THE COMMISSIONER OF INCOME TAX, DELHI-IV vs. M/S D.C.M. LIMITED

* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL NO. 35/2002
th
Reserved on: 8 September, 2014
rd
Date of decision: 23 December, 2014

THE COMMISSIONER OF INCOME TAX, DELHI-IV.. Appellant
Through Mr. Rohit Madan, Sr. Standing Counsel.
versus
M/S D.C.M. LIMITED ..... Respondent
Through Mr. S. Ganesh, Sr. Advocate with
Mr. V.P. Gupta & Mr. Anunav Kumar, Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO

SANJIV KHANNA, J.:
This appeal by the Revenue under Section 260A of the Income Tax
Act, 1961 (Act, for short) stands admitted for adjudication on the following
substantial question of law:-
―Whether the Tribunal was right in holding that there
was no transfer within the meaning of S.32A(5) of the
Act under the Scheme of Arrangement of the assessee
company and, therefore, the Assessing Officer erred in
withdrawing the investment allowance granted earlier
under Section 155 (4A) of the Act?‖
2. The respondent-assessee is a company and during the period 1983-84
to 1990-91 had availed of and was granted benefit of investment allowance
or carried forward of investment allowance under Section 32A of the Act.
3. Under a scheme of arrangement under Sections 391 and 394 of the
st
Companies Act, 1956 which came into effect on 1 April, 1990, 9 out of 13
industrial units held by the respondent company were transferred to three
ITA No. 35/2002 Page 1 of 28


newly formed companies, namely, M/s DCM Shriram Industries Limited,
M/s DCM Shriram Consolidated Limited and M/s DCM Shriram Industrial
Enterprises Limited. Relying upon sub-section (5) to Section 32A and
treating transfer of assets and liabilities, including plant and machinery as
―sale or otherwise transfer‖, the Assessing Officer passed an order under
Section 32A(5) read with Section 155(4A) and 154 of the Act withdrawing
benefit of investment allowance or carried forward of investment allowance.
First appeals were dismissed by two separate orders, passed by the
th
Commissioner of Income Tax (Appeals) dated 19 September, 1994 in
relation to Assessment Years 1987-88, 1988-89, 1989-99 and 1990-91 and
st
order dated 21 October, 1994 in respect of Assessment Years 1983-84,
1984-85 and 1985-86. The assessee, however, succeeded by the impugned
order passed by the Income Tax Appellate Tribunal (‗Tribunal‘, for short)
st
dated 1 August, 2001, inter alia , holding that scheme of arrangement did
not result in ‗transfer‘ under sub-section (5) to Section 35A. The Tribunal
preferred to give purposive interpretation to the expression ‗otherwise
transfer‘ used in Section 32A(5) of the Act. Scheme of arrangement it
stands observed should not be construed as violating the negative mandate
which prohibits transfer. Sub-section (5) to Section 32A of the Act was not
enacted to bar such schemes as the purpose behind Section 32A was to
promote industrial growth and production, which was not adversely
effected.
4. In order to appreciate the controversy, we would like to first
reproduce relevant portions of Section 32A, i.e., sub-section (1), (5), (6) and
(7) of Section 32A of the Act, which read:-
“ 32A. (1) In respect of a ship or an aircraft or machinery or plant specified
in sub-section (2), which is owned by the assessee and is wholly used for the
purposes of the business carried on by him, there shall, in accordance with
and subject to the provisions of this section, be allowed a deduction, in
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respect of the previous year in which the ship or aircraft was acquired or the
machinery or plant was installed or, if the ship, aircraft, machinery or plant
is first put to use in the immediately succeeding previous year, then, in
respect of that previous year, of a sum by way of investment, allowance
equal to twenty-five per cent of the actual cost of the ship, aircraft,
machinery or plant to the assessee:
Provided that in respect of a ship or an aircraft or machinery or plant
specified in sub-section (8B), this sub-section shall have effect as if for the
words "twenty-five per cent", the words "twenty per cent" had been
substituted :
Provided further that no deduction shall be allowed under this section in

respect of—
( a ) any machinery or plant installed in any office premises or any
residential accommodation, including any accommodation in the nature of a

guest house;

( b ) any office appliances or road transport vehicles;
( c ) any ship, machinery or plant in respect of which the
deduction by way of development rebate is allowable under section 33; and
( d ) any machinery of plant, the whole of the actual cost of which
is allowed as a deduction (whether by way of depreciation or otherwise) in
computing the income chargeable under the head "Profits and gains of

business or profession" of any previous year.
Explanation : For the purposes of this sub-section, "actual cost" means the
actual cost of the ship, aircraft, machinery or plant to the assessee as reduced
by that part of such cost which has been met out of the amount released to

the assessee under sub-section (6) of section 32AB.
xxx

(5) Any allowance made under this section in respect of any ship, aircraft,
machinery or plant shall be deemed to have been wrongly made for the

purposes of this Act—
( a ) if the ship, aircraft, machinery or plant is sold or otherwise
transferred by the assessee to any person at any time before the expiry of
eight years from the end of the previous year in which it was acquired or

installed; or
( b ) if at any time before the expiry of ten years from the end of
the previous year in which the ship or aircraft was acquired or the
machinery or plant as installed, the assessee does not utilise the amount
credited to the reserve account under sub-section (4) for the purposes of
acquiring a new ship or a new aircraft or new machinery or plant [other than
machinery or plant of the nature referred to in clauses ( a ), ( b ) and ( d ) of
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the second proviso to sub-section (1)] for the purposes of the business of the

undertaking; or
( c ) if at any time before the expiry of the ten years aforesaid, the
assessee utilises the amount credited to the reserve account under sub-
section (4) for distribution by way of dividends or profits or for remittance
outside India as profits or for the creation of any assets outside India or for
any other purpose which is not a purpose of the business of the undertaking,
and the provisions of sub-section (4A) of section 155 shall apply

accordingly :

