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Tax Publishers CIT v. Nalwa Investment Ltd. [ITA Nos. 822, 853, 935, 961/2005, dt. 7-8-2020] : 2020 TaxPub(DT) 3168 (Del-HC) Swapping of shares of amalgamated company in lieu of shares of amalgamating company -- Shares held as capital asset or as stock in trade -- Whether profit accrues on the transfer as capital asset or as business profits -- Taxability thereof *Facts:* Assessee held shares in Jindal Ferro Alloys Ltd. (JFAL) which got amalgamated with Jindal Strips Ltd. (JSL) thru a court approved scheme of amalgamation. The share swap ratio was for every 100 shares of JFAL, 45 shares of JSL would be allotted (Exchange ratio 100/45 = 2.2). Thus, assessee came to hold shares of JSL in lieu of Shares of JFAL. The revenue claimed that the shares were held as stock-in-trade thus the assessing officer took market value of each JSL share @ Rs. 395 minus 2.2 x 35 (Rs. 35 was the book value of the shares of JFAL recorded by the assessee) = Rs. 318 - and held Rs. 318/share was income in the hands of the assessee for the assessment year 1997-98 which was upheld by the Commissioner (Appeals). Aggrieved the assessee went in higher appeal to ITAT who held that it was inconsequential whether the assessee held it as stock-in-trade or as a capital asset as to tax profits or even as capital gains there has to be a transfer or sale. A mere extinguishment/exchange in one share to another share without a change of hands cannot trigger capital gains or any other income as there was no "transfer" nor "sale". The ITAT applied the decision of CIT v. Rasiklal Maneklal (HUF) (1989) 177 ITR 198 (SC) : 1989 TaxPub(DT) 1092 (SC) while opining thus. Department appealed to the high court with the following plea -- The distinction of how the shares were held as to whether they were stock-in-trade or capital asset do make a difference in taxability and this should have been adjudicated by the ITAT which was not done by the ITAT. Decision of Grace Collis & Ors. (2001) 248 ITR 323 (SC) : 2001 TaxPub(DT) 1188 (SC) be applied if held as capital asset read with section 2(47(ii)/(iv) and its extended meaning of "transfer". Decision of Orient Trading Co. Ltd. v. Commissioner of Income Tax, (1997) 224 ITR 371 (SC) : 1997 TaxPub(DT) 1020 (SC) be followed where barter/exchange of shares was held taxable as business income. Assessee's plea was -- If the shares were held as capital asset -- then section 47(vii) would apply which would exempt the exchange of shares in the court approved scheme of amalgamation from the clutches of capital gains tax. Grace Collis decision would not apply as there was no transfer in the first place with two people being involved. On similar principles of notional taxation -- one cannot make profit out of himself thus held in Chainrup Sampantram v. CIT, (1953) 24 ITR 481 (SC) : 1953 TaxPub(DT) 0120 (SC) it be held that mere appreciation/depreciation of stock-in-trade cannot bring in profit thus cannot be taxed as business income either. That they held it as investment irrespective of what position it was taken in the balance sheet as the shares of JFAL were that of the group company with no control on the amalgamation process by the assessee. Held in favour of the revenue by the Delhi high court that the ITAT should have considered the question of the taxability looking into the nature of the holding as to whether it was stock-in-trade or as a capital asset. Since the same was not done it was remanded to ITAT for a fresh consideration. *Editorial Note:* In Grace Collis case it was held that there was a transfer in extinguishment as there was change of hands. The plea raised by assessee in Grace Collis case was that there was no cost of acquisition for the amalgamated companies shares which arose thru the extinguishment of shares in amalgamating company's shares. In the realm of this the Apex court dissenting with Vania Silk Mills case (1991) 191 ITR 647 (SC) : 1991 TaxPub(DT) 1542 (SC) held that transfer in section 2(47) will need to be extended to extinguishment of any kind/sort. In Vania Silk Mills the asset got destroyed so the Apex court held there cannot be an extinguishment of an asset which did not exist. This reading cannot be read thus was what Grace Collis held giving an extended meaning to extinguishment. In Orient trading case the shares were swapped/bartered with another person and the difference in the fair market value was held as income by the Apex court. What is to be noted here in this case is there is no second person involved but there is simply change of shares of one company (amalgamated company) for the shares of the amalgamating company which is what was the case of Rasiklal Maneklal (HUF) where it was held there was no transfer. Then there is also the fact that the Apex court did not have an opportunity to read a case of shares being held as stock-in-trade in Rasiklal Maneklal's case as it was about taxability of capital gains. In Chainrup Sampantram it was held one cannot make profit out of oneself -- a notional appreciation/depreciation cannot be taxed in stock-in-trade it can be taxed only when the stock-in-trade is sold. What is also interesting to note that the conversion of stock-in-trade into capital asset is now taxable at its fair market value in the year of conversion vide section 2(24)(xiia) read with section 28(via) with effect from 1-4-2019. But for this section to be triggered, there has to be a stock-in-trade and a conversion of that also happening thus which is not the case of the assessee here. This conversion is now notional/deemed taxation with no change of hands/sale required is also to be noted. The author is of the personal view that if we accept the fact that income tax is a tax on real income as held in Shoorji Vallabhdas case (1962) 46 ITR 144 (SC) : 1962 TaxPub(DT) 0307 (SC) then the fact of Chainrup Sampantram's case should fit in here (even if it was held that the shares held were stock-in-trade) where it was held that one cannot make a profit out of himself thus there can be no business income either in the swap of the shares of the amalgamated company to the assessee.

