Madras High Court
Swamy Studio vs Income Tax Officer on 29 August, 1997
Equivalent citations: (1998)61TTJ(MAD)166
ORDER
P.S. Kalsