[1977] 108 ITR 1000 (Mad

[1977] 108 ITR 1000 (MAD.)

HIGH COURT OF MADRAS

Commissioner of Income-tax

M.A. Alagappan

V. RAMASWAMI AND V. SETHURAMAN, JJ.

TAX CASE NO. 268 OF 1970

MARCH 16, 1976

JUDGMENT

V. Ramaswami, J.—The assessee was a shareholder of a company called "Ajax Products Ltd" which went into voluntary liquidation on 30th October, 1954. At the time of voluntary liquidation, he held 378 and 2/3rd shares of the face value of Rs. 100 each. The liquidator who was appointed to wind up the affairs of the company, sold some of its assets in February, 1955, to a new company and in pursuance of that sale, the shareholders of Ajax Products Ltd. were allotted fully paid up shares of the new company equal in number and face value to the share they held in the old company. Thereafter, the liquidator distributed from time to time various sums to the shareholders out of realisations in respect of the remaining assets. In the year of account, relevant to the assessment year 1965-66, the assessee received a sum of Rs. 8,331 at the rate of Rs. 22 per share. Since the assessee had already received the full value of his original investment in the form of shares in the new company at the very first distribution itself, the Income-tax Officer brought this sum of Rs.8,331, received by the assessee, as capital gains under section 46(2) of the Income-tax Act, 1961, hereinafter called the Act. The assessee preferred an appeal to the Appellate Assistant Commissioner and contended that there was no transfer of a capital asset by the appellant in the previous year relevant to the assessment year under appeal to render him liable to be assessed in respect of any capital gains. The Appellate Assistant Commissioner held that when a company is taken into liquidation and the liquidator starts distribution of the assets of the company among the share-holders, there is a progressive extinguishment of the rights of the shareholders with each distribution. He referred to the definition of the word "transfer" in section 2(47) of the Act which included relinquishment of the asset or the extinguishment of any rights therein also coming within the meaning of the word "transfer". Inasmuch as the transfer in relation to a capital asset had been given an extended meaning to include an extinguishment of the rights therein, there is a transfer at each distribution. He was also of the view that by virtue of the provisions contained in sub-section (2) of section 46, the sum which the shareholder received from the liquidator is assessable to tax as "capital gains" to the extent it is not liable to be treated as dividend under clause (c) of sub-section (22) of section 2 of the Act. In the result, he held that the sum of Rs. 8,331 is taxable as "capital gains".

On a further appeal, the Tribunal held that the disputed amount could not be included in the chargeable income of the assessee under the head "capital gains". According to the Tribunal, "capital gains" could not ordinarily be treated as a taxable income. But, by specific deeming provisions, certain kinds of gains arising from the transfer of a "capital asset" were treated as taxable income in order that such a deemed income is included in the chargeable income. According to the Tribunal, a specific mention of such deemed income has to be made in the definition of the word "income" under section 2(24). While there is such a specific mention of capital gains chargeable under section 45, in section 2(24), the omission of any reference to section 46 is conspicuous though both the sections had been enacted at the same time. The Tribunal also sought support for this view by a reference to section 19(3)(i) which again refers to only "capital gains" chargeable under section 45 and not section 46. The Tribunal, therefore, held that the capital asset could be brought to tax only if there is a transfer within the terms of the provisions of section 45 and the provisions of section 46 would not by themselves give authority for including the same in the total income.

At the instance of the revenue the following question has been referred:

"Whether, on the facts and in the circumstances of the case, the appellate Tribunal was right in law in holding that the sum of Rs. 8,331 received by the assessee from the liquidator of M/s. Ajax Products Ltd. in the year of account relevant to the assessment year 1965-66 cannot be included in the chargeable income of the assessee under the head ' capital gains?"

The learned counsel for the revenue contended that the sum of Rs. 8,331 is a profit or gain arising from the extinguishment and that in view of the extended definition of the word "transfer" in section 2(47), such profits or gains arise from the transfer of the shares within the meaning of section 45 of the Act and accordingly liable to be included in the total income of the assessee. He also wanted to infer a legislative intention to treat the distribution of the asset of a company among its shareholders on its liquidation as a transfer by a reference to section 46(1) of the Act.

