well as the order of the Hon'ble High Court sanctioning the scheme dated 12th September 1986 falls under the assessment year 1987-88. Without prejudice to its claim of deduction as business loss, the assessee has contended that the loss of Rs. 28,13,180 be allowed under the head 'Capital gains' on account of cancellation of its investment in the case of Neomer.
2.2 In so far as the relevant assessment year is concerned in which the entire issue has to be considered, we feel that in the instant case, the date of amalgamation being 1st January, 1983 is the material date on which Neomer has merged with the assessee-company alongwith its assets and liabilities. The scheme of the amalgamation approved and sanctioned by the High Court envisages that the property rights and powers as well as the liabilities and dues of Neomer stood transferred and vested with effect from 1-1-1983 in the assessee-company. Therefore, the material date for the purposes of present controversy is 1-1-1983 relevant for the assessment year 1984-85 (the accounting year of the assessee ending on 31-12-1983). The mere fact that the scheme has been sanctioned by the High Court vide order dated 12-9-1986 would not in any manner alter the factum of amalgamation being effective from 1st January, 1983. Therefore, in so far as the assessment year 1987-88 is concerned, the claim of deduction either as business loss or by way of loss under the head 'Capital gains' can not be allowed. On this issue, therefore, this ground in ITA No. 512/Ahd./1991 stands dismissed.
3. That leaves us with the ground for deduction of loss for the assessment year 1984-85 involved in ITA No. 4544/Ahd./1991.
4. The ld. counsel for the assessee-company argued that the amalgamation with Neomer resulted in a business loss inasmuch as investment of Rs. 28,13,180 for purchase of shares of Neomer has to be written off on amalgamation and no shares could be allotted to self by the assessee-company. The ld. counsel further submitted that the assessee had purchased shares of Neomer for business purposes to maintain control over the management of Neomer and the loss due to amalgamation is, therefore, allowable as business loss. Reliance is placed on the decision of the Hon'ble Gujarat High Court in. Addl. CIT v. Laxmi Agents (P.) Ltd. [1980] 125 ITR 227. The ld. counsel further submitted that the amalgamation was for more efficient carrying on of the business by the assessee. The assessee got the benefit of carry forward of losses of Neomer under section 72A of the Income-tax Act resulting in substantial reduction in its tax liability and substantial funds became available to the assessee as a result of merger. In support of this contention, the ld. counsel placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Bombay Dyeing & Mfg. Co. Ltd. [1996] 219 ITR 521/85 Taxman 396. Further reliance is placed on the decision of the Hon'ble Supreme Court in the case of Bombay Steam Navigation Co. (1953) (P.) Ltd v. CIT [1965] 56 ITR 52 and State of Madras v. G. J. Coleho [1964] 53 ITR 186. On the basis of the aforesaid decisions, the ld. counsel argued that business loss suffered by the assessee as a result of amalgamation amounting to Rs. 28,13,180 should be allowed under section 28 of the Income-tax Act, 1961. Without prejudice to the claim of deduction as business loss, the ld. counsel made the alternative plea that the loss should be considered under the head 'Capital gains' and allowed to be set off/carried forward as per law. The ld. counsel added that due to the amalgamation of Neomer, the shares of Neomer held by the assessee-company were totally extinguished as no share could be issued to the assessee by itself. The ld. counsel placed reliance on the following decision in support of his contentions :
(1.) Anarkali Sarabhai v. CIT [1982] 138 ITR 437/[1983] 12 Taxman 120 (Guj.) confirmed by the Hon'ble Supreme Court in Anarkali Sarabhai v. CIT [1997] 224 ITR 422/90 Taxman 509 (2.) Kartikeya V. Sarabhai v. CIT [1997] 228 ITR 163/94 Taxman 164 (SC) (3.) Marshall Sons & Co. India Ltd. v. ITO [1997] 223 ITR 809/[1996] 89 Taxman 619 (SC) (4.) CIT v. Jay Krishna Hari Vallabhdas [1998] 231 ITR 108 (Guj.) On behalf of the department, the ld. Sr. DR strongly urged that the claim of deduction on account of cancellation of investment with Neomer cannot be allowed as a business loss since the entire assets and liabilities of Neomer have been merged with the assessee-company and no loss has been incurred in the process. Regarding the claim of loss under the head 'Capital gains', the ld. DR argued that the transaction cannot be considered as a transfer by virtue of section 47 (vi). Reliance is placed by the ld. DR on the following decisions :
(i) Mrs. Grace Collis v. CIT [1997] 226 ITR 55 (Ker.)
(ii) Shaw Wallace & Co. Ltd v. CIT [1979] 119 ITR 399/1 Taxman 551 (Cal.)
