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C.I.T. V. Ram Kumar Aggrawal [1993] INSC 471 (2 November 1993)

JEEVAN REDDY, B.P. (J) JEEVAN REDDY, B.P. (J) BHARUCHA S.P. (J) CITATION: 1994 SCC (1) 201 JT 1993 (6) 290 1993 SCALE (4)320

ACT:

HEADNOTE:

The Judgment of the Court was delivered by B.P. JEEVAN REDDY, J.- This appeal arises from the judgment of a Division Bench of the Calcutta High Court answering the questions referred to it in favour of the assessee and against the Revenue. The assessment year concerned herein is 1956-57. The three questions referred at the instance of Revenue, for the opinion of the High Court are:

"(1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in investigating the nature of the shares held by the assessee in Chrestian Mica Co. Ltd. when both the assessee and the Income Tax Authorities had treated them as the stock- in-trade of the assessee as a dealer in share for every assessment year since 1949-50 and proceeded on the same basis for the instant assessment year? (2) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the shares held by assessee in Chrestian Mica Co. Ltd.

were not its stock-in-trade for dealing in shares? (3) If the answer to question (2) be in the negative then whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rupees Thirty-two lakhs twenty-five thousand and five hundred and fifty was not assessable in the hands of the Assessee?"

2. The assessee is a partnership firm. The accounting year relevant to A.Y. 1956-57 was the year ending on December 31, 1955. The Income Tax Officer made an assessment on a total income of Rs 36,41,544 which included a sum of Rs 32,25,550 representing the surplus which the assessee received during the previous year from the liquidator of Chrestian Mica Co. Ltd. which went into voluntary liquidation in the year 1955. The assessee preferred an appeal to the Appellate Assistant Commissioner objecting to the inclusion of the said surplus amount. The appeal was dismissed. But on further appeal, the Income Tax Appellate Tribunal agreed with its contention.

3. The assessee was a regular dealer in shares. In the year 1945, it purchased all the equity shares of Chrestian Mica Co. Ltd. which was then a public limited company. The assessee took over its management. In 1947, the company was converted into a private limited company. For the A.Y. 1949-50, the assessee claimed a trading loss of Rs 20,88,735 stated to be the 204 loss suffered on account of depreciation of the value of the shares of the said company. This claim was made on the basis that all the shares of the company were held by it as stock-in-trade. Its claim was allowed by the Tribunal on appeal. In all the subsequent assessments, the said shares were treated as its stock-in-trade and value of those shares as claimed by the assessee was adopted.

4. In the assessment proceedings relating to the assessment year concerned herein (1956-57), the assessee admitted that the shares of the said company were held by it as stock-in-trade. On that basis, the said surplus amount received by it from the liquidator was included in its total income by the ITO and the AAC. On appeal, however, there was a difference of opinion between the Judicial Member and the Accountant Member whereupon the matter was referred to the Vice-President. He upheld the assessee's plea. Then followed the reference to the High Court.

5. Before the High Court, the counsel for the assessee contended that the admission and concession made by the assessee to the effect that the said shares were held by it as stock-in-trade was erroneous and was, therefore, not binding upon it. Some decisions relating to adventure in the nature of trade were relied upon in that behalf. The said contention was, however, rejected by the High Court and rightly in our opinion. It was then argued for the assessee that the said shares ceased to be stock-in-trade of the assessee the moment the company was converted from a public limited company to a private limited company. This contention was also rejected by the High Court. The High Court then considered the question whether the amount received by the assessee from the liquidator was in lieu of the shares held by it. Following the decision of the House of Lords in IRC v. George Burrell' it held that whatever is received by a shareholder on the liquidation of a company is not the income of the property but the property itself. The High Court referred to certain other English and Indian decisions and observed that as a general rule, what is distributed in a liquidation is capital whatever may have been its source. It also observed that there was no sale or transfer of the shares held by the assessee "the liquidator sells the assets of the company and not the shares of the shareholders", it observed. Reference was also made to the provisions of Section 211 of the Indian Companies Act, 1913 and Section 511 of the Companies Act, 1956. For all the said reasons, the questions referred were answered in favour of the assessee. Dipak Kumar Sen, J.

delivered a separate concurring opinion. The learned Judge did not place much reliance upon the English decisions. He pointed out that in none of the English decisions relied upon before them, did the assessee hold the shares as stock- in-trade. The main ground upon which he held in favour of the assessee runs thus:

"Where a limited liability company is liquidated and the liquidator distributes the surplus assets, there is no transaction in the trading sense between the liquidator and the shareholders. Irrespective of the decision 1 9 Tax Cases 27: (1924) All ER Rep 672: (1924) 2 KB 52 205 of the shareholders the liquidator has to carry out his duties and obligation as laid down in the Companies Act. No consideration passes from the liquidator to the shareholder as in the case of sale. Nor can it be said that the liquidator in distributing the surplus assets is realising or redeeming the shares. In law, a shareholder may technically continue to be a shareholder even after he gets his share of the surplus. Till the company is struck off the register, he remains a shareholder in law. He retains his share scrips. By virtue of his holding, a shareholder is entitled to surplus assets on the liquidation of company and such surplus assets appear to me to be in the nature of an accretion to his share."

