Commissioner of Income Tax vs Gautam Sarabhai Trust

R.C. Mankad, J.—The assessee is a trust assessed in the status of an association of persons. The assessment year under consideration is

1982-83, the relevant previous year ending on March 31, 1982. The assessee owned l, 512 equity shares (""shares"" for short) of Shahibag

Entrepreneurs Private Limited (""SEPL"" for short) of the face value of Rs. 100 each. Alkapuri Investments Private Limited (""Alkapuri"" for short)

was a wholly owned subsidiary of SEPL. By an order dated December 22, 1980, passed in Company Petition No. 11 of 1980, u/s 394 of the

Companies Act, 1956, this court sanctioned a scheme of amalgamation of SEPL with Alkapuri. Under the scheme of amalgamation, which was to

come into effect from April 1, 1981, the assessee received the following for each share of SEPL held by it :

(i) One share of face value of Rs. 100 and two fractional certificates, each certificate representing a fractional entitlement of 1/10th of one share of

Rs. 100 of Alkapuri credited as fully paid-up; and

(ii) One 11% Redeemable Bond of face value of Rs. 100 of Alkapuri credited as fully paid-up.

The assessee, therefore, received 1,815 shares and 1,512 11% redeemable bonds (""bonds"" for short) of Alkapuri of Rs. 100 each.

In the return of income for the assessment year 1982-83, the assessee claimed that it was not liable to pay any tax on account of capital gains

arising from the transfer of 1,512 shares of SEPL held by it in consideration for 1,812 shares and 1,512 bonds of Alkapuri under the scheme of

amalgamation. According to the assessee, the aforesaid transaction did not amount to transfer of a capital asset within the meaning of section 2(47)

of the Income Tax Act, 1961 (""the Act"" for short). It was further contended that even if it was a transfer within the meaning of section 2(47), it was

not to be regarded as a transfer u/s 47(vii) and nothing contained in section 45 of the Act would apply to such transfer. The assessee, therefore,

contended that it was not liable to pay tax on profits or gains arising from the transfer of shares of SEPL held by it under the head ""Capital gains"".

The Income Tax Officer, however, negatived these contentions and brought to tax Rs. 1,05,427 under the head ""Capital gains"". In the appeal

before the Commissioner of Income Tax (Appeals) (""the Commissioner"" for short), the assessee reiterated the same contentions which were raised

before the Income Tax Officer and urged that the Income Tax Officer had erred in bringing to tax capital gains of Rs. 1,05,427. The

Commissioner, however, for the reasons recorded in his order, confirmed the view taken by the Income Tax Officer.

Being aggrieved by the order of the Commissioner, the assessee preferred further appeal before the Income Tax Appellate Tribunal (""the

Tribunal"" for short). Learned counsel for the assessee and the representative of the Income Tax Department agreed before the Tribunal to argue

the matter on the assumption that the transaction by which the assessee acquired the shares and bonds of Alkapuri for the shares of SEPL held by

it, was a transfer of capital asset within the meaning of section 2(47) of the Act. It may be made clear that learned counsel for the assessee did not

concede that the transaction amounted to transfer of a capital asset within the meaning of section 2(47); but, for the purpose of deciding the

question whether such transfer was excluded u/s 47(vii), he was prepared to assume that there was transfer of a capital asset within the meaning of

section 2(47). The Tribunal, there - fore, did not decide the question whether or not the aforesaid transaction amounted to transfer of a capital

asset within the meaning of section 2(47). The Tribunal held that on a plain reading of section 47(vii), a shareholder of the amalgamating company

would be entitled to claim exemption from the provisions of section 45 of the Act if the following conditions are fulfilled by him :

(a) he transfers his share in the amalgamating company;

(b) in consideration of such transfer, he has been allotted a share or shares of the amalgamated company; and

(c) the amalgamated company is an Indian company.

The Tribunal observed that in the instant case, there was no dispute that the assessee had fulfilled the conditions (a) and (c). However, so far as

condition (b) was concerned, it was argued that as the assessee had, along with allotment of shares of the amalgamated company, received bonds,

it was not entitled to claim exemption u/s 47(vii). The Tribunal took the view to the effect that there was nothing in section 47(vii) to indicate that

there was any restriction to receive anything else besides shares from the amalgamated company. In other words, according to the Tribunal, merely

because the assessee had, in addition to the shares, received bonds from the amalgamated company (Alkapuri), it could not be denied exemption

u/s 47(vii). It was urged by the Revenue before the Tribunal that if the above view was taken, there would be difficulty in working out the cost of

the acquisition of the shares u/s 49(2) and determining the period during which the shares and bonds of Alkapuri were held in the context of section

