Counsel appeared R. H. Toprani, for the Appellant : R. Raju, for the Respondent

Transcription

1 OUDH SUGAR MILLS LTD. vs. INCOME TAX OFFICER ITAT BOMBAY A BENCH M. A. Ajinkya, A.M. & Anoop Sharma, J.M. IT Appeal No. 97/Bom/1986; Asst. yr th February, 1990 Counsel appeared R. H. Toprani, for the Appellant : R. Raju, for the Respondent Order PER SHRI M.A. AJINKYA, A.M.: This appeal by the assessee raises an interesting issue concerning the interpretation of s. 41(2) in respect of which several arguments were advanced on either side which have to be considered carefully before a decision on the point raised by the assessee-appellant is reached. Before dealing with the main issue, however, we will dispose of two other points raised by the appellant of relatively minor importance. 2. The appellant herein is a public limited company engaged in manufacture of sugar. We are concerned in this appeal with asst. yr for which the accounting period ended on 30th June, The first ground raised by the appellant is that the CIT(A) erred in confirming the disallowance of a sum of Rs. 5,02,620 being contribution to Molasses & Alcohol Reserve Fund. This issue had come for consideration before the CIT(A) for the asst. yrs and , and for the reasons stated by the first appellate authority in those orders, which was decided against the appellant, the first ground of appeal is rejected. The second ground is that the CIT(A) erred in confirming the disallowance of Rs. 24,003 being bad debts written off during the year. The ITO has devoted considerable attention to the claim of deduction of bad debts of Rs. 12,63,952. After rejecting this claim for the detailed reasons stated by the ITO, the ITO proceeded to consider the additional claim of the following debts which were also claimed as bad debts: i. Om Prakash Puri : 14,016 ii. Radhey Shyam Oberoi : 3,450 iii. Dalla Miyam : 6,537

2 24,003 According to the ITO, no reasons or evidence for claiming these debts as bad debts had been filed by the company though such details were specifically asked for. The company had not discharged the onus to establish that the debts had become bad and that they were, therefore, admissible discharge. When the matter went before the CIT(A), the CIT(A) considered it in para-35 of his order. He refused to consider the submissions made in this behalf by the assessee s representative, Shri S.N. Gupta, and confirmed the disallowance of Rs. 24,003. In the course of hearing before us, Shri Toprani, learned counsel for the assessee who ably argued the case for the assessee pointed out that the amounts against the aforementioned three parties were in effect balances on advances made to these parties (who were transport operators) which were not recovered and which were in a sense "left over advances". All these persons were given contracts for transportation of cane at rates settled with them long before These persons had the facility of maintaining running accounts with the factory in which advances used to be given and such amounts were realised from their bills according to need and mutual convenience of the parties. A number of such operators in course of time left the work when they started experiencing difficulty in doing the transport work at the stipulated rates. The above three parties were such parties to whom advances were made but who had ran away without completing the work and from whom the balance of advances made could not be recovered for more than three years. They were ultimately written off. It was claimed that these were in the nature of trade losses and should have been allowed. We find that this aspect of the matter, which is not without substance, has not been appreciated by the Revenue authorities. We would set aside the order of the CIT(A) on this issue and restore the matter to the file of the ITO with a direction that he should consider the admissibility of deduction of Rs. 24,003 as a trading loss or loss incurred in the course of business as an alternative argument of the assessee. The second ground will be treated as allowed. The third ground in the appeal is that the CIT(A) erred in confirming the inclusion of a sum of Rs. 26,93,099 under s. 41(2) of the IT Act. This ground raises certain interesting issues which have to be discussed at length. Firstly, the relevant facts may be stated. The assessee-company, as stated earlier, is a public limited company engaged in the manufacture and sale of sugar. It had a unit at Akola called Berar Oil Industries. It transferred this unit to another limited company called Akola Oil Industries Ltd. as per the scheme of arrangement approved by the Bombay High Court in terms of its order dt. 24th June, As per the scheme, certain assets of Berar Oil Industries became the property of Akola Oil Industries from 1st July, Some assets were given on lease.