Provided that nothing in clause ( a ) shall apply—
( i ) where the ship, aircraft, machinery or plant is sold or
otherwise transferred by the assessee to the Government, a local authority, a
corporation established by a Central, State or Provincial Act or
a Government company as defined in section 617 of the Companies Act,
1956 (1 of 1956); or
( ii ) where the sale or transfer of the ship, aircraft, machinery or
plant is made in connection with the amalgamation or succession, referred
to in sub-section (6) or sub-section (7).
(6) Where in a scheme of amalgamation, the amalgamating company sells
or otherwise transfers to the amalgamated company any ship, aircraft,
machinery or plant, in respect of which investment allowance has been

allowed to the amalgamating company under sub-section (1),—
( a ) the amalgamated company shall continue to fulfil the
conditions mentioned in sub-section (4) in respect of the reserve created by
the amalgamating company and in respect of the period within which such
ship, aircraft, machinery or plant shall not be sold or otherwise transferred
and in default of any of these conditions, the provisions of sub-section (4A)
of section 155 shall apply to the amalgamated company as they would have

applied to the amalgamating company had it committed the default; and
( b ) the balance of investment allowance, if any, still outstanding
to the amalgamating company in respect of such ship, aircraft, machinery or
plant, shall be allowed to the amalgamated company in accordance with the
provisions of sub-section (3), so, however, that the total period for which
the balance of investment allowance shall be carried forward in the
assessments of the amalgamating company and the amalgamated company
shall not exceed the period of eight years, specified in sub-section (3) and
the amalgamated company shall be treated as the assessee in respect of such
ship, aircraft, machinery or plant for the purposes of this section.
(7) Where a firm is succeeded to by a company in the business carried on
by it as a result of which the firm sells or otherwise transfers to the
company any ship, aircraft, machinery or plant, the provisions of clauses ( a )
and ( b ) of sub-section (6) shall, so far as may be, apply to the firm and the

company.
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Explanation : The provisions of this sub-section shall apply only where—
( i ) all the property of the firm relating to the business

immediately before the succession becomes the property of the company;
( ii ) all the liabilities of the firm relating to the business
immediately before the succession become the liabilities of the company;
and
( iii ) all the shareholders of the company were partners of the firm
immediately before the succession.
xxx‖

5. At this stage, we would also like to reproduce the definition of the
term ‗transfer‘ in Section 2(47) of the Act. The said clause, it must be
noted, is in relation to capital asset and reads:-
― 2. In this Act, unless the context otherwise requires,—
xxx
( 47 ) "transfer", in relation to a capital asset, includes,—
( i ) the sale, exchange or relinquishment of the asset; or

( ii ) the extinguishment of any rights therein; or

( iii ) the compulsory acquisition thereof under any law; or
( iv ) in a case where the asset is converted by the owner thereof
into, or is treated by him as, stock-in-trade of a business carried on by him,

such conversion or treatment; or
( v ) any transaction involving the allowing of the possession of
any immovable property to be taken or retained in part performance of a
contract of the nature referred to in section 53A of the Transfer of Property
Act, 1882 (4 of 1882); or
( vi ) any transaction (whether by way of becoming a member of,
or acquiring shares in, a co-operative society, company or other association
of persons or by way of any agreement or any arrangement or in any other
manner whatsoever) which has the effect of transferring, or enabling the

enjoyment of, any immovable property.
Explanation : For the purposes of sub-clauses( v ) and ( vi ),
"immovable property" shall have the same meaning as in clause ( d ) of
section 269UA

(48 ) xxx‖
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(The provisions reproduced in paragraph Nos.4 and 5 are as they existed on
st
1 April, 1990, i.e., the date on which the scheme of arrangement became
effective and 9 out of 13 units owned by the respondent-assessee were
transferred to the three newly incorporated companies.)
6. Sub-section (5) uses two expressions ―sold or is otherwise
transferred‖. Scheme of amalgamation or reconstruction under Sections 391
and 394 of the Act whereby assets or units/undertakings were transferred
would be covered by the expression ‗otherwise transferred‘ in sub-section
(5). We do not think by adopting purposive or applying the said principle of
interpretation, it can be held that the scheme did not result in transfer of the
assets. The decision of the Tribunal to this extent should not be accepted. If
the reasoning given by the Tribunal is to be accepted, then sub-section (6) to
Section 35A of the Act would become redundant and otiose. It will stand
erased. The said sub-section carves out an exception to sub-section (5) and
states that sub-section (5) would not apply to cases of amalgamation
provided the two conditions stipulated therein are satisfied. On reading of
sub-section (6), it is clear that scheme of amalgamation is treated and would
constitute transfer under sub-section (5) of Section 32A of the Act. The two
provisions have to be read harmoniously. Any other interpretation would be
clearly contrary to the express language and stipulations of the Section itself
and, therefore, would be unacceptable.
7. The word ―transfer‖ and its purport was examined by the Supreme
Court in the Commissioner of Income Tax, Lucknow versus Narang Dairy
Products, Lucknow , [1996] 219 ITR 478 (SC) with reference to Sections 33
and 34 of the Act in the following words:-
―Even assuming that the transaction may not be a ―transfer‖ as defined
under Section 2(47) of the Act, in our view, the definition section is an
inclusive one and does not exclude the contextual or the ordinary meaning
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of the word, ―transfer‖. There are different shades of meaning to the word
―transfer‖, vis-., ―to make over possession of to another‖, ―a delivery of
title or property from one person to another‖, ―to displace from one
surface to another‖, ―removal‖, ―handover‖, ―make over possession of
property to another‖, ―change‖, ―displace‖, etc.‖
In the said case, the assessee, a partnership firm had transferred by way of
lease, possession and enjoyment of machinery or plant to a third person. It
was held that the grant of lease by itself would be covered by the expression
―otherwise transferred for the purpose of Sections 33 and 34 of the Act‖.
The said decision, however, did not examine or answer whether a scheme of
amalgamation or arrangement, has the effect of alienation of assets and can
be treated as a transfer in the eyes of law. However, the said aspect is not
res integra as per the affirmative pronouncements of the Supreme Court.
Whether amalgamation results or constitutes transfer of assets was
examined in some detail by this Court in The Commissioner of Income
Tax-II, New Delhi vs. Mira Exim Ltd. (2013) 359 ITR 70 (Del), in the
following manner:-
―9. … Thus, we do not agree with the findings recorded by the
tribunal that it is not a case of amalgamation; or merger and
amalgamation are different or it is a case of purchase of business
as a going concern and, therefore, different principles apply. In the
present case, there was transfer, as merger or amalgamation results
in transfer.
10. Term ―merger or amalgamation‖ has no precise legal
meaning but it involves blending of two or more existing
undertaking into one. In case of merger, there is complete
blending of the merged undertaking into the other company, but
this does result in the transfer of the assets from the merged
undertaking. Assets are acquired by the other undertaking. Upon
merger, the earlier concern or undertaking loses its identity and the
ownership in the asset. (see Saraswati Industrial Syndicate
Limited versus Commissioner of Income Tax , [(1990) 186 ITR
(SC)]. In Hindustan Lever versus State of Maharashtra , (2004) 9
SCC 438 expounding on the concept of amalgamation and whether
it amounts to transfer, it was held as under:-
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― 9. Section 394 provides that application and order of
amalgamation under Section 394 is based on compromise or
arrangement which has been proposed for the purpose of
amalgamation of two or more companies. The amalgamation
scheme, which is an agreement between the companies is
presented before the court and the court passes an appropriate
order sanctioning the compromise or arrangement. The
foundation or the basis for passing an order of amalgamation is
agreement between two or more companies. Under the scheme
of amalgamation, the whole or any part of the undertaking,
properties or liability of any company concerned in the scheme
is to be transferred to the other company. The company whose
property is transferred would be the transferor company and
the company to whom property is transferred would be
considered as the transferee company. The scheme of
amalgamation has its genesis in an agreement between the
prescribed majority of shareholders and creditors of the
transferor company with the prescribed majority of
shareholders and creditors of the transferee company. The
intended transfer is a voluntary act of the contracting parties.
The transfer has all the trappings of a sale. The transfer is
effected by an order of the court. The proposed compromise or
arrangement is subject to verification by the court as provided
therein. First is that the scheme of compromise or arrangement
proposed for the purposes of amalgamation or in connection
therewith, shall not be sanctioned unless the court has received
a report from the Company Law Board or the Registrar that the
affairs of the company have not been conducted in a manner
prejudicial to the interest of its members or to public interest;
and secondly, that the order of resolution of transfer of the
company shall not be made unless official liquidator on
scrutiny of the books and papers of the company makes a
report to the court that the affairs of the company had not been
conducted in a manner prejudicial to the interest of its
members or to public interest.‖

