Commissioner of Income Tax Gujarat-Ii,
Ahmadabad, Vs. R.M. Amin  INSC 304 (26 November 1976)
KHANNA, HANS RAJ KHANNA, HANS RAJ SINGH,
CITATION: 1977 AIR 999 1977 SCR (2) 220 1977
SCC (1) 691
CITATOR INFO :
E 1980 SC 176 (4) C 1991 SC2104 (7)
Income Tax Act 1961--Sec. 2(17), 2(47), 45,
46(2)--Capital 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
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 liquidation and the amount paid
by the assessee for the acquisition 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 entitled 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 meaning 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,
(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
provisions of s. 46(2) do not apply to it. The said distribution, 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
calculating the capital gains. [225 A-F]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 51 of 1972.
(From the judgment and order dated the 16th
Oct., 1970 of them Gujarat High Court in I.T. Ref. No. 4 of 1967) 221 V.S.
Desai, J. Ramamurthi and Girish Chandra, for the appellant.
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 answered 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
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 liquidators 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. Accordingly, the entire amount was
liable to be taxed as above.
On appeal before the Appellate Assistant
Commissioner reference 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, extinguishment 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 accordingly
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 contention. 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 repelled. In the result the appeal of the assessee was accepted. 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
distribution 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 Incometax 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 inserted 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 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;"
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 distributed to its shareholders
on its liquidation, such distribution shall not be regarded as a transfer by
the company for the purposes of section 45.
(2) Where a shareholder on the liquidisation
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 contention 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 contention of Mr. Sen
The question as to whether the distribution
of assets of a company has gone into voluntary liquidation to its shareholder
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 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. 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 section
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 opinion, would also cover the case of extinguishment of any rights in
(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 shareholders.
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 aforesaid 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 history cannot be allowed to override the plain words of a statute.
As a result of the above, we dismiss the
appeal with costs.
P.H.P. Appeal dismissed.