* IN HIGH COURT OF DELHI AT NEW DELHI Reserved on: 02.07.2020 Pronounced on: 07.08.2020 + ITA 822/2005 COMMISSIONER OF INCOME TAX-V, NEW DELHI Appellant Through: Mr.Sunil Agarwal, Senior Standing Counsel with Mr.Tushar Gupta, Junior Standing Counsel for Income Tax Department. versus M/S NALWA INVESTMENT LTD. Respondent Through: Mr.Ajay Vohra, Senior Advocate with Ms.Kavita Jha, Advocate. + ITA 853/2005 COMMISSIONER OF INCOME TAX DELHI Appellant Through: Mr.Deepak Anand, Senior Standing Counsel with Mr.Vipul Agarwal, Junior Standing Counsel. versus M/S ABHUINANDAN INVESTMENTS LTD. Respondent Through: Mr.Ajay Vohra, Senior Advocate with Ms.Kavita Jha, Advocate. + ITA 935/2005 COMMISSIONER OF INCOME TAX DELHI ..... Appellant Through: Mr.Ajit Sharma, Senior Standing Counsel with Ms.Adeeba Mujabhid, Junior Standing Counsel. ITA 822/2005 & connected matters Page 1 of 37 versus M/S JINDAL EQUIPMENT LEAST ..... Respondent Through: Mr.Ajay Vohra, Senior Advocate with Ms.Kavita Jha, Advocate. + ITA 961/2005 COMMISSIONER OF INCOME TAX DELHI ..... Appellant Through: Mr.Sunil Agarwal, Senior Standing Counsel with Mr.Tushar Gupta, Junior Standing Counsel for Income Tax Department. versus M/S MANSAROVAR INVESTMENTS LTD. ..... Respondent Through: Mr.Ajay Vohra, Senior Advocate with Ms.Kavita Jha, Advocate. CORAM: HON'BLE MR. JUSTICE MANMOHAN HON'BLE MR. JUSTICE SANJEEV NARULA JUDGEMENT SANJEEV NARULA, J. 1. present appeals under Section 260A of Income Tax Act, 1961 ( Act ) filed by Revenue are directed against common order dated 17th February, 2005, ( impugned order ) passed by Income Tax Appellate Tribunal ( ITAT ) in ITA No.(s) 1739,1740,1742 & 1743/Del/ 2001 Assessment Year 1997-98 ( AY ), allowing appeals preferred by Respondent-assessees against order of CIT(A). Resultantly, ITA 822/2005 & connected matters Page 2 of 37 additions made by Assessing Officer ( AO ) in orders of assessment, as confirmed by CIT(A) have been set-aside. 2. ITAT has decided all appeals by way of common order and furthermore since question of law arising therefrom is identical in all appeals, same were heard together and are being disposed of by way of this common judgment. However, for sake of convenience and to precisely delineate controversy in present appeals, factual background in ITA No. 822/2005 is being noted and discussed in detail. Facts in brief: 3. 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 ). Vide amalgamation scheme sanctioned under Section 391-394 of Companies Act, 1956, JFAL got amalgamated with Jindal Strips Ltd. ( JSL ). Consequently, Respondent-assessee company transferred its shareholding in JFAL in lieu of receipt of shares of JSL and claimed that transaction was exempt from capital gain tax under Section 47(vii) of Act. AO adopting value of shares of JSL at rate of Rs. 218 per share, calculated profit on receipts of shares of JSL under scheme of amalgamation at Rs. 5,31,28,579/-, and taxed same as business income . Revenue contended that since Respondent-assessee was holding JFAL shares as stock-in-trade and not as capital asset, it was not entitled to exemption under Section 47(vii) of Act. statutory first Appellate Authority [ CIT(A) ] upheld action of AO. In further appeal before ITAT at instance of Respondent herein, Tribunal without recording categorical finding as to whether shares qualified as capital ITA 822/2005 & connected matters Page 3 of 37 asset or stock- in- trade , allowed appeals in favour of Respondents, holding that no profit accrues when shares of amalgamated company are received in lieu of shares of amalgamating company. relevant portion of impugned order reads as under: 7. In view of above decision, it cannot be said that appellants were holding shares of JFAL either by way of investment or stock in trade. However, we need not adjudicate upon this issue since decision on this issue is not of much relevance in deciding large issue before us. major question for our consideration is whether any profit accrued to appellants when they got shares of amalgamated company in lieu of shares of amalgamating company held by them. In our opinion, no profit accrues unless shares held by assessee are either sold or transferred otherwise for consideration irrespective of nature of holding. 4. concluding remarks in said order are as follows: 10. Before parting with this order, we would like to mention that issue, whether appellants were holding shares of JFAL by way of investment or stock in trade, has not been adjudicated by us since assessee has succeed on legal issue. Accordingly, said issue would remain open for adjudication in year or years when such shares are sold. For similar reasons, we need not adjudicate upon last contention of assessee's counsel. Subject to observations made above, appeals of assessee are allowed. Question of law: 5. Aggrieved with aforesaid order, Revenue filed present appeals questioning correctness of reasoning given by ITAT and raised several questions of law. Vide order dated 5th July, 2006, present appeals were admitted and substantial question of law was framed as follows: ITA 822/2005 & connected matters Page 4 of 37 Whether ITAT was correct in holding that where assessee gets shares of Amalgamated Company in lieu of shares of amalgamating company, no transfer takes place? Contentions of parties: 6. Mr. Sunil Agarwal, learned Senior Standing Counsel led arguments on behalf of Appellant. He commenced his submissions by referring to impugned order and contended that Tribunal has erroneously allowed appeals in favour of Respondent-assessees without recording clear-cut finding of fact and resolving crucial question whether assessees were holding shares as capital asset or stock-in-trade . On this aspect he drew our attention to observations and analysis given by ITAT in Paragraph nos. 7 and 10 of impugned order which has been reproduced hereinabove. Mr. Agarwal argued that in absence of factual determination on above-said vital aspect, Tribunal has grossly erred in coming to conclusion that it did and same is wholly irrational. He contended that matter needs to be restored to file of Tribunal with direction to first adjudicate fundamental factual question that has been left undecided. Without prejudice to his preliminary submission, Mr. Agarwal further argued that impugned order is unsustainable for reason that question of law arising out of present appeals is entirely covered in favour of Revenue by virtue of decision of Supreme Court in Commissioner of Income-Tax v. Mrs. Grace Collis and Ors., [2001] 248 ITR 323 (SC). He submitted that reasoning of Tribunal is flawed since it is primarily based on views of Supreme Court in its earlier decision in case of Commissioner of Income-Tax, Bombay v. Rasiklal ITA 822/2005 & connected matters Page 5 of 37 Maneklal (HUF), [1989] 177 ITR 198 (SC) which was decided in context of Income Tax Act, 1922 ,when relevant provision was different. Further, issue as to whether holding of shares was capital asset or stock-in-trade was not in controversy in said case. In any event, subsequently, Supreme Court in Grace Collis and Others (supra) after examining facts and circumstances in Rasiklal Maneklal (supra) and on consideration of provisions of Section 47(vii) of current Act, held that receipt of shares of amalgamated company in lieu of shareholding in amalgamating company, constitutes transfer . 