11. Similar view was taken earlier in the case of Singer India
Limited versus Chander Mohan Chadha, (2004) 7 SCC 1 wherein
th
the following extract from Halsbury‟s Laws of England (4 Edn.,
Vol. 7) paragraph 1539 was quoted:-
―Amalgamation is a blending of two or more existing
undertakings into one undertaking, the shareholders of each
blending company becoming substantially the shareholders in
the company which is to carry on the blended undertakings.
There may be amalgamation either by the transfer of two or
more undertakings to a new company, or by the transfer of one
or more undertakings to an existing company. Strictly
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‗amalgamation‘ does not, it seems, cover the mere acquisition
by a company of the share capital of other companies which
remain in existence and continue their undertakings, but the
context to which the term is used may show that it is intended
to include such an acquisition.
The question whether a winding up is for the purposes of
reconstruction or amalgamation depends upon the whole of the
circumstances of the winding up.‖

12. In the case of Singer India Limited (supra), question arose
whether upon amalgamation the tenancy rights were transferred
and whether there was subletting. It was held that there was
transfer and the tenancy or right to occupation of the transferor
company got vested in the transferee company. Thus, there was
subletting. The law on subletting under the Delhi Rent Control
Act, 1958 did not make any exception in favour of a lessee, who
may have adopted a course of action of amalgamation. Similar
view has been taken in Speedline Agencies versus T. Stanes &
Company Limited , (2010) 6 SCC 257.
13. In Commissioner of Income Tax versus Mrs. Grace
Collis, (2001) 248 ITR 323 (SC) pursuant to scheme of
arrangement, assets and liabilities of the amalgamating company
became assets and liabilities of the amalgamated company.
Shareholders of amalgamating company were issued shares of
amalgamated company in lieu of the shares held by them in
amalgamating company. The assessee had sold the shares of the
amalgamated company and the question related to the purchase
cost of the shares of the amalgamated company. The question
raised was whether there was transfer within the meaning of
Section 2(47), when an assessee acquired shares in the
amalgamated company. It was observed by the Supreme Court
that the definition of ‗transfer‘ in Section 2(47) was wider and
broader than even its ordinary, common and natural meaning. The
word ‗transfer‘ as defined in Section 2(47) includes
extinguishment of any right and it was further observed that the
said expression i.e. ‗extinguishment of any right‘ would include
extinguishment of a right in a capital asset, independent of and
otherwise than on account of transfer.‖
8. The aforesaid ratio is apposite and would negate the contention raised
by the assessee and the finding recorded by the Tribunal to the contrary, that
a scheme of arrangement or amalgamation would not result in transfer of the
ITA No. 35/2002 Page 9 of 28


assets from the earlier owner to the new or the amalgamated company.
‗Transfer‘ in law upon amalgamation can take place. In Section 32A, the
Legislature has not used the term ‗sale‘, i.e. ‗conveyance‘ alone, but
consciously and deliberately used the expression ‗otherwise transferred‘.
Unlike 1922 Act, the expression ‗transfer‘ is now defined in sub-section
(47) to Section 2 which specifically refers to sale, exchange, relinquishment,
extinguishment of any right in an asset, compulsory acquisition, conversion
by the owner of an asset into stock in trade etc. The term ‗transfer‘ is
defined in Section 2(47) of the Act is very broad and wide and goes much
beyond the legal term ‗sale‘. Besides the aforesaid definition is inclusive
definition and it would not be appropriate to give restrictive interpretation of
a term of such wide denotation.
9. We have already quoted the expression ‗transfer‘ as defined in
relation to capital assets in Section 2(47), which refers to extinguishment of
rights, which is a very broad and a wide approach. In these circumstances,
we are unable to accept the submission of the assessee that the scheme of
arrangement or reconstruction in the present case did not result in transfer of
the 9 units of the assessee to the three newly formed companies. The said
three companies were in fact separate juristic entities in law. The
expression ―otherwise transfer‖ according to us cannot be given a narrow
meaning to exclude all transfers as a result of merger, amalgamation, etc.
10. The decision of the Supreme Court in Malabar Fisheries Company
versus CIT , [1979] 120 ITR 49 (SC) is not applicable in the present factual
matrix as it was a case of dissolution of a firm and a firm it is well known is
not a juristic entity in law. We have also noticed the distinguishing features
in the case of Narang Dairy Products (supra), but have held that in case of
amalgamation or merger, the transfer in law can take place and, therefore,
ITA No. 35/2002 Page 10 of 28