Under section 45 any profits or gains arising from the transfer of a capital asset shall be chargeable to income-tax under the head "capital gains". The word "transfer" is defined in section 2(47) in relation to a capital asset as including "sale, exchange or relinquishment of the asset, or extinguishment of any rights therein or compulsory acquisition thereof under any law". The word "transfer" was not defined under the Indian Income-tax Act, 1922. But section 12B of that Act provided that tax shall be payable by an assessee under the head "capital gains" in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset. In cases arising under section 12B of the old Act, the Supreme Court in CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC), approving the view of this court, held that the distribution of the asset of a company in liquidation does not amount to a transaction of a sale, exchange, relinquishment or transfer so as to attract section 12B of the Act.

It is true that the present definition of the word "transfer" includes the extinguishment of any rights also as a transfer. The question, therefore, for consideration is whether there is any extinguishment of any of the rights of the assessee and whether such extinguishment of the rights will fall within the ambit of section 2(47) of the Act. A similar question directly arose for consideration in CIT v. R.M. Amin [1971] 82 ITR 194 (Guj). Bhagwati C.J., holding that when a shareholder receives his share on a final distribution of the net assets of the company in liquidation, there was no transfer of capital asset by him which would attract the charge of capital gains under section 45, observed at page 202:

"Section 48 says that the income chargeable to tax as "capital gains" shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset' the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer; and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. The amounts specified in clauses (i) and (ii) are to be deducted from the 'consideration received or accruing as a result of the transfer of the capital asset' for the purpose of determining the profits or gains chargeable to tax. The transfer that is contemplated by section 45 read with section 2(47) is, therefore, a transfer as a result of which consideration is received by the assessee or accrues to the assessee. Substituting the words 'extinguishment of any rights in the capital asset' for the words 'transfer of the capital asset', the transaction, in order to attract the charge of tax as capital gains, must, therefore, be such that consideration is received by the assessee or accrues to the assessee as a result of the extinguishment of the rights in the capital asset. There must be an element of consideration for the extinguishment of the rights in the capital asset. Then only would it be a transfer exigible to capital gains tax. Now, as we have already pointed out above, when a shareholder receives moneys representing his share on distribution of the net assets of the company in liquidation, he 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 or rights in the share. The share merely represents the right to receive moneys on distribution of the net assets of the company in liquidation and that right is satisfied and, by satisfaction, extinguished when such moneys are received by the shareholder. Such moneys received by the shareholder do not represent any consideration received by him as a result of the extinguishment of his rights in the share. It is not the extinguishment of his rights in the share for which consideration is received by him, it is rather because moneys representing his share in the distribution are received by him that his rights in the share are extinguished".

We are, respectfully, in entire agreement with this reasoning and conclusion. This decision also was followed by the Patna High Court in CIT v. Vijoy Kumar Budhia [1975] 100 ITR 380 (Pat). Thus, even under the extended definition of the word "transfer", we are of the view that the distribution of assets of the company in liquidation, does not amount to a transfer. The learned counsel for the revenue contended that Parliament intended to treat even distribution of the assets on winding-up also as a transfer and for this argument, he relied on section 46(1), which reads as follows:

"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".

According to the learned counsel, if there was no transfer, there was no need for this specific provision not to regard the distribution as a transfer by the company. We are not able to agree with this contention. First of all, legislative assumptions cannot be treated as law. It has been clearly held by the Supreme Court in CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC) that there is no transfer when the assets of a company are distributed to its shareholders on its liquidation. There is no transfer either from the company or from the shareholder. Therefore, section 46(1) is only per curia and could not be treated as law. We are of the view that section 46(1) is intended to make clear that the company would not be liable for payment of any capital gains. We are, therefore, of the view that the sum of Rs. 8,331 could not be included in the chargeable income as capital gains under section 45.

The learned counsel for the revenue next relied on section 46(2) and argued that the amount received by the assessee is chargeable to income-tax under the head "capital gains" to the extent it is not liable to be treated as dividend, as if arising out of a transfer of a capital asset. In other words, according to the learned counsel, in such a case, Parliament deemed the amount received as profit or gain arising from transfer and, therefore, chargeable under section 45. This argument was advanced by the learned counsel for the revenue as one of the answers to the contention of the learned counsel for the assessee which found favour with the Tribunal that only capital gains chargeable under section 45 could be included in the total income and not all cases of capital gains. We are not able to agree with the learned counsel for the revenue that section 46(2) deems the receipt of the money or other assets on liquidation as profit or gain "arising from transfer" within the meaning of section 45. There are no words in section 46(2) which create a fiction of transfer. What all section 46(2) provides is that the amount received by the shareholder shall be chargeable to income-tax under the head "capital gains" and the amount, to the extent it is not liable to be treated as dividend, shall be deemed to be the full value of the consideration for purposes of section 48. It is thus an independent provision making the amounts received also chargeable to income-tax under the head "capital gains" though it did not arise from transfer of a capital asset.

