Holding

The receipt of shares on amalgamation is neither an exchange nor a relinquishment; consequently s.12B does not apply and no capital gains tax is chargeable.

Summary

The assessee, a Hindu Undivided Family, owned 90 shares of Shorrock Co. which was amalgamated into New Shorrock Co. under a court‑sanctioned scheme that allotted the assessee 45 shares of the new company for every two shares held in the old company. The Commissioner of Income Tax treated the receipt of the 45 shares as an "exchange" under s.12B of the Indian Income Tax Act, 1922 and assessed a capital gain of Rs.49,350. The Income Tax Appellate Tribunal and the High Court held that the transaction was neither an exchange nor a relinquishment, and therefore s.12B did not apply. The Supreme Court affirmed this view, holding that no mutual transfer of property occurred and the old shares lost all value upon dissolution, so no capital gains tax is payable.

Issues considered

Whether the receipt of shares on amalgamation constitutes an "exchange" or a "relinquishment" within the meaning of s.12B of the Indian Income Tax Act, 1922.
Whether a capital gain arises from such receipt and is assessable under s.12B.

Legislation cited

Companies Act, 1956s. 391, s. 394
Income Tax Act, 1922s. 12B(1), s. 33B

Subjects

capital gainsexchangerelinquishmentamalgamationshare allotmentIndian Income Tax ActCompanies Acttax assessmentmutual transfer

Judgment

COMMISSIONER OF INCOME TAX, BOMBAY A
v.
RASIKLAL MANEKLAL (H.U.F.) & ORS.

MARCH 29, 1989
B
[R.S. PATHAK, CJ AND RANGANATH MISRA, J.]

Indian Income Tax Act, 1922-Sub-s. ( 1) of s. 12B-Amalgama-
tion of two companies resulting in dissolution of one of them and allot-
ment of shares of the surviving company to the shareholders of the
dissolved company-Whether amounts to 'exchange' or 'relinquish-
ment' within the meaning of the sub-section. c
}-
' Words and Phrases-Meanings of 'exchange' and 'relinquish-
ment'.

Snb-s. (I) of s. 12B of the Indian Income Tax Act, 1922 provides
D
that tax shall be payable by an assessee under the head "Capital gains"
in respect ·•f any profits or gains arising from the sale, exchange, relin-
quishment or transfer of a capital asset.
v The respondent-assessee who owned 90 shares in the Shorrock
Co. which stood dissolved under a scheme of amalgamation with
E
another company known as New Shorrock Co., which was sanctioned
by the High Court, was allotted 45 shares of the New Shorrock Co. in
terms of the provisions of the said scheme. Doring the assessment
proceedings for the assessment year 1961-62, the Income Tax Officer
--\ omitted to consider the applicability of s. 12B to the case of the assessee.
> Later on, the Commissioner issued a notice under s. 33B to the assessee
F
~ 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 au amount
of Rs.49,350 representing the capital gain resulting from the transac-
. tion. Ou appeal by the assessee the Appellate Tribunal held that the
G
.\ transaction represented neither an exchange 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,
H

179
180 SUPREME COURT REPORTS [1989] 2 S.C.R.

A HELD: The sole question is whether the receipt of the 45 shares y·
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 transfer of property by one person to another and
B 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 t
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 bis holding the 90 shares of Shorrock Co. The holding of the
c 90 shares in the Shorrock Co. was merely a qualifying condition entitl-
ing 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. [183B-E] '

On the question whether there was any relinquishment, the
D decision must again be against the Revenue. A relinquishment 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 relinquishment. Upon amalgamation, the shares of the
Shorrock Co. lost all value as that company stood dissolved. [183E-FI

E 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.
F
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 Jee! Peres
for the Respondents.
G
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 purchased a share of the Shor-
H rock Spinning and Manufacturing Co. Ltd., hereinafter referred to as
C.l.T. v. RASIKLAL [PATHAK, CJI) 181

'cf "the Shorrock Co.", of the face value of Rs.1,000 for Rs.3,307. Later
A
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.
B
l There is another company called the New Shorrock Spinning 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 petitions filed under s. 391 ands. 394
• of the Companies Act, 1956 the Gujarat High Court made an order
dated 23 September, 1960 directing meetings of the share holders of
both the companies. The meetings were held on 27 October, 1960 and
c
,.._ 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 D
property rights and powers as well as all liabilities and duties of the
Shorrock Co. were to stand transferred 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
y 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 E

-
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. F

-· 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 company 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 G
~ accordingly.

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 H
182 SUPREME COURT REPORTS [1989] 2 S.C.R.

A New Shorrock Co. omitted to consider the applicability of s. 12B of the 'r
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
B 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 Income j
t
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
c 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,
s. 12B oftheActwasnotattracted.
D
At the instance of the Revenue the Appellate 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
E
hands of the assessee as capital gains as having accrued y.
to the assessee by exchange or relinquishment as pro-
vided for under section 12B of the Act?
' ,..
2. If the answer to the above quesiion is in the affirmative,
whether the said sum of Rs.49,350 was assessable in the
year 1961-62?"
F ;-
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 s. 12B. The High
Court took the view that no exchange can be said to have taken place
G 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
'
t-
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:
H
C.l.T. v. RASIKLAL {PATHAK, CJ!] 183

S. 12B(l) Capital gains. The tax shall be payable by an A
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 3 lst
day of March, 1956, and such profits and gains shall be
deemed to be income of the previous year in which the sale,
B
exchange, 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. i2B of the Act. It seems
plain to us that no exchange is involved in the transaction. An ex- c
change 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 thmg 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 D
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 hold-
ing of the 90 shares of that company of all value.
E
On the question whether there was any relinquishment, the
decision must again be against the Revenue. A relinquishment 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 relinquishment. Upon amalgamation, the shares of the
Shorrock Co., as has been mentioned earlier, lost all value as that F
I/I 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, G
and dismiss these appeals with costs.

H.L.C. Appeals dismissed.