the legislature had incorporated a saving and ameliorative provision in the
form of sub-section (6) to Section 32A of the Act. Reliance placed on
certain judgments under Chapter XX-C of the Act is not apposite as the said
Chapter related to an entirely different concept of pre-emptive purchase to
curtail black money menace in sale and purchase of immovable properties.
In Mustafa Umar versus Appropriate Authority , [2001] 248 ITR 436 (Ker)
the transfer was made by the owner to its 100% subsidiary company.
11. No doubt that Section 32A(5) of the Act is a negative provision,
which may be penal, but when the legislative intention and requirement is
clear in the form of sub-section (6), it would be difficult to ignore the
legislative mandate and hold that amalgamation or merger would not result
and constitute transfer within the expression ―otherwise transfer‖ used in
sub-section (5) to Section 32A of the Act.
12. However, the assessee, we feel is entitled to succeed on their
alternative submission that the aforesaid arrangement is protected being
covered under sub-section (6) to Section 32A. We may record that after
nd
arguments were heard on 2 September, 2014, the appeal was re-listed for
th
hearing on the said aspect on 8 September, 2014, when the counsel for the
parties were heard on whether the scheme of arrangement would be covered
under sub-section (6) to Section 32A of the Act. Accordingly, we deem it
appropriate to frame the following additional substantial question of law:
―Whether the scheme of arrangement/reconstruction
can be regarded as amalgamation and protected under
sub-section (6) to Section 32A of the Income Tax Act,
1961?‖
13. We have already quoted sub-section (6) to Section 32A, but at this
stage would like to reproduce the term ―amalgamation‖ as defined in
st
Section 2(1B) of the Act (as on 1 April, 1990) which reads:-
ITA No. 35/2002 Page 11 of 28


―2. In this Act, unless the context otherwise requires,—
xxx
( 1B ) "amalgamation", in relation to companies, means the merger of
one or more companies with another company or the merger of two or
more companies to form one company (the company or companies which
so merge being referred to as the amalgamating company or companies
and the company with which they merge or which is formed as a result of
the merger, as the amalgamated company) in such a manner that—
( i ) all the property of the amalgamating company or compa-
nies immediately before the amalgamation becomes the property of the

amalgamated company by virtue of the amalgamation;
( ii ) all the liabilities of the amalgamating company or
companies immediately before the amalgamation become the liabilities of

the amalgamated company by virtue of the amalgamation;
( iii ) shareholders holding not less than nine-tenths in value of
the shares in the amalgamating company or companies (other than shares
already held therein immediately before the amalgamation by, or by a
nominee for, the amalgamated company or its subsidiary) become

shareholders of the amalgamated company by virtue of the amalgamation,
otherwise than as a result of the acquisition of the property
of one company by another company pursuant to the purchase of such
property by the other company or as a result of the distribution of such
property to the other company after the winding up of the first-mentioned

company;
xxx ‖
14. The expression ―demerger‖ is defined in Section 2(19AA) and was
st
inserted by Finance Act, 1999 with effect from 1 April, 2000.
Undoubtedly, in case the scheme of arrangement had been implemented
st
with effect from 1 April, 2000, it would have been treated as a scheme of
demerger. In the present case, as noticed above, the arrangement had been
st
implemented and applied a decade earlier, as it was effective from 1 April,
1990. It can be argued with some merit and conviction that the Act did not
move with the time to accommodate and deal with amalgamation of the
nature which were taking place in the corporate world. However, we would
not like to base our decision on the said submission/argument, albeit we
ITA No. 35/2002 Page 12 of 28


have used the said argument to interpret sub-section (6) to Section 32A of
the Act.
15. We have referred to the definition clause 2(1B) of the Act, which
defines the term ―amalgamation‖ in relation to companies to mean merger
of one or more companies into another or merger of two or more companies
into one. Section 2(1B), therefore, postulates extinction of the company
upon merger with the amalgamated company. Clause (i) to Section 2(1B)
states that all properties of an amalgamating company immediately before
amalgamation should become properties of the amalgamated company and
similarly the liabilities of the amalgamating company should become
liabilities of the amalgamated company. There should be complete and
absolute merger and integration of the amalgamating company with the
amalgamated company. In clause (iii), shareholders not less than nine-tenth
in value in the amalgamating company subject to certain other conditions,
should become shareholders of the amalgamated company by virtue of
amalgamation.
16. Section 2(1B) seeks to define the word ‗amalgamation‘ for the
purpose of the Act and the statutory definition stands enacted should be
applied when interpreting the word in a section. However, this rule is
subject to the qualification mentioned in the beginning of the definition
section – ―unless the context otherwise requires‖. Repugnancy of the
definition would be accepted if the statutory definition is not in agreement
with the subject or context. Statutory definitions or abbreviations must
necessarily be read subject to this qualification expressed in the definition
clause itself. It is possible that the word defined in the definition clause
could have a somewhat different meaning in different sections of the Act,
depending upon the subject or context. Thus, the Legislature has prefixed
ITA No. 35/2002 Page 13 of 28


the qualifying words in Section 2. Therefore, one would ordinarily apply
the definition clause but this is not inflexible rule and the definition clause
can be departed from on account of subject or context in which the word is
used in a particular section. In Vangaurd Fire and General Insurance Co.
Ltd., Madras versus Fraser & Ross, AIR 1960 SC 971, it was observed:

th
17. G.P. Singh in Principles of Statutory Interpretation , 13 Edition,
2012, at page 191 has discussed definition clauses and the effect of the
―reference to the context‖ in the following words:-
―… And as recently stated by Lord Lowry: ―If Parliament in a statutory
enactment defines its terms (whether by enlarging or by restricting the
ordinary meaning of a word or expression), it must intend that, in the
absence of a clear indication to the contrary, those terms as defined
shall govern what is proposed, authorised or done under or by reference
to that enactment.‖ But where the context makes the definition given in
the interpretation clause inapplicable, a defined word when used in the
body of the statute may have to be given a meaning different from that
ITA No. 35/2002 Page 14 of 28