2(42A). The Tribunal was of the view that it was not called upon to decide as to what would happen in future when the assessee sold or

transferred shares and/or bonds of Alkapuri held by it under the scheme of amalgamation and, therefore, it was not necessary for it to deal with the

situation where the shares of the amalgamated company are sold by a previous shareholder of the amalgamating company. The Tribunal observed

that there are two stages, namely, (i) amalgamation of two companies and the consequences arising therefrom; and (ii) where shareholder of the

amalgamated company sells his shares and certain other things are allotted to him on amalgamation. Both these stages have to be kept separate

and distinct and the Tribunal was concerned only with the first stage. Therefore, the assessee could not be denied exemption u/s 47(vii) because of

some difficulty at the second stage. The Tribunal was of the view that once it is held that the assessee is entitled to exemption u/s 47(vii), it is of no

consequence whether along with the allotment of the share or shares of the amalgamated company, the assessee had also received bonds

debentures. The Tribunal observed that it was fortified in the view it was taking by the order of the Bombay Bench ""A"" of the Tribunal in 5th ITO,

A-I Ward, Bombay v. H. K. Bhavani (I. T. A. Nos. 1766 (Bom) & 1767 (Bom) of 1977-78 decided on July 6, 1978). The Tribunal also

rejected the Revenue''s contention that applying the principles laid down by the Supreme Court in McDowell and Co. Ltd. Vs. Commercial Tax

Officer, , it must be held that amalgamation of SEPL with Alkapuri was a device to evade tax. The Tribunal was of the view that if the object and

purpose of the shareholders of the said two companies were to avoid or evade tax, this court would not have approved the amalgamation of the

two companies as was done by it in the case of In Re: Wood Polymer Limited; In Re: Bengal Hotels Pvt. Ltd., . The Tribunal further observed that

there was no allegation made by the Revenue that amalgamation of SEPL with Alkapuri was made with a view to evade tax and that it was a

colourable transaction or that the parties never intended to act upon it. It was, therefore, held that the decision of the Supreme Court in McDowell

and Co. Ltd. Vs. Commercial Tax Officer, , had no application to the facts in the instant case. In the result, the Tribunal concluded that the taxing

authorities were not justified in working out capital gains of Rs. 1,05,427 in the hands of the assessee. The orders passed by the taxing authorities

were, therefore, set aside.

It is in the background of the above facts that the Tribunal has, at the instance of the Revenue, referred to us for our opinion the following

question u/s 256(1) of the Act :

Whether, on the facts and in the circumstances of the case, the assessee was entitled to exemption u/s 47(vii) of the Income Tax Act, 1961 ?

The question which has been referred to us has to be decided on the assumption that the transaction, as a result of which the assessee acquired

shares and bonds of Alkapuri for the shares of SEPL held by it under the scheme of amalgamation, amounts to transfer of a capital asset within the

meaning of section 2(47) of the Act and the profits and gains arising from such transfer are exigible to tax under the head ""Capital gains"". As before

the Tribunal, learned counsel for the assessee made it clear before us that he was not conceding that the transaction amounted to such transfer, but

it was only for the purpose of section 47(vii) that he was assuming that there was such a transfer. He submitted that in case the question which is

referred to us is answered in the negative and against the assessee, the Tribunal will have to decide the question whether the transaction amounted

to transfer of a capital asset within the meaning of section 2(47) so as to attract exigibility to tax u/s 45. This position was not disputed by learned

counsel for the Revenue. Therefore, as observed above, we proceed to resolve the controversy involved in this reference on the assumption that

the aforesaid transaction amounted to transfer of a capital asset within the meaning of section 2(47) which would attract tax liability on the profits

and gains from such transfer. The controversy which we are called upon to resolve is whether such a transfer is not to be regarded as a ""transfer

u/s 47(vii). Section 47(vii) reads as under :

Nothing contained in section 45 shall apply to the following transfers :- ...

(vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating

company, if -

(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company; and

(b) the amalgamated company is an Indian company.

The above provision was inserted by the Finance (No. 2) Act, 1967. Both learned counsel referred to paragraph 36 of the Memorandum

explaining the provisions of the Finance (No. 2) Act, 1967, in which the Objects and Reasons for inserting the above provision are explained. The

relevant portion of this paragraph 36 which is reproduced at page 200 of [1967] 64 ITR (St.) reads as under :

Provisions for facilitating amalgamation of uneconomic company units. 36. Under the present law, certain tax liabilities are attracted in the case of

a company merging with another company under a scheme of amalgamation and, also, in the cases of the shareholders of the ''amalgamating

company'' (i.e., the company which merges into another company) who receive shares in the'' amalgamated company'' (i.e., the company in which

the enterprise of the other company is merged) in lieu of their shareholdings in the amalgamating company. Some of these tax liabilities discourage

amalgamations. For the purposes of facilitating the merger of uneconomic company units with other financially sound Indian companies in the

interests of increased efficiency and productivity, it is proposed to make the following provisions in the law :

(vi) The shareholders in the amalgamating company receiving shares in the amalgamated company in lieu of their original shareholdings will be liable

to tax on capital gains only at the stage when they sell or otherwise transfer the shares in the amalgamated company and realise any capital gains

thereon. Such capital gains will be computed by taking the ''cost of acquisition'' thereof to be the cost of acquisition of the shares in the

amalgamating company......

