Commissioner Of Income-Tax, Delhi (Central) v. Bharat Development P. Ltd. (And Another Case)

Ranganathan, J.:— These are two references by the Commissioner of Income-tax under s. 66(1) of the Indian I.T Act, 1922. The respondent-assessee in I.T.R No. 34/70 is Bharat Development Pvt. Ltd., Rajpura, and the assessee in I.T.R No. 42/71 is M/s. Manav Sahyog Pvt. Ltd., Rajpura. The former reference relates to the assessment years 1960–61 and 1961–62, for which the relevant previous years ended on October 31, 1959, and October 31, 1960, respectively. In the case of the latter reference the assessment year is 1958–59, for which the previous year ended on January 31, 1958. The question arising for consideration is similar in both the references and it will be convenient to dispose of the two references by a common judgment.

2. The question of law referred to us for decision in the case of Bharat Development Pvt. Ltd. is as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the surplus of Rs. 2,01,445 and Rs. 33,397 in the assessment years 1960–61 and 1961–62, respectively, arising on account of remission of debts consequent on the amalgamation of Matru Bhumi Nirman Private Ltd. and Swadeshi Nirman Private Ltd. could not be taxed as revenue receipts on the ground that the said, amalgamations were neither business transactions nor adventure in the nature of trade?”

3. In the case of Manav Sahyog Pvt. Ltd., the following two questions have been referred to us for decision:

“1. Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the amalgamation of four companies, namely, Rashtriya Agencies Pvt. Ltd., M/s. Rajasthan Udyog Pvt. Ltd., M/s. Pepsu Trading Co. Ltd. and M/s. Dadri Marketing Ltd. was neither a business transaction nor an adventure in the nature of trade?

2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the surplus of Rs. 4,10,415 was not taxable as revenue gain?”

4. Though the questions are framed in a slightly different way in the two cases, as already mentioned, the question that arises for consideration is out of facts similar and almost identical in the two cases. The factual background in the case of Bharat Development Pvt. Ltd. may be set out first. The assessee is a private limited company. On going through the balance-sheet of the company for the accounting year which ended on October 31, 1959, the ITO found that a concern known as Matru Bhumi Nirman Private Ltd. had been amalgamated with the assessee in accordance with the provisions of s. 494 of the Companies Act and that in this process a surplus of Rs. 2,01,445 had resulted to the assessee which was carried to the amalgamation account. The ITO brought this amount of Rs. 2,01,445 to tax, following his decision for the assessment year 1958–59, in the case of Manav Sahyog Pvt. Ltd. which, it may be mentioned, was also a company belonging to the same group of assessees which may be described as the Dalmia group of companies. Similarly, in the course of the accounting year which ended on October 31, 1980, relevant for the assessment year 1961–62, another company, Swadeshi Nirman Private Ltd., was amalgamated with the assessee-company under a scheme of amalgamation under s. 494 of the Companies Act, 1956. As a result of this a surplus of Rs. 33,397 was credited to the amalgamation account. This amount was also treated by the ITO as an item of profit accruing to the assessee. The ITO pointed out that as a result of the amalgamation there was a credit of Rs. 9,84,644 whereas there was a debit of Rs. 9,51,247 resulting in the surplus of Rs. 33,397. Actually, the ITO disallowed two sums amounting to Rs. 544 on the debit side of the above account and included in the assessment a sum of Rs. 33,941.

5. In the case of Manav Sahyog Pvt. Ltd. there was an amalgamation under s. 494 of the Companies Act, 1956, read with s. 208C of the Indian Companies Act, 1913, by which four companies, namely, Rashtriya Agencies Pvt. Ltd., M/s. Rajasthan Udyog Pvt. Ltd., M/s. Pepsu Trading Co. Ltd. and M/s. Dadri Marketing Ltd. were amalgamated with M/s. Manav Sahyog Pvt. Ltd. Here again on the amalgamation there was a surplus of Rs. 10,61,675 which was credited to the amalgamation account. The ITO found that the liabilities which had been taken over by the assessee, M/s. Manav Sahyog Pvt. Ltd., from these concerns which were taken over by it came to Rs. 6,51,260. Deducting these liabilities from the surplus of Rs. 10,61,675 he added as the net profit of the assessee as a result of the amalgamation a sum of Rs. 4,10,415. He, however, observed if the figure of liabilities needed modification in the light of appellate orders in respect of income-tax demand or otherwise in the light of evidence produced by the assessee, necessary rectification under s. 154 of the I.T Act, 1961, would be made as and when necessary.

6. The orders passed by the ITO were confirmed by the AAC on appeal. The appeals in the case of Bharat Development Pvt. Ltd. were heard by the AAC in the first instance. We shall refer a little later to the details of the figures regarding the taking over, which have been dealt with by the AAC in the appeal of Bharat Development Pvt. Ltd. for the assessment year 1960–61. For the present it is sufficient to say that the AAC in both the cases confirmed the findings of the ITO that there had been a profit realised by the assessee as a result of the takeover. It may also be mentioned that he came to a similar conclusion in the case of Manav Sahoyg Pvt. Ltd. In the course of the hearing of this appeal an attempt was made by the ITO to contend that he had actually erred in allowing the assessee the benefit of certain liabilities to the extent of Rs. 6,51,260. The AAC rejected this contention based on which the ITO had sought for an enhancement of the assessment.

7. Both the assessees appealed to the Income-tax Appellate Tribunal. The appeal of Bharat Development Pvt. Ltd. for the assessment year 1960–61 was disposed of by the Tribunal in the first instance by its order dated September 27, 1969, and this was followed on September 30, 1969, while disposing of the appeal for 1961–62. On behalf of the assessee, it had been contended that according to the arrangement or scheme of amalgamation the assessee-company took over the liabilities and assets of the amalgamated company and paid a sum of Rs. 4 lakhs to the shareholders of the amalgamated companies though the paid up value of those shares was Rs. 5 lakhs. As a result of this adjustment there had been a surplus which had been taken to the reserve. It was argued that this was a notional surplus which was nothing more than a remission of the debt which the assessee-company owed to the amalgamating companies. Reliance was placed in support of this contention on a decision of the Gujarat High Court in CIT v. Spunpipe and Construction Co. Ltd., [1965] 55 ITR 68. The Tribunal accepted this contention. It noticed that a similar conclusion had been arrived at by the Tribunal in the case of another company of the group, South Asia Industries Ltd. It relied on the decision in CIT v. Spunpipe and Construction Co. Ltd., [1965] 55 ITR 68, distinguished the decision in Surangmali Punamchand Surana v. CIT, [1960] 40 ITR 360 (Assam) and observed:

“The amalgamation made between the assessee-company and the other company, which was in liquidation, was in accordance with the provisions of the companies act and this was under an arrangement. The only asset of the amalgamated company was the debt which the assessee-company owed to the amalgamated company. Therefore, if any surplus could be said to have been realised as a result of the amalgamation, it was only on account of the debt which was owed by the assessee-company itself. The other case cited by the departmental representative is also not relevant, inasmuch as it is also concerned with the purchase of plots and their sale. Therefore, in our view, this decision also does not help the department. It is no doubt true that one of the objects in the articles of association was amalgamation with other companies, but merely because an object is mentioned in the articles of association, it does not become a business by itself. As mentioned in Kanga and Palkkivala's Commentary, page 490, cited above, an amalgamation does not involve any exchange, transfer or sale and, therefore, in our view, cannot be said to have any ingredient of a busines transaction.”