contained in the interpretation clause‘ all definitions given in an
interpretation clause; all definitions given in an interpretation clause are
therefore normally enacted subjected to the qualification – ‗unless there
is anything repugnant in the subject or context‘, or ‗unless the context
otherwise requires‘. Even in the absence of an express qualification to
that effect such a qualification is always implied. However, it is
incumbent on those who contend that the definition given in the
interpretation clause does not apply to a particular section to show that
the context in fact so requires. An argument based on contrary context
which will make the inclusive definition inapplicable to any provision
in the Act cannot be accepted as it would make the definition entirely
useless. Repugnancy of a definition arises only when the definition does
not agree with the subject or context; any action not in conformity with
the definition will not obviously make it repugnant to subject or context
of the provision containing the term defined under which such action is
purported to have been taken. When the application of the definition to
a term in a provision containing that term makes it unworkable and
otiose , it can be said that the definition is not applicable to that
provision because of contrary context…‖
18. The aforesaid observations and decisions are apposite and relevant
when we minutely examine sub-sections (5) and (6) to Section 32A. Sub-
section (5) to Section 32A fixates and makes pointed reference to allowance
made under the said Section in respect of any ship, aircraft, machinery or
plant. The allowance is deemed to be wrongly made if the aforesaid assets
are sold or otherwise transferred at any time before expiry of eight years
from the end of the previous year in which it was acquired or installed or at
any time before expiry of ten years the amount credited to the reserve
account is not utilized for the purposes of acquiring a new ship, aircraft,
machinery or plant or is used for payment of dividend of profits or
remittances out of India as profits or for creation of an asset outside India,
etc. The core focus and convergence, therefore, is on the assets, namely,
ship, aircraft, machinery or plant. The asset created should not be
transferred and the reserve created should be used for purchase and
installation of the said assets. Sub-section (6) refers to scheme of
amalgamation and states that if the amalgamating company sells or
otherwise transfers to the amalgamated company, ship, aircraft, machinery
ITA No. 35/2002 Page 15 of 28


or plant in respect of which investment allowance has been allowed to the
amalgamating company, then the amalgamated company shall continue to
fulfil the conditions mentioned in sub-section (4) in respect of unexpired
lock-in period of sale/transfer or the reserve created by the amalgamating
company and provisions of Section 4A of Section 155 shall apply to the
amalgamated company as would have applied to the amalgamating
company if it would have committed the default. The sub-section (6),
therefore, talks of sale or otherwise transfer by the amalgamating to the
amalgamated company of a ship, aircraft, machinery or plant. It does not
speak and refer to any stipulation with regard to transfer of all properties or
assets or liabilities of the amalgamating company being transferred to the
amalgamated company. It does not speak of complete merger, extinction or
absorption of the amalgamating company into the amalgamated company.
Clause (b) of sub-section (6) stipulates that balance of investment
allowance, if any, still standing to the amalgamating company in respect of
such ship, aircraft or machinery shall be allowed to the amalgamated
company in accordance with the provisions of sub-section (3) for the total
period for which the balance investment allowance shall be carried forward.
Clause (b) clearly supports the view that the amalgamating company need
not extinguish or cease to exist pursuant to the scheme of amalgamation.
Sub-Section (6) to Section 32A does not, therefore, refer to taking over of
all assets and liabilities. In these circumstances, we do not think it would be
appropriate and proper to fully apply Section 2(1B) of the Act, when we
interpret sub-section (6) to Section 32A. The legislative intent of Sections
32A(5) and 32A(6) of the Act is to the contrary.
19. The word amalgamation is used in Sections 32A, 33(3), 33A(4) &
(5), 34(3)(b), proviso, 35(5), 35A(6), 35D(5), 35DD, 35E(7), 41(2), 41(4)
(Explanation 2), 43(1) (Explanation 7), 43(6) (Explanation 2), 43C, 47(vi)
ITA No. 35/2002 Page 16 of 28


and (vii), 49(1)(iii)(e), 49(2), 72A, and 72AA (some of the Sections stand
deleted). Thus, the word ‗amalgamation‘ finds mention in a number of
sections. It may not have universal and similar meaning in all places where
it occurs. While interpreting the said word in a particular provision, the
language, the context and the purpose of the provision has to be given due
recognition and kept in mind. A universal or broad brush application
without reference to the context can result in interpretational error for it may
negate the very purpose and objective of the Legislation in enacting a
provision.
20. The reason for enacting sub-section (5) to Section 32A is to prevent
instances of abuse of the concession of investment allowance. Investment
allowance was allowed at the rate specified on the cost of acquisition of new
machinery and plant installed after a particular date. To prevent abuse, the
statutory requirement stipulated creation of a reserve and in case the reserve
was not utilized for the purpose of acquiring new machinery or plant within
the stipulated time, the investment allowance should be withdrawn. In this
manner, the section ensured that an assessee engaged in priority industries
adequately provided for renewal or renovation and, therefore, employment
and industrial growth was not jeopardized. The stipulation provided
stimulus to growth and modernization and reduced dependence of an
assessee on financial institutions.
21. The purpose and object of providing limited umbrella protection
under sub-sections (6) and (7) of Section 32A, shows the flexible and
realistic approach in cases of business reorganization which normally are
treated as tax neutral, unless there is ulterior motive of tax evasion, abusive
tax avoidance or possibly even tax arbitrage. Thus, cases of business
reorganization in the nature of amalgamation or conversion of partnership
ITA No. 35/2002 Page 17 of 28