(iii) CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198/43 Taxman 259 (SC)
(iv) Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 647/59 Taxman 3 (SC)
5. After careful consideration of rival submissions of both the sides, we are inclined to dismiss the ground relating to deduction of Rs. 28,13,180 as business loss or in the alternative as loss under the head 'Capital gains'. In our opinion, scheme of amalgamation of Neomer has got to be viewed as integrated whole while adjudicating upon the point in dispute in the instant appeal. The amalgamation resulted in the absorption and blending of the amalgamating company Neomer with the amalgamated company i.e., the assessee. The assets of Neomer have been taken over by the assessee at existing book values. While determining the exchange ratio. M/s. Dalal & Shah, C.As. have noted that the current value of the fixed assets as well as the advantage attached to the existence of a duly organized undertaking have been kept in view. Various other tangible benefits and advantages which accrued to the assessee-company as a result of merger, as pointed out by the C.As. in their valuation report, pertained to substantial tax savings due to set off of accumulated losses and unabsorbed depreciation allowance etc. in the hands of the assessee-company. The valuation report further refers to the likely reduction in the loan liabilities of the financial institutions and banks on account of waiver of penal interest, which may be obtained as a result of mutual negotiations. Such concessions were expected by the valuers by way of assistance from the financial institutions and banks towards the revival of Neomer unit. The fact that the assessee-company could not allot shares to itself in lieu of its holding of 2,81,400 equity shares of Neomer would have to be considered as an integral and indivisible part of the merger scheme and not in isolation by ignoring the various advantages and benefits, tangible as well as intangible, which have been secured by the assessee-company under the amalgamation scheme. The amalgamation scheme has resulted in the taking over of the assets and liabilities of Neomer. Neomer has been dissolved without winding up and consequently, the shares of Neomer lost all value. However, insofar as the assessee's investment in shareholding of Neomer is concerned, no loss as such has been incurred either revenue or capital with the enter undertaking of Neomer vesting with the assessee-company with effect from 1-1-1983. Shares are property in the nature of "chose in action". The shareholder has a number of contractual statutory rights against the company including, inter alia, right to share in its assets when it is wound up and right to receive dividend out of its profits. The extinction of share in Neomer has thus to be viewed in the light of the fact that the property, rights and powers alongwith the liabilities of Neomer as an undertaking now vest with the assessee-company. Any claim of loss on extinction of shares as made by the assessee-company is, therefore, fictional and contrary to the facts and circumstances of the case. It is further to be noted that the business of the assessee-company before amalgamation comprised of the manufacture and sale of medicines of basic drugs. Amalgamation of Neomer which dealt in manufacture of Polypropylene is not in any manner connected with the carrying on of the pharmaceutical business of the assessee. Therefore, there is no occasion in any case for the assessee-company to claim any deduction by way of business loss under section 28 or for that matter under section 37(1). The reliance placed by the ld. counsel on the decision of Hon'ble Gujarat High Court in Laxmi Agents (P.) Ltd's case (supra) is entirely misplaced inasmuch as the said decision deals with entirely a different issue - whether the interest paid on the amounts borrowed for the purchase of shares should be allowed as business expenditure or should be allowed as deduction against the dividend income of the assessee. The said decision affords no assistance to the assessee's case.
6. The next decision relied upon by the ld. counsel is Bombay Dyeing & Mfg. Co. Ltd.'s case (supra). The said decision rendered by the Hon'ble Supreme Court involves the deduction of professional charges paid to a firm of solicitors with regard to amalgamation with another company carrying on the same business of Ginning and Pressing as carried on by the assessee. The Hon'ble Supreme Court took note of the fact that "both the companies were carrying on complimentary business and their amalgamation was necessary for smooth and efficient conduct of the business. In the background of these facts, expenditure of professional charges was held to be allowable as business expenditure under section 37(1) of the Income-tax Act. The facts in the instant case are entirely different. Firstly, no expenditure as such has been incurred for which deduction under section 37(1) could be allowed. Furthermore, the business of the assessee-company being manufacture of drugs is entirely different from the business of amalgamated company namely, manufacture of Polypropylene fibre. Needless to repeat that no business expenditure has been incurred in the instant case and for that matter, no loss has been incurred, which could be claimed as business loss.
7. The decision in Bombay Steam Navigation Co. (1953) (P.) Ltd.'s case (supra) relied upon by the ld. counsel pertains to amalgamation of two shipping company and involved entirely the distinguishable set of facts. Similarly, the decision of the Hon'ble Supreme Court in the case of G. J. Coelho (supra) by the ld. counsel involved the deductibility of interest on the amounts borrowed for acquiring a capital asset. The decision has no relevance to the facts of the present case before us. In our considered opinion, the deduction of Rs. 28,13,180 claimed as business loss has been rightly disallowed by the tax authorities below. We uphold this action.
