The assessees were shareholders of Ambassador Steamship (P.) Ltd. Ambassador Steamship Pvt. Ltd. (‘the amalgamating company’) was amalgamated with Collis Line Pvt. Ltd. (‘the amalgamated company’). As per the scheme, the members of the amalgamating company, were issued 14 equity shares of Rs. 100 each, credited as fully paid-up, in the amalgamated company for each share held in the amalgamating company. 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.
The issue before the Supreme Court was whether there was a transfer by the assessee of their shares in Ambassador Steamships Pvt. Ltd, on the amalgamation of Ambassador Steamships Pvt. Ltd. with Collis Line Pvt. Ltd. The Supreme Court had to further consider Whether section 49(2) of the IT Act applied to the sale of the shares by the assessee in Collis Line Pvt. Ltd., which were obtained by the assessee on the amalgamation of Ambassador Steamship Pvt. Ltd. with Collis Line Pvt. Ltd.
On these issues, the SC held as follows:
The SC held that 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. The SC observed that “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.”
The SC further held that 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. The SC concluded that “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 is to say, the cost was deemed to be the cost of the acquisition by the assessees of their shares in the amalgamating company.”