7. Mr. Agarwal further contended that ITAT should have followed decision of Supreme Court in case of Orient Trading Co. Ltd. v. Commissioner of Income-Tax, (1997) 224 ITR 371 (SC), since factual situation in said case is similar to one in hand. He argued that since shares in question were stock-in-trade of assessees, exemption under Section 47(vii) is not available and thus transaction is taxable. order of ITAT should be reversed and order of AO as confirmed by CIT(A) ought to be restored. In same vein, Mr. Deepak Anand and Mr. Ajit Sharma, learned Senior Standing Counsel on behalf of Revenue argued that reasoning of ITAT was flawed and contrary to law applicable in given factual situation. It was contended that difference between market value of shares received by assessee-companies in exchange of shares of JFAL and book value of shares has to be treated as income of assesses under Section 28 of Act. learned AO has treated shares of JFAL as stock-in-trade and not as capital asset/investment not only in relevant AY but in earlier AYs as well. ITA 822/2005 & connected matters Page 6 of 37 This finding of fact has been upheld by CIT(A). ITAT erroneously held that there is no transfer of shares in case of amalgamation of company. judgment relied upon by ITAT in case of Rasiklal Maneklal (supra) does not deal with issue in hand and is only in respect of exchange and relinquishment within meaning of Section 12B of IT Act, 1922. 8. Mr. Ajay Vohra, learned Senior Counsel on behalf of Respondent- assessees countered submissions of Revenue and argued that preliminary objection/ submission of Mr. Agarwal is beyond scope of appeal. He contended that having regard to questions of law proposed by Revenue and substantial question of law admitted vide order dated 5th July, 2006, Revenue is seeking to expand scope of appeal by contending that matter has to be sent back to Tribunal, which is impermissible in terms of Section 260A of Act. 9. On merits, Mr. Vohra argued that Respondent-assessees are investment companies of Jindal Group. shares of operating company i.e. JFAL and/or JSL are held as part of promoter holding, representing controlling interest; Respondent-assessees had furnished non-disposal undertaking to financial institution and lenders who had lent money to operating company. Further such shares were reflected as investment in balance-sheet. He argued that irrespective of fact whether shares were held as stock-in-trade or capital asset, there is no taxable income arising in year under consideration on Respondent-assessees receiving shares in JSL in lieu of shares held in JFAL under scheme of ITA 822/2005 & connected matters Page 7 of 37 amalgamation. On demurrer, he submitted that if it is assumed that shares are held in stock-in-trade as alleged by Revenue, receipt of shares of JSL, without anything more, could not lead to any addition to income of Respondent-assessees since there can be no addition of any notional accretion/notional profit under head profit and gain of business or profession under Section 28 of Act. Only profit on realisation of stock- in-trade by way of sale thereof can be brought to tax under that head. shares received in JSL on amalgamation were not sold during relevant previous year and therefore there can be no addition for business profit in hands of Respondent-assessees, even assuming that there was notional accretion in value of shares of JSL vis-a-vis value of shares held in JFAL. Mr. Vohra differentiated judgments relied upon by Revenue and argued that decision in case Orient Trading Co. (supra) has no application to facts of present case. In said case it was held that accretion in value of shares received in exchange amounted to realisation of profit and was therefore, taxable as business income. No such situation has arisen in present case. Mr. Vohra also relied upon observations made by Supreme Court in Para 7 in Rasiklal Maneklal (supra), reproduced hereinabove, to contend that aforesaid reasoning of Supreme Court continues to hold field and Court correctly laid down proposition that amalgamation does not amount to exchange . Without prejudice to aforenoted contentions, he further argued that AO has erred in taking value of shares of JSL at rate of Rs.218 per share instead of Rs.76 being market price of shares of JSL on 23rd December, 1996 [record date under scheme of amalgamation] and even ITA 822/2005 & connected matters Page 8 of 37 if value of Rs.76 per share is adopted, same will result in business loss instead of business profit as worked out by AO. 10. Mr. Vohra strenuously urged that there is no necessity for determining nature and character of shareholding of assessees i.e. whether it is capital asset or stock-in-trade. Tribunal correctly did not go into this controversy and aptly decided appeals in favour of Respondent- assessees, on correct reading of legal position with respect to concept of transfer of shares in amalgamation of companies. He submitted that there could be no income of Respondent-assessees on mere receipt of shares of JSL (in lieu of extinguishment of shares held in JFAL). In event shares were held as capital asset, no capital gain would be liable to tax on receipt of shares of JSL in lieu of shares held in JFAL. He referred to Section 45 of Act which deals with taxing profits and gains arising from transfer of capital asset effected during relevant year under head capital gain and further contended that assessees would be entitled to exemption under Section 47(vii) of Act. He also argued that decision of Grace Collis and Ors. (supra) has no application to facts of present case. He further relied upon CBDT Circular No.6/2016 dated 29th February, 2016 and argued that although Tribunal has left aforesaid issue open for adjudication in year of subsequent sale of shares, issue is today no longer res integra as in aforenoted circular, CBDT has clarified as under: CIRCULAR NO.6/2016 [F.NO.225/12/2016-ITA-lI], DATED 29-2- 2016 Sub-section (14) of section 2 of Income-tax Act, 1961 (Act) defines term "capital asset" to include property of ITA 822/2005 & connected matters Page 9 of 37 any kind held by assessee, whether or not connected with his business or profession, but does not include any stock-in- trade or personal assets subject to certain exceptions. As regards shares and other securities, same can be held either as capital assets or stock-in-trade/trading assets or both. Determination of character of particular investment in shares or other securities, whether same is in nature of capital asset or stock-in-trade, is essentially fact-specific determination and has led to lot of uncertainty and litigation in past. 2. Over years, courts have laid down different parameters to distinguish shares held as investments from shares held as stock-in-trade. Central Board of Direct Taxes ('CBDT') has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15 2007, summarized said principles for guidance of field formations. 3. Disputes, however, continue to exist on application of these principles to facts of individual case since taxpayers find it difficult to prove intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide character of income from sale of shares and securities (i.e. whether same is in nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of listed ones and with view to reduce litigation and uncertainty in matter, in partial modification to aforesaid Circulars, further instructs that Assessing Officers in holding whether surplus generated from, sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account following (a) Where assessee itself, irrespective of period of holding listed shares and securities, opts to treat them as stock-in-trade, income arising from transfer ITA 822/2005 & connected matters Page 10 of 37 of such shares/securities would be treated as its business income, (b) In respect of listed shares and securities held for period of more than 12 months immediately preceding date of its transfer, if assessee desires to treat income arising from transfer thereof as Capital Gain, same shall not be put to dispute by Assessing Officer. However, this stand, once taken by assessee in particular Assessment Year, shall remain applicable in subsequent Assessment Years also and taxpayers shall not be allowed to adopt different/contrary stand in this regard in subsequent years; (c) In all other cases, nature of transaction (i.e. whether same is in nature of capital gain or business income) shall continue to be decided keeping in view aforesaid Circulars issued by CBDT. 4. It is, however, clarified that above shall not apply in respect of such transactions in shares/securities where genuineness of transaction itself is questionable, such as bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham transactions. 