8. The appeal preferred by M/s. Manav Sahyog Pvt. Ltd. for the assessment year 1958–59 came up for hearing later. The Appellate Tribunal took note of the fact that the assessee had objected to the assessment of the surplus in each of these cases on the following grounds:

1. It is not the business of the company to take over the assets and liabilities of their concerns and make a profit by realising the assets and paying off the liabilities. The company not being a dealer in book debts, the amount of surplus cannot be brought to tax as a business profit.

2. Even assuming that any profit had arisen out of amalgamation arrangement, it was exempt from tax under section 4(3)(vii) of the Income-tax Act as a receipt of casual and non-recurring nature.

3. No profit could accrue at the time of taking over of the assets and liabilities of these concerns. Such a profit could arise only when the assets and liabilities are realised or cleared.

4. The question of profit in these arrangements did not arise in the assessment years in question as the liabilities had not been fully cleared and the venture had not come to an end. No profit could be assessed on part realisation of the assets and part payment of the liabilities.

9. It was pointed out that the ITO had rejected all the contentions of the assessee. The Tribunal, however, was of the opinion, following the orders of the Tribunal in the case of Bharat Development Pvt. Ltd. for the assessment year 1960–61 and South Asia Industries Pvt. Ltd., that the assessment as made by the ITO could not be upheld. It pointed out that the process of amalgamation meant that assets and liabilities were taken over by the assessee for which consideration in the shape of shares were issued to the shareholders of the companies which were being amalgamated. This process, according to the Tribunal, could not/be described as a purchase. But even assuming that it could be treated as a purchase, the Tribunal was of the opinion that no profit could arise by this process alone. The Tribunal proceeded to quote from the order in the case of South Asia Industries:

“Even assuming that the assessee got all the assets at a concessional price, the difference between actual price and the concessional price cannot be treated as a profit. We may illustrate this point. Suppose a motor car whose market price is say Rs. 20,000 is purchased by the assessee for Rs. 15,000, can it be said that the assessee has earned a profit of Rs. 5,000? Such a profit may arise when the assessee may sell the motor car and at that point of time the profit would be reckoned as the difference between the sale price and the assessee's own cost price. In other words a profit can arise or a profit can be said to be realised only when the chain of transactions culminates in the act of sale. It cannot be the case of department that the assessee has sold all these assets during the year in appeal. If there is, therefore, no realisation of profit and merely a purchase effected, the case of the department is weaker still when all that has happened during the year in appeal is amalgamation of the companies. In this view of the matter, we have no doubt in our mind that the assessee has not made any profit by the process, which may conveniently be described as amalgamation. This ground is, therefore, rejected.”

10. The Tribunal thus came to the conclusion that no profits accrued to the assessee at all, and so found it unnecessary to consider the other contentions, namely, contentions Nos. 1, 2 and 4 set out earlier which the assessee had put forward before the ITO. The Tribunal again distinguished the decision in the case of Surangmali Punamchand Surana v. CIT, [1960] 40 ITR 360 (Assam) which had been relied upon for the department.

11. It is in these circumstances that the questions set out earlier have been referred to us for our decision.

12. I have given the matter a careful consideration and I am of opinion that the conclusion arrived at by the Tribunal was correct and does not call for any interference. Though the sums involved are very substantial and the matter is a little complicated by the amalgamation of several companies, I agree with the Tribunal that in the ultimate analysis the matter is a very simple one, of a trader being able to purchase a commodity for a price which is less than what the article deserves either on the basis of its market value or on the basis of its actual value. As rightly pointed out by the Tribunal, a trader cannot be said to make a profit merely because he has been able to obtain an item of stock-in-trade for less than its market price. The illustration given by the Tribunal in para. 7 of its order in the case of Manav Sahyog Pvt. Ltd. is quite apposite. Suppose a motor car the market price of which is, say Rs. 20,000, is purchased by an assessee who is a dealer in motor cars for Rs. 15,000. It cannot be said at that stage that the assessee has earned a profit of Rs. 5,000. All that it means is that if eventually he sells the motor car, say at Rs. 25,000 his profit will be not Rs. 5,000 as it will be in the case of a trader who had purchased it for the normal market price of Rs. 20,000 but it will be much more. It will be Rs. 10,000, being the difference between the price for which he bought it and the price for which he sold it. In other words, at the mere stage of purchase there cannot be a profit even assuming that the article has been purchased for less than the market value. This seems to be quite obvious and unexceptionable.

13. The only question that arises, therefore, in the present case is whether the transactions here can be approximated to the above illustration or analogy. The assessee had raised a point before the ITO that he is not a dealer in amalgamations and that it is not the company's business to take over the assets and liabilities of other concerns. It was, therefore, argued that even if the assessee is considered as having made a profit by acquiring the concern for less than its real value that would be a profit on capital account and not on revenue account. This contention was rejected by the ITO by pointing out that the memorandum of association of the company provided for the taking over of a going concern with all the assets and liabilities of such a concern: The assessee's contention is that this was only an empowering clause in the objects and that there was no evidence to show that the company was making a trade of taking over going concerns with their assets and liabilities. I agree with the Tribunal that for the purposes of the present cases it is not necessary to go into this contention. From the record before us it is seen that there have been a large number of transactions in the Dalmia group of concerns where some concerns belonging to the group appear to have been absorbed by other concerns in the group. In the case of Manav Sahyog Pvt. Ltd., we find the company absorbing four other companies belonging to the same group. In the case of Bharat Development Pvt. Ltd., there was an amalgamation of Swadeshi Nirman Private Ltd., in the accounting year which ended on October 31, 1960.

14. In the immediately preceding year, Matru Bhumi Nirman Private Ltd. had been amalgamated with the same assessee-company and from the order of the AAC it is seen that some time earlier, i.e, on February 20, 1957, there had been a scheme of arrangement by which the company known as Vishwa Industries Pvt. Ltd. was amalgamated with Matru Bhumi Nirman Private Ltd. Further, from the order of the Tribunal it is seen that there had been a similar amalgamation of some company with South Asia Industries Pvt. Ltd. Other instances have been given by the AAC in his order for 1961–62. Thus, it would appear that there have been a number of companies belonging to this group which have entered into the schemes of amalgamation whereby their assets and liabilities were taken over by other companies belonging to the group. It is a moot question as to how far the existence of similar transactions by other companies can lend the colour of a trading transaction in regard to the transaction put through by the two assessees who are before us. However, as I have already stated, it is not necessary for the purposes of the present case to decide this issue as to whether the take over of the other companies by the two present assessees can be described as a business transaction or an adventure in the nature of trade, for, even assuming that it is so and that these are normal trading transactions, the assessee would still be outside the taxing net if the present case can be analogised to the illustration given earlier of a trader purchasing his stock-in-trade for less than the market value. I shall, therefore, for the purposes of the present case, proceed on the assumption that the amalgamation with the assessee-company of other concerns is a normal transaction in the course of the trade so far as the present assessees are concerned and proceed to analyse whether even on that assumption the surplus resulting to the assessee as a result of the amalgamation can be brought to charge.