firm into a company stand excluded from the effect of sub-section (5) to
Section 32A of the Act, provided the conditions of the relevant sub-sections
are satisfied.
22. The expression ‗amalgamation‘ does mean amalgamation of two or
more companies which are merged into one. It has the effect of an
arrangement by which one of the companies involved absorbs the business,
all assets and liabilities of another with the latter being dissolved or in
alternative two or more companies being absorbed into one company,
formed for that purpose. (Refer Heavy Head & Co. versus Ropre Holding
Ltd. , 1952 CH 154). Therefore, the term ‗amalgamation‘ contemplates a
state of things under which two companies are joined so as to form a third
entity or one company is absorbed or blended with the other company.
Amalgamating company, thereupon, loses its entity and ceases to exist. But
there are instances or arrangements under which there is transfer of one or
more undertakings to a new company or to another existing company. In
these cases, the amalgamating company continues to exist and is not
dissolved as it does not get fully merged. Such arrangements are also
treated as amalgamation. Halsbury‟s Laws of England (5th Edition, Volume
15, at p.700) reads as under:-
― 1435. Meanings of ‘reconstruction’ and ‘amalgamation’ .
Neither „reconstruction‟ nor „amalgamation‟ has precise legal
meaning .
Where an undertaking is being carried on by a company and is in
substance transferred, no to an outsider, but to another company
consisting substantially of the same shareholders with a view to its
being continued by the transferee company, there is reconstruction. It
is nonetheless a reconstruction because all the assets do not pass to
the new company, or all the shareholders of the transferor company
are not shareholders in the transferee company, or the liabilities of the
transferor company are not taken over by the transferee company.
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Amalgamation is a blending of two or more existing undertakings
into one undertaking, the shareholders of each blending company
becoming substantially the shareholders in the company which is to
carry on the blended undertakings. There may be amalgamation either
by the transfer of two or more undertakings to a new company, or by
the transfer or one or more undertakings to an existing company .
Strictly ‗amalgamation‘ does not, it seems, cover the mere acquisition
by a company of the share capital of other companies which remain in
existence and continue their undertakings, but the context in which the
term is used may show that it is intended to include such an
acquisition.‖
(emphasis supplied)
Such schemes are treated as scheme of reconstruction or reorganization or
scheme of arrangement. The term ‗amalgamation‘ as such is broad to
include the said schemes. The term ‗amalgamation‘, it has been observed,
should not be given any definite legal meaning. Charlesworth similarly
observes that neither the word ―reconstruct‖ nor ―amalgamation‖ has any
definite legal meaning. A reconstruction is where a company transfers its
assets to a new company with substantially the same shareholding. Both, a
reconstruction and amalgamation are permissible under the Companies‘ law.
Section 391 read with Section 394 state that a scheme may take a form of
‗arrangement‘ or ‗reconstruction‘. They are akin and would broadly fall and
treated as amalgamation.
23. Thus, amalgamation as a term can include transfer of one or more
undertakings to another company without really blending of one or more
existing companies into the transferee/amalgamated company. All assets of
the transferor/amalgamating company need not be transferred to the new or
other company. The purpose and objective behind sub-section (6) to Section
32A is to facilitate reconstruction and amalgamation and not to obstruct
genuine transactions of such nature. The emphasis in sub-section (6) to
Section 32A is on sale or transfer of the ship, aircraft, machinery or plant,
subject matter of investment allowance in connection with amalgamation or
ITA No. 35/2002 Page 19 of 28


reconstruction. There is also reference to reserves. The emphasis in sub-
section (6) is not upon the blending or merger of the existing company,
which has availed of benefit under Section 32A into another or new
company. At the same time, appropriate and required conditions have been
incorporated in sub-section (6) to Section 32A to ensure that there is no
abuse of the conditions applicable to the amalgamating company, both with
regard to the reserve and the time stipulation on sale or ‗otherwise transfer‘
of assets is applied and adhered to. Violation thereof would cause and result
in negative and penal consequences.
24. There is another way of looking sub-section (6) to Section 32A as it
uses the expression ―in a scheme of amalgamation‖. The expression
―scheme of amalgamation‖ can be interpreted as is commercially and
legally understood in terms of Sections 391 to 394 of the Companies Act,
1956. Section 394 of the Companies Act, 1956 in the heading uses the
phrase ―provisions for facilitating reconstruction and amalgamation of
companies‖. Under Section 394(1)(b), the Legislature besets and includes a
scheme which refers to transfer of whole or part of an undertaking, property
or liabilities of a company concerned between the transferor/amalgamating
and the transferee/amalgamated company. In such cases, the scheme would
not generally involve winding up or dissolution of the
transferor/amalgamating company.
25. Thus, a defined term would not apply if a contrary intention appears
from a provision of the Act. Further, a contrary intention may apply only to
a part of the definition and not the whole. There could be restricted
application of the definition clause (see Francis Bennion , Interpretation of
Statutes , Third Edition, at page 433 Section 199, Statutory definitions,
paragraphs 3 and 4). The said text also states that whatever meaning may be
ITA No. 35/2002 Page 20 of 28


expressly attached to a term, it is important to realise that its dictionary
meaning is likely to exercise some influence over the way the definition will
be understood by the Court. It may not be possible to cancel the ingrained
emotion of a word merely by an announcement. Therefore, it is possible
that the term defined in the definition provisions of the Act may have a
different meaning even, when used within the same Act. In R versus
Lynsey , (1995) 3 All England Reporter 654, it was observed:-
― … The interpreter needs to remember that drafters are fallible. ‗In
stipulating a meaning for a word, a writer demands that his reader
shall understand the word in that sense whenever it occurs in that
work. The writer thereby lays upon himself the duty of using the
word only in that sense, and tacitly promises to do so, and tacitly
prophesies that he will do so. But sometimes a writer does not use
the word only in the sense he has stipulated.‖
26. In NWL Limited versus Woods , (1979) 1 WLR 294, Lord Scarman
had observed:-
―It is wrong to attempt to construe any section or subsection of these
Acts without reference to their legislative purpose. And it is also
necessary to have regard to the history of the statute law and the case
law since 1906 for a full understanding of them. This history I
would summarise as a shifting pattern of Parliamentary assertions
and judicial responses, a legal point counterpoint which has been
more productive of excitement than of harmony. The judges have
been, understandably, reluctant to abandon common law and
equitable principles, unless unambiguously told to do so by statue.
Parliament has created ambiguity not through any lack of drafting
skill but by its own changes of mind.‖
The words are not deployed in vacuum, but in the context of their setting
and to help the interpreter to arrive at the meaning intended.
27. There is another reason why we feel that this interpretation given to
sub-section (6) to Section 32A of the Act. In the present case, 9 out of 13
undertakings of the respondent assessee were taken over by the three new
companies, while the earlier company, i.e. the present assessee, continues to
exist. The case set up by the Revenue is that in case assessee had ceased to
ITA No. 35/2002 Page 21 of 28