The abovementioned provisions will apply only in a case where the amalgamated company is an Indian company. These provisions are sought to

be given effect to for and from the assessment year 1967-68.

It is apparent from the ""Objects and Reasons"" that it was for the purpose of facilitating merger of uneconomical company units with other

financially sound Indian companies in the interests of increased efficiency and productivity, that certain provisions including section 47(vii) were

inserted in the Act. In the context of clause (vii) of section 47, it is stated that the shareholders in the amalgamating company receiving shares in the

amalgamated company in lieu of their original shareholdings will be liable to tax on capital gains only at the stage when they sell or otherwise

transfer the shares in the amalgamated company and realise any capital gains thereon. It was further stated that such capital gains will be computed

by taking the ""cost of acquisition"" thereof to be the cost of acquisition of the shares in the amalgamating company. Section 49(2) which has also

been inserted in the Act by the Finance (No. 2) Act, 1967, provides as to what would be the cost of acquisition in case a capital asset being share

or shares in an amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in

clause (vii) of section 47. Both learned counsel have strongly relied on the above ""Objects and Reasons"" in support of their respective contentions.

Incidentally, it may be pointed out that in the instant case, we are not dealing with a case of merger of an uneconomic company unit with a

financially sound company. Neither SEPL nor Alkapuri was an uneconomical company unit at the relevant time. The face value of the share of each

of the said companies was Rs. 100. However, the exchange ratio of shares under the scheme of amalgamation was fixed as already stated above.

It would, therefore, appear that the market value of the share of SEPL was more than double that of Alkapuri. This is not relevant for the purpose

of the controversy involved in this reference. However, it is not disputed that neither of these two companies was an uneconomical company unit.

Learned counsel for the Revenue argued that on a plain reading of section 47(vii), it is clear that what it contemplates is that in consideration of

the transfer of his share or shares held in the amalgamating company, the shareholder of the amalgamating company must receive share or shares of

the amalgamated company. The transfer must be occasioned by consideration of the allotment of shares and not shares and something also. In the

instant case, the assessee had made transfer of the shares held by it in SEPL not in consideration of the shares alone of Alkapuri but in

consideration of the shares and bonds of Alkapuri. Therefore, the consideration was something more than the consideration which is contemplated

u/s 47(vii). The shareholders of SEPL, submitted learned counsel, agreed to transfer the shares held by them because they were offered shares and

bonds of Alkapuri. That was a composite consideration as contemplated by section 47(vii). It was submitted that unless the words ""wholly or in

part"" are read after the word ""consideration"" in clause (vii) of section 47, such a composite consideration would not fall under the said clause. The

consideration had to be share or shares only and nothing more to get the benefit of the said clause (vii). Learned counsel for the Revenue submitted

that the interpretation of section 47(vii) suggested by the assessee and accepted by the Tribunal, cannot be accepted, because (a) it would create

anomalies and absurdities; (b) it is against the intention of the Legislature; (c) it would make the whole scheme underlying section 47(vii) and

section 49(2) unworkable; and (d) mechanical interpretation should be avoided. Explaining as to how the assessee''s interpretation would create

anomalies, learned counsel gave the following example :

In a scheme of amalgamation, the shares of an amalgamating company whose cost is Rs. 10,000 and the market value Rs. 1,00,000, are

transferred in consideration of the shares of the value Rs. 1,000 and cash of Rs. 99,000 of the amalgamated company, the shareholder of the

amalgamating company will pay no tax on the cash receipt of Rs. 99,000 and will claim, at the time of the sale of shares of Rs. 1,000 of the

amalgamated company, that their cost of acquisition should be taken to be Rs. 10,000 u/s 49(2). It was further submitted that the worth or value of

something which a shareholder of the amalgamating company receives over and above the shares of the amalgamated company would become

irrelevant, though factually it would not be so. It was further submitted that at the time when the bonds which were allotted by the assessee in

addition to the shares of the amalgamated company are sold or redeemed, it would be impossible to attribute or ascertain the cost of those bonds

u/s 49(2) and the said provision would be rendered otiose. These, according to learned counsel for the Revenue, were anomalies which would

result if the interpretation of section 47(vii) canvassed on behalf of the assessee was accepted. It was further submitted that when the assessee sells

the shares of Alkapuri, it would not be possible to determine the cost of acquisition of the shares u/s 49(2). If section 47(vii) is read in the context

of section 49(2), argued learned counsel for the Revenue, it becomes clear that the consideration contemplated u/s 47(vii) can only be the shares

of the amalgamated company and nothing more. Relying on the decision of the Supreme Court in Girdhari Lal and Sons Vs. Balbir Nath Mathur

and Others, , learned counsel urged that the primary and foremost task of a court in interpreting a statute is to ascertain the intention of the