15. Normally speaking in a transaction where a company takes oyer the assets and liabilities of another company there is not likely to be any surplus credit in the amalgamation account. The transferee-company will take over the assets and liabilities of the transferor-company and the shareholders of the transferor-company will be paid the worth of their shares and thus the entire account will be squared up. The surplus in the present cases has arisen because the shareholders of the transferor-company had not been paid the full value of the difference between the assets and the liabilities taken over from them.

16. It may be convenient at this stage to give the factual details of the take-overs.

(a) In the case of Bharat Development Pvt. Ltd., in the assessment year 1961–62, it is seen that the value of the assets taken over from Swadeshi Nirman Pvt. Ltd. came to Rs. 9,84,644 whereas the value of the liabilities including the amounts paid to the shareholders of the transferor-company came only to Rs. 9,51,247. No further break up of these figures is available except that the ITO has mentioned that the only asset of the transferor-company was a loan due from South Asia Industries Ltd., and the liabilities were the payments made or to be made to the shareholders of the transferor-company.

(b) In the case of the amalgamation of Matru Bhumi Nirman Pvt. Ltd. with Bharat Development Pvt. Ltd., in the previous year relevant to the assessment year 1960–61, the position is slightly more complicated. Out of the total surplus of Rs. 2,01,445 it was only a surplus of Rs. 1,09,556 which had resulted from the take-over of the Matru Bhumi Nirman Pvt. Ltd. by Bharat Development Pvt. Ltd., on August 13, 1959.

17. The AAC has explained how this difference arose. On the credit side were the value of assets taken over from the transferor-company. These were Rs. 8,15,903, being the amount due to the appellant (sic) from Matru Bhumi Nirman Pvt. Ltd., Rs. 14 being the deposit with the Registrar of Companies, Rs. 1,829, being the bank balance and Rs. 290, being the cash balance. The total of assets thus came to Rs. 8,18,036. On the debit side there was an item of Rs. 3,06,685, being the amount due to the shareholders of South Asia Industries Pvt. Ltd. and interest thereon. The assessee-company had also paid to Shri R. Dalmia and certain other shareholders of Matru Bhumi Nirman Pvt. Ltd., who held 5,000 equity shares in that company, of the face value of Rs. 100 each, a sum of Rs. 4,00,000 (@ Rs. 80 for each share held by them). Thus, the total amount of liabilities which the assessee had to discharge came to Rs. 7,06,685. There were also certain minor debits representing expenses and interest paid to the creditors of Viswa Industries Pvt. Ltd. Thus, the net surplus amounted to Rs. 1,09,556. In other words, the surplus primarily arose because the assessee-company paid to the shareholders of Matru Bhumi Nirman Pvt. Ltd., a sum of only Rs. 4 lakhs as against Rs. 5 lakhs which were due to them by way of return of share capital. The AAC points out. that as on the date of amalgamation a share of Rs. 100 of Matru Bhumi Nirman Pvt. Ltd. was worth Rs. 125 whereas on the same date the break-up value of the share of the appellant was only 83% of its face value. Thus it has been pointed out that the assessee-company had paid to Matru Bhumi Nirman Pvt. Ltd., amounts which were considerably below the value of the assets taken over from them. The balance surplus of Rs. 91,889 in the amalgamation account was referable to the surplus that had resulted when Matru Bhumi Nirman had taken over earlier the assets and liabilities of Viswa Industries P. Ltd.

(c) The full details in the case of Manav Sahyog Pvt. Ltd. are not available. But here again it appears that a sum of Rs. 10,61,675 represents the excess of assets over liabilities after making payments to the transferor-companies. The ITO has, however, originally deducted Rs. 6,51,260 in respect of amounts due to three of the transferor-companies which perhaps he should not have done if the figure of Rs. 10,61,675 represented the surplus. Excepting in the case of one transferor-company, namely, Dadri Marketing Ltd., the assessee-company appears to have taken over the assets and liabilities of the transferor-company and made cash payments to the shareholders of the transferor-companies.

18. As already, stated though the transfers themselves are complicated, the sum and substance of the position is only this: A company goes into liquidation. Its assets exceed its liabilities, say, by Rs. 10,000. The assessee-company takes over the assets and liabilities but pays to the transferor-company not Rs. 10,000 but only Rs. 8,000. The surplus of Rs. 2,000 is credited to the amalgamation account. If we are correct on this then obviously the illustration given much earlier applies squarely to the facts of the case. All that has happened is that the assessee whose business includes, as we have assumed, the business of taking over of other concerns has been able to take over a concern of the value of Rs. 10,000 by paying only Rs. 8,000 therefor. In other words, this is no different from the case of a dealer in motor cars being able to acquire a motor car of the market value of Rs. 20,000 for Rs. 15,000. The fact of his having made a good bargain by way of purchase only means that he has saved a sum of Rs. 5,000; at this stage he has earned no income. The income will arise and the profit embedded in the bargain will be reflected when eventually the motor car is sold. That would be the stage of realisation of profits. The position is exactly similar here and we agree with the Tribunal that the assessee cannot be said to have made a profit by acquiring these concerns at a cheaper price than what they perhaps deserved.

19. Two decisions have been referred to by the ITO on the one hand and the assessee on the other. The case of Surangmali Punamchand Surana v. CIT, [1960] 40 ITR 360 (Assam), cited by the ITO, is clearly distinguishable. In that case, the assessee was a dealer in potato, oilcakes, etc., and was carrying on a commission agency business. He had borrowed large amounts from a bank on an overdraft account. Some time in 1948 the bank suspended operations and applied for a scheme. The assessee was pressed by the bank for the payment of the amounts due by him. The assessee approached the board of directors of the bank and obtained a concession by which the bank agreed to adjust such fixed and other deposits of the bank as the assessee could tender in settlement of his dues at their face value, provided the assessee paid in cash Rs. 5,000 immediately. The assessee paid the sum of Rs. 5,000. The assessee, thereafter, purchased from several persons their fixed and other deposits held by them in the bank, tendered the receipts to the bank and got an adjustment against the debt due by him for a sum of Rs. 23,866. It was found that he had bought the receipts for a sum of Rs. 5,677. In this manner, the assessee had been able to obtain a net surplus of Rs. 16,995. This was treated as business profits and was upheld by the High Court. It is very clear that there was a realisation of an actual surplus by the assessee in that case. He had purchased certain deposits of the face value of about Rs. 23,000 for a sum of about Rs. 5,600. Having paid a smaller sum for these deposits, he was able to get an adjustment from the bank in respect of a larger amount. It was in those circumstances that it was held that the transaction by the assessee amounted to a business transaction and that the surplus represented the profits or gains of the business. That was a clear case in which the assessee had purchased certain receipts for a particular sum and then traded them with the bank for a larger sum of money.