exist and had merged, conditions mentioned in Section 2(1B) of the Act
would be satisfied. In other words, in case the scheme of arrangement had
postulated creation of a fourth company to which four units which continued
to remain with the respondent-assessee had been transferred, requirement of
Section 2(1B) of the Act would have been satisfied. Thus, it is a matter of
not selecting a correct taxable event, possibly due to inability and lack of
foresight in comprehending the objection that could be raised. This would
not be in consonance with the object, aim and purpose behind Sub-Section
(6) to Section 32A of the Act. In our decision in ITA No.41 of 2002, dated
nd
22 December, 2014, titled Commissioner of Income Tax versus Shiv Raj
Gupta , we have held:-
―50. The assessed is well within his right to choose any one event
between two or more events and select an event to minimize or reduce
his tax liability. The Act, i.e. the Income Tax Act, 1961, imposes and
saddles tax liability on the chosen tax event. The Act per se , unless a
provision so stipulates, does not restrict or curtail the right of choice.
Tax is determined and gets crystallized on the tax event adopted by the
assessee. For example, in Vodafone’s case (supra), the assessed had
several options and therefore, right to choose a particular tax event. As
long as the choice is within the framework of law, the Assessing
Officer cannot disturb the tax effect or liability, which is the
consequence of the event. The choice of the assessee is not abrogated
or invalidated. For example, a company has several legal options, and
therefore, right to choose how to dispose of a capital asset, as in
Vodafone ‘s case (supra). Similarly, an assessee can opt for and has
multiple options for raising debt to finance business expansion plans.
The assessed may have several legally permissible alternatives to
effect and divide the assets on partition. Such examples are numerous.
The choice might result in mitigation of tax liability, but the tax effect
would not classify or help us differentiate between tax avoidance and
abusive tax avoidance. Any attempt to minimize or eliminate tax
liability would not make the choice of the tax payer abusive tax
avoidance. The foundation of the said principle is that the tax code by
its nature differentiates between different types of actions,
transactions, arrangements and activities and then identifies and
stipulates the consequences. The tax code, i.e. the Income Tax Act,
1961 is rule based and complex. The Act is not entirely principle
based. The provisions are read and applied. Principle of purposive
interpretation both in favour of Revenue or assessed can be applied but
within four corners of law. In fact, in some cases, the assessed may
ITA No. 35/2002 Page 22 of 28


find themselves taxed at a higher liability for failure to choose a more
tax friendly event. But the right of choice is hedged with one
significant condition. The event selected, as noticed above and
subsequently, should be real and not a colourable device, sham and
deceit.‖
28. The submission of the Revenue that the assessee was not covered by
Section 2(1B), we feel in the context of Section 32A and specially sub-
section (6) thereof, should not be accepted because it does not promote the
object, aim and purpose behind Section 32A and the restriction or the bar
created in sub-section (5) and the exception which has been carved out in
sub-section (6). The object and purpose of the provision as is discernible is
to promote and encourage industrialization. The restriction of the sale or
transfer is to ensure that an assessee who avails of investment allowance
does not sell or otherwise transfer the plant and equipment after obtaining
tax benefit as it would be contrary to the intention and the purpose behind
the enactment of the Section. Sub-section (6) is an exception to sub-section
(5) as the legislature did not want to obstruct and withdraw benefit of
investment allowance in cases of genuine arrangements required and
necessary for business and commercial expediency and good reasons. The
intention was not to control and put unnecessary fetters on the manner and
method of conducting business but to ensure that the investment allowance
provisions are not misused by first claiming tax benefit and then selling or
transferring the plant and machinery. The legislature also intended that the
amalgamated company must be bound by the terms and conditions, which
were applicable to the amalgamating company even when there was transfer
or sale of the relevant asset. In this context, we would like to reproduce a
passage from CIT versus Podar Cement (P) Ltd , [1997] 226 ITR 625
wherein while interpreting the word ―owner‖ in the context of Section 22 of
the Act the principle of updating construction of words used in the statute
was expounded in the following words:-
ITA No. 35/2002 Page 23 of 28


―In State ( Through CBI/New Delhi ) v. S. J. Choudhary, AIR
1996 SC 1491, 1494; [1996] 2 SCC 428, this court has quoted
the following passage with approval in support of updating
construction (page 433 of [1996] 2 SCC):
― Statutory Interpretation by Francis Bennion, 2nd edn.
Section 288 with the heading ‗Presumption that updating
construction to be given‘ states one of the rules thus (page
617):
(2) It is presumed that Parliament intends the court to
apply to an ongoing Act a construction that continuously
updates its wording to allow for changes since the Act was
initially framed (an updating construction). While it remains
law, it is to be treated as always speaking. This means that in
its application on any date, the language of the Act, though
necessarily embedded in its own time, is nevertheless to be
construed in accordance with the need to treat it as current
law .
In the comments that follow it is pointed out that an
ongoing Act is taken to be always speaking. It is also, further,
stated thus (pp. 618-19):
‗ In construing an ongoing Act, the interpreter is to
presume that Parliament intended the Act to be applied at any
future time in such a way as to give effect to the true original
intention. Accordingly the interpreter is to make allowances
for any relevant changes that have occurred, since the Act‟s
passing, in law, social conditions, technology, the meaning of
words, and other matters. Just as the US Constitution is
regarded as ―a living Constitution‖, so an ongoing British Act
is regarded as ―a living Act‖. That today‘s construction
involves the supposition that Parliament was catering long ago
for a state of affairs that did not then exist is no argument
against that construction. Parliament, in the wording of an
enactment, is expected to anticipate temporal developments.
The drafter will try to foresee the future, and allow for it in the
wording.
An enactment of former days is thus to be read today,
in thelight of dynamic processing received over the years, with
such modification of the current meaning of its language as
will now give effect to the original legislative intention. The
reality and effect of dynamic processing provides the gradual
adjustment. It is constituted by judicial interpretation, year in
and year out. It also comprises processing by executive
officials‘.‖