Legislature, actual or imputed; and having ascertained the intention, the court must then strive to so interpret the statute as to promote and advance

the object and purpose of the enactment. It was pointed out that for this purpose and to avoid patent injustice, anomaly or absurdity, where

necessary, the court may even depart from the rule that plain words should be interpreted according to their plain meaning. Relying on the above

decision of the Supreme Court, it was urged that since the interpretation of section 47(vii) which is canvassed on behalf of the assessee will lead to

anomalies and absurdities, such interpretation should be avoided. Learned counsel for the Revenue also invited our attention to the principles of

interpretation of statutes laid down by the Supreme Court in State of Tamil Nadu Vs. Kodaikanal Motor Union (P) Ltd., Varghese v. ITO [l98I]

131 ITR 597 and by this court in Commissioner of Income Tax, Gujarat III Vs. Natu Hansraj, . He also relied on the commentary under the

caption ""Exposition ex visceribus actus"" in Craies on Statute Law, sixth edition.

The thrust of the argument of learned counsel for the assessee was that if section 47(vii) is interpreted in the manner suggested by the Revenue,

it would result in injustice and would defeat the very purpose and object for which the Legislature introduced it in the Act. He submitted that there

was no economical or legal reason or reason in equity, justice or fairplay as to why a shareholder getting a share and bond of the amalgamated

company in consideration of the transfer of shares held by him in the amalgamating company under a scheme of amalgamation would be disentitled

to the benefit of section 47(vii). It was contended that the interpretation suggested by the assessee would not lead to any anomalies or absurdities

as contended on behalf of the Revenue. It was urged that if a cash amount along with the shares of the amalgamated company was given in

consideration of the transfer of shares of the amalgamating com-pany under a scheme of amalgamation, such amalgamation would not amount to an

amalgamation within the meaning of section 2(1A) of the Act. Therefore, submitted learned counsel for the assessee, the example which learned

counsel for the Revenue gave was not an apt example and in case the exchange ratio as suggested by learned counsel for the Revenue was

prescribed under a scheme of amalgamation, such amalgamation would not be an amalgamation within the meaning of section 2(1A). Learned

counsel urged that for application of section 47(vii), three conditions were required to be satisfied, namely, (i) the shares in the amalgamating

company should cease to belong to the shareholder of the amalgamating company; (ii) the shareholder of the amalgamating company should, in

consideration, get any share or shares in the amalgamated company; and (iii) the amalgamated company should be an Indian company. If these

three conditions are satisfied, the shareholder of the amalgamating company would be entitled to the benefit of section 47(vii). It is not disputed that

in the instant case, the assessee has ceased to hold the shares of the amalgamating company and that the amalgamated company is an Indian

company. The assessee has received shares of the amalgamated company in consideration of the transfer of its shares in the amalgamating

company. Therefore, all the three conditions requisite for the application of section 47(vii) have been satisfied in the instant case. It was urged that

merely because the assessee has received bonds in addition to the shares of the amalgamated company in consideration of the transfer of the

shares held by it in the amalgamating company, it could not be said that its case does not fall u/s 47(vii). What section 47(vii) contemplates is that a

shareholder of the amalgamating company must receive any share or shares of the amalgamated company under the scheme of amalgamation, and

if that is established, he would be entitled to the benefit of section 47(vii) notwithstanding the fact that he had, in addition to the shares of the

amalgamated company, received something more, such as bonds or a transistor radio. It was urged that if the interpretation canvassed on behalf of

the Revenue is to be accepted, the word ""only"" will have to be read in section 47(vii). It was submitted that there is nothing in the definition of

amalgamation"" in section 2(1A) to contraindicate creation of new liability in the form of debentures by the amalgamated company. Learned

counsel for the assessee argued that issue of debentures with shares is usage known for decades and it would be unthinkable that the law makers in