Tax Publishers

CIT v. Nalwa Investment Ltd. [ITA Nos. 822, 853, 935, 961/2005, dt. 7-8-2020] : 2020 TaxPub(DT) 3168 (Del-HC)

Swapping of shares of amalgamated company in lieu of shares of amalgamating company -- Shares held as capital asset or as stock in trade -- Whether profit accrues on the transfer as capital asset or as business profits -- Taxability thereof

Facts:

Assessee held shares in Jindal Ferro Alloys Ltd. (JFAL) which got amalgamated with Jindal Strips Ltd. (JSL) thru a court approved scheme of amalgamation. The share swap ratio was for every 100 shares of JFAL, 45 shares of JSL would be allotted (Exchange ratio 100/45 = 2.2). Thus, assessee came to hold shares of JSL in lieu of Shares of JFAL. The revenue claimed that the shares were held as stock-in-trade thus the assessing officer took market value of each JSL share @ Rs. 395 minus 2.2 x 35 (Rs. 35 was the book value of the shares of JFAL recorded by the assessee) = Rs. 318 - and held Rs. 318/share was income in the hands of the assessee for the assessment year 1997-98 which was upheld by the Commissioner (Appeals).

Aggrieved the assessee went in higher appeal to ITAT who held that it was inconsequential whether the assessee held it as stock-in-trade or as a capital asset as to tax profits or even as capital gains there has to be a transfer or sale. A mere extinguishment/exchange in one share to another share without a change of hands cannot trigger capital gains or any other income as there was no "transfer" nor "sale". The ITAT applied the decision of CIT v. Rasiklal Maneklal (HUF) (1989) 177 ITR 198 (SC) : 1989 TaxPub(DT) 1092 (SC) while opining thus.

Department appealed to the high court with the following plea --

The distinction of how the shares were held as to whether they were stock-in-trade or capital asset do make a difference in taxability and this should have been adjudicated by the ITAT which was not done by the ITAT.

Decision of Grace Collis & Ors. (2001) 248 ITR 323 (SC) : 2001 TaxPub(DT) 1188 (SC) be applied if held as capital asset read with section 2(47(ii)/(iv) and its extended meaning of "transfer".

Decision of Orient Trading Co. Ltd. v. Commissioner of Income Tax, (1997) 224 ITR 371 (SC) : 1997 TaxPub(DT) 1020 (SC) be followed where barter/exchange of shares was held taxable as business income.

Assessee's plea was --

If the shares were held as capital asset -- then section 47(vii) would apply which would exempt the exchange of shares in the court approved scheme of amalgamation from the clutches of capital gains tax.

Grace Collis decision would not apply as there was no transfer in the first place with two people being involved.

On similar principles of notional taxation -- one cannot make profit out of himself thus held in Chainrup Sampantram v. CIT, (1953) 24 ITR 481 (SC) : 1953 TaxPub(DT) 0120 (SC) it be held that mere appreciation/depreciation of stock-in-trade cannot bring in profit thus cannot be taxed as business income either.

That they held it as investment irrespective of what position it was taken in the balance sheet as the shares of JFAL were that of the group company with no control on the amalgamation process by the assessee.

Held in favour of the revenue by the Delhi high court that the ITAT should have considered the question of the taxability looking into the nature of the holding as to whether it was stock-in-trade or as a capital asset. Since the same was not done it was remanded to ITAT for a fresh consideration.

Editorial Note: In Grace Collis case it was held that there was a transfer in extinguishment as there was change of hands. The plea raised by assessee in Grace Collis case was that there was no cost of acquisition for the amalgamated companies shares which arose thru the extinguishment of shares in amalgamating company's shares. In the realm of this the Apex court dissenting with Vania Silk Mills case (1991) 191 ITR 647 (SC) : 1991 TaxPub(DT) 1542 (SC) held that transfer in section 2(47) will need to be extended to extinguishment of any kind/sort. In Vania Silk Mills the asset got destroyed so the Apex court held there cannot be an extinguishment of an asset which did not exist. This reading cannot be read thus was what Grace Collis held giving an extended meaning to extinguishment.

In Orient trading case the shares were swapped/bartered with another person and the difference in the fair market value was held as income by the Apex court. What is to be noted here in this case is there is no second person involved but there is simply change of shares of one company (amalgamated company) for the shares of the amalgamating company which is what was the case of Rasiklal Maneklal (HUF) where it was held there was no transfer. Then there is also the fact that the Apex court did not have an opportunity to read a case of shares being held as stock-in-trade in Rasiklal Maneklal's case as it was about taxability of capital gains. In Chainrup Sampantram it was held one cannot make profit out of oneself -- a notional appreciation/depreciation cannot be taxed in stock-in-trade it can be taxed only when the stock-in-trade is sold.

What is also interesting to note that the conversion of stock-in-trade into capital asset is now taxable at its fair market value in the year of conversion vide section 2(24)(xiia) read with section 28(via) with effect from 1-4-2019. But for this section to be triggered, there has to be a stock-in-trade and a conversion of that also happening thus which is not the case of the assessee here. This conversion is now notional/deemed taxation with no change of hands/sale required is also to be noted.

The author is of the personal view that if we accept the fact that income tax is a tax on real income as held in Shoorji Vallabhdas case (1962) 46 ITR 144 (SC) : 1962 TaxPub(DT) 0307 (SC) then the fact of Chainrup Sampantram's case should fit in here (even if it was held that the shares held were stock-in-trade) where it was held that one cannot make a profit out of himself thus there can be no business income either in the swap of the shares of the amalgamated company to the assessee.