COMMISSIONER OF INCOME TAX, COCHIN versus MRS. GRACE COLLIS AND ORS.

Citation: [2001] 2 S.C.R. 98 · Decided: 23-02-2001 · Supreme Court of India · Bench: S.P. BHARUCHA · Disposal: Appeal(s) allowed

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Judgment (excerpt)

A 
COMMISSIONER OF INCOME TAX, COCHIN 
v. 
MRS. GRACE COLLIS AND ORS. 
) 
FEBRUARY23, 2001 
-
B 
[S.P. DHAR UCHA, N. SANTOSH HEGDE AND Y.K. SABHARWAL, JJ.] 
Income Tax Act, 1961-Sections 2(47), 45, 47 and 49(2)-Scheme of 
Amalgamation under the Companies Act-Sharns in amalgamated company 
given in lieu of sharns in amalgamating company in the ratio of 1: 14-Sale 
c 
of sharns of amalgamated company by assessee-Transfer--Capital Gains 
Tax-Liability of-Held, extinguishment of shares of amalgamating company 
on amalgamation ccme within the purview of the definition of 'transfer' -
Exigible to capital gains tax-Companies Act, 1956-Sections 391 (2) and 
394. 
D 
Respondent-assessees were shareholders of 'A' company. Under a 
Scheme of Arrangement under Section 391(2) and 394 of the Companies 
Act, 1956, 'A' company (amalgamating company) was amalgamated with 
'C' company (amalgamated company) in consideration of issuing 14 equity 
shares of Rs.100 each, fully paid up, in the amalgamated company for each 
E 
share held by the shareholders in the amalgamating company. The assessees 
sold 45,318 shares of the amalgamated company for Rs. 48,72,523 i.e. at Rs. 
107.50 each in the previous year relating to assessment year 1976-77. The 
assessees did not furnish to I. T.O., the cost of acquisition of the shares of the 
amalgamating company. The I. T.O. computed the cost of acquisition by 
multiplying the number of shares sold of the amalgamated company with 
F 
their face value and dividing the result by 14. The I. T.O. levied capital gains 
tax under the provisions of the Income Tax Act, 1961. The order of the 
I. T.O. was confirmed by CIT (Appeals) and the Tribunal. On reference at 
-+ 
the instance of the assessees, the High Court held in favour of the assessees. 
Hence these appeals by the Revenue. 
G 
The assessees contended that the shares in the amalgamating com-
pany ceased to exist on amalgamation; that there was no transfer of their 
shares in the amalgamating company to any one; that the expression 'extin-
guishment of any rights therein' in Section 2(47) of the Act is not applicable 
as there was extinguishment of the asset itself; that the shares of the amal-
H 
gamated company were obtained on account of holding shares in the amal-
98 
C.l.T. v. MRS. GRACE COLLIS [BHARUCHA, J.] 
99 
..... 
gamating company; and that capital gains tax could not be levied as there 
A 
* 
was no provision under the Income Tax Act to determine the cost of the 
shares received from the amalgamated company. 
Allowing the appeals, the Court 
HELD : 1.1. The definition of 'transfer' in Section 2(47) of the 
B 
Income Tax Act, 1961 clearly contemplates the extinguishment of rights 
in a capital asset distinct and independent of such extinguishment conse· 
quent upon the transfer thereof. There is no limitation of the expression 
"extinguishment of any rights therein" to such extinguishment on account 
of transfers. The expression "extinguishment of any rights therein" can· 
not be extended to mean the extinguishment of rights independent of or c 
otherwise than on account of transfer. Therefore, the expression includes 
extinguishment of rights in a capital asset independent of and otherwise 
than on account of transfer. [106-B-C] 
1.2. The rights of the assessees in the capital asset, being their shares 
D 
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 accord· 
E 
ance with the provision of Section 49(2) of the Act. [106-D-E] 
Commissioner of Income-tax, Bombay v. Ra<iklal Maneklal (HUF). 177 
ITR 198 and Vania Silk Mills Pvt. l.Jd. v. CIT, 191 ITR 647, referred to. 
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 4437-45 of 
F 
1997 . 
... 
From the Judgment and Order dated 3.6.96 of the Kerala High Court 
in l.T.R. Nos. 269-277 of 1985. 
M.L. Verma, P.S. Narsimha and Ms. Sushma Suri for the Appellant. 
Joseph Vellapally, S. Rajappa, V. Balaji and P.N. Rarnalingarn for the 
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Respondents. 
The Judgment of the Court was delivered by 
BHARUCHA, J. These are the appeals by the Revenue against the 
decision of a Division Bench of the High Court of Kerala

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