1967 were unaware of it. Therefore, when the Legislature enacted section 47(vii), it did not intend to make it inapplicable where the consideration

is composite consisting of shares and bonds or debentures of the amalgamated company. The consideration must, no doubt, consist of any share

or shares of the amalgamated company, but if in addition to the share or shares, the shareholder of the amalgamating company is allotted bonds or

debentures of the amalgamated company, he would not be deprived of the benefit of section 47(vii). Learned counsel for the assessee argued that

the object of section 47(vii) is to encourage amalgamation and, therefore, it should be so interpreted as to advance that object. He submitted that

the interpretation which is sought to be placed on that provision on behalf of the assessee is the correct interpretation and such interpretation would

advance the legislative object. In support of his arguments, he also placed reliance upon the principles of interpretation of statutes laid down in the

authorities which were cited on behalf of the Revenue. Learned counsel for the assessee further urged that in order to resolve the controversy

involved in this reference, the provisions of section 49(2) have no relevance. The question of application of section 49(2) would arise when the

shares of the amalgamated company allotted to the assessee are sold. In any case, when the shares of the amalgamated company are sold by the

assessee, the provisions of section 49(2) would apply and the cost of acquisition can be worked out by the application of proper principles. So far

as the bonds are concerned, the cost of acquisition can be worked out under the provisions of section 48. Therefore, submitted learned counsel,

apart from the fact that section 49(2) has no relevance, there would not be any difficulty in working out the cost of acquisition of the shares and

bonds of the amalgamated company. Learned counsel further urged that the Revenue has uniformly applied section 47(vii) in the cases of hundreds

of thousands of shareholders who were similarly situated. It was pointed out that the shareholders of many nationalised banking companies had

received shares and debentures of the companies in which those banking companies were amalgamated under the scheme of amalgamation and the

Revenue had given the benefit of section 47(vii) to those shareholders. In this connection, learned counsel cited a decision of the Tribunal in the

case of H. K. Bhavani on which reliance has been placed by the Tribunal. It was submitted that that was a case in which the assessee had received

shares and debentures of the Tata Engineering and Locomotive Co. Ltd. for shares of the Central Bank of India Limited, which had amalgamated

with the Tata Engineering and Locomotive Co. Ltd. When the case came up for hearing before the Tribunal. the Departmental representative had

conceded that no capital gains charge was attracted. The Tribunal had also held that the assessee in that case was entitled to the benefit of section

47(vii) which excluded from the operation of section 45 any transfer by a shareholder, in the scheme of amalgamation, of a capital asset being a

share or shares held by him in the amalgamating company. Learned counsel for the assessee, therefore, submitted that in the instant case. the

Tribunal was right in holding that the assessee was entitled to the benefit of section 47(vii).

We will now refer to the principles of interpretation of statutes laid down in various decisions and Craies on Statute Low on which reliance was

placed by both learned counsel.

In Girdhari Lal and Sons Vs. Balbir Nath Mathur and Others, , the Supreme Court has observed (p. 1503) :

Parliamentary intention may be gathered from several sources. First, of course, it must be gathered from the statute itself, next from the preamble

to the statute, next from the Statement of Objects and Reasons, thereafter from Parliamentary debates, reports of Committees and Commissions

which preceded the legislation and finally from all legitimate and admissible sources from where there may be light. Regard must be had to

legislative history too.

Once the Parliamentary intention is ascertained and the object and purpose of the legislation is known, it then becomes the duty of the court to give

the statute a purposeful or a functional interpretation. This is what is meant when, for example, it is said that measures aimed at social amelioration

should receive liberal or beneficent construction. Again, the words of a statute may not be designed to meet the several uncontemplated forensic

situations that may arise. The draftsman may have designed his words to meet what Lord Simon of Glaisdale calls the ''primary situation''. It will

then become necessary for the court to impute an intention to Parliament in regard to ''secondary situations.'' Such ''secondary situation'' may be

imputed in relation to secondary situation so as to best serve the same purpose as the primary statutory intention does in relation to a primary

situation.

The Supreme Court observed (p. 1503) : "".... the primary and foremost task of a court in interpreting a statute is to ascertain the intention of

the Legislature, actual or imputed. Having ascertained the intention, the court must then strive to so interpret the statute as to promote/advance the

object and purpose of the enactment. For this purpose, where necessary, the court may even depart from the rule that plain words should be

interpreted according to their plain meaning. There must be no meek and mute submission to the plainness of the language. To avoid patent

injustice, anomaly or absurdity or to avoid invalidation of a law, the court would be well justified in departing from the so-called golden rule of

construction so as to give effect to the object and purpose of the enactment by supplementing the written word if necessary.

