Whether 'amalgamation' as term can include transfer of one or more undertakings to another company without actually blending existing companies into amalgamated company - YES: HC

THE issue before the Bench is - Whether "amalgamation" as a term can include transfer of one or more undertakings to another company without actually blending existing companies into the amalgamated company. And the answer is YES.

Facts of the case

The assessee company is engaged in the business of manufacturing of textiles. Upon verification of its return, the assessee had claimed and was granted benefit of investment

allowance or carried forward of investment allowance u/s 32A. Subsequently, it was noticed by the AO that under a scheme of arrangement u/s 391 and 394 of Companies Act, nine out of thirteen industrial units held by assessee were transferred to three newly formed companies, namely, M/s DCM Shriram Industries Ltd., M/s DCM Shriram Consolidated Ltd., and M/s DCM Shriram Industrial Enterprises Ltd. Accordingly, relying upon section 32A(5) and treating transfer of assets and liabilities, including plant and machinery as "sale or otherwise transfer", the AO passed an order u/s 32A(5) r/w/s 155(4A) and 154 withdrawing benefit of investment allowance or carried forward of investment allowance. On appeal, the CIT(A) confirmed the order of AO. On further appeal, the Tribunal reversed the order of CIT(A) by holding that scheme of arrangement did not result in 'transfer' u/s 35A(5).

Having heard the parties, the High Court held that,

++ the word "transfer" and its purport was examined by the Supreme Court in the case of CIT vs. Narang Dairy Products, wherein it was observed that 'even assuming that a transaction of 'transfer of possession and enjoyment of machinery or plant to a third person by way of lease' may not be a "transfer" as defined u/s 2(47), the definition section is an inclusive one and does not exclude the contextual or the ordinary meaning of the word, "transfer". Whether amalgamation results or constitutes transfer of assets was examined in detail by this Court in case of CIT vs. Mira Exim Ltd., wherein it was held that the term "merger or amalgamation" has no precise legal meaning but it involves blending of two or more existing undertaking into one. In case of merger, there is complete blending of the merged undertaking into the other company, but this does result in the transfer of the assets from the merged undertaking. Assets are acquired by the other undertaking. Upon merger, the earlier concern or undertaking loses its identity and the ownership in the asset. In these circumstances, the submission of the assessee that the scheme of arrangement or reconstruction in the present case did not result in transfer of the nine units of assessee to the three newly formed companies, cannot be accepted. The said three companies were in fact separate juristic entities in law. The expression "otherwise transfer" cannot be given a narrow meaning to exclude all transfers as a result of merger and amalgamation. No doubt that Section 32A(5) is a negative provision, which may be penal, but when the legislative intention and requirement is clear in the form of sub-section (6), it would be difficult to ignore the legislative mandate and hold that amalgamation or merger would not result and constitute transfer within the expression "otherwise transfer" used u/s 32A(5);

++ the expression 'amalgamation' does mean amalgamation of two or more companies which are merged into one. It has the effect of an arrangement by which one of the companies involved absorbs the business, all assets and liabilities of another with the latter being dissolved or in alternative two or more companies being absorbed into one company, formed for that purpose. Therefore, the term 'amalgamation' contemplates a state of things under which two companies are joined so as to form a third entity or one company is absorbed or blended with the other company. Amalgamating company, thereupon, loses its entity and ceases to exist. But there are instances or arrangements under which there is transfer of one or more undertakings to a new company or to another existing company. In these cases, the amalgamating company continues to exist and is not dissolved as it does not get fully merged. Such schemes are treated as scheme of reconstruction or reorganization or scheme of arrangement. The term 'amalgamation' as such is broad to include the said schemes. The term 'amalgamation', it has been observed, should not be given any definite legal meaning. Section 391 r/w/s 394 state that a scheme may take a form of 'arrangement' or 'reconstruction'. Thus, amalgamation as a term can include transfer of one or more undertakings to another company without really blending of one or more existing companies into the amalgamated company. All assets of the amalgamating company need not be transferred to the new company. The purpose and objective behind Section 32A(6) is to facilitate reconstruction and amalgamation and not to obstruct genuine transactions of such nature. The emphasis u/s 32A(6) is not upon the blending or merger of the existing company, which has availed of benefit u/s 32A into another or new company;

++ the case set up by the Revenue is that in case assessee had ceased to exist and had merged, conditions mentioned u/s 2(1B) would be satisfied. In other words, in case the scheme of arrangement had postulated creation of a fourth company to which four units which continued to remain with the assessee had been transferred, requirement of Section 2(1B) would have been satisfied. Thus, it is a matter of not selecting a correct taxable event, possibly due to inability and lack of foresight in comprehending the objection that could be raised. This would not be in consonance with the object, aim and purpose behind Section 32A(6). The submission of the Revenue that the assessee was not covered by Section 2(1B), should not be accepted because it does not promote the object, aim and purpose behind Section 32A and the restriction or the bar created in sub-section (5) and the exception which has been carved out in sub-section (6). The object and purpose of the provision as is discernible is to promote and encourage industrialization. The restriction of the sale or transfer is to ensure that an assessee who avails of investment allowance does not sell or otherwise transfer the plant and equipment after obtaining tax benefit as it would be contrary to the intention and the purpose behind the enactment of the Section. The legislature also intended that the amalgamated company must be bound by the terms and conditions, which were applicable to the amalgamating company even when there was transfer or sale of the relevant asset;

++ while interpreting Section 32A(6), it is to be kept in mind that the provision is broad enough and would include any scheme of merger provided the legislative stipulations in sub-section (6) are met. It is not necessary and required u/s 32A(6) that the amalgamating company should have been dissolved or fully merged. Thus, the assessee should be able to show and establish that the liabilities associated with the plant or machinery were transferred to the amalgamated company by virtue of amalgamation as also the condition that the shareholders not holding less than nine-tenth in value of the shares was satisfied. Similarly, the stipulations of sub-section (6) to Section 32A must be met and satisfied. As these aspects have not been examined, the matter requires to be remitted back to the Tribunal for proper examination. Accordingly, the assessee would be entitled to protection u/s 32A(6) if the conditions specified therein as well as Section 2(1B)(ii) & (iii) are satisfied. Therefore, the matter is remanded back to the Tribunal.