PETITIONER:
COMMISSIONER OF INCOME TAX GUJARAT-II, AHMEDABAD,
Vs.
RESPONDENT:
R.M. AMIN
DATE OF JUDGMENT26/11/1976
BENCH:
KHANNA, HANS RAJ
SINGH, JASWANT
CITATION:
1977 AIR 999 1977 SCR (2) 220
1977 SCC (1) 691
ACT
Income Tax Act 1961--Sec. 2(17), 2(47), 45, 46(2)--Capi-
tal gains-Distribution of assets by a liquidator of company
in voluntary liquidation--If liable to capital gains tax--If
foreign company which is not a company within the meaning of
the Income Tax Act--Company--Meaning of--Transfer.
HEADNOTE
The respondent assessee acquired before 1-1-1954 certain
shares in a private limited company incorporated in Uganda
for Sh. 192002--Rs.1,28,000/-. The said company went into
voluntary liquidation in the year 1961. The liquidators,
sold the assets of the company and the assessee received an
amount equivalent to Rs.3,12,326/-. The Income Tax Officer
treated the difference between the amount received on liqui-
dation and the amount paid by the assessee for the acquisi-
tion of shares as capital gains liable to tax within s. 45
of the Income Tax Act, 1961. The Income Tax Officer held
that since the Uganda company was not a company within the
meaning of s. 2(17) of the Act, the assessee was not enti-
tled to the benefit of s. 46(2) and, therefore, the entire
amount was liable to. be taxed. On an. appeal, the AAC held
that the transaction amounted to a transfer within the
meaning of s. 2(47) because there was extinguishment of the
rights in the capital assets as represented by the shares.
The Tribunal held that it was not transfer within the mean-
ing of s. 2(47). The High Court decided the reference in
favour of the assessee on the ground that when a shareholder
received monies representing his share on distribution of
the net assets of the company in liquidation, he receives
such monies in satisfaction of the right which belongs to
him by virtue of his holding the share and not by way of
consideration for the extinguishment of his right in the
share.
Dismissing the appeal by certificate,
HELD: (1) The Uganda company is not a company within the
meaning of s. 2(17). There was no transfer as contemplated
by the Act to attract the. levy of capital gain tax. This
Court in the case of Madurai Mills has already held that the
act of liquidation in distributing the assets of the company
which. had gone into voluntary liquidation did not result in
the creation of new rights.. It merely entailed recognition
of the legal rights which were in existence prior to the
distribution. [223 C, 224 E-F]
Commissioner of Income-tax, Madras v. Madurai Mills Co.
Ltd., 89 ITR 45, followed.
(2) The legislature made express provisions in s. 46(2)
for levying capital gains tax in respect of distribution of
assets of a company. But for the said provision distribution
of assets on the liquidation of a company would not attract
the capital gains tax under s. 45. Since the Uganda company
is not a company within the meaning of the Act the provi-
sions of s. 46(2) do not apply to it. The said distribu-
tion, therefore, does not attract capital gains tax. Section
46(2) creates the liabality of a shareholder to pay the tax
on capital gains and also prescribes the mode of calculat-
ing the capital gains. [225 A-F]
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 51 of 1972.
(From the judgment and order dated the 16th Oct., 1970
of the. Gujarat High Court in I.T. Ref. No. 4 of 1967)
221
V.S. Desai, J. Ramamurthi and Girish Chandra, for the appel-
lant.
B. Sen, Mrs. ,4. K. Verma, K.J. John and Shri Narain
for the respondents.
Judgment of the Court was delivered by
KHANNA, J. This appeal on certificate is against the
judgment of Gujarat High Court whereby the High Court an-
swered the following question referred to it under section
256(1) of the Income-tax Act, 1961 (hereinafter referred to
as the Act of 1961) in favour of the assessee-respondent and
against the revenue:
"Whether on the facts and in the circumstances
of the case, there was a transfer of a
capital asset within the meaning of
section 45 read with section 2(47) of the
Income-tax Act, 1961 ?"