20. On the other hand, the decision of the Gujarat High Court in CIT v. Spunpipe and Construction Co. Ltd., [1965] 55 ITR 68 appears to have greater relevance to the present case. In that case, the assessee purchased a factory at Ahmedabad. There were two agreements between the assessee and the vendor-company. By one of the agreements the assessee purported to have purchased the fixed assets, machinery, etc., for Rs. 1,59,900 and by the other agreement, it proceeded to take over sundry debts including work-in-progress and liabilities and in respect of these items the price allocated was Rs. 50,000. Thus, the total purchase price, as per these two agreements, came to Rs. 2 lakhs. On the other hand, according to the books of the vendor-company, the value of the assets purchased were much more. By a comparison between the book value and the value paid as per the agreements there was a surplus of Rs. 28,034 regarding the items covered by the first agreement and similarly by the second agreement there was a surplus of Rs. 21,057. The surplus of Rs. 49,081 was transferred by the assessee to the capital reserve account and was shown as such in the balance-sheet for the year July 31, 1954. The question that came up for consideration was whether this surplus was taxable or not. The question was reframed by the High Court in the following manner:

“Whether, on the facts and in the circumstances of the case, the difference between the book value of the assets of the factory acquired by the assessee-company as a running concern and the price paid for the same was assessable in whole or in part as revenue profits derived by it during the previous year relevant to the assessment year 1955–56?”

21. The answer to this question has been given at p. 83 of the report in the following manner:

“…….it is clear that the difference between the book value of any part of the assets acquired by the assessee and the price paid by the assessee for the same cannot be regarded as revenue profit derived by the assessee. As a matter of fact it is not possible to say that any profit at all is made by th??? assessee from the purchase of any of the assets. At the highest, what can be said is that assets worth a particular amount are purchased by the assessee for a smaller amount but that does not represent the profit of the assessee. It is, therefore, not right to regard the difference between the value of the assets and the price paid for the same as revenue profit liable to be added to the assessable income of the assessee.”

22. Actually it appears that this basis of assessment was perhaps considered even by the revenue to be clearly unsustainable, for, at the time of the hearing before the High Court, it was contended by the Advocate-General on behalf of the revenue that this was not the contention of the revenue at all and that the contention really was that the trading assets forming part of the opening stock had been overvalued and the difference was, therefore, liable to be disallowed to that extent. A considerable part of the decision is concerned with the discussion as to whether it was permissible for the revenue to take up this stand at the hearing before the High Court and ultimately the revenue was not permitted to raise this contention at the stage of the reference. This left for consideration only the question as already referred to and the answer to this was set out at p. 83 which has already been extracted. This decision clearly shows that the proposition which I have already set out and which has arisen in the present case is capable of only one answer, namely, that there can be no profit merely because a concessional purchase is made by an assessee.

23. Perhaps conscious of the above difficulty the AAC while dealing with the case of Bharat Development for the assessment year 1960–61 tried to distinguish the facts of the present case. He seems to suggest that in the present case the position was different because there was a realisation at the stage of acquisition. He observes:

“The assets taken over from M.B.N were of such a nature that they were realised automatically immediately on the take-over. The liabilities of the shareholders of M.B.N were discharged fully by cash payment. The only liabilities which remained outstanding were in respect of deposit receipts of the amount of Rs. 1,86,900 issued to the shareholders of South Asia Industries Pvt. Ltd., under a scheme of arrangement u/s. 208C of the Indian Companies Act, 1913, by V.I which were taken over by M.B.N and then in turn by the appellant, and the interest thereon and a further sum of Rs. 435 due to the shareholder of V.I”

24. It is, however, not clear, how the AAC arrived at this conclusion. A little earlier he has pointed out that the assets taken over by the assessee-company were of the value of Rs. 8,17,955. Leaving out the cash deposit with the Registrar, the cash balance in hand and the bank balance, there was an asset of Rs. 8,15,903. The AAC has observed that this was “the amount due to the appellant from Matru Bhumi Nirman Pvt. Ltd.” There seems to be some mistake here as the amount due to the appellant from the Matru Bhumi Nirman Pvt. Ltd. could not be an asset in the hands of Matru Bhumi Nirman Pvt. Ltd. But even assuming that so far as the asset position was concerned the assessee had been able to realise the same, it is clear that on the debit side there were amounts payable by the assessee to several shareholders of South Asia Industries Pvt. Ltd. with interest under a scheme of arrangement by which Matru Bhumi Nirman Pvt. Ltd. had taken over Viswa Industries Pvt. Ltd. For instance, if the assessee being unable to pay off the liabilities immediately or for other reasons, the value of the liabilities went on mounting and ate away the value of the assets taken over, there would be no resulting surplus at all. It seems to me, therefore, that the case is no different from that of a regular take-over of different kinds of assets and liabilities at a valuation.

25. We may also look at the transaction referred to in the preceding paragraph on the assumption that the sum of Rs. 8,15,903 referred to above represented an amount due to Matru Bhumi Nirman Pvt. Ltd. In other words, let us assume that the assessee owed the Matru Bhumi Company Rs. 8,15,903 and that, since that company was in liquidation, the liquidator agreed to write off the amount, provided the assessee was willing to pay off Rs. 3,05,685 to South Asia Industries Ltd., Rs. 435 to the shareholders of Viswa Industries and Rs. 4 lakhs to its own shareholders. Even on this assumption all that it means is that in the final analysis they have been content to accept about Rs. 4 lakhs in place of about Rs. 5 lakhs due to them. All we have is, therefore, the case of an acceptance by the creditor of a smaller amount in settlement of his debt—in other words, a remission or waiver of a debt by the creditor. It is a well established principle that where a trader is able to have his trade debt settled by payment of a smaller amount than the face value of the debt, there is only a saving and no income. This general principle was enunciated in the British Mexican Petroleum Company's case, [1932] 16 TC 570 (HL) and followed in India in a number of cases. Even in this view (of the facts, which is possible, if at all, only in the case of Bharat Development Company for 1960–61), therefore, no taxable surplus arises.

26. For the above reasons, I am in agreement with the conclusion arrived at by the Tribunal in both these cases. I would, therefore, answer the questions referred to us in the affirmative and in favour of the assessee. There will, however, be no order as to costs.

D.R Khanna, J.:— As the narration of facts brought out by my learned brother shows, the memorandum of associations of the assessee-companies provided for the taking over of going concerns with all assets and liabilities of such concerns. This was not a mere empowering clause, as, for that purpose, the companies need not have introduced articles in their memoranda of associations. Recourse to the provisions contained in the Companies Act or otherwise could in any case have been available in that direction. In fact I agree with the findings of the ITO that it was one of the objects of the incorporation of the assessee-companies to make a trade in the taking over of going concerns with their assets and liabilities. Their conduct covering a number of years has amply brought out the same. In my opinion, this was a significant circumstance to be taken into account for determining whether in the process of amalgamations which the present assessees engineered, any income accrued or resulted in their favour. My learned brother has taken note of a large number of transactions in the Dalmia group of concerns, to which the present assessees also belonged, where several concerns were absorbed by other concerns and so on. In the case of Manav Sahyog Pvt. Ltd., the company amalgamated four other companies belonging to the same group. In the case of Bharat Development Pvt. Ltd., there was amalgamation of the Swadeshi Nirman Pvt. Ltd. and Matru Bhumi Nirman Pvt. Ltd. The AAC has also noted that there had been schemes of arrangement of amalgamation of different companies from time to time.

27. My learned brother has in the circumstances at one stage proceeded with the assumption that the amalgamations with the assessee-companies of other concerns were normal transactions in the course of the trade.

28. It is next also apparent from the narration of facts brought out by my learned brother that in the process of those amalgamations, the assessee-companies have enjoyed considerable surplus and stood to gain substantially. Figures thereof have been already enumerated in the order of my learned brother and I need not reproduce them here again. In the case of one of the assessees, substantial trading debt due from it to the amalgamating company was wiped off. In the other concern, the shareholders were allowed amounts at a far lesser rate than the market value of the shares. R. Dalmia had also stood to gain.

29. The term “income” has a wide amplitude and it has varied facets. Section 2(6C) of the Indian I.T Act, 1922, amplified its vast scope.

30. Reference to the observations at p. 490 of Law and Practice of Income Tax by Kanga and Palkhivala, in my view, does not call for undue significance when the articles of associations of the companies, of their own, make amalgamation, taking over, etc., as part of the trading activities of the companies. That general rule enunciated in the said commentary does not apply when it is specifically envisaged in the articles that it would be one of the objects of the trading activity of the company.

31. In my considered view, the approach adopted by the learned Tribunal that income can result only when two processes of purchase and sale are effected is too simplistic and may not always be so. That may be correct in the case of a marketable commodity, like a motor car or other mercantile goods. However, where the acquisition of a certain thing by its very nature reflects its money value and the same is otherwise apparent and ascertainable irrespective of embarking upon the second stage of sale, it cannot be said that the purchase alone has not resulted in the accrual of profit and gain. One such instance can be where the demonetization of high denomination currency notes takes place. Not unoften, deals in them at a far lower valuation than their face value are effected simply because the purchasers are situated in circumstances that they can get them encashed at their right value. Such purchase of demonetized currency notes itself results in profit and gain. There need not be a further sale. There have been instances where displaced persons' verified claims were purchased at far lower amounts than their face values. The ITO has aptly narrated the case of a person who purchased fixed deposits of a bank (which had suspended operation) at a lower value than their face value in order to wipe off his overdraft account and in the deal stood to gain a considerable amount. He was held to have enjoyed income assessable to tax: [Surangmali Punamchand Surana v. CIT, [1960] 40 ITR 360 (Assam)].

32. Where a money aspect is apparent from its very nature or is inherent in the circumstances, it can be taken that a transaction of purchase itself can result in profit and gain.

33. In the present cases, the acquisition, amalgamation and taking over of the other companies by the assessee-companies have in fact resulted in such profits and gains. The balance-sheets and profit and loss accounts of those amalgamating companies amply brought out their financial position and their money value. They were not dependent on any element of resale. If the assets of the company far exceeded its liabilities, the acquisition of that company at a value less than those assets minus the liabilities would surely result in gain.

34. It is correct that normally the mere purchase of merchandise does not result in income. Profit thereto arises only at the time of sale. But to purchase other companies or to embark upon amalgamations with other companies in the form of trading activity is rarely a business adopted by people. Such acquisitions or amalgamations of companies do not render them as commodities which are readily marketable. They cannot be termed as a normal class of stock-in-trade. Such trading activity has to be treated as a class of its own which may itself result in a plain profit if the price paid or cost involved was less than the value of the assets of those companies after deductions of their liabilities. If in these processes, substantial surplus amounts resulted in favour of the present assessees and they were shown in the amalgamation accounts as having accrued to them, there are no reasons why those amounts should not be treated as gains and profits enjoyed from those well-planned and concerted activities. Thus, in the case of the Bharat Development Private Ltd., the surpluses so enjoyed extended to Rs. 2,01,445 and Rs. 33,397 in the assessment years 1960–61 and 1961–62, respectively. In the case of Manav Sahyog Pvt. Ltd., the surplus so enjoyed after deduction of liabilities amounted to Rs. 4,10,415.

35. Reference may be made here to the decision of the Supreme Court in the case of P.M Mohammed Meerakhan v. CIT, [1969] 73 ITR 735. The facts of that case were that the assessee had agreed to purchase 477.71 acres of land forming part of an estate for Rs. 6 lakhs. The assessee divided the estate into 23 plots and arranged for the sale of 22 plots to different purchasers for Rs. 5,18,500. He, however, retained the 23rd plot measuring 104 acres for himself. The ITO valued its estimated cost at Rs. 2,08,000 and worked out the profit from the transaction as follows:

Rs. Sale price of 373 acres 5,18,500 Value of 104 acres retained by the appellant at Rs. 2,000 per acre 2,08,000 7,26,500 Less cost 6,00,000 Total 1,26,500

The amount of Rs. 1,26,500 in round figures representing the profit enjoyed during the entire transaction was treated as the assessee's income accruing from business and taxed accordingly. This was upheld by the Supreme Court. It was observed that the ITO had correctly treated the land as stock-in-trade and estimated it according to the normal accountancy practice. It was also observed that it was not correct to say that the profits of the adventures could be determined only at the time of completion of the sale of the entire estate. Each year was a self-contained unit and in the case of a trading adventure for computing the true profits of the year, the value of the stock-in-trade at the beginning and at the end of the accounting year had to be taken into account. The following observations made in Whimster & Co. v. IRC, [1925] 12 TC 813 were cited with approval at p. 823:

“In computing the balance of profits and gains for the purposes of Income Tax……two general and fundamental commonplaces have always to be kept in mind. In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts. In the second place, the account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting, so far as applicable and in conformity with the rules of the Income Tax Act, or of that Act as modified by the provisions and schedules of the Acts regulating Excess Profits Duty, as the case may be. For example, the ordinary principles of commercial accounting require that in the profit and loss account of a merchant's or manufacturer's business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower; although there is nothing about this in the taxing statutes.

36. Reference was also made to similar observations in IRC v. Cock Russell and Co. Ltd., [1949] 29 TC 387 (KB) in the following terms (p. 392):

“There is no word in the statutes or rules which deals with this question of valuing stock-in-trade. There is nothing in the relevant legislation which indicates that in computing the profits and gains of a commercial concern the stock-in-trade at the start of the accounting period should be taken in and that the amount of the stock-in-trade at the end of the period should also be taken in. It would be fantastic not to do it; it would be utterly impossible accurately to assess profits and gains merely on a statement of receipts and payments or on the basis of turnover. It has long been recognised that the right method of assessing profits and gains is to take into account the value of the stock-in-trade at the beginning and the value of the stock-in-trade at the end as two of the items in the computation. I need not cite authority for the general proposition which is admitted at the Bar, that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes.”

37. Similarly, Shah J., in CIT v. A. Krishnaswami Mudaliar, [1964] 53 ITR 122 (SC) observed at p. 133 as follows:

“These observations do not affect the true character of the profits of a business. Adjustments may have to be made in the principle having regard to the special character of the assets, the nature of the business and the appropriate allowances permitted, in order to arrive at the taxable profits. They do not support the proposition that, in the case of a trading venture, you canarrive at the true profits of a year by ignoring altogether the valuation of the stock-in-trade at the end of the year, while debiting its value at the commencement of the year as an outgoing; for determination of the profits by ignoring the valuation of the stock at the end of the year and debiting the value of the assets at the commencement of the year would not give a true picture of the profit for the year of account.”