5. It is reiterated that above principles have been formulated with sole objective of reducing litigation and maintaining consistency in approach on issue of treatment of income derived from transfer of shares and securities. All relevant provisions of Act shall continue to apply on transactions involving transfer of shares and securities. 11. He summed up his submissions by contending that there is no error in order passed by Tribunal and same deserves to be upheld and appeals of Revenue should be dismissed. ITA 822/2005 & connected matters Page 11 of 37 Analysis: 12. We have given our thoughtful consideration to contentions of parties. During course of final hearing, as Learned counsel forged ahead with their arguments, controversy in present case got streamlined which we shall hereinafter crystalize and then comprehensively deliberate upon same. However, before we proceed to do that, in order to fully comprehend controversy, we first need to delve into facts and note analysis and findings of ITAT in impugned order. Controversy and proceedings before ITAT: 13. assessee was holding shares of JFAL. Consequent to scheme of amalgamation sanctioned under Section 391 to 394 of Companies Act, 1956, JFAL got amalgamated with JSL and assessee [Nalwa Investment Limited] received shares of JSL. In terms of scheme of amalgamation, shareholders of JFAL were to be allotted 45 shares of JSL in lieu 100 shares of JFAL. value of shares of JFAL as per assessee s book was Rs. 35/- per share as against which assessee company got shares of JSL whose market value was Rs. 395/- per share on date of allotment. Taking note of above position, AO issued show cause notice under Section 143(3) of Act for AY 1997-98 and observed that as result of realisation, assessee-company earned profit of Rs. 395 - (35 * 2.2) i.e. Rs.318 for each share of JSL. Respondent-assessee was issued show cause as to why same should not be treated as income for Financial Year 1996-97. In response thereto, Respondent-company vide letter dated 16th February, 2000 inter alia contented that assessee has not transferred any share for consideration and drew support from views of Supreme ITA 822/2005 & connected matters Page 12 of 37 Court in Rasiklal Maneklal (supra). Respondent-company also contended that nothing in Section 45 of Act would apply as it is transfer of capital asset being shares held in amalgamating company and assessee was entitled to avail benefit of section 47 (vii) of Act. Respondent-assessees further contended that if shares were to be considered as stock-in-trade , assessees should be allowed benefit of fall in value of shares after valuing them at cost or market value, whichever is less. 14. AO considered all contentions raised by assessees but did not agree with any of them. He relied upon decision of Supreme Court in Orient Trading Co. Ltd. (supra) and held that Respondent-assessees had earned profit by realising shares of JSL in exchange for its own shareholding in planned scheme of amalgamation. With respect to contentions raised by assessees regarding applicability of Section 47 of Act, AO observed that reliance on aforesaid provision was misplaced as same related to transfer of capital asset and not to stock held as stock- in-trade. During income tax assessment proceedings for preceding year, holding of shares were treated as stock-in-trade and not as capital asset. Further relying upon decision of Supreme Court in G.Venkataswami Naidu Co. v. CIT, (1959) 35 ITR 594, (SC), it was concluded that Section 45 has no applicability to case of Respondent-assessees. appeal before CIT(A) also was rejected and assessment order passed by AO was confirmed. When matter travelled to Tribunal, Respondent- assesees assailed common order of CIT(A) by raising several contentions; foremost being that shares of JFAL were acquired by way of investment and not as stock-in-trade and that said issue stands covered ITA 822/2005 & connected matters Page 13 of 37 by various decisions of Tribunal. Tribunal did not agree with Respondent-assessees on this count and held that reliance on decisions cited by them was misplaced. Nevertheless, in paragraph 7 of impugned order, ITAT concluded that in view of above decision it cannot be said that appellants were holding shares of JFAL either by way of investment or stock-in-trade . At this stage, dispute assumed new dimension. Tribunal perceived that it need not adjudicate upon this vexed question since decision on same is not of much relevance in deciding larger issue before it. This became focal point and principal question for determination was formulated in following words: whether any profit accrued to appellant when they got shares of amalgamated company in lieu of shares of amalgamating company held by them? (See paragraph 7 of impugned order of ITAT). Answering this question, ITAT observed that in our opinion, no profit accrued unless shares held by assessee are either sold or transferred otherwise for consideration irrespective of nature of holding . It was also observed that since there was no sale of shares in present case, only question that arose for consideration was whether it can be said that there is transfer of shares where assessee gets shares of amalgamated company in lieu of shares of amalgamating company . This critical question was answered by relying upon decision of Supreme Court in Rasiklal Maneklal (supra) by decisively concluding that there was no transfer of shares and consequently, question of accruing any profit to appellants would not arise (Paragraph 8 of impugned order). ITA 822/2005 & connected matters Page 14 of 37 15. Therefore, before us, there is indeed no factual determination as to whether shares in questions were being held by Respondent-assessees as capital asset or stock-in-trade. Nonetheless, even in absence of this factual determination, legal proposition vis-a-vis applicability of Section 45 and 47(vii) of Act is beyond controversy. We shall elaborate why we say this. If Shares are held to be Capital Asset Effect of Section 45 and exception thereto under section 47(vii) of Act; 16. Mr. Ajay Vohra submitted that if shares were held as capital asset, assessees are entitled to benefit of exemption provided under Section 47(vii) of Act. At this juncture, let us first take note of Section 45 of Act, relevant portion whereof is extracted as under: Capital gains. 45. (1) Any profits or gains arising from transfer of capital asset effected in previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under head "Capital gains", and shall be deemed to be income of previous year in which transfer took place. XXXXX [Emphasis Supplied] 17. aforesaid Section is under head of capital gains . Any profit or gain arising from transfer of capital asset effected in previous year shall, save as otherwise provided in Section, be chargeable to Income ITA 822/2005 & connected matters Page 15 of 37 Tax under head capital gains and shall be deemed to be income of previous year in which transfer took place. Section 47 of Act enumerates transactions which are not regarded as transfer . In this provision, we are concerned with sub-section (vii) which read as under: 47. Nothing contained in section 45 shall apply to following transfers : XXXX (vii) any transfer by shareholder, in scheme of amalgamation, of capital asset being share or shares held by him in amalgamating company, if (a) transfer is made in consideration of allotment to him of any share or shares in amalgamated company except where shareholder itself is amalgamated company, and (b) amalgamated company is