In State of Tamil Nadu Vs. Kodaikanal Motor Union (P) Ltd., , the Supreme Court observed as under :

The courts must always seek to find out the intention of the Legislature. Though the courts must find out the intention of the statute from the

language used, but language more often than not is an imperfect instrument of expression, of human thought. As Lord Denning said, ''it would be

idle to expect every statutory provision to be drafted with divine prescience and perfect clarity''. As judge Learned Hand said, ''we must not make

a fortress out of the dictionary but remember that statutes must have some purpose or object, whose imaginative discovery is judicial

craftsmanship''. We need not always cling to literalness and should seek to endeavour to avoid an unjust and absurd result. We should not make a

mockery of legislation. To make sense out of an unhappily worded provision, where the purpose is apparent to the judicial eye ''some'' violence to

language is permissible. K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, , and Luke v. IRC [1963] 54 ITR 682.

In K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, , the Supreme Court observed as follows (p. 604) :

The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few

words possess the precision of mathematical symbols. It is an attempt to discover the intent of the Legislature from the language used by it and it

must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord

Denning, it would be idle to expect every statutory provision to be ''drafted with divine prescience and perfect clarity''. We can do no better than

repeat the famous words of judge Learned Hand when he said :

''... it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any

writing : be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a

fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and

imaginative discovery is the surest guide to their meaning''

In Commissioner of Income Tax, Gujarat III Vs. Natu Hansraj, , this court observed as follows :

It is well settled that words of a statute, when there is doubt about their meaning, are to be understood in the sense in which they best harmonise

with the subject of the enactment and the object which the Legislature has in view. Their meaning is found not so much in a strictly grammatical or

etymological propriety of language, nor even in its popular use, as in the subject or in the occasion on which they are used, and the object to be

attained. Workmen of Dimakuchi Tea Estate Vs. The Management of Dimakuchi Tea Estate, . The expressions used in a statute should ordinarily

be understood in a sense in which they best harmonise with the object of the statute and which effectuate the object of the Legislature New India

Sugar Mills Ltd. Vs. Commissioner of Sales Tax, Bihar, . It is necessary, therefore, to read section 54 in the context of the subject-matter and its

setting in the scheme of capital gains and the object of exemption and then to ascertain the true import of the relevant part thereof.

Craies on Statute Law (8th edition) has, under the caption ""Exposition ex visceribus actus"", at page 21, stated :

But besides the rules laid down in Heydon''s case [1584] 3 Co Rep 7a, for the exposition of obscurely penned statutes, there is a general rule of

construction applicable to all statutes alike, which is spoken of as construction ex visceribus actus - within the four corners of the Act.''The office of

a good expositor of an Act of Parliament'', said Coke in the Lincoln College case [1595] 3 Co Rep 58b, ''is to make construction on all parts

together, and not of one part only by itself - Nemo euim aliquam partem recte intelligere potest antequam totum iterum atque iterum perlegerit.''

And again he says : ''It is the most natural and genuine exposition of a statute to construe one part of a statute by another part of the same statute,

for that best expresseth the meaning of the makers... and this exposition is ex visceribus actus''. But this rule of construction is never allowed to

alter the meaning of what is of itself clear and explicit; it is only when, as the court said in Palmer''s case [1785] 1 Leach CC 355, ''any part of an

Act of Parliament is penned obscurely and when other passages can elucidate that obscurity, that recourse ought to be had to such context for that

purpose''; for as the judges said in the House of Lords in Warburton v. Loveland [1832] 2 D Cl 480, 500, ''no rule of construction can require that

when the words of one part of a statute convey a clear meaning it shall be necessary to introduce another part of a statute for the purpose of

controlling or diminishing the efficacy of the first part''.''It is not the duty of a court of law,'' said Selwyn L. J. in Smith''s case [1869] LR 4 Ch.

App. 611, ''to be astute to find out ways in which the object of an Act of the Legislature may be defeated''.

It is a well-settled rule of construction that in the first instance, the grammatical sense of the words is to be adhered to. If that is contrary to or

inconsistent with any expressed intention, or declared purpose of the statute, or if it would involve any absurdity, repugnance or inconsistency, the

grammatical sense must then be modified or extended or abridged so far as to avoid such inconvenience, but no further. The elementary rule is that

the words used in a section must be given their plain grammatical meaning. As held by the Supreme Court in NEW PIECE GOODS BAZAR

CO., LTD., BOMBAY Vs. COMMISSIONER OF Income Tax, BOMBAY., , it is an elementary duty of a court to give effect to the intention of

the Legislature as expressed in the words used by it and no outside consideration can be called in aid to find that intention. Recourse to extrinsic

aid in interpreting a statutory provision would be fortified only within well recognised limits. Primarily, the effect of the statutory provision must be

judged on a fair and reasonable construction of the words used by the statute itself. The language which is plain and easily understood should be

looked to without extensive aid for the meaning intended.

