The Delhi High Court while restoring the matter back to the ITAT held that the shares that were with the assessees have undergone the amalgamation process whereby they are replaced with new shares which would be valued entirely on different fundamentals.
The Respondent-assessee, Nalwa Investment Limited belongs to Jindal Group of Companies and is its promoter company. It was holding shares of Jindal Ferro Alloy Ltd. (JFAL).
Consequent to the scheme of amalgamation sanctioned under Section 391 to 394 of the Companies Act, 1956, JFAL got amalgamated with JSL and the assessee received shares of JSL. In terms of the scheme of amalgamation, the shareholders of JFAL were to be allotted 45 shares of JSL in lieu of 100 shares of JFAL.
The AO held that the Respondent-assessees had earned profit by realizing the shares of JSL in exchange for its own shareholding in a planned scheme of amalgamation.
When the matter traveled to the Tribunal, the Respondent- assesses assailed the common order of CIT(A) by raising several contentions; the foremost being that shares of JFAL were acquired by way of investment and not as stock-in-trade and that the said issue stands covered by various decisions of the Tribunal.
The tribunal concluded that it cannot be said that the appellants were holding the shares of JFAL either by way of investment or stock-in-trade.
The ITAT observed that no profit accrued unless the shares held by the assessee are either sold or transferred otherwise for consideration irrespective of the nature of holding.
It was also observed by the ITAT that since there was no sale of shares in the present case, the only question that arose for consideration was whether it can be said that there is a transfer of shares where the assessee gets the shares of an amalgamated company in lieu of shares of amalgamating company.
The division bench consisting of Justice Sanjeev Narula and Justice Manmohan held that under the scheme of amalgamation, the amalgamating company is getting extinguished in the sense that the surviving entity now is only the amalgamated company. However, we cannot ignore the fact that the shares that were with the assessees have undergone the amalgamation process whereby they are replaced with new shares which would be valued entirely on different fundamentals. Subsequent to the amalgamation it is not the same stock in the inventory of the assessees.
The court while quashing the order of ITAT further observed that the dissenting shareholders receive the value of their shareholding while the approving shareholders receive the same value in the form of shares of the amalgamated company. The process of amalgamation in its legal effect from the taxation viewpoint would apply equally, irrespective of the status of the shareholder.
“We are of the view that the matter needs to be remanded back to ITAT since the factual dispute between the parties has not been decided. Accordingly, we restore the matter back to the file of ITAT for fresh adjudication,” the bench said.
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