6. Shri G.C. Sharma, learned counsel for the Revenue characterised the view taken by the High Court as unsustainable in law besides being unrealistic and hypertechnical. Learned counsel submitted that the assets which a shareholder receives on the liquidation of a company is in lieu of and on account of the shares held by him.

Once a company goes into liquidation and the liquidator distributes the assets among the shareholders (after discharging the liabilities, if any) the company ceases to exist, though technically speaking it may continue as such until its name is struck off the register of companies. It is not necessary, submitted the learned counsel, that there should be a sale or transfer of shares for the income to arise. Once the shares get converted into money (or other assets), by whatever means it may be, the money (or assets) received by the holder of such shares must be held to have realised the value of the said shares.

7. Though the respondent was duly served and was represented by Shri P.K. Mukherjee, it was represented by the learned counsel on the last date of hearing that in spite of repeated letters by him, the assessee was not responding and, therefore, he was obliged to report 'no instructions'. Thereafter, he did not participate in the hearing of the appeal.

8. Whether shares of a company held by a person constitute his capital or his stock-in-trade, is not a pure question of law but essentially one of fact. While one person may hold the shares of a company by way of investment, the other may hold them as his stock-in-trade. In this case, it is clear beyond any doubt that the assessee has been holding the shares of the aforesaid company as its stock-in-trade. In the earlier years, it claimed a trading loss on the footing that they represented its stock-in-trade. Even in the assessment proceedings for the A.Y. 1956-57 (concerned herein), it took the very same stand though at the stage of Tribunal and High Court, it sought to wriggle out of the said admission unsuccessfully. The High Court has held rightly that it cannot do so and that it is bound by its admission and its course of conduct over the past several years. The High Court, it may be recalled, has also rejected its further submission that the said shares ceased to be its stocking trade on the conversion of the company from a public limited company to a private limited company.

If so, it follows that if the assessee receives any surplus amount in lieu of the said shares, it must be held to be a revenue receipt in his hands. It cannot be denied that the amount received by the assessee from the liquidator in this case was in lieu of its share-holding. In 206 effect and in truth, the amount received by it represented the recompense for its shares, even though it is true there was no transfer of shares from the assessee to the liquidator or to anyone else. It was a case of return for the money paid by the assessee for acquiring the said shares. In one case, the return may be more than what the holder paid for them while in another it may be less; the character of the receipt remains the same. The High Court has however held in favour of the assessee opining that (i) whatever is received by the shareholder on liquidation of a company is "no income of the property but the property itself'; (ii) that whatever is disturbed in a liquidation is capital, whatever may have been its source, as held in Brogan (Inspector of Taxes) v. Stafford Coal and Iron Co.

Ltd'; (iii) in the course of liquidation of the company the liquidator sells the assets of the company and not the shares of the shareholders; and (iv) where a limited company is liquidated and the liquidator distributes the surplus assets, there is no transaction in the trading sense between the liquidator and the shareholders. By virtue of his holding, a shareholder is entitled to surplus assets on the liquidation of the company and such surplus assets are in the nature of an accretion to the shares held by him.

9. The question is whether the opinion of the High Court is correct in law? We find it difficult to say so. Section 51 1 of the Companies Act applies to every voluntary winding up. It says that:

"511. Subject to the provisions of this Act as to preferential payments, the assets of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu and, subject to such application, shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company." The concluding words of this section indicate that the assets of a company, on its liquidation, shall be distributed among the shareholders according to their rights and interests in the company which necessarily means according to their share-holding. What each shareholder gets is proportionate to his share-holding in the company.

Once the distribution takes place, the shares and the share- holding come to an end. The fact that the shares may technically continue until the name of the company is struck off the register of the company is of little significance.

After the distribution of the assets, nothing remains of the shares. To say that the assets a shareholder receives on the liquidation of the company are unrelated to his share- holding is to be blind to the reality. Such an argument ignores the basic reality recognised by Section 511 of the Companies Act. The same comment holds good about the argument that the amount received is an accretion to the shares. It is true that a liquidator does not sell the shares. It is equally true that there is no transfer of shares by the shareholder to the liquidator or to any other person. That is not really necessary. So long as money is received in lieu of shares, there is a receipt and where an assessee is a dealer in shares, any surplus amount received by him constitutes his income. As stated above, where a company 2 41 Tax Cases 305: (1963) 3 All ER 277: (1963) 1 WLR 905 207 goes into liquidation and the liquidator distributes the assets of the company among the shareholders, what each shareholder gets is in lieu of his shareholding. That is the worth, the value and the price of his share-holding. A shareholder participates in the distribution of the assets of a company on its liquidation by virtue of and because of his share-holding. We, therefore, find it difficult to agree with the High Court that a shareholder participates in the distribution of assets on the liquidation of the company dehors his shareholding. Once this is so, it follows that the money received by the assessee in lieu of its share- holding partakes of the same character in which he held the shares. If he held the shares as stock-in-trade, the money received by it represents his income, i.e., a revenue receipt in its hands. If it held them by way of investment, the money it receives represents a capital receipt by it.