Indian company; XXXX [Emphasis Supplied] 18. opening words nothing contained in Section 45 shall apply to following transfers signifies that said provision is as exception to Section 45. Meaning thereby that transfers which are enumerated in sub clauses (i) to (xix) as stipulated in Section 47, are exempted from applicability of Section 45. It also manifests that transfers exempted from applicability of Section 45, nevertheless qualify to be transfer . This is evident from opening words of Section 47 which stipulate that Section 45 shall not apply to following transfers . Thus, if assessees were to contend that shares in question were held as capital asset, in order to take ITA 822/2005 & connected matters Page 16 of 37 benefit of exemption, receipt of shares of amalgamated company in lieu of shares held in amalgamating company would have to be regarded as transfer. Mr. Agarwal, learned Senior Standing Counsel for Revenue agrees to aforenoted legal proposition and submits that if shares were held as capital asset, transfer would be exempt from capital gain taxation under Section 47(vii) of Act and Revenue would have no case to argue . These precise words are captured from rejoinder written submission of Revenue filed before this Court. Thus, if shares in question are capital asset, there is no disagreement between parties that assessees would be entitled to take benefit of exemption under Section 47(vii) of Act, provided of course, if they fulfil requirements enumerated therein. This stand of parties substantially narrows down gamut of controversy as far as legal propositions are concerned. Nevertheless, this concurrence between parties does not resolve dispute before us since Revenue strongly refutes factual assertion of assessees and zealously argues that shares are stock-in-trade . This contentious fact coupled with lack of factual determination by ITAT leaves things in state of uncertainty. In this backdrop we shall now deal with analysis of ITAT holding factual determination vis-a-vis holding of shares as capital asset or stock-in-trade to be non-issue for taxation, for reason that there is no transfer of shares in scheme of amalgamation. 19. Let s now proceed to examine correctness of aforenoted conclusion. Section 2(47) defines concept of transfer in context of ITA 822/2005 & connected matters Page 17 of 37 capital asset by enumerating several sub-sets. said provision read as under: (47) "transfer", in relation to capital asset, includes, (i) sale, exchange or relinquishment of asset; or (ii) extinguishment of any rights therein; or (iii) compulsory acquisition thereof under any law; or (iv) in case where asset is converted by owner thereof into, or is treated by him as, stock-in-trade of business carried on by him, such conversion or treatment; or (iva) maturity or redemption of zero coupon bond; or (v) any transaction involving allowing of possession of any immovable property to be taken or retained in part performance of contract of nature referred to in section 53A of Transfer of Property Act, 1882 (4 of 1882); or (vi) any transaction (whether by way of becoming member of, or acquiring shares in, co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has effect of transferring, or enabling enjoyment of, any immovable property. Explanation 1. For purposes of sub-clauses (v) and (vi), "immovable property" shall have same meaning as in clause (d) of section 269UA. Explanation 2. For removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or ITA 822/2005 & connected matters Page 18 of 37 flowing from transfer of share or shares of company registered or incorporated outside India; 20. aforesaid inclusive definition clearly demonstrates that concept of transfer in relation to capital asset is very wide. Transfer takes within its sweep concept of sale, exchange or relinquishment of asset as well as extinguishment of any right therein. In fact, under subsection (iv) of Section 2(47) even if asset is converted by owner thereof into or treated by him as, stock-in-trade of business carried on by him, such conversion or treatment would amount to transfer in relation to capital asset. This shows that transfer of capital asset is not confined only to sale or exchange but is concept that would cover several other situations which may not be understood as transfer in common parlance. 21. In present case, Tribunal has come to conclusion that there is no transfer of shares and has primarily relied upon case of Rasiklal Maneklal (supra). First and foremost, said case does not deal with issue as to whether amalgamation of company leads to transfer of shares. In said case, assessee which was HUF derived income from interest on security. assessee purchased shares of Shorrock SPG and MSG.Co Ltd. and later share was split into 10 shares of Rs. 100/- each and from time to time total of 80 shares of face value of Rs. 100/- each was issued to assessee by way of bonus shares. As consequence, assessee owned 90 shares in Shorrock Co. on face value of Rs. 100/-. It was decided to amalgamate Shorrock Co. with New Shorrock Co. and upon petitions filed under Section 391 - 394 of Companies Act, Gujarat High Court approved scheme of amalgamation. Under scheme of ITA 822/2005 & connected matters Page 19 of 37 amalgamation, undertaking and all property rights and powers as well as all liabilities and duties of Shorrock Co. were to stand transferred and vest in New Shorrock Co. Under scheme of amalgamation, New Shorrock Co., as transferee company was directed to allot to members of Shorrock Co. transferor company one share in transferee company for every two shares of transferor company held by them. During assessment proceedings, although ITO was apprised of scheme of amalgamation and acquisition of 45 shares of New Shorrock Co. but he omitted to consider applicability of section 12B of Income Tax Act, 1922 (the relevant provision under said Act dealing with capital gains). question arose whether in facts and circumstances of case amount representing capital gain resulting from transaction of acquiring 45 shares of New Shorrock Co. in place of 90 shares held in Shorrock Co. could be assessed in hands of assessee as capital gain since it has been accrued by exchange or relinquishment as provided for under Section 12B of Income Tax Act, 1922. Supreme Court considered relevant provision as reproduced in said judgment and observed as under: 4. During assessment proceedings for assessment year 1961-62, previous year being financial year ending 31-3- 1961, Income Tax Officer, although apprised of fact of scheme of amalgamation and of acquisition by assessee of 45 shares of New Shorrock Co. omitted to consider applicability of Section 12-B of Indian Income Tax Act, 1922. On 21-1-1964 Commissioner of Income Tax issued notice under Section 33-B of Act to assessee stating that receipt of 45 shares of New Shorrock Co. in exchange of his original holding of 90 shares in Shorrock Co. in December 1960 had resulted in assessable profit, and this aspect had been overlooked by Income Tax Officer when making regular assessment, and, therefore, he proposed revision of assessment. After hearing assessee, Commissioner of ITA 822/2005 & connected matters Page 20 of 37 Income Tax passed order dated 29-1-1964 directing Income Tax Officer to revise assessment and to include amount of Rs 49,350 representing capital gain resulting from transaction of acquisition of 45 shares of New Shorrock Co. in place of 90 shares held in Shorrock Co. On appeal by assessee before Income Tax Appellate Tribunal, Appellate Tribunal held that transaction represented neither exchange nor relinquishment and, therefore, Section 12-B of Act was not attracted. XXXXX 6. Before High Court Revenue did not contend that transaction constituted sale or transfer, and parties confined themselves to point whether transaction represented exchange or relinquishment for purposes of Section 12-B. High Court took view that no exchange can be said to have taken place on allotment of 45 shares of New Shorrock Co. under scheme of amalgamation. Nor, in opinion of High Court, did it constitute relinquishment. In result, High Court answered both questions in favour of assessee and against Revenue. 