3 Employees of Berar Oil Industries ( BOI for short) became the employees of Akola Oil Industries Ltd. ( AOIL for short) and all the liabilities of BOI were taken over by AOIL. The ITO held that since the assets of the assessee were sold during the previous year, there was a profit assessable under s. 41(2) which he computed at Rs. 26,93,099. Objecting to this stand, the assessee stated that there was no sale within the meaning of s. 41(2) and that therefore no profit would be brought to tax under s. 41(2). This argument was rejected by the ITO. He held that there was no itemisation of the assets transferred, that the assets which had been given on lease had been shown in Annexure A and that the other assets had been transferred to AOIL. The ITO also observed that there was consideration involved. The consideration had been received by thing the shareholders of the assessee-company in the form of four equity shares of Rs. 10 fully paid in respect of every one ordinary share of Rs Therefore, there was an exchange of assets with the shares of the new company and since the definition of the term sold for the purpose of s. 41(2) included transfer by way of exchange or compulsory acquisition under the law, there was, according to the ITO, a transfer. He, therefore, justified the assessment of the aforementioned sum of Rs. 26,93,099 as profit under s. 41(2). When the matter went to the CIT(A), the CIT(A) dealt with this issue at some length in paragraphs 38 to 44 of his order in a slightly different way. For the detailed reasons given by the CIT(A), he held that there was a consideration inasmuch as the assessee was absolved of the responsibility of discharging the liabilities of AOIL. The CIT(A) held that in view of the language of s. 41(2), it would have to be held that the assessee had sold depreciable assets and the moneys payable in respect of such assets to the extent the same exceeded the written down value thereof would be chargeable to income-tax as income of the business of the assessee. It is against this finding of the CIT(A) that the present appeal is mainly directed. It is necessary to record at some length the arguments of Shri Toprani the learned counsel of the appellant as they raise certain fundamental issues. Shri Toprani argued that s. 41(2) created a legal fiction in terms of which amounts which are not normally income are deemed to be income. Therefore, this section had to be interpreted strictly. He pointed out that the expression "moneys payable" and the expression "sold" will have to be interpreted strictly. He referred to s. 43 of the Act in which the main section which deals with definition of certain terms started in the following words : "43. In ss. 28 to 41 and in this section unless the context otherwise requires.... " This expression which is used in s. 43, argued Shri Toprani, has not been used in s. 41 and therefore the words "sold, discarded, demolished or

4 destroyed" as well as the words "moneys payable" appearing in s. 41(2) have to be interpreted strictly. These words cannot be allowed to take colour from the context in which they are used. According to Shri Toprani, there was neither a sale of assets nor any consideration had passed and moneys paid when the above scheme of amalgamation was finalised. In terms of the scheme of amalgamation, which was approved by the High Court, certain assets such as plant and machinery of one industrial unit called Berar Oil Industries in Maharashtra vested in AOIL w.e.f. 1st July, The liability of this industrial unit also vested in AOIL w.e.f. that date. The total assets of BOI which stood at Rs. 4,10,97,283 were transferred at book value, i.e., the value appearing in the books of BOI and they were vested with AOIL. The liabilities of BOI which were to the tune of Rs. 3,24,01,483 were also taken over by AOIL and the difference between the assets and liabilities which amounted to Rs. 86,95,800 was to be met by Akola Oil Industries by issue of shares which were to be allotted not to the company called Oudh Sugar Mills Ltd., but to the shareholders of Oudh Sugar Mills Ltd., Shri Toprani then referred to ss. 391 and 394 of the Companies Act. These relate to provisions for facilitating reconstruction and amalgamation of companies. He referred to Ramaiya on Companies Act, 1988 Edition, pp (for discussion on s. 391) and pp and 1073 (for his reliance on s. 394). He argued that in terms of these sections the Companies Act clearly provided for an arrangement for issue of shares to the shareholders instead of to the company in any scheme of amalgamation or reconstruction of two companies. Therefore, the procedure adopted in the present case where the difference between the assets and liabilities was sought to be met by AOIL by issue of shares to the shareholders of Oudh Sugar Mills Ltd., and not to the company itself was not an irregular procedure but was something which was sanctioned and provided for by the provisions of the Company law. Shri Toprani further argued that what was sought to be brought to tax under s. 41(2) was commercial profit arising out of a transaction. In the present case, there was no commercial profit as such because there was no sale or exchange in the first place between the two parties and further because there was no consideration flowing from one party to the other which resulted in a profit. Elaborating on the concept of what constitutes exchange, Shri Toprani referred to s. 118 of the Transfer of Property Act (7th Edition By Mulla, p. 779) in which it was clearly laid down that there cannot be an exchange if the parties to the exchange are not the same. In support of the argument that there was strictly no exchange because the arrangement was a tripartite arrangement, Shri Toprani referred to a decision of the Supreme Court in the case of CIT vs. Rasiklal Maneklal (HUF) (1989) 77 CTR (SC) 31 : (1989) 177 ITR 198. He also relied on another decision of the Supreme Court in CIT vs. B.M. Kharwar (1969) 72 ITR 603 to argue that the substance of the transaction has to be looked into as well as the form. There was no exchange in the present arrangement and no consideration had passed between the two parties to the transaction and, therefore, neither the provisions of s. 41(2) nor the provisions of s. 45 would