The matter relates to the assessment year 1962-63, for
which the accounting previous year was calendar year 1961.
The assessee who is an individual held 192 shares of
Kawelengoji Ginneries Ltd., Kampala, a private limited
company incorporated in Uganda (hereinafter referred to as
the Uganda company). Those shares were acquired by the
assessee sometimes before January 1, 1954 and he paid Sh.
1000 for each share. The amount thus paid by the assessee
for the 192 shares was Sh. 1,92,000, equivalent to
Rs.28,000. The said company went into voluntary liquidation
as per special resolution dated July 10, 1961. The liquida-
tors sold the assets of the company in due course and the
liquidators account was finally drawn up on July 31, 1961.
As per this account, the assessee became entitled to receive
Sh. 4,68,489 at the rate of Sh. 2440.0493 per share as
return of capital. The above amount was equivalent to
Rs.3,12,326. There was thus an excess of Rs.1,84,326. This
amount was received by the assessee during the accounting
year.
The Income-tax Officer treated the amount of Rs.1,84,326
as capital gains liable to tax within the meaning of section
45 of the Act of 1961. It was pointed out by him that the
Uganda company was not a company within the meaning of
section 2(17) of the Act of 1961 and the shareholders
thereof could not be said to be entitled to the benefit
provided under section 46(2) of the Act of 1961. Accord-
ingly, the entire amount was liable to be taxed as above.
On appeal before the Appellate Assistant Commissioner refer-
ence was made on behalf of the assessee to the definition
of the word "transfer" in section 2(47) of the Act of 1961.
according to which transfer in relation to a capital asset
includes the sale, exchange or relinquishment of the
asset or the extinguishment of any rights therein or
the compulsory acquisition thereof under any law. There
was no dispute that the present was not a case of sale,
exchange or compulsory acquisition of capital asset within
the meaning of section 2(47) of the Act of 1961. The only
question was whether there was "relinquishment of the asset
or the extinguishment of any rights therein". The Appellate
Assistant Commissioner held that for the relinquishment of
an asset, the asset must
222
continue to be in existence. Applying that criterion, the
Appellate Assistant Commissioner held that there was no
relinquishment of the asset. There was, however, in the
opinion of the Appellate Assistant Commissioner, extinguish-
ment of the rights in the capital assets as represented by
the shares and therefore the amount was liable to be taxed
to capital gains tax. The appeal of the assessee was ac-
cordingly dismissed. On second appeal the assessee, apart
from contesting the taxability of the amount of Rs.1,84,326
as capital gains, raised two other contentions. One of
those contentions was that in any event the capital gains
should have been computed by deducting the fair market value
of the asset as on January 1, 1954 from the amount received
by the assessee. The other contention was that having regard
to the provisions of section 114 of the Act of 1961 the levy
of capital gains tax should have been much less than the
amount actually calculated by the Income-tax Officer. We
are in the present case not concerned with the second con-
tention. The first of these two contentions was, however,
accepted and it was held that taking into account the value
of the shares as on January 1, 1954 the capital gain, if
chargeable, would work out to be Rs.1,23,590. The Tribunal
then went into the question as to whether there was transfer
of capital assets and came to the conclusion that there was
no such transfer within the meaning of section 2(47) of the
Act of 1961. The contention of the revenue that there had
been extinguishment of the rights of the assessee was re-
pelled. In the result the appeal of the assessee was ac-
cepted. On the application made by the appellant, the
question reproduced above was then referred to the High
Court.
The High Court in answering the question referred to it
in the negative, held that the transfer contemplated by
section 45 should be one as a result of which consideration
is received by the assessee or accrues to him. When a
shareholder receives moneys representing his share on dis-
tribution of the net assets of the company in liquidation,
he, in the opinion of the High Court, receives such moneys
in satisfaction of the right which belongs to him by virtue
of his holding the share and not by way of consideration
for the extinguishment of his right in the share. The High
Court accordingly concluded that when a shareholder receives
his share on final distribution of the assets of the company
in liquidation, there is no transfer of capital assets by
him which would attract the charge of capital gains tax.
The judgment of the High Court is reported in 82 ITR 194.
Before proceeding further, we may mention that tax on
capital gains was charged for the first time by the Income-
tax and Excess Profits Tax (Amendment)Act, 1947 (Act 22 of
1947) which inserted section 12 B in the Indian Income-tax
Act, 1922. It taxed capital gains arising after March 31,
1946. The tax on capital gains was virtually abolished by
the Indian Finance Act, 1949 which confined the operation of
section 12 B to capital gains arising before April 1, 1948.
Capital gains tax was. however. revived with effect from
April 1. 1957 by the Finance (No. 3) Act, 1956 which insert-
ed new section 12 B instead of the old section 12 B in the
Act of 1922.
223
In the present appeal we are, however, concerned with the
Act of 1961. It may be appropriate at this stage to refer
to the relevant provisions of that Act at the material time.
Section 2(14) of the Act defined capital assets to mean
property of any kind held by an assessee, whether or not
connected with his business or profession, but does not
include certain categories of property which need not be
mentioned as we are not concerned with them. It is the
common case of the parties that the shares held by the
assessee in the Uganda company constituted capital asset.
"Company" has been defined in Section 2(17) of the Act to
mean
(i) any Indian company, or
(ii) any association, whether incorporated
or not and whether Indian or non-Indian, which
is or was assesable or was assessed under the
Indian Income-tax Act, 1922 (XI of 1922), as a
company for the assessment year
commencing_from the 1st day of April, 1947,
o.r which is declared by general of special
order of the Board to be a company for the
purposes of the Act.
The learned counsel for the parties are agreed that the
Uganda company was not a company within the meaning of the
word "company" as given in the above provision. Transfer in
relation to a capital asset has been defined in clause (47)
of section 2 of the Act, and the definition reads as under:
"(47) ’transfer’ in relation to a capi-
tal asset, includes the sale, exchange or
relinquishment of the asset or the extin-
guishment of any rights therein or the
compulsory acquisition thereof under any law;"
Section 45 deals with the levy of tax on
capital gains, and reads as under:
"45 Capital gains.--Any profits o.r gains
’arising from
the transfer of a capital asset effected in
the previous year shall, save as otherwise
provided in section 53 and 54, be chargeable
to income-tax under the head ’Capital gains’
and shall be deemed to be the income of the
previous year in which the transfer took
place."
Section 45 deals with the levy of tax on
capital gains, and reads as by companies in
liquidation reads as under:
"46. Capital gains on distribution of
assets by companies in liquidation.--(1)
Notwithstanding anything contained in section
45, where the assets of a company are dis-
tributed to its shareholders on its liquida-
tion, such distribution shall not be regarded
as a transfer by the company for the purposes
of section 45.
(2) Where a shareholder on the liquidi-
sation of a company receives any money or
other assets from the company, he shall be
chargeable to income-tax under the head
’Capital gains’, in respect of the money so
received or the market
224
value of the other assets on the date of
distribution, as reduced by the amount
assessed as dividend within the meaning of
sub-clause (c) of clause (22) of section 2 and
the sum so arrived at shall be deemed to be
the full value of tire consideration for the
purposes of section 48."
Section 47 specifies some of the transactions which shall
not be regarded as transfers. Section 48 prescribes the
mode of computation and deductions in the matter of tax on
capital gains.