8. Coming now to the alternative plea of the ld. counsel of the assessee for claiming the loss under the head 'Capital gains', we find that the provisions of section 45 are not applicable in the instant case and no loss under the head 'Capital gains' is, therefore, allowable. In amalgamation of companies if the amalgamated company is an Indian Company, any transfer attributable to the scheme of amalgamation of capital asset by the amalgamating company to the amalgamated company would not be construed as transfer as per section 47 (vi) of the Income-tax Act. Where shares are allotted as a consequence of sanctioned scheme of amalgamation, there is no 'transfer' within the meaning of section 2(47). Under section 45 of the Income-tax Act, a capital gain, or in the negative sense a capital loss can occur only on the transfer of capital asset. A transfer always involves more than one party. There cannot be a transfer by a person to himself. The expression 'relinquishment of the asset' or the words like 'sale', 'exchange' etc. used in the definition clause of section 2(47) imply the existence of the asset and of the transferee. The expression 'extinguishment of any right' would necessarily take colour from those associated words and expressions and will have to be restricted to the sense analogous to them. The existence of assets during the process of transfer is an essential precondition. The expression 'extinguishment of any rights' would have to be understood as relatable to the factum of transfer and cannot be extended to mean any extinguishment of rights independent of or otherwise than on account of transfer. In the instant case, the amalgamation resulted in dissolution of the Neomer and the shares thereof, therefore, became worthless. In the absence of the assets as well as the dissolution of Neomer, both the conditions envisaged under section 2(47) namely, existence of the asset as well as the transferee as above are not fulfilled. There is, therefore, no transfer and the provisions of section 45 would not apply. In support of the view taken here, reliance is placed on the decision of the Hon'ble Kerala High Court in Mrs. Grace Collis' case (supra) and the Hon'ble Calcutta High Court in Shaw Wallace & Co. Ltd's case (supra) relied upon by the ld. DR. Both these decisions are direct authorities in support of our finding that with the extinction of shares of Neomer, no transfer has taken place in terms of section 2(47) and provisions of section 45 would, therefore, not be applicable. The decisions of the Hon'ble Supreme Court cited by the ld. DR in Vania Silk Mills (P.) Ltd.'s case (supra) and Rasiklal Maneklal (HUF)'s case (supra) lend further support to the view taken by us. In both these decisions, the Hon'ble Supreme Court has enunciated the scope and ambit of 'transfer' contained in section 2(47) and the consequent levy of capital gains under section 45. Analysing essential ingredients for the transaction of 'transfer' as per section 2(47), the Hon'ble Supreme Court in Vania Silk Mills (P.) Ltd's case (supra) at page 648 of the report observed as under :-
"Since associated words and expressions like "sale", "exchange" etc. used in the definition of "transfer" in section 2(47), imply the existence of the asset and of the transferee, according to the rule of noscitur a socis, the expression "extinguishment of any rights" would take colour from those associated words and expressions and will have to be restricted to the sense analogous to them. If the Legislature had 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 lights 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."
The learned counsel has next relied upon two decisions of the Hon'ble Supreme Court in the case of Anarkali Sarabhai (supra) and Kartikeya V. Sarabhai (supra). Both these decisions involved redemption of preference shares and their Lordships specifically referred to the provisions of section 77 of the Companies Act, 1956 and observed that when a preference share is redeemed by a company, what a share holder does in effect is to sell the shares to the company. The restriction imposed upon a company in respect of buying its own shares does not apply to redemption of preference shares issued under section 80 of the Companies Act. Both the decisions relating to preference shares are therefore distinguishable and do not apply to the facts of the present case involving equity shares. It is relevant to mention here that in Anarkali Sarabhai's case (supra) the Hon'ble Supreme Court has specifically referred at page 430 of the report to its earlier decision in the case of Rasiklal Maneklal (HUF) (supra) and Vania Silk Mills (P.) Ltd. (supra) which have been referred to above to bring out the distinguishing features of redemption of preference shares as against extinguishment of equity shares in the context of section 2(47). The decision cited by the learned counsel therefore do not support the assessee's case.
8.1 The learned counsel has next strongly relied upon the decision of the Hon'ble Gujarat High Court in the case of Jaikrishna Harivallabhdas (supra). This decision involved entirely different set of facts namely, distribution of assets to shareholders on winding up of a company and the effect of section 46 thereto. The decision renders no assistance to the assessee's case as already mentioned above. Neomer, the amalgamating Company had not gone into liquidation. Neomer has in fact amalgamated with the assessee-company. There is no winding up of Neomer; what has taken place is taking over of the undertaking alongwith its assets and liabilities by the assessee-company and the dissolution of the Neomer. The decision, therefore, does not help the assessee.
9. Having regard to the aforesaid discussion as well as the principles governing the scope and ambit the word "transfer" and applicability of section 45 as enunciated in the various judicial pronouncements ref erred to above, we have no hesitation in holding that amalgamation of Neomer with the assessee-company does not entail transfer of shares held by the assessee-company and the provisions of section 45 are therefore not attracted. The claim of the assessee for allowing of loss under the head 'Capital gains' has therefore been rightly rejected by the authorities below. The alternative contention of the learned counsel is therefore, rejected. The ground of appeal relating to a deduction of Rs. 28,13,180 taken in ITA No. 4544/Ahd./1991 is hereby dismissed.
10. In the result, the ground of appeal regarding deduction of Rs. 28,13,180 is dismissed for both the assessment year i.e., assessment years 1984-85 and 1987-88.