10. It would be appropriate at this stage to consider the decisions cited by Shri G.C. Sharma and those referred to in the judgment of the High Court. In CIT v. Madan Gopal Radhey Lal3, it was held that though the assessee held certain shares of a company as stock-in-trade, the bonus shares issued by the company and received by him were received by him as capital. On the facts of that case, however, it was held that since the assessee had converted the same into his stock-in-trade, the sale proceeds of the said bonus shares represented his business receipts. We are unable to see any relevance of the said proposition to the question at issue herein. At the relevant time, under the Income Tax Act, 1922, issue of bonus shares by capitalisation of the accumulated profits was not treated as distribution of dividend. It is the said circumstance which seems to have influenced the decision of this Court. The learned counsel for the Revenue brought to our notice a passage from the opinion of Lord Evershed in Brogan2. At page 333 (All ER p. 283), the following statement occurs:

"It cannot now be in doubt that surplus assets in the hands of the liquidator of a limited liability company whether limited by share capital or by guarantee are in his hands capital. Such a conclusion was laid down by the Court of Appeal in IRC v. Burrell' and it has never since been questioned. The terms of Section 302 of the Companies Act, 1948, are entirely consistent with this view, for they speak of the 'property of the company' being distributed as therein stated. I agree that the fact that the surplus assets of a company on its winding-up are capital in the hands of the liquidator is not conclusive on the question whether the respective shares of them handed out to the members are likewise in their respective hands capital also. But prima facie beyond doubt they are. Some businesses may consist of dealing with capital assets; for example a company whose business is that of buying and selling real property or stocks and shares. In the case of such a company, no doubt the capital share of the surplus assets in a liquidation would be no less a trading receipt than the proceeds of sale of any other of the assets it had acquired for the purposes of its business." 3 (1969) 73 ITR 652: AIR 1969 SC 840: (1969) 2 SCR 7 208

11. The learned counsel says that the said statement of law runs counter to the decision of this Court in Madan Gopal Radhey Lal3. He also invited our attention to Hari Prasad Jayantilal & Co. v. V.S. Gupta, ITO4 to contend that the principle of this decision also runs counter to the decision in Madan Gopal Radhey Lal3. It is unnecessary for us to go into the said aspect as in our opinion the principle of Madan Gopal Radhey Lal3 has no application to the facts herein.

12. The High Court has placed strong reliance upon the decision of the Court of Appeal in IRC v. Burrell'. In that case, the respondents-assessees were partners in a firm which held shares in a number of single ship companies. On the sale or loss of each ship, each of the companies went into voluntary liquidation, and its surplus assets, including reserves set aside out of profits, and other undivided profits, accumulated and current, were distributed by the liquidator among the shareholders. On those facts, it was held that on the liquidation of a company undistributed profits can no longer be distinguished from the capital and that such portion of the assets distributed by the liquidator as represents undistributed profits is not income in the hands of the shareholders which they are required to include in their returns of total income for super-tax purposes. Firstly, it is not a case where the assessees or the firms of which they were partners held the shares as stock-in-trade. Secondly, the said decision cannot mechanically be applied to the cases arising in this country in view of the definition of the expression "dividend" in Section 2(6-A) of 1922 Act and in Section 2(22) of the 1961 Act. The same comment holds good with respect to the decision of the House of Lords in Brogan 2 .

This was also not a case where the shares were held by the assessee as his stock-in-trade.

13. Reference may now be made to the decision of the Patna High Court in Dalmia Cement and Paper Marketing Co. Ltd. v. CIT5. In this case, the assessee-company was a dealer in shares and securities. It held the shares of another company of the face value of Rupees Four lakhs which formed part of the stock-in-trade of the assessee's share-dealing business. The other company went into voluntary liquidation as a result of which the liquidator sold its assets and distributed a certain amount pro rata among the shareholders. The assessee received Rs 4,75,000 in one year and Rs 8021 in the next year. The Income Tax Authorities treated Rs 75,000 and Rs 8021 (being the surplus amount over the purchase price of the shares) as revenue receipts and included them in the assessable income of the respective years. It was held by the Patna High Court that the Income Tax Authorities acted in accordance with law in doing so inasmuch as the said amounts represented revenue receipts in the hands of the assessee. In the judgment under appeal, the Calcutta High Court has disagreed with this view but, for the reasons given hereinabove, we are of the opinion that the view taken by the Patna High Court is the correct one.

4 (1966) 59 ITR 794: AIR 1966 SC 1481: (1966) 2 SCR 732 5 (1949) 17 ITR 141 (Pat) 209

14. For the above reasons, we allow this appeal, set aside the judgment of the High Court and answer all the three questions referred in the negative, i.e., in favour of the Revenue and against the assessee. No costs.

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