5 apply in the present case. Shri Toprani then argued that the property in shares was created only when they were allotted to the shareholders. It was not as if the existing lot of shares was transferred. Raising the question whether this type of allotment was a normal mode of transfer, Shri Toprani referred to s. 63 of the I.T. Act which dealt with the definition of "transfer" and "revocable transfer". Clause (b) of this section provides that "transfer" includes any settlement, trust, covenant, agreement, or arrangement. According to Shri Toprani, the definition of the term "transfer" contained in s. 63 was relevant for the purpose of ss. 60, 61 and 62 and was not contemplated for the purpose of s. 41(2). The expressions used in s. 41(2) were "sold", "discarded", "demolished" or "destroyed" and these terms for the interpretation of sec. 41 had to be given only that definition which was contained in Expln. (4) of s. 41 which specifically defined the expressions "moneys payable" and "sold". The Explanation to s. 41(1) clearly stated what the expression "moneys payable" meant in respect of any building, plant or furniture. It was clear that moneys payable would mean cash towards insurance, salvage or compensation or where building, machinery or plant was sold, the price thereof. In the present case, no cash amount or cash consideration had passed hands. Shri Toprani s next argument was that such s. 41(2) was a charging section and it also provided for machinery for computation of profit. He relied on a decision of the Supreme Court in CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 at p. 295 to argue that there was no profit arising out of this transaction. In support of the argument that there was no consideration, Shri Toprani argued that the exchange documents connected with this transaction do not mention any price. He also argued that the term exchange is not mentioned in s. 41(2) and, therefore, even if it was assumed that there was an exchange s. (2) would not be applicable. Referring to s. 118 of the Transfer of Property Act, Shri Toprani argued that exchange contemplates mutual transfer of properties, of which both the parties should be respective owners at the time of the transfer and the exchange documents should mention the price for which the exchange takes place. In the present case, the parties to the transaction are not the respective owners. There is no consideration mentioned and, therefore, there is no exchange and the requirements of s. 118 of the Transfer of Property Act are not met in the present type of exchange. This argument was advanced without prejudice to the alternative argument that exchange is not covered by s. 41(2). 9. Shri Raju for the Department relied on several decisions of the Supreme Court to defend the order of the CIT(A). He argued that there was a sale. The term "moneys payable" included payment in kind and relied on the decisions of the Supreme Court in CIT vs. Bansi Dhar & Sons (1986) 50 CTR (SC) 250 : (1986) 157 ITR 665 and Associated Clothiers Ltd. vs. CIT (1967) 63 ITR 224 in support of his arguments. He also relied on the decision of the Supreme Court in Jagdish Sugar Mills Ltd. vs. CIT (1986) 58 CTR (SC) 95 : (1986) 161 ITR 209 and the deicision of the Calcutta High Court in CIT vs.