38. In my considered opinion, the decision of the Supreme Court in the case of P.M Mohammed Meerakhan, [1969] 73 ITR 735 has a significant bearing on the present case in order to show that profit need not essentially arise to a person when he effects sale of his stock-in-hand. Its retention by him and its computation of value at the close of the year in accordance with the general principle of commercial accounting can result in profit and the same can be assessable to tax. In the present cases, the surplus accounts reflected the gains which they had enjoyed in the amalgamation of various companies with them. They had resulted from the trading activity which the two assessees specifically entered into and which their articles of associations permitted. It is noteworthy to mention here that the AAC has in the case of the Bharat Development Pvt. Ltd., specifically taken note that there was no mention as to what were the principal objectives of the formation of the assessee-company. The past activities of the company did not give a clear indication in this regard. The assessee simply gave out that the company was one of the companies of the Dalmia group, the purpose of which was to borrow and lend money. The activity of the assessee was, therefore, considered to be one of accommodating other companies in the group. The AAC next stated that it did not stand to reason that the creation of a separate corporate entity was needed for this purpose when there were other corporate entities in the group through which such transaction could easily be carried out. It was in these circumstances felt that there was something other than that met the eyes, and in this background, the different clauses of the memorandum of association assumed importance. After taking note of those clauses, it was found that the transactions of acquisition of assets and liabilities of other companies were carried on through different stages by a conscious and planned effort and the purpose obviously was to make a gain out of them. Those were held to be not really schemes of amalgamation as such, because none of the chief objectives of amalgamation, viz., to eliminate or minimise competition to pool resources, whether financial or technical, facilitating the best utlisation of stock, etc., to effect general economies in production, use and power of capital, salary, distribution and general overheads through centralisation and closing down unprofitable and redundant sections or to create a more powerful economic unit, was present. The purchase of assets and liabilities of one company was made, not while it was a going concern, but from a voluntary liquidator.

39. Reference may here also be made to the aforesaid decision of the Assam High Court in the case of Surangmali Punamchand Surana v. CIT, [1960] 40 ITR 360. In that case, the assessee who had an overdraft account with the bank found that the bank has suspended operation. The assessee in the circumstances purchased from several persons who held deposits, at values less than the face value of those deposits and got them adjusted against his overdraft account with the bank. In that process he stood to gain Rs. 16,995. It was held that the purchase of deposits with a view to derive the full benefit of the sums which the depositors held in the bank and deriving that benefit from the bank by adjustment amounted to “business” and the profit derived therefrom came within the scope of “profits or gains of business” within the meaning of s. 10 of the I.T Act.

40. From the side of the assessee considerable reliance has been placed upon the observations of the Gujarat High Court in CIT v. Spunpipe and Construction Co. Ltd., [1965] 55 ITR 68. It was held in that case that if a going concern including fixed assets and stock-in-trade was purchased, the difference between the book value of any part of the assets acquired by the assessee and the price paid by the assessee for the same cannot be regarded as revenue profit derived by the assessee. No profits, at all, it was held, was made by the assessee from the purchase of any of the assets. That was a case where the assessee had a singular transaction of purchase of a factory, and there was nothing to show that a concerted trading activity in the form of purchase of businesses or amalgamations of the companies was part of the normal business of that assessee as is the position in the present cases. Moreover, most of the discussion in that case pertained to the nature of the question referred by the Tribunal to the High Court and what were the controversies agitated before the I.T authorities and the Tribunal, respectively.

41. Two other decisions referred were the Central India Industries Ltd. v. CIT, [1975] 99 ITR 211 (Cal) and CIT v. V. Rasiklal Maneklal (HUF), [1974] 95 ITR 656 (Bom). In these cases, the assessees were not the amalgamated and amalgamating companies. The assessees, in fact, were mere shareholders. These cases, therefore, do not in any manner come to the avail of the present assessee. My learned brother has already taken note that in one of the present cases, surpluses had arisen because the shareholders of the transferor-company had not been paid the full value of the difference between the assets and liabilities taken over from them.

42. Moreover when, within the normal trading activity, gain is enjoyed by getting a part of the debt due remitted, the same, in given circumstances, as in the present case can be treated as a part of the overall amalgamation scheme.

43. The following observations of the AAC in the case of the Bharat Development Pvt. Ltd., in my view, fairly bring out the resultant effect of the amalgamations:

“It appears to me that the transaction in question bore all the indicia of trade and that a similar transaction was repeated in a succeeding year which indicated the transaction in question was a part of a scheme of profit making. The offer was made by the appellant to the voluntary liquidator of a company which was in voluntary liquidation and the assets and liabilities of that company were purchased by the company for a consideration. The consideration was satisfied by cash payment to the shareholders of the transferor-company. The assets were immediately realised and the liabilities which were only in respect of debts due to companies in the same group were shown in the balance-sheet. These liabilities could be taken at best on their face value and a straight gain resulted. Thus I do not find any merit also in the contention of the appellant's counsel that a gain would not result merely on the purchase of assets. This was not a case merely of purchase of assets and holding them as such. The assets were actually realised and a gain resulted which was duly shown in the account.”

44. I am, therefore, of opinion that when the money aspect and gain thereof are by themselves plainly discernible and are not dependent on the sale that may or may not take place, and the surplus enjoyed is clearly visible and stands accordingly credited in the books, as in the present case, it will not be correct to say that profit has still not accrued. The conduct of the present assessees in crediting the gains and surplus enjoyed in the amalgamation accounts of their books, of its own, reflected how the assessees took them to be. They had, in a way, tacitly acknowledged of having enjoyed a surplus in the process of amalgamations. There, this part of the trading activity of acquiring companies in the form of amalgamations was complete. Any sale of what had become an integral part of the corporate selves of the assessees could arise only if they themselves chose to amalgamate or transfer themselves to some other corporate body. That would have been self-extinctive or merger with others. The gain and loss in that case would have been of the other.

45. I am, therefore, of the opinion that the questions referred have to be answered in the negative and in favour of the revenue. Looking at the circumstances of the case, there will be no order as to costs.

D.K Kapur, J.:— These two references were heard by S. Ranganathan J. and D.R Khanna J., who differed in their answers to the questions referred and the references have been placed for decision before me under s. 66A(1) of the Indian I.T Act, 1922.

46. The assessees in question are M/s. Bharat Development Private Ltd., Rajpura, in I.T.R No. 34 of 1970, and M/s. Manav Sahyog Private Ltd., Rajpura, in I.T.R No. 42 of 1971. The questions that are referred by the Income-tax Appellate Tribunal in the two cases are somewhat similar. Both the companies have been amalgamated with some other companies and an entry has appeared in the balance-sheet showing a surplus amount in what may be called the amalgamation account. The question for consideration is whether these surpluses are taxable.

47. In the case of Bharat Development Private Ltd., the question referred is as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the surpluses of Rs. 2,01,445 and Rs. 33,397 in the assessment years 1960–61 and 1961–62, respectively, arising on account of remission of debts consequent on the amalgamations of Matru Bhumi Nirman Private Ltd., and Swadeshi Nirman Private Ltd. could not be taxed as revenue receipts on the ground that the said amalgamations were neither business transactions nor adventure in the nature of trade?”

48. In the case of Manav Sahyog Private Ltd., the questions referred are as follows:

“1. Whether, on the facts and in the circumstances of the case, the Income-tax. Appellate Tribunal was justified in holding that the amalgamation of four companies, namely, Rashtriya Agencies Pvt. Ltd., M/s. Rajasthan Udyog Pvt. Ltd., M/s. Pepsu Trading Co. Ltd. and M/s. Dadri Marketing Ltd. was neither a business transaction nor an adventure in the nature of trade?

2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the surplus of Rs. 4,01,415 was not taxable as revenue gain?”