The learned counsel for the assessee contended that only capital gains which is chargeable under section 45 is included in the definition of income in section 2(24)(vi) and that though section 46(2) provided for taxing the amount received under the head "capital gains" it had not been made part of the income or total income and that, therefore, even if section 46(2) intended to charge to income-tax the amount received on liquidation, this had not been effectuated by reason of the non-inclusion of that income in the definition. This is the argument that was accepted by the Tribunal.

The emphasis in section 4 on charge to income-tax is in respect of total income of the previous year". Total income" is defined in section 2(45) as meaning "the total amount of income referred to in section 5 computed in the manner laid down in the Act". Section 5 defines the range of total income of any previous year. Section 14 classifies and enumerates the heads of income for the purpose of charge of income-tax and computation of total income. Sections 15 to 59 are the computation provisions. It is now well-settled that:

"The scheme of the Act is that although income is classified under different heads and the income under each head is separately computed in accordance with the provisions dealing with that particular head of income, the income which is the subject-matter of tax under the Act is one income which is the total income". [Vide K.V.AL.M. Ramanathan Chettiar v. CIT [1973] 88 ITR 169, 191 (SC)].

The provisions of sections 4 and 5 also clearly show that there is only one tax on the total income of the assessee as defined in section 2(15). As pointed out by the Supreme Court in CIT v. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118 (SC) the manner of computation is also an integral part of the definition of "total income". Thus, if an income which is includible in the total income of an assessee under section 5 and falls into a specific source and the manner of computation is provided for the same, it would be chargeable even though it does not fall under any of the enumerated clauses in the definition of income. It would also be seen that the definition of income under section 2(24)(vi) is an inclusive definition and the natural meaning of the word "income" could not be curtailed with reference to the enumerated clauses of the inclusive portion. The Supreme Court in Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 (SC) held that the word "income" in its ordinary, natural and grammatical meaning would include "capital gains". Section 46 had provided expressly for charging to income-tax under the head "capital gains" in respect of the money received by the shareholder from the company on liquidation. The same provision also provided for the manner of computation by stating that the sum so arrived at shall be deemed to be the full value of the consideration for the purpose of section 48. Therefore, even if capital gains of the nature falling under section 45 is only included in the definition of income in section 2(24)(vi) and not any other kinds of capital gains, section 46(2) made the amount received by the shareholder on liquidation of a company a chargeable income under the head "capital gains" and, therefore, it will have to be included in the total income of the assessee. Thus, the definition of the word "income" understood in the light of the scheme of the Act clearly included the amount chargeable to tax under section 46. Some of the decisions which had referred to the provisions of section 46(2) also support our view. In CIT v. R.M. Amin [1971] 82 ITR 194 (Guj) the Uganda company which went into liquidation was not a company within the meaning of section 2(1) of the Act. Therefore, the assessee was held not chargeable to tax under section 46(2) in respect of the monies received by him on liquidation of the said Uganda company. But dealing with an assessment under section 45 and meeting the argument of the revenue that section 46(2) was enacted with a view only to exclude from the money or other assets received by the assessee on liquidation of the company, the amounts assessed as dividend within the meaning of section 2(22)(c) so that the assessee may not suffer double taxation in respect of the same amount, the learned Chief justice observed that (page 204):

"Section 46(1) carves out an exception from the general rule as to chargeability enacted in section 45 while section 46(2) brings within the net of taxation transaction which would not otherwise fall within it under section 45. One sub-section performs the function of exclusion while the other performs the function of inclusion. If the intention of the legislature were merely to provide the mode of computation in a case falling within section 46(2) so as to avoid double taxation of the same amount, the legislature need not have used words appropriate to a charging provision, namely, 'he shall be chargeable to income-tax under the head "capital gains" in respect of the monies so received or the market value of the other assets on the date of distribution.' It would have been sufficient for the legislature to introduce a special provision in regard to computation of capital gain in any of the succeeding sections".

The Supreme Court in CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC) and this court in T.M. Rangachari v. CIT [1976] 102 ITR 50 (Mad) referred to section 46(2) as an express provision for charging as capital gains the money or assets received by a shareholder on the liquidation of a company. We are, therefore, of the view that the amount received by the assessee, in this case, is includible in the chargeable income of the assessee under the head "capital gains". We, accordingly, answer the reference in the negative and in favour of the revenue. The revenue will be entitled to its costs. Counsel's fee Rs. 250.