6 Bengal Assam Steamship Co. Ltd. (1986) 56 CTR (Cal) 201 : (1986) 161 ITR 576 and the decision of the Madhya Pradesh High Court in CIT vs. Amar Transport Services (1987) 59 CTR (MP) 88 : (1986) 162 ITR 1. Shri Toprani, in reply, stated that the facts in the case of the Bansi Dhar & Sons were distinguishable, that in the case of CIT vs. Motors & General Stores (P) Ltd. (1967) 66 ITR 692 (SC) there was a money consideration involved and he reiterated his reliance on the decision of the Supreme Court in Rasiklal Maneklal s case (supra) in support of his case. 10. We have considered the submissions made on both sides. In order to understand the nature of the various issues raised, it is necessary to re-state certain salient facts. The assessee had during the relevant accounting period transferred its Akola Unit known as Berar Oil Industries to Akola Oil Industries Ltd. as per the scheme of arrangement approved by the Bombay High Court in terms of its order dt. 29th June, A copy of the original order of the Court dt. 29th June, 1981 along with the scheme of arrangement between Oudh Sugar Mills Ltd., and AOIL has been filed before us and is on record. The appellant herein, Oudh Sugar Mills Ltd., was incorporated under the provisions of the Indian Companies Act and had its registered office at Industry House, Bombay. This company had sugar factories, oil mills, solvent extraction plant in Uttar Pradesh and vanaspati oil and solvent extraction plant at Akola in the State of Maharashtra. AOIL is also incorporated under the provisions of the Companies Act and had its registered office at Akola, Maharashtra. It was a new company and was registered on 5th May, Since the activities of Oudh Sugar Mills were spread over both in Maharashtra and Uttar Pradesh, it found it desirable and expedient to separate BOI so that the activities in Maharashtra and Uttar Pradesh could be looked independently making for a more effective and efficient management. Therefore, the appellant-company proposed to segregate its Berar unit and hand it over to AOIL w.e.f. 1st July, The modalities of take-over arrangement have been laid down in Part II of the scheme of arrangement. It was firstly decided that all the assets, properties, debts, obligations, etc., proposed to be transferred to AOIL would be determined with reference to the book value after closing the books of account on 30th June, The manner in which the consideration for transfer of assets and liabilities was to be paid was laid down in paragraphs 3 & 5 of the scheme which read as under : "3 allot in the manner provided in cl. 5 hereafter to every member or the nominee or nominees of every member of Oudh holding Preference Shares, one 11 per cent Pref. Share of Rs. 100 each fully paid up in respect and in lieu of every one 9.5 per cent Pref. Share of Rs. 100 each fully paid up and held by him in Oudh. The Preference Shares so issued would carry dividend w.e.f. 1st July, 1980 and be redeemable within 1st July, 1992.

7 allot to every member or the nominee or the nominees of every member of Oudh holding ordinary shares, four equity shares of Rs. 10 each fully paid in respect of every one ordinary share of Rs. 100 each fully paid up and held by him in Oudh. 5. For the purpose of allotment of Preference Shares by Akola Industries as aforesaid, 25, per cent (free of Company s tax but subject to deduction of tax at source) Cumulative Remeemable Preference Shares of Rs. 100 each fully paid of Oudh shall stand redeemed and for this purpose Capital Redemption Reserve Account of an amount equivalent to the nominal value of the Preference Shares so redeemed shall be created by Oudh by transfer of an equivalent amount from its General Reserve. The Preference Shares of Akola Industries shall be deemed to have been allotted to the Preference shareholders of Oudh and paid up against redemption of the Preference Shares of Oudh in consideration of the corresponding assets of Oudh transferred under the Scheme as aforesaid. The shareholders of Oudh shall be deemed to have consented to the alteration in terms and conditions of Issue of the Preference Shares as contained in the Memorandum of Association and prospectus dt. 13th Dec of Oudh." Annexure A specified the list of machines to be given on leave and licence basis to AOIL. These machineries were not transferred to AOIL but were given on a leave and licence basis. Whatever assets that had been transferred were transferred, as stated above, at book value. There was a difference in the book value and the written down value of the assets because the assessee was providing for depreciation in its books on straight line basis and such difference was brought to tax by the ITO as profit under s. 41(2). Although it was argued before the CIT(A) that there was no sale of assets and that no consideration had been paid by AOIL to the assessee, the CIT(A) rejected these arguments. He observed that there were three parties to the transaction of the scheme of arrangement, namely, the assesseecompany, AOIL and the preference and ordinary shareholders of the assessee-company. The CIT(A) admitted that the assessee had not been given any shares of AOIL and what had actually happened, as far as the assessee was concerned, was that some of the accounts representing some assets and liabilities of BOI had been closed and the amounts representing the excess of assets over liabilities which had been taken over by AOIL had been debited to the general reserve account. The shareholders of the assessee-company got shares of AOIL in consideration of the transfer of some shares and liabilities of the assessee-company to AOIL. According to the CIT(A), this was a tripartite arrangement where the consideration was paid by AOIL by allotment of shares to the shareholders of the assesseecompany. The CIT(A) held that the transaction of transfer of assets by the assessee-company to AOIL with the consent of the preference and ordinary shares of the assessee-company amounted to a sale within the meaning of