49. In both these cases/the Tribunal had come to the conclusion that the surpluses were not taxable as revenue gains. The facts of the two cases are not at all in dispute. In the case of Bharat Development Private Ltd. company called Matru Bhumi Nirman Private Ltd. was amalgamated with the assessee-company and there was a surplus of Rs. 2,01,445 in the assessment year 1960–61, and in the assessment year 1961–62, another company known as Swadeshi Nirman Private Ltd. was amalgamated with the assessee-company and a surplus of Rs. 33,397 arose. This amount was placed by the assessee in the capital reserve account. The ITO treated this amount as profit on amalgamation and brought the amount to tax. In appeal, the assessee contended that the surplus was in the nature of a capital receipt or casual receipt and did not arise from any business transaction. The AAC found that there was a conscious and planned effort involved in the amalgamation for the purpose of making a gain. He, therefore, held that the sums were taxable. The assessee appealed to the Tribunal which came to the conclusion that the sums were not taxable as there was no exchange, transfer or sale involved. One of the arguments addressed on behalf of the revenue was that the articles of association allowed for amalgamation and these amalgamations were a business transaction. The Tribunal rejected this contention and held that the amounts were not taxable.

50. In the case of the other company, Manav Sahyog Private Ltd., four other companies, namely, Rashtriya Agencies Private Ltd., Rajasthan Udyog Private Ltd., Pepsu Trading Co. Ltd. and Dadri Marketing Ltd. were amalgamated. In the assessment year 1958–59, there was a surplus of Rs. 10,61,675 which was credited to the amalgamation account. The ITO held that the liabilities taken over by the assessee amounted to Rs. 6,51,260 and, therefore, there was a taxable surplus of Rs. 4,10,415. On appeal to the AAC, the decision of the ITO was upheld. On further appeal, the Tribunal accepted the assessee's contention and held that the amount was not taxable.

51. On the reference being made in these two cases, the matter was heard by a Bench and I have had the advantage of going through the judgments delivered by S. Ranganathan J. and D.R Khanna J., who have given opposite answers to the questions referred. It has been held by S. Ranganathan J. that no profit is involved in the fact that the assessees have acquired the assets of the amalgamating companies at a cheaper rate or price. It has been held by D.R Khanna J. that the business of the companies in question included amalgamation with other companies because it was so provided in the articles of the two assessee-companies. It was further held that a surplus had resulted to the two companies which was a gain from business and it was not necessary that there should be a purchase followed by a sale in order that there should be a profit. Both judgments have referred to a number of decided cases.

52. Before dealing with the referred questions, it may be useful to say that the principal question involved in this case is regarding the nature of the surpluses involved in the case. In the judgment delivered by S. Ranganathan J., it has been assumed that the assessees have got something cheaper than they would have otherwise got it, but the excess amount is not taxable. In the judgment delivered by D.R Khanna J., it has been held that the fact that the assessee has got something cheaper is part of its business dealings and, therefore, that saving is a revenue receipt. In my view, these decisions have made an assumption which has to be more carefully and critically examined regarding the nature of the receipts involved in those cases.

53. In order to understand the true nature of the transactions, it is important to note that the Companies Act provides a method by which two or more companies can amalgamate and the assets and liabilities of what may be called the transferor-company can pass and belong to the transferee-company. As far as the balance-sheet of the companies is concerned, their very nature requires and pre-supposes that they must balance. If company “A” amalgamates and becomes part of company “B”, then the assets of company “B” will consist of its assets plus the assets of the transferor-company. Similarly, the liabilities are amalgamated so that the liabilities of the transferee-company will be the sum total of the liabilities of the two companies. As both the sides are equal, it would follow that the assets and liabilities when joined together should also be equal. In practice, this is always not so because the transfer involves the liquidation of the share account of the transferor-company and its replacement by new shares of the transferee-company. If these shares are issued at par, i.e, on a one-to-one basis, then the resultant combined balance-sheet should show no surplus or deficit. However, if the shares are not issued on a one-to-one basis and there is a ratio, for converting the shares of the transferor-company into shares of the transferee-company, then an artificial surplus or an artificial deficit will appear in the balance-sheet. That is exactly what has happened in the present cases as a further analysis will demonstrate. The question for consideration will, therefore, have to be whether the artificial surplus or artificial deficit just mentioned can be treated to be a revenue receipt or a revenue deficit, as the case may be.

54. Under the Companies Act, the court can be called upon to consider many different types of compromises, arrangements and reconstructions of companies. Section 391 of the Companies Act, 1956, deals with compromises or arrangements proposed between a company or its creditors or a company and its members. Section 394 deals with compromises or arrangements which are entered into for the purpose of amalgamating two or more companies. There can be different types of schemes put forward under this provision. For instance, in a company which is financially embarrassed, there may be a scheme for delaying payments to creditors or creditors may be agreeable to receive lesser amounts than they might otherwise be entitled to. Such schemes would always have the effect of reducing the financial liability of the company and would, therefore, lead to a gain to the company as opposed to the creditors. The question would then arise as to whether such a gain is a revenue gain subject to tax. The giving up of a debt is not a revenue receipt: [See British Maxican Petroleum Co. Ltd. v. Jackson, [1932] 16 TC 570 (HL)]. This is subject to the provisions of s. 41(1) of the I.T Act, 1961, whereby in certain circumstances a remission of liability may be treated as a profit chargeable to tax.

55. In the case of a company amalgamating with another company, certain changes were introduced into the I.T Act, 1961, by means of the Finance Act, 1967. The provisions in question are to be found in ss. 32, 33, 33A, 35, 35A, 43, 47 and 49. The object of these provisions was to give the transferee-company the same rights regarding depreciation, development rebate, etc., which were available to the transferor-company. As the case now before me relates to the earlier years, these provisions are referred to only per curiam. The noteworthy feature of an amalgamation of two companies is the fact that the assets are transferred, by what is described as the amalgamating company in s. 2(1 A) to the amalgamated company, without any payment to the said amalgamating company. In actual fact, the assets belong to the shareholders of the amalgamating company. The effect of the amalgamation is that the assets come to the amalgamated company, which, in turn, issues a fresh share capital to the shareholders of the amalgamating company. No actual cash payment is involved in the amalgamation as far as the amalgamated company is concerned. Applying this analysis to the present case, it would appear that when Matru Bhumi Nirman Private Ltd. amlgamated with M/s. Bharat Development Private Ltd., the assets of the amalgamating company came into the hands of the assessee, but no payment as such was made by the assessee for getting those assets. In the place of those assets which would now come to the right hand side of the balance-sheet of the amalgamated company, the assessee would issue shares of its own to the shareholders of the amalgamating company. Obviously, there is no purchase involved in the amalgamation and no expense at all. All that the assessee-company did was to obtain the assets as well as the liabilities and the shareholders of the amalgamating company got shares in the assessee-company.

56. If we consider the balance-sheet of the amalgamating company, i.e, Matru Bhumi Nirman Private Ltd., we would find that its balance-sheet would consist of its shareholding and other debts on the left hand side and on the right hand side, it would have its physical assets such as money in the bank, fixed assets and outstanding credits. Both the assets and the liabilities of the amalgamating company would be transferred to the assessee-company. Any shareholding of the amalgamating company would be replaced by shares of the amalgamated company. If the value of these shares was such as to balance the balance-sheet without any further entry, there would neither be a surplus nor a deficit in the combined account and the question referred would not arise. However, if the amounts do not balance, then it is necessary to introduce into the balance-sheet an artificial entry such as the one that appears in the actual combined balance-sheet. Unfortunately, the actual figures are not given in the paper book, nor in the balance-sheet reproduced, but the above analysis shows the reason why the surplus has appeared.