There can be no dispute that the amount received by the
assessee in respect of the 192 shares of the Uganda company
held by him in excess of the cost of acquisition of those
shares constituted profits or gains. The question with
which we are concerned is whether those profits or gains
arose from a transfer of the capital assets. The argument
of Mr. Desai, learned counsel for the appellant, is that
when the assessee received the sum of Sh. 4,68,489 in lieu
of the 192 shares held by him in the Uganda company, he
received that amount as a result of transfer. The word
"transfer" in relation to a capital asset. according to the
learned counsel, includes extinguishment of any rights
therein. The words "extinguishment of any rights therein",
it is submitted, would cover the case of the assessee when
he received the amount mentioned above on account of the
shares held by him in the Uganda company. The above conten-
tion has been controverted by Mr. Sen who was urged that
there was no transfer contemplated by law as to attract the
levy of tax on capital gains. After giving the matter our
earnest consideration, we are of the opinion that the con-
tention of Mr. Sen is well-founded.
The question as to whether the distribution of assets of
a company has gone into voluntary liquidation to its share-
holder would amount to sale, exchange, relinquishment or
transfer within the meaning of section 12 B of the Act of
1922 as amended in 1956 was considered by this Court in the
case of Commissioner of Income-tax, Madras v. Madurai Mills
Co. Ltd.(1) While answering that question in the negative,
this Court held that the act of the liquidators in distrib-
uting the assets of the company which had gone into volun-
tary liquidation did not result in the creation of new
rights. It merely entailed recognition of the legal rights
which were in existence prior to the distribution. This
Court further observed
"When a shareholder receives money
representing his share on distribution of the
net assets of the company in liquidation. he
receives that money in satisfaction of the
right which belonged to him by virtue of his
holding the shares and not by operation of
any transaction which amounts to sale,
exchange, relinquishment or transfer."
The above observations, though made in the context of sec-
tion 12 B of the Act of 1922 which related to capital gains
in respect of profits or gains arising from sale, exchange.
relinquishment or transfer of capital assets, in our opin-
ion, would also cover the case of extinguishment of any
rights in capital assets.
(1) 89 L T.R. 45.
225
The matter can also be looked at from another angle. In
the case of Indian companies and the other companies falling
within the definition of company, as given in section 2(17)
of the Act of 1961, the legislature, has made. express
provision in sub-section (2) of section 46 of the Act that
where a shareholder on the liquidation of a company receives
any money or other assets from the company, he shall be
chargeable. to income-tax under the head "Capital gains" in
respect of the money so received or the market value of
the other assets on the date of distribution as reduced by
certain amounts which need not be specified. But for this
provision, it would not have been possible, in our opinion,
to charge tax under the head "Capital gains" on the money or
other assets of a company received by its shareholder on its
liquidation. The provisions of sub-section (2) of section
46, as already mentioned, apply only to the distribution of
assets by such companies in liquidation as are covered by
the definition of the word "company" in section 2(17) of the
Act. The legislature having made no similar provision in
respect of companies other than those which fall within the
definition contained in section 2(17), we find it difficult
to sustain the levy of tax on capital gains when such
other companies distribute assets on liquidation to share-
holders.
We are not impressed by the argument of Mr. Desai that
section 46(2) does not create liability of a share-holder to
pay tax on capital gains which liability, according to the
learned counsel, arises because of section 45, but was
enacted with a view to prescribe the mode of calculating
capital gains in the event of distribution of the assets of
a company in liquidation to its share-holders. The afore-
said section, in our view, was enacted. both with a view to
make shareholders liable for payment of tax on capital gains
as well as to prescribe the mode of calculating the capital
gains to the shareholders on the distribution assets by a
company in liquidation. But for that sub-section, as
already mentioned, it would have been difficult to. levy tax
on capital gains to the shareholders on distribution of
assets by a company in liquidation.
Mr. Desai took us through the legislative history of the
provisions relating to the levy of tax on capital gains. A
similar attempt was made by the learned counsel for the
revenue in the case. of Madurai Mills (supra) and this Court
observed that consideration stemming from legislative histo-
ry cannot be allowed to override the plain words of a stat-
ute.
As a result of the above, we dismiss the appeal with costs.
P.H.P. Appeal
dismissed.
16--1458SCI/76
226