8 s. 32(1) of the IT Act. This arrangement involved transfer of assets for which consideration was paid by the transferee. As far as the assessee-company was concerned, it was absolved of the responsibility of discharging the liabilities which had been taken over by AOIL. Further, the AOIL had issued its shares to the shareholders of the assessee-company. The face value of the shares issued is equal to the amount debited to the general reserve account of assessee-company. Therefore, it could be said that for effecting the transfer of the assets consideration had been received both by the assessee-company as well as by the shareholders of the company. Since under s. 41(2) where a depreciable asset is sold and moneys payable in respect of such assets exceed the written down value thereof, so much of the excess as does not exceed the difference between the actual cost and the written down value is chargeable to income-tax as income of the business. The CIT(A) rejected the argument that no consideration had been received by the assessee. The fact that the assessee was absolved of the responsibility of discharging the liabilities which were taken over by AOIL was itself part of the consideration. Further, the CIT(A) observed that this was a transaction which involved three parties, namely, the assessee, AOIL and the shareholders. The shares of the new company had been allotted to the preference and ordinary shareholders of the company in consideration of the transfer of the assets and liabilities. The CIT(A), therefore, held that in view of the language of s. 41(2) it would have to be held that the assessee had sold depreciable assets and that moneys payable in respect of such assets to the extent that the same exceeded the written down value thereof would be chargeable to income-tax as income of the business of the assessee. In CIT(A) s opinion, it was not correct to say that no consideration had been paid by the AOIL in respect of the assets acquired by it. He, therefore, confirmed the action of the ITO of invoking the provisions of s. 41(2) and bringing to tax what he described as the excess of the moneys payable in respect of the assets acquired by it. He, therefore, confirmed the action of the ITO invoking the provisions of s. 41(2) and bringing to tax what he described as the excess of the moneys payable in respect of the assets acquired by it over the written down value of such assets as business income in the hands of the assessee. 11. For resolving the controversy before us, we have to deal with three aspects of the issue : (i) was there a sale in this transaction within the meanings of s. 41(2); (ii) was any consideration paid which could fall within the connotation of the term "moneys payable"; and (iii) whether the appellant company could be said to have received any consideration which could be said as moneys payable consequent to this transaction. We will try and deal with these three issues in an effort to arrive at a solution to the controversy raised before us. As we have seen, the word sold which occurs in this sub-section includes a transfer by way of exchange or a compulsory acquisition of any liability for the time being in force and "moneys payable" includes the sale price or insurance, salvage or compensation moneys. Now,

9 the term "exchange" has not been defined under the IT Act. Therefore, its definition under the Transfer of Property Act may usefully be referred to. Sec. 118 of the Transfer of Property Act defines "exchange" as under : "118. When two persons mutually transfer the ownership of one thing for the ownership of another, either thing or both things being money only, the transaction is called an exchange. A transfer of property in completion of an exchange can be made only in manner provided for the transfer of such property by sale." There cannot be an exchange if the parties are not the same (vide Palacherla Anandu vs. Mallipudi Acharyulu (1958) AP 525). In Rasiklal Maneldal s case (supra), the Supreme Court had occasion to consider the meaning of the terms "exchange" and "relinquishment". The Supreme Court observed (vide p. 202 of the report) that an exchange involves the transfer of property by one person to another and reciprocally the transfer of property by that other to the first person. There must be a mutual transfer. (Emphasis, italicised in print, provided). In yet another case, namely, Motors & General Stores (P) Ltd. s case (supra), the Supreme Court was considering the interpretation of the term sale for the purpose of s. 10(2)(vii) of the Indian IT Act, The Supreme Court observed at p. 696 of the report as under : -" The definition of exchange in s. 118 of the Transfer of Property Act is not limited to immovable property but it extends also to barter of goods. It is clear therefore that both under the Sale of Goods Act and the Transfer of Property Act, sale is a transfer of property in the goods or of the ownership in immovable property for money consideration. But in exchange there is a reciprocal transfer of interest in the immovable property, the corresponding transfer of interest in the movable property being denoted by the word barter. The difference between a sale and an exchange is this, that in the former the price is paid in money, whilst in the latter it is paid in goods by way of barter. (Chitty on Contracts, 22nd edition, volume II, p. 582). " In that case, the Supreme Court had held that the essence of the transaction between the respondent company and the Zamindar and Zamindarini was one of exchange and there was no sale of assets of the cinema house for any money consideration and that, therefore, the provisions of s. 10(2)(vii) (of the old Act) did not apply. In B.M. Kharwar s case (supra), the Supreme Court was dealing with the taxability of profit under s. 10(2)(vii) and laid down the principle that in determining whether a receipt is liable to be taxed the taxing authorities are not entitled to ignore the legal character of the transaction and proceed on what they regard as "the substance of the transaction". The Supreme Court held that the company is a legal entity distinct from the partnership. In the light of these crucial pronouncements, it is very difficult to hold on the basis of facts of the present case, that there has been any sale of assets in the arrangement arrived at between the assessee-company and the AOIL. Now, s. 394 of the Companies Act, which