57. The important question to be discovered is whether the surplus is a revenue receipt or a capital receipt or no receipt at all. As the amalgamating company has not spent any money for acquiring the assets of the amalgamated company, it does not appear to be a receipt at all. The effect of the amalgamation is to transfer all the assets and all the liabilities of the amalgamating company to the balance-sheet of the assessee. If these amounts all balance, then as already stated, there will be no surplus. However, in making the combined balance-sheet, the shareholding of the amalgamating company which appears on the left hand side of the balance-sheet of that company disappears altogether and has to be replaced by the new shares issued by the amalgamated company, i.e, the assessee. If this is not the same amount, then a surplus appears. As it happens, the balance-sheet of the other assessee, Manav Sahyog Private Ltd., has been produced in the paper book and that will serve as a proper example of the procedure in making the amalgamation. I reproduce the relevant part of that balance-sheet:

LIABILITIES

Rs. Rs. Share Capital : Subscribed, called & paid up: 30 Equity shares of Rs. 100 each issued for cash 3,000.00 1,010 Equity shares of Rs. 100 each issued in full pursuant to scheme of arrangement u/s. 208C of the Indian Companies Act, 1913. 1,01,000.00 1,04,000.00 Reserves & Surplus: Net profit transferred from Profit & Loss A/c. 1,580.90 Unsecured loans (bank over-drafting temporarily overdrawn). 5.12 Current liabilities & provisions: Outstanding liabilities 450.75 Sundry creditor a/c. Dadri Marketing Pvt. Ltd. 132.47 Deposit receipts a/c. Dissenting shareholders of Patiala Biscuit Mfrs. Pvt. Ltd. 25,125.62 Interest accrued and accruing on above deposits 2,358.11 Deposit Receipt 47.50 Shareholders' Pepsu Trading Co; Pvt. Ltd. 1,035.50 Amalgamation a/c. 10,61,675.42 10,90,825.37 11,96,411.39

ASSETS

Rs. Rs. Loans and Advances: Loan (unsecured—considered good, due from a private limited com-pany) 11,49,222.30 Customers' a/c.-Dadri Marketing Private Ltd. (unsecured—considered doubtful) 410.00 Advance payment—income-tax a/c. Dadri Marketing Private Ltd. 2,750.62 Pre-paid expenses 12.00 11,52,394.92 Cash and bank balance: Cash in hand 42,833-39 Miscellaneous expenditure & losses: Preliminary expenses 1,183.08 11,96,411.39

58. From this balance-sheet it appears that before the scheme of arrangement was made, the assessee-company had share capital of Rs. 3,000, but after the scheme of arrangement was made, a new share capital amounting to Rs. 1,01,000 was issued. This share capital must have been issued to the shareholders of the amalgamating companies. There were four such companies as is noticed and this shareholding would replace the shares of the amalgamating companies in the hands of the shareholders of the amalgamating companies. On the assets side of this balance-sheet, the figure obtained after amalgamation of the companies is as much as Rs. 11,96,411.39, which means that as a result of the amalgamation, the assets side has increased enormously, whereas the liabilities side has only been increased to the extent of the new share capital issued. To balance the two sides the surplus appears in the amalgamation account amounting to Rs. 10,61,67542. The only explanation for this surplus is the fact that the shares issued to the shareholders of the amalgamating company have a much lower par value than their previous shares. Undoubtedly if the shares issued in the amalgamated company had been more, then the amalgamation account would be less. Hence, the surplus depends on how many shares are issued to the previous shareholders. I cannot see how the sum of Rs. 10,61,675.42 can be treated as a receipt in the hands of the assessee-company. No such amount has come to the assessee-company. The assets received by the company after the amalgamation are the assets shown on the right hand side of the balance-sheet. These assets have been transferred by the shareholders of the amalgamating companies and in lieu of this transfer those shareholders of the amalgamating companies have got shares in the assessee-company which they have accepted. There is neither a receipt nor any payment by the assessee-company. To illustrate the point even further, an artificial example of an amalgamation between two companies “A” and “B” can be conveniently framed. Suppose, there is a company “A” whose balance-sheet is as follows:

LIABILITIES ASSETS Rs. Rs. Share capital 1,00,000 Cash in Bank 1,00,000

and there is a company “B” whose balance-sheet is as follows:

LIABILITIES ASSETS Rs. Rs. Share capital 10,00,000 Outstanding loans 12,00,000 Reserves 2,00,000 considered good

If these two balance-sheets are combined and company “B” becomes a part of company “A”, the resultant balance-sheet would be:

LIABILITIES ASSETS Rs. Rs. Share capital 11,00,000 Cash in bank 1,00,000 Reserves 2,00,000 Outstanding monies considered good 12,00,000 Total 13,00,000 13,00,000

This would be the result if the shareholders; of company “B” are given a one-to-one shareholding in company “A”. But if the shareholding to be given to “B” is less, i.e, only one-tenth, then the balance-sheet will read:

LIABILITIES ASSETS Rs. Rs. Share capital 2,00,000 Amount in Bank 1,00,000 Reserves 2,00,000 Loans considered good 12,00,000 Total 4,00,000 13,00,000

59. The two sides of the balance-sheet do not balance. So, an artificial amount has to be introduced in the left hand side to cover the difference, i.e, in this case that amount has to be Rs. 9,00,000. That sum of Rs. 9,00,000 when introduced into the balance-sheet is not a capital or a revenue receipt, but only a balancing entry which in fact is not a receipt, nor a deficit.

60. My conclusion, therefore, is that the entries which are under consideration are neither revenue receipts nor capital receipts. They would, therefore, in any event, be not taxable. It is not necessary to deal with the case-law referred to in the two judgments because my conclusion is based on the fact that there is no receipt in any of the two cases. Learned counsel for the department urges that it should also be considered that the business of the assessee-company included amalgamation with other companies. It is, therefore, contended that the amounts appearing as surplus are revenue receipts received in the course of business by the assessee-company in these cases. I cannot accept this contention for the simple reason that in a case of amalgamation, the assets of the amalgamating company come to the amalgamated company. The amalgamated company, i.e, the assessees in these cases, do not have to pay anything to any one. They have only to replace the shareholding of the amalgamating company by their own shares. This is the only form in which the amalgamated companies pay for the assets of the amalgamating companies. These shares may be issued at any convenient value. The shareholders of the previous company, i.e, the transferring-company, may be given more shares than they previously had or they may be given less shares. This depends on the scheme of amalgamation entered into between the two sets of shareholders which is again subject to the approval of the court. If less shares are issued, i.e, for lesser than par value, then a surplus appears in the account. If more shares of greater than par value are issued, then a deficit will appear in the amalgamated account. In no event will this surplus or deficit be a capital or revenue receipt or payment. They are merely book entries introduced for the purpose of accountancy, i.e, for balancing the balance-sheet.

61. I would, therefore, answer the questions referred in the affirmative, in favour of the assessees and against the department. In view of the fact that the questions referred are not covered by any reported case, and have led to a difference of opinion in this court, I would leave the parties to bear their own costs.