A pretty interesting case came into my notice while preparing my report on Amalgamation and Demergers. A brief summary is as follows.
The facts of the case are as follows:-
· APH Ltd., wholly owned subsidiary of HGmbH, Germany got amalgamated with HGmbH. Both are incorporated in Germany.
· APH Ltd. Is holding shares of APL, an Indian co.
The question is whether the transfer of shares of APL will be exempt from capital gain tax u/s 47(via) of the Act.
AAR decided that 47(via)(a) contemplates that at least 25% of the shareholders of amalgamating co remain the shareholder of amalgamated co. Now, here holding co is having 100% of the shares of amalgamating co. So, it must remain shareholder of amalgamated co, i.e. holding co. So, it means that HGmbH must remain shareholder of itself. But, a company can’t remain shareholder of itself. Therefore, AAR relied to well settled legal principle that a person cant be expected to perform a condition which is impossible to perform.
The AAR also quoted Hon’ble Supreme Court in the case of Commissioner of Income-tax v/s Gotla, 156 ITR 323:
“Where the plain literal interpretation of the statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the Court might modify the language used by the legislature so as to achieve the intention of the Legislature and produce a rational construction.”
And thus, AAR has held that this transaction will not be chargeable to CG tax.
However, I would like to differ with this view of AAR. When there is explicit condition on the share holders to remain as shareholder of amalgamated co then its impossibility to perform by a particular instance will not make it immune from chargeability of CG tax. The correct approach would be to say that amalgamation of subsidiary with holding co is deliberately kept beyond the purview of 47(via) by the legislature and hence impossibility to perform 47(via)(a)will render the APH liable to capital gain tax.