10 was cited before us and with reference to which certain arguments were addressed, reads as under : - "Sec Provisions for facilitating reconstruction and amalgamation of companies ---- (1) where an application is made to the Court under s. 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Court ---- (a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies or the amalgamation of any two or more companies; and (b) that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme (in this section referred to as a "transferor company") is to be transferred to another company (in this section referred to as "the transferee company"); the Court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters : (i) (ii) the allotment of appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person. " Generally, the expression "reconstruction", "reorganisation" or "scheme of arrangement" is used where only one company is involved and the rights of its shareholders and/or creditors are varied and the term "amalgamation" is used where two or more companies are amalgamated or where one is merged in another or taken over by another. The object of reconstruction is usually to reorganise capital or to compound with creditors or to effect economies. If the scheme involves the transfer of a company s undertaking to another company, usually the transfer is brought about by allotment of shares to the shareholders of the transferor company, in satisfaction of the assets transferred. This is a perfectly legitimate arrangement and the scheme of arrangement cannot be considered fraudulent or illegal merely because it is so arranged as to avoid capital gains or any other tax liability as a person is lawfully entitled to do anything or so conduct his affairs as to avoid or reduce tax liability. These principles are laid down in A.W. Figgis &

11 Co. (P) Ltd., In re (1980) 50 Com. Cas. 95 (Cal), followed in W.H. Targett & Co. Ltd. vs. Wall Street Investment (P) Ltd. (1986) 59 Com. Cas. 335 (Cal) (Please refer to pp to 1075 of A. Ramaiya s Companies Act, 1988 Edition). Now, the expression "sold" for the purpose of s. 41(2) is to be given the same meaning as is contained in Explanation to sub-s. (3) of s. 41. Clause (2) of this Explanation provides that the expression "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company. [Emphasis italicised in print, provided) Now, in the present case, there is no exchange inasmuch as the parties to the transaction are not two persons who have mutually exchanged the ownership of one thing for the ownership of another. This, as explained by the CIT(A), is a tripartite agreement where the shareholders of the company constitute the third party along with the assessee-company and AOIL. As we have already seen, there cannot be an exchange if the parties are not the same and, therefore, in our opinion, the present arrangement does not constitute exchange for the reason that this is not a bipartite agreement but it is a tripartite agreement. Secondly, the scheme of arrangement under which the assets have been made over has been formed consequent to a company petition made to the High Court and it has been approved by the High Court as a scheme of arrangement under s. 391 r/w s. 394 of the Companies Act. The scheme itself is described as a scheme of arrangement between Oudh Sugar Mills, AOIL and their respective shareholders. Since this scheme has been finalised under s. 391 r/w s. 394, it is in the nature of a scheme of amalgamation. Whatever has been done in this scheme is legitimately done. It is approved by the High Court, and any transfer in a scheme, which is akin to the scheme of amalgamation, cannot come within the meaning of the term sold as per cl. (2) of Explanation to sub-s. (3) of s. 41. We are, therefore, of the view that there is neither a sale nor an exchange in the present transaction. This is an arrangement between two companies and the shareholders of one of them, and while strictly interpreting the provisions of s. 41, we hold that the building, machinery and plant, which were transferred by the assessee-company at the book value to AOIL along with the liabilities, could not be said to have been sold to that company. Therefore, the first issue raised has to be decided against the Department and in favour of the assessee by holding that there is no sale or exchange of the assets. 12. Secondly, we have to see whether there is any consideration. Here again, the expression "moneys payable" has been explained in cl. (1) of Explanation to sub-s. (3) of s. 41 as insurance, salvage or compensation moneys or where building, machinery, plant or furniture is sold, the price for which it is sold. In the present case, no such price has been paid for the assets transferred. There is only an arrangement for issue of shares to the shareholders which is again a legitimate arrangement sanctioned by the