7. relevant portion of Section 12-B of Act provides: 12-B. (1) Capital gains. tax shall be payable by assessee under head capital gains in respect of any profits or gains arising from sale, exchange, relinquishment or transfer of capital asset effected after 31st day of March, 1956, and such profits and gains shall be deemed to be income of previous year in which sale, exchange, relinquishment or transfer took place. 8. sole question is whether receipt of 45 shares of New Shorrock Co. upon amalgamation by reason of shareholding of 90 shares of Shorrock Co. can be described as exchange or relinquishment within meaning of Section 12-B of Act. It seems plain to us that no exchange is involved in transaction. exchange involves transfer of property by one person to another and reciprocally transfer of property by that other to first person. There must be mutual transfer of ownership of one thing for ownership of another. In ITA 822/2005 & connected matters Page 21 of 37 present case, assessee cannot be said to have transferred any property to anyone. When he was allotted shares of New Shorrock Co. he was entitled to such allotment because of his holding 90 shares of Shorrock Co. holding of 90 shares in Shorrock Co. was merely qualifying condition entitling assessee to allotment of 45 shares of New Shorrock Co. dissolution of Shorrock Co. deprived holding of 90 shares of that company of all value. [Emphasis Supplied] 22. It is clear from above observations that sole question decided by Supreme Court related to receipt of shares upon amalgamation in context of exchange or relinquishment within meaning of Section 12B of Income Tax Act, 1922. In this context, it was observed that no exchange is involved in transaction and it was further observed that exchange involves transfer of property by one person to another and reciprocally transfer of property by that other to first person. In essence Court felt that there must be mutual transfer of ownership for one thing for ownership of another. 23. aforenoted judgment subsequently came up for consideration in later decision of Grace Collis and Ors. (supra) [Bench strength: 3] where Supreme Court again dealt with proposition of transfer of shares in amalgamation of companies. Court noticed that factual situation in Rasiklal Maneklal (supra) was decided in refence to 1922 Act, while observing as under: 9. In CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198, this Court was concerned with case of acquisition of shares consequent upon scheme of amalgamation virtually identical to Scheme before us. At that time, capital gains were chargeable ITA 822/2005 & connected matters Page 22 of 37 to tax by reason of section 12B of Indian Income-tax Act, 1922, which stated thus: "12B. Capital gains. (1) tax shall be payable by assessee under head 'Capital gains' in respect of any profits or gains arising from sale, exchange, relinquishment or transfer of capital asset effected after 31st day of March, 1956, and such profits and gains shall be deemed to be income of previous year in which sale, exchange, relinquishment or transfer took place." question this Court was called upon to consider read thus: "Whether, on facts and in circumstances of case, sum of Rs. 49,350 could be assessed in hands of assessee as capital gains as having accrued to assessee by exchange or relinquishment as provided for under section 12B of Act?" This Court held that no exchange was involved in transaction. exchange involved transfer of property by one person to another and, reciprocally, transfer of property by that other to first person. There had to be mutual transfer of ownership of one thing for ownership of another. In case before Court, assessee could not be said to have transferred any property to anyone. When he was allotted shares of amalgamated company, he was entitled to such allotment because of his holding 90 shares of amalgamating company. holding of 90 shares in amalgamating company was merely qualifying condition entitling assessee to allotment of 45 shares in amalgamated company. dissolution of amalgamating company deprived holding of 90 shares of that company of all value. 10. learned counsel for assessees submitted that no capital gains tax could be levied upon assessees in respect of sale by them of their shares in amalgamated company because there was no provision in Act with regard to manner of determination of cost of these shares. This was for reason that section 49(2) prescribed mode of determining cost where shares in amalgamated company had become property of assessee in consideration of transfer, as referred to in section 47(vii), that is to say, transfer by shareholder in ITA 822/2005 & connected matters Page 23 of 37 scheme of amalgamation of shares held by him in amalgamating company if transfer was made in consideration of allotment to him of shares in amalgamated company. decision in Rasiklal Maneklal (HUF) 's case (supra) had held that there was no transfer of any property to anyone by assessee in circumstances identical to those before us. [Emphasis Supplied] 24. After taking note of Rasiklal Maneklal (supra) Court further observed in Para 11 that it was not end of matter as Section 2 (47) under 1961, Act defined transfer to include extinguishment of any right in capital asset. relevant portion is extracted hereunder: 11. This, however, is not end of matter for section 2(47) defines 'transfer' to include 'the extinguishment of any rights' in capital asset. 12. In this regard, our attention was drawn by learned counsel for assessees to decision of Bench of two learned judges of this Court in Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 647. This was case in which appellant-company carried on business of manufacture and sale of art-silk cloth. It purchased during year 1957 machinery and gave it on hire to Jasmine Mills at annual rent. Jasmine Mills, as bailee of machinery, insured it against fire along with its own machinery. insurance policy contained reinstatement clause requiring insurer to pay cost of machinery as on date of fire in case of destruction or loss. fire did break out in premises of Jasmine Mills causing extensive damage, inter alia, to machinery which became useless as result. On settlement of insurance claim, Jasmine Mills received amount from insurance company. From out of it, it paid Rs. 6,32,533 to appellant on account of destruction of machinery. ITO brought to tax sum of Rs. 3,50,792, being difference between insurance amount received by appellant for machinery and original cost thereof as capital gain. Tribunal held that insurance amount was not received by appellant on transfer of capital asset but on account of damage to its machinery and ITA 822/2005 & connected matters Page 24 of 37 that section 45 of Act was not attracted. On reference, High Court reversed decision of Tribunal. This Court held in appeal therefrom that when asset was destroyed, there was no question of transferring it to others. destruction or loss brought about destruction of right of owner of asset in it, but it was not on account of transfer but on account of disappearance of asset. extinguishment of right in asset on account of extinguishment of asset was not transfer of right but its destruction. destruction of right on account of destruction of asset could not be equated with extinguishment of right on account of its transfer. Section 45 of Act was, therefore, not attracted. fact that while paying for total loss or damage to property insurance company took over such property or whatever was left of it did not change nature of insurance claim, which was