In our opinion, the interpretation of section 47(vii) poses no problem or difficulty. The language of the provision is clear and unambiguous. On

a plain reading of that provision, it becomes clear that in order to attract its application, the following requirements must be satisfied : (i) there has

to be a transfer by a shareholder, in a scheme of amalgamation, of a capital asset being share or shares held by him in the amalgamating company.

(Be it noted that the transfer has to be of a share or shares and no other capital asset); (ii) such transfer is made in consideration of the allotment to

him of any share or shares of the amalgamated company; and (iii) the amalgamated company is an Indian company. So far as the second

requirement or condition is concerned, what is envisaged is that the transfer of the share or shares in the amalgamating company should be in

consideration of allotment of a share or shares in the amalgamated company. In other words, consideration for such transfer should be any share or

shares in the amalgamated company. The question which one has to ask oneself is what is the consideration for the transfer of a share or shares in

the amalgamating company and if the answer is that it is a share or shares in the amalgamated company, the requirement or condition (ii) would

stand satisfied. However, if the consideration for such transfer is a share or shares and something else, can it be said that the consideration is a

share or shares in the amalgamated company ? The answer is obviously no. The above provision does not contemplate a composite consideration.

In other words, if the consideration consists of something more than the share or shares in the amalgamated company, it is a composite

consideration which is not contemplated under the above provision. In our opinion, since the language of section 47(vii) is plain and easily

understood, it is not necessary to call in aid any outside consideration to gather its meaning. Even if the above provision is construed keeping in

mind the object with which it was enacted, no other construction can be placed on it. We have already referred to the object of the Legislature in

enacting the above provision. The object was to facilitate merger of uneconomic company units with other financially sound Indian companies in the

interest of increased efficiency and productivity. The object was not to encourage amalgamation of companies in general, but to facilitate

amalgamation of uneconomic company units with financially sound Indian companies. It was with a view to achieving this object that the Legislature

provided that in the case of amalgamation of companies, where the transfer by a shareholder of the amalgamating company of the share or shares

held by him in the amalgamating company is in consideration of a share or shares in the amalgamated company, the shareholder of the

amalgamating company would be entitled to the benefit of section 47(vii). In the case of such transfer, even if it is covered by section 45, profits

and gains from such transfer would not be exigible to tax. The Legislature, it is obvious, did not contemplate consideration other than the share or

shares of the amalgamated company. It is significant to note that the transfer to which section 45 is not made applicable is transfer of a share or

shares in the amalgamating company and no other capital asset. If under the scheme of amagamation, a capital asset other than shares held by the

shareholder or other person is transferred, such transfer is not excluded from the application of section 45. It is evident that the Legislature did not

want share capital to be liquidated or disturbed when uneconomic company units merged with financially sound Indian companies and it is for that

reason that the exclusion from application of section 42 is confined to transfer of shares in the amalgamating company in consideration of shares in

the amalgamated company and nothing else.

The intention of the Legislature in confining consideration to a share or shares of the amalgamated company also becomes clear from the

provisions of section 2(42A) and section 49(2). We do not agree that for the purpose of construing section 47(vii), section 2(42A) and section

49(2) are irrelevant. If there is any obscurity in section 47(vii) (though, in our opinion, there is none), it is permissible to refer to other provisions in

the same statute which dispel obscurity. Section 49(2) provides that where the capital asset being a share or shares in the amalgamated company

which is an Indian company becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, the cost of

acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating company. It became

necessary to insert section 2(42A) and section 49(2) because of section 47(vii). These provisions are interlinked. When the transfer of a share or

shares of the amalgamating company in consideration of a share or shares in the amalgamated company under a scheme of amalgamation takes

place, section 45 would not apply to such transfer and the profits and gains arising from such transfer would not be exigible to tax under the head

Capital gains"". However, the question as to how capital gain is to be computed would arise when shares of the amalgamated company acquired

by a shareholder of the amalgamating company are sold by him. Two questions may arise in the case of sale of shares in the amalgamated

company by a shareholder of the amalgamating company : (i) whether the asset sold is a short-term capital asset; and (ii) what is the cost of

acquisition of the shares. It is in the context of such sale or transfer that section 2(42A) and section 49(2) have been enacted. Explanation (i) (c) to

section 2(42A) provides that in determining the period for which any capital asset is held by the assessee, in the case of a capital asset being a

share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of

section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee. Thus, for the

purpose of deciding whether the share in the amalgamated company held by the shareholder of the amalgamating company is a short-term capital

asset or not, the period for which the share in the amalgamating company is held by the shareholder has to be taken into account. However, the

question of clubbing of the two periods would arise only in case where the share or shares in the amalgamated company has or have become the

property of the assessee in consideration of the transfer referred to in clause (vii) of section 47. If, in consideration of the transfer of a share or

shares in the amalgamating company, the shareholder of the amalgamating company is given something, say bonds or debentures, in addition to the

share or shares of the amalgamated company, it would not be permissible to club the two periods as provided in Explanation (i) (c) to section

2(42A). Further, as rightly pointed out by learned counsel for the Revenue, where a scheme of amalgamation provides for a composite

consideration consisting of shares and bonds or debentures for the transfer of shares in the amalgamating company, it would be difficult to work

out the cost of acquisition of the shares in the amalgamated company u/s 49(2). In such a case, as pointed out above, it would also not be

permissible to club the period during which the shares in the amalgamating company are held with the period during which the shares in the

amalgamated company are held for the purpose of deciding whether the shares held in the amalgamated company are short-term capital asset

within the meaning of section 2(42A). A combined reading of section 2(42A), section 47(vii) and section 49(2) leaves no room for doubt that the

consideration contemplated under sub-clause (a) of clause (vii) of section 47 is nothing but a share or shares only in the amalgamated company. It

is not necessary to add or read the word ""only"" in the said sub-clause (a) as urged on behalf of the assessee to reach this conclusion.

In the light of what is discussed above, we hold that the consideration which is contemplated u/s 47(vii) is a share or shares of the amalgamated

company and nothing more. We do not agree with learned counsel for the assessee that if as part of the consideration, the share or shares of

amalgamated company are also allotted, the requirement of said clause (vii) would be satisfied. In other words, if besides the share or shares in the

amalgamated company, the shareholder of the amalgamating company is allotted something more, namely, bonds or debentures, in consideration of

the transfer of his share or shares in the amalgamating company, he cannot get the benefit of section 47(vii). We do not accept the submission of

learned counsel for the assessee that a composite consideration is contemplated by sub-clause (a) of clause (vii) of section 47 and that such

composite consideration would advance the object for which the Legislature has inserted that provision. It may be that issue of bonds/debentures

with shares is a usage known for decades, but that is not relevant for the purpose of deciding whether the transaction in question comes within the

purview of section 47(vii). Unless the transaction falls within the four corners of section 47(vii), it cannot be excluded from the application of

section 45. There is also no question of justice, equity or fairplay involved in interpreting section 47(vii). It was for the law-making body to decide

to which category of transfers the provisions of section 45 should not be made applicable. If that body, in its wisdom, decides not to apply section

45 only in case of transfer of shares by a shareholder in the amalgamating company in consideration of any share or shares in the amalgamated

company, we fail to see how the principles of justice, equity and fairplay come into play. The law-making body, even though aware of the long-

standing usage of issue of bonds/debentures with shares, has thought it fit to confine the consideration only to a share or shares of the amalgamated

company. We have already referred to the obvious reason as to why the law-making body has done so. For the same reason, the economical

reason is also not relevant. The definition of ""amalgamation"" given in section 2(1A) does not in any way support the interpretation canvassed on

behalf of the assessee. It may be that in the past, the shareholders of the banking companies which were nationalised, were given the benefit of

section 47(vii) even when they had received the shares and debentures of the amalgamated companies in consideration of the transfer of their share

or shares in the amalgamating companies, but, for that reason, we cannot alter the meaning of the words of the statute which are clear and

unambiguous. It is likely that it was on account of wrong interpretation of the said provision by the taxing authorities that the benefit of it was given

to those shareholders. The decision of the Tribunal in the case of Bhavani, on which reliance was placed by learned counsel for the assessee, does

not indicate that the Revenue had conceded that the shareholders of the Central Bank of India Ltd. (amalgamating company) were entitled to the

benefit of section 47(vii). What the Departmental representative conceded was that the assessee''s claim that no capital gains charge is attracted

was directly covered by the decision of the Bombay High Court in Commissioner of Income Tax, Bombay City II Vs. Rasiklal Maneklal (H.U.

F.), Bombay, . It is true that the Tribunal agreed with the view of the Appellate Assistant Commissioner that section 47(vii) excluded the operation

of section 45, but no concession to that effect was made on behalf of the Revenue. In our opinion, the above decision of the Tribunal does not

carry the matter any further. We, therefore, do not see any force in the argument of learned counsel for the assessee that for the above reasons,

section 47(vii) should be construed in the manner suggested by him.

In the view which we are taking, we do not consider it necessary to deal with other arguments advanced by learned counsel.

In the result, it must be held that the interpretation which is placed on section 47(vii) of the Act by the Tribunal is not correct and that the

assessee is not entitled to the exemption u/s 47(vii). We, therefore, answer the question which is referred to us in the negative and against the

assessee.

Reference answered accordingly with no order as to costs.