The whole transaction of amalgamation has been made tax-neutral for both the companies (amalgamating and amalgamated) as well as the shareholders of the amalgamating company who receive the shares. Numerous provisions elaborately attempt to take care of all the eventualities that may arise in the case of an amalgamation and the purpose is that there should be no tax loss to any person on account of the amalgamation.

Thus, the amalgamating company does not pay any tax for the transfer of undertaking, the shareholders of the amalgamating company do not pay any tax for the exchange of shares, the written down value of fixed assets in the hands of the amalgamated company is the same as in the hands of the amalgamating company and so on. As compared to this, another type of transaction like a take-over, though simpler, does not find any mention at all in the Income-tax Act, 1961. In fact, this transaction is not recognised at all and a take-over in the form of acquisition of controlling interest of a company is treated like an ordinary transaction of sale and purchase of shares.

There are only indirect references such as in section 79 for change in controlling interest and its effect on carried forward losses. Transactions like demergers have seen recognition only recently.

Coming back to amalgamations, as stated above, the law has attempted to cover and remove tax effects in every way of this transaction. However, it is difficult to visualise everything and hence some eventualities are often not covered and this has happened in amalgamations also. What happens then when one or more aspects of the series of steps that concern amalgamations are not covered which, in all likelihood, is unintentional? Should the taxpayer suffer (or gain undue advantage)? Should one wait till the law is amended? Or, will the Court intervene and fill in this gap either by doing "violence" to the written law, or by "stretching" the literal meaning of certain provisions or by taking a beneficial construction? A recent case has shown that a Court has, it is submitted, taken such a stand.

The importance of this case lies not only in respect of amalgamation so that other gaps in amalgamation may also be treated similarly but also in other areas of the Income-tax Act, 1961 where there may be similar gaps.

The case in question is that of H. F. Craig Harvey ((2000) 244 ITR 578 (Mad.)). The facts and the issue involved are quite simple to follow. The assessee was originally holding shares of a particular company. These shares were acquired prior to 1st January 1964. The importance of this date is that if capital assets are acquired prior to this date, then the assessee has an option to substitute for the cost of the capital assets the fair market value of such assets on 1st January 1964. This date keeps on changing as time passes and at present, this date is 1st April 1981. After this date, the companies in which the shares were held amalgamated with another company and hence the assessee received shares of the amalgamated company.

The assessee thereafter sold the shares of the amalgamated company. The simple question is whether the assessee can substitute the fair market value of the shares of the original company as on 1st January 1964 for its cost.

The department took the technical stand that only the market value of the shares that are sold can be substituted since the provision relating to substitution of market value refer to the capital assets sold. The court referred to the general scheme of tax benefits granted to amalgamation and how, in the whole framework, the shares held in the amalgamating company and the shares held in the amalgamated are sought to be placed at par. For example, it is provided that the cost of the shares of the amalgamated company shall be the same as that of the amalgamating company. There is no tax levied on exchange of shares on amalgamation. As stated earlier, at the level of the companies also, this neutrality is maintained.

Another provision specifically states that where shares are received on amalgamation, the period for which shares were held in the amalgamating company will be added to the period for which the shares in the amalgamated company where held for determining the holding period. This is necessary to decide whether the asset is a long term or a short term capital asset.

However, there is no specific provision stating that in such a case, the fair market value of the shares of the amalgamating company as on 1st January 1964 should be available to the assessee for substitution.

A literal reading of the provision reveals that the assessee is entitled to substitute only the fair market value as on such date of the new shares, i.e., the shares of the amalgamated Company. There was no doubt that the gap is unintentional (incidentally, even today, it exists). Should the benefit of substitution be denied to the assessee?

The Court chose to pay emphasis on the provision in section 49 that states that the cost of the shares of the amalgamated company shall be the cost of the shares of the amalgamating company. The Court stressed the word "cost" in relation to the shares of the amalgamating company and stated that this term would include the fair market value of such shares as on 1st January 1964. In other words, it made, it is respectfully submitted, a beneficial interpretation of the wording in favour not only of the assessee but in favour of maintaining the whole scheme of law. Arguably, the literal provisions may, favour the other interpretation of not permitting this.

However, the Court intervened and filled the gap that exists clearly and unintentionally. The conclusion that can be drawn is that this case helps in other areas where there are still gaps in the scheme of provisions relating to amalgamations. These are many. For example, can the amalgamated company claim a deduction of expenses relating to payment of taxes, etc. covered by section 43B which allows deduction only on payment? The answer, it is submitted, would be yes, relying on this decision. Obviously, this decision can also be used against the assessee where he seeks to rely on a gap to take a tax advantage. This decision can also help in areas where there are obvious gap in a scheme and set of provisions of law.

-- The author is a Mumbai-based chartered accountant