12 provisions of s. 394 of the Companies Act. Further, it is pertinent to note that in terms of cls. 3 and 5 of the scheme which have been reproduced in the earlier part of the order, AOIL agreed to allot in the manner provided in cl. 5 preference shares as per the details mentioned in cl. 5. Now, the expression "allotment" is not defined in the Companies Act. It means a division of the entire share capital into definite shares each of particular value and also of different classes and an assignment of such shares singly or numerously to different persons. The Calcutta High Court in Calcutta Stock Exchange Association Ltd., In re (1957) 27 Com. Cases 559 held that allotment means the appropriation out of the previously unappropriated share capital of a company, of a certain number of shares to a person. Till such allotment, the shares do not exist as such. It is on allotment in this sense that the shares come into existence. The allotment of shares was probably made in terms of cl. (ii) of s. 394(1) of the Companies Act and the receipt of shares on allotment by the shareholders of the assessee-company cannot take the form of the expression "moneys payable". Firstly, the difference between assets and liabilities was paid in the form of allotment of shares and secondly such allotment was made to the shareholders of the assessee-company and not to the company as such. In this process, the assessee-company could not be said to have received any consideration or price for the plant & machinery transferred and in that case what was received by the shareholders could not be said to be a consideration in the form of "moneys payable", being the price of the assets transferred, since it was not paid to or received by the assessee-company. We are, therefore, inclined to accept the arguments advanced by the assessee s counsel, Shri Toprani, and hold that there was no sale or exchange between the assessee-company and AOIL, that there was no consideration paid by the latter to the former and that, therefore, the amount representing the difference between the assets and liabilities could not be brought to tax as deemed profits under s. 41(2) of the IT Act. Before parting with this issue, it is necessary to deal with some of the authorities relied upon by the Department. Shri Raju referred to the decision of Supreme Court in Jagdish Sugar Mills Ltd. s case (supra) where the Supreme Court was dealing with a case of public limited company which was ordered to be wound up and there was compulsory sale by the Collector for recovery of cane cess and arrears of land revenue. On a perusal of this decision, we find that the facts there were slightly different and the Supreme Court was not required to consider the various issues raised in the present appeal. There money consideration was received by the assessee and the transaction was not a tripartite arrangement. In that sense, this decision does not advance the case of the Department. Another decision cited by Shri Raju was the case of Bansi Dhar & Sons (supra). The facts there are quite different and do not at all apply to the facts of the present case. On the other hand, the Supreme Court has in Motors & General Stores (P) Ltd. s

13 case (supra) clearly dealt with the scope of the expression exchange and has held that s. 2(10) of the Sale of Goods Act defines "price" as being the money consideration for a sale of goods. The presence of money consideration is, therefore, an essential element in a transaction of sale. If the consideration is not money but some other valuable consideration, it may be an exchange or barter but not a sale. It is not disputed that in the present case no money has been paid but only shares allotted to the shareholders of the company. In our opinion, the provisions of s. 41(2), which are deeming provisions, have to be interpreted strictly and we cannot give an interpretation to a transaction which will enlarge the scope of this section and bring to tax an amount which has not been received by or accrues to the appellant company. Such assessment would not be warranted by the wording of the section. There is clearly no sale within the meaning of s. 41(2). Further, there is no consideration in cash within the meaning of the expression "moneys payable" receivable by the appellant company. This is not a transaction between two parties but a tripartite transaction and, therefore, the assessment of the impugned amount as profit under s. 41(2) is not legally correct and the CIT(A) s decision confirming such assessment has to be reversed. This ground of appeal is, therefore, allowed. In the result, the appeal by the assessee is allowed in part.