(emphasis supplied)
ITA No. 35/2002 Page 24 of 28


29. The principle of updating construction is premised on the doctrine
that Acts are always speaking and are intended to apply over a period of
time. There is, therefore, need to interpret and construct them with reference
to contemporary understanding. The construction should be continuously
updated to allow for changes, after the Act was written. This would be an
intention of the Legislature, as it is not expected that the Legislature will
intervene every now and then, when the Act is intended to apply over a long
time. The Act is a living Act and not a relic. Therefore, it may not be true
and correct that the language of statute must always be understood in the
sense it was understood when it was passed.
30. Referring to the principle of purposive construction to meet the ends
of justice, G.P. Singh in Principles of Statutory Interpretation at page 127
had stated:-
―In the context of purposive construction Sinha J.* recommends: ―To
interpret a statute in a reasonable manner the court must place itself in
the chair of a reasonable legislator/author. So done the rules of
purposive construction have to be resorted to which would require the
construction of the Act in such a manner as to see that the object of the
Act is fulfilled.‖ He then quotes a passage from Barak from his work on
Purposive Construction which refers to two elements of objectivity in
the process of construction as introduces by Hart and Sachs: “first the
interpreter should assume that the legislature is composed of
reasonable people seeking to achieve reasonable goals in a reasonable
manner; and second the interpreter should accept the non-rebuttable
presumption that members of the legislative body sought to fulfill their
constitutional duties in good faith. This formulation allows the
interpreter to inquire not into the subjective intent of the author, but
rather the intent the author would have had, had he or she acted
reasonably.” ‖
(emphasis supplied)
(in New India Assurance Co. Ltd v. Nusli Nerille Wadia, *
(2008) SCC 279, para 51)
31. The Supreme Court in K.P. Verghese versus ITO [1981] 131 ITR
597 while adjudicating on the scope of Section 52(2) of the Act relating
ITA No. 35/2002 Page 25 of 28


under-statement of consideration received on transfer a capital asset
elaborated on purposive construction in the following words:-
―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. ‖
We must not adopt a strictly literal interpretation of s. 52, sub-s. (2),
but we must construe its language having regard to the object and
purpose which the Legislature had in view in enacting that provision
and in thecontext of the setting in which it occurs. We cannot ignore the
contextand the collocation of the provisions in which s. 52, sub-s. (2),
appears,because, as pointed out by judge Learned Hand in the most
felicitous language:
―... the meaning of a sentence may be more than that of the separate
words, as a melody is more than the notes, and no degree of
particularity can ever obviate recourse to the setting in which all appear,
and which all collectively create.‖ ‖

32. Therefore, when we examine, read and interpret sub-section (6) to
Section 32A, we do not think that it would be proper to assert and hold that
the legislature intentionally kept out schemes of part merger from the
protection of Section 32A(6) of the Act. Sub-section (6) to Section 32A is
broad enough and would include any scheme of merger provided the
legislative stipulations in sub-section (6) are met. We do not think it is
necessary and required under the sub-section (6) to Section 32A that the
ITA No. 35/2002 Page 26 of 28


amalgamating company should have been dissolved or fully merged. The
expression ―amalgamation‖ as understood in law and in common parlance is
a very broad and a wide expression. It would include any type of corporate
restructuring or reorganisation and is not restricted to only cases where the
amalgamating company/companies get merged into another entity and cease
to thereafter exist. It is not necessary that the scheme of amalgamation must
postulate a complete merger of the company with assets and liabilities. Part
or partial merger would equally be cases of amalgamation. It is in this
context in the case of Singer India Limited versus Chander Mohan
Chadha , (2004) 7 SCC 1, the aforesaid definition in Halsbury‟s Laws of
England has been accepted and quoted with approval. In the context of the
sub-section (6), we think that the term ―amalgamation‖ used was intended to
include such amalgamations.
33. In paragraph 25 above, we have referred to Francis Bennion and
observed that contrary intention may apply to part of the definition and not
the whole. When we apply purposive interpretation for the benefit of the
respondent-assessee, it is equally important to ensure that the assessee
complies and does not negate the purpose of the Legislation, be it in the
form of conditions stipulated in Section 2(1B) and specific stipulations of
Section 32A sub-section (6). Conformity and fulfilment of conditions when
applicable to cases of amalgamation have to be satisfied. Thus, the assessee
should be able to show and establish that the liabilities associated with the
plant, machinery, ship or aircraft were transferred to the amalgamated
company by virtue of amalgamation (Clause (ii) of Section 2(1B) of the
Act) as also the condition that the shareholders not holding less than nine-
tenth in value of the shares (Clause (iii) of Section 2(1B) of the Act) was
satisfied. Similarly, the stipulations of sub-section (6) to Section 32A must
be met and satisfied. As these aspects have not been examined, we pass an
ITA No. 35/2002 Page 27 of 28


order of remit to the Tribunal to examine the said aspects. We would
request the Tribunal to go into the said aspects and if facts are required to be
clarified, ask the respondent-assessee to furnish relevant data and details and
seek report from the Assessing Officer. Only if it is not possible on the
basis of the said exercise to decipher and decide the correct factual position,
appropriate orders for further remand may be passed. We have made this
request as the present appeal pertains to Assessment Year 1990-91 and if
possible, another round of litigation from the first stage should be avoided.
th
34. The substantial question of law framed on 24 September, 2002 is
accordingly answered holding that there was transfer within the meaning of
Section 32A(5) of the Act. The substantial question of law framed in
paragraph 12 above is partly decided in favour of the respondent assessee
and against the appellant Revenue. The assessee would be entitled to
protection under sub-section (6) to Section 32A of the Act if the conditions
specified in the said sub-section as well as clauses (ii) and (iii) of Section
2(1B) of the Act are satisfied. Stipulations under Section 32A(6) of the Act
should also be satisfied. For examination of these two aspects, an order of
remand is being passed. To cut short delay, the parties will appear before the
th
Tribunal on 10 February, 2015, when a date of hearing will be fixed.
The appeals are accordingly disposed of. No costs.

(SANJIV KHANNA)
JUDGE


(V. KAMESWAR RAO)
JUDGE
rd
DECEMBER 23 , 2014
VKR/kkb/NA
ITA No. 35/2002 Page 28 of 28