indemnity or compensation for loss. payment of insurance claim was not in consideration of property taken over by insurance company for one was not consideration for other. This Court then, having so very rightly held that section 45 was not attracted went on to consider definition of 'transfer' and it said: "It is true that definition of 'transfer' in section 2(47) of Act is 'inclusive' definition and, therefore, extends to events and transactions which may not otherwise be 'transfer' according to its ordinary, popular and natural sense. It is this aspect of definition which has weighed with High Court and, therefore, High Court has argued that, if words 'extinguishment of any rights therein' are substituted for word 'transfer' in section 45, claim or compensation received from insurance company would attract said section. High Court has, however, missed fact that definition also mentions such transactions as sale, exchange, etc., to which word 'transfer' would properly apply in its popular and natural import. Since those associated words and expressions imply existence of asset and of transferee, according to rule of noscitur sociis, expression 'extinguishment of any right therein' would take colour from said associated words and expressions and will have to be restricted to sense analogous to them. If Legislature intended to extend definition to any ITA 822/2005 & connected matters Page 25 of 37 extinguishment of right, it would not have included obvious instances of transfer, viz., sale, exchange, etc. Hence, expression 'extinguishment of any rights therein' will have to be confined to extinguishment of rights on account of transfer and cannot be extended to mean any extinguishment of right independent of or otherwise than on account of transfer." (p. 653) 13. learned counsel for assessees relied upon this decision to contend, again, that there had been no transfer by assessees of their shares in amalgamating company and that, therefore, case would still not fall within meaning of expression 'extinguishment of any rights therein' in section 2(47) . By reason of decision, expression 'extinguishment of any rights therein' had to be confined to extinguishment of rights on accounting of transfer and could not be extended to refer to extinguishment of rights independent of or otherwise than on account of transfer. 14. learned counsel for revenue submitted that having held that payment in settlement of insurance claim was not in consideration of transfer to insurer of damaged machinery and that, therefore, there was no transfer within meaning of section 45, it was unnecessary for this Court in Vania Silk Mills (P.) Ltd.'s case (supra) to go on to consider definition in section 2(47) and meaning to be attached to expression 'extinguishment of any rights therein'. In his submission, decision in Vania Silk Mills (P.) Ltd.'s case (supra) was to this extent obiter dicta. definition in section 2(47) of 'transfer' included sale and exchange. In each of those cases there was extinguishment of right of seller or exchanger in capital asset. To restrict extinguishment of rights to extinguishment on account of transfer was, in learned counsel's submission, to render expression 'extinguishment of any rights therein' otiose and to nullify effect of their use in definition. 15. We have given careful thought to definition of 'transfer' in section 2(47) and to decision of this Court in Vania Silk Mills (P.) Ltd.'s case (supra) . In our view, definition clearly contemplates extinguishment of rights in capital asset distinct and independent of such extinguishment consequent upon transfer thereof. We do not approve, respectfully, of limitation ITA 822/2005 & connected matters Page 26 of 37 of expression 'extinguishment of any rights therein' to such extinguishment on account of transfers or to view that expression 'extinguishment of any rights therein' cannot be extended to mean extinguishment of rights independent of or otherwise than on account of transfer. To so read, expression is to render it ineffective and its use meaningless. As we read it, therefore, expression does include extinguishment of rights in capital asset independent of and otherwise than on account of transfer. 16. This being so, rights of assessees in capital asset, being their shares in amalgamating company, stood extinguished upon amalgamation of amalgamating company with amalgamated company. There was, therefore, transfer of shares in amalgamating company with meaning of section 2(47) . It was, therefore, transaction to which section 47(vii) applied and, consequently, cost to assessees of acquisition of shares of amalgamated company had to be determined in accordance with provision of section 49(2), that is to say, cost was deemed to be cost of acquisition by assessees of their shares in amalgamating company. [Emphasis Supplied] 25. Admittedly, in present case we are concerned with 1961 Act and not old Act. Notably, in Grace Collis and Ors. (supra) scheme of amalgamation was virtually identical to scheme that was in question in Rasiklal Maneklal (supra). Court went into expanded definition of transfer under Section 2 (47) of Act and extinguishment of rights of assessee in capital asset, being shares in amalgamating company, was held to be transfer within meaning of Section 2(47). Thus, judgment of Grace Collis and Ors. (supra) has direct bearing on present case, and pertinently because findings of ITAT are solely resting on decision in Rasiklal Maneklal (supra) which has been ITA 822/2005 & connected matters Page 27 of 37 considered and not followed in later decision in Grace Collis and Ors. (supra). upshot of above discussion is that, observation of ITAT that there is no transfer in scheme of amalgamation, is flawed and unsustainable in so far as capital asset is concerned. Therefore, decision of ITAT is liable to be set aside on this short ground alone. However, since parties agree that such transfer will be exempted under section 47(vii) of Act, we will have to examine whether scheme of amalgamation viz shares held in stock-in-trade results in taxable event which renders factual determination inconsequential as held by ITAT. If shares are held as Stock-in-trade, whether amalgamation would result in income chargeable to tax under head profits and gain of business or profession . 26. In case transaction comes out of ambit of Section 47(vii), it s taxability would be governed by Section 28 of Act, where there is no exemption akin to section 47 of Act. If shares are held as stock-in- trade, income shall be chargeable to income-tax under head profits and gain of business or profession . Here spotlight should not entirely be on concept of transfer but instead whether there is business income in hands of assessee. We, therefore, now proceed to delve into question as to whether in scheme of amalgamation, shares of amalgamated company received in lieu of amalgamating company which were held as stock-in-trade, would result in income chargeable to tax under head Profits and gain of business or profession . 27. Mr. Vohra relied upon judgment of Supreme Court in Chainrup Sampantram vs. CIT, 1953 24 ITR 481 (SC) to argue that as long as ITA 822/2005 & connected matters Page 28 of 37 stock-in-trade remain with trader and if appreciation/ depreciation in its value is notional, it is not subject to taxability. There is no dispute regarding this proposition. It is well settled in law that Income Tax cannot be levied on hypothetical income. But is this case where there is only notional/ hypothetical income and no realisation in hands of assessee? Here, judgment of Supreme Court in Orient Trading Co. Ltd. (supra) becomes relevant, which deals with case where shares/security held in stock-in-trade and were transferred for consideration in kind (exchange or barter). In said case, Supreme Court was dealing with case where assessee was company dealing in shares. It was holding 14,500 shares in company of face value of Rs. 10/- as stock-in-trade. shares were valued and included in its closing stock. In AY in question i.e. 1963-64, new company offered to obtain shares in exchange for allotment of its own shares. assessee accepted offer and received shares. assessee valued shares at same amount at which it was holding exchange shares. AO found market quotation of shares and valued shares at higher amount and taxed difference as profit in said transaction. Both Tribunal and High Court upheld decision of ITO. When matter reached Supreme Court, Court formulated question whether surrendering of shares in first company in exchange of shares in second company by assessee can be regarded as realisation of security on date of such surrender and exchange. In such case, difference between book value of shares of first company and market value of shares of second company as on date of such realisation will have to be treated as profit earned by assessee in that transaction. After considering several judgments, ITA 822/2005 & connected matters Page 29 of 37 Supreme Court affirmed view of High Court, holding it to be in consonance with established principles governing law in this field. 28. At this juncture, we would like to note that decision in Orient Trading Co. Ltd. (supra), Supreme Court has dealt with approval English cases which deal with amalgamation. relevant portion of said judgment is reproduced hereinunder: 4. question that arises for consideration is whether surrendering of its shares in first Company in exchange for shares of second Company by assessee can be regarded as realisation of security on date of such surrender and exchange. If it can be so regarded that sum of Rs. 4,06,000/-, difference between book value of 14,500 shares of first Company and market value of 55,500 shares of second Company as on date of such realisation, will have to be treated as profit earned by assessee in that transaction: 5. In impugned judgment, High Court has agreed with decision of Tribunal that exchange of shares of first company with shares of second company is to be treated as realisation of security. said view of High Court, as will be presently seen, is in consonance with established principles governing law in this field. 6. In Westminster Bank Ltd.'s case (supra), appellant was holding National War Bonds which were surrendered in exchange for conversion loan and war loan and value of stock received in exchange was greater than cost to Bank of National War Bonds. question was: whether excess amount could be regarded as profit of Banker's trade for purpose of income-tax? On behalf of Bank, it was argued that nature of transaction was equivalent to mere exchange of item in stock-in-trade of trader and that in fact there was no realisation of profit and there was mere accretion of capital value which could not be brought into account until in fact it had been realised. Dealing with said contention Lord Buckmaster said: ITA 822/2005 & connected matters Page 30 of 37 "The exchange effected in present case was in fact exact equivalent of what would have taken place had instructions been given to sell original stock and invest proceeds in new security. investment represented by original War Bonds came to end as soon as new securities were taken in its place, when new venture was begun in relation to new holding, and fact that this transformation took place by process of exchange does not in any opinion avoid conclusion that there has been what is described as realisation of security." (pp. 68, 69) 7. decision of Rowlatt, J. in Royal Insurance Co. Ltd. v. Stephen 14 Tax Cas 22, was approved in said case. In case of Royal Insurance Co. Ltd. (supra), appellant- company had, under Railways Act, 1921, to accept new stocks in amalgamated companies in exchange for stock held in companies which were absorbed and which resulted in loss to appellant-company. claim of appellant-company for deduction of such loss was upheld by Rowlatt, J. who held: "At bottom of this principle of waiting for realisation, I think there is this idea; while investment is going up or down for income-tax purposes company cannot take any notice of fluctuations, but it has to take notice of them when all that state of affairs comes to end, when that investment is wound up I will say - 'wound up' is unfortunate expression perhaps and I will say when investment ceases to figure in company's affairs, when it is known exactly what holding of that investment has meant, plus or minus to company, and then company starts so far as that portion of its resources is concerned with new investment. Then one knows where one is and it is no longer question of paper, it is question of fact and that is realisation. I think that is point of view from which it ought to be looked at, and looking at it from that point of view Company is right. It has done with investments in companies. They have disappeared. It is known exactly in money. It is known now exactly what their holding of them has meant to company. They will never more go up or down. What will go up or down now are different shares ITA 822/2005 & connected matters Page 31 of 37 in new companies, altogether different investments really, and therefore, I think that old investment is closed and realised and new investment is started." (pp. 28, 29) Similarly, in California Copper Syndicate v. Harris 5 Tax Case 159, decided by Court of Exchequer in Scotland, Lord Trayner has said : "But it was said that profit - if it was profit - was not realised profit and, therefore, not taxable. I think profit was realised. profit is realised when seller gets price he had bargained for. No doubt, here price took form of fully paid shares in another company, but, if there can be no realised profit, except when that is paid in cash, shares were realisable and could have been turned into cash, if appellants had been pleased to do so. I cannot think that income-tax is due or not according to manner in which person making profit pleases to deal with it." (p. 167) 8. These observations have been quoted with approval by this Court in Raja Mohan Raja Bahadur v. CIT [1967] 66 ITR 378. In that case, assessee, carrying on business of money-lending, had obtained decree against debtor and had received Encumbered Estate Bonds of U.P. Government in part satisfaction of liability of debtor. said Bonds were sold by appellant in year relevant to assessment year subsequent to year in which they were received. It was held that Bonds were fresh security liability of original debtor having been substituted by obligation by State and since Bonds were convertible in terms of money, income was realised by assessee when bonds were received. 9. subsequent decision of House of Lords in British South Africa Co.'s case (supra) does not lend assistance to submission of Shri Puri. In that case, appellant-company in 1953 had lent 2,00,000 pounds to gold mining company and in return had received, inter alia, option to subscribe for 100,000 shares in mining company at 1 pound per share, value of shares then being 19 s. 6 d. share. In 1954 when value of shares had gone up to 43 s. 6 d. share appellant exercised option and ITA 822/2005 & connected matters Page 32 of 37 obtained shares worth 2,17,500 pounds for which they paid 1,00,000 pounds. company was assessed for income-tax on profit of 11,75,000 pounds. On behalf of company it was urged that upon exercise of option there was realisation because option which was 'trading asset' or item of 'stock-in-trade' was exchanged for or was replaced by different item of stock-in- trade which had value in money's worth. said contention was rejected by House of Lords (Lord Guest dissenting). It was held that appellant-company never, in fact, realised their option in sense of passing it on, for consideration to someone else and that there was neither sale of option nor its exchange for something else and that when company exercised their option or used or availed themselves of their rights they did not make end of trading transaction and that there was merely end of beginning of trading transaction. It was emphasised that there was no element of exchange as there was in Royal Insurance Co. Ltd.'s case (supra) and in Westminster Bank Ltd.'s case (supra) [See: Lord Morris of Borth- Y-Gest at pp. 394-395], Lord Guest, in his dissenting judgment, however, felt that option was trading asset of appellant-company and, applying principles laid down in Royal Insurance Co. Ltd.'s case (supra) and Westminster Bank Ltd.'s case (supra), held that exercise of option amounted to realisation of option which resulted in trading profit of 11,75,000 pounds. This would show that principles laid down in Royal Insurance Co. Ltd.'s case (supra) and Westminster Bank Ltd.'s case (supra) have been affirmed by all law Lords and difference amongst them was only as regards applicability of said principles to facts of that case. 10. Motors & General Stores (P.) Ltd.'s case (supra) relates to interpretation of word 'sale' in section 10(2)(vii). said decision has no bearing on present case. 11. Having regard to principles laid down in decisions aforementioned, it must be held that High Court has rightly taken view that as result of their having taken shares in second company in exchange of shares of first company assessee had made realisation of value of shares of first company and difference between price of shares of first company and second company on date of such ITA 822/2005 & connected matters Page 33 of 37 exchange, i.e., Rs. 4,06,000, has to be treated as profit of assessee and has been rightly assessed as income of assessee. We, therefore, do not find any merit in appeal and same is accordingly dismissed. But in circumstances, no order as to costs. [Emphasis Supplied] 29. As matter of fact, after reserving appeals for pronouncement of judgment, we relisted matter to have views of Counsel on above referred case law. Mr. Vohra attempted to distinguish decision of Orient Trading Co. Ltd. (supra) by contending that there is no sale or exchange under scheme of amalgamation and factual situation in said case was entirely different. He also sought to distinguish case of Royal Insurance Co. Ltd. v. Stephen, 14 Tax Cases 22 by arguing that there are different provisions of Income Tax Act relating to Insurance Companies and taxation of Insurance Companies are dealt differently. In our considered opinion fine distinction which Mr. Vohra has tried to bring out to render said decision inapplicable is not correct approach. There are separate provisions under Act for business and investment income. Consequently, characterization of item of income determines which tax provision would be applicable to it. gain may be income from business if it arises from transaction or adventure or concern in nature of trade undertaken with intent of business or making profit. Income is recognised when it is earned or realised irrespective of whether it is in cash or kind. As we can see in Orient Trading Co. Ltd. (supra), if shares are exchanged, it can be said assessee has made realisation of value of shares and difference in price of shares would have to be treated as profit of assessee for taxation purpose. Assesses also agree that taxable event ITA 822/2005 & connected matters Page 34 of 37 would occur under amalgamation if shares are treated as capital asset, but argue to contrary if same are treated as stock-in-trade . Now, can it be said that this concept of extinguishment/transfer would not lose its relevance if same shares are characterized as stock-in-trade in hands of assessee? In Hindustan Lever versus State of Maharashtra, (2004) 9 SCC 438, expounding on concept of amalgamation and whether it amounts to transfer, it was held as under: "9. Section 394 provides that application and order of amalgamation under Section 394 is based on compromise or arrangement which has been proposed for purpose of amalgamation of two or more companies. amalgamation scheme, which is agreement between companies is presented before court and court passes appropriate order sanctioning compromise or arrangement. foundation or basis for passing order of amalgamation is agreement between two or more companies. Under scheme of amalgamation, whole or any part of undertaking, properties or liability of any company concerned in scheme is to be transferred to other company. company whose property is transferred would be transferor company and company to whom property is transferred would be considered as transferee company. scheme of amalgamation has its genesis in agreement between prescribed majority of shareholders and creditors of transferor company with prescribed majority of shareholders and creditors of transferee company. intended transfer is voluntary act of contracting parties. transfer has all trappings of sale. transfer is effected by order of court. proposed compromise or arrangement is subject to verification by court as provided therein. First is that scheme of compromise or arrangement proposed for purposes of amalgamation or in connection therewith, shall not be sanctioned unless court has received report from Company Law Board or Registrar that affairs of company have not been conducted in manner prejudicial to interest of its members or to public interest; and secondly, that ITA 822/2005 & connected matters Page 35 of 37 order of resolution of transfer of company shall not be made unless official liquidator on scrutiny of books and papers of company makes report to court that affairs of company had not been conducted in manner prejudicial to interest of its members or to public interest." 30. No doubt, here under scheme of amalgamation, amalgamating company is getting extinguished in sense that surviving entity now is only amalgamated company. However, we cannot ignore fact that shares that were with assessees have undergone amalgamation process whereby they are replaced with new shares which would be valued entirely on different fundamentals. Subsequent to amalgamation it is not same stock in inventory of assessees. Under Companies Act, shareholders who dissent to scheme of amalgamation [ dissenting shareholders ] are given option of receiving cash or equivalent kind as price for shares on basis of exchange ratio. In another words, dissenting shareholders receive value of their shareholding while approving shareholders receive same value in form of shares of amalgamated company. process of amalgamation in its legal effect from taxation viewpoint would apply equally, irrespective of status of shareholder. taxable event is not just matter of entries made in account books of assessee but is essentially one of substance and of real nature of what transpired in transaction. income generated from transaction has to be charged to Income tax as per provisions of law. fundamental principle to be followed is that basic substance for transaction has to be separated from form and taxing statue has to be applied accordingly. In light of above discussion, findings of ITA 822/2005 & connected matters Page 36 of 37 Tribunal are plainly erroneous. Thus, question of law formulated before us is answered in favour of Revenue and against assessees. 31. Having answered question of law in above terms, we are of view that matter needs to be remanded back to ITAT since factual dispute between parties has not been decided. Accordingly, we restore matter back to file of ITAT for fresh adjudication. Tribunal, after resolving factual controversy shall proceed to decide appeals having regard to views expressed hereinabove. present appeals are allowed in favour of Revenue and against assessees. No order as to costs. SANJEEV NARULA, J MANMOHAN, J AUGUST 07, 2020 v ITA 822/2005 & connected matters Page 37 of 37 Commissioner of Income-tax-V, New Delhi v. Nalwa Investment Ltd