THE COMMISSIONER OF INCOME TAX-V, NEW DELHI V M/S NALWA INVESTMENT LTD. ITA 822/2005 Del

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.

Whether this Nalwa investment ltd held shares of JFAL were acquired by way of investment or as stock-in-trade is to be observed …

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 high court 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.

Since the factual dispute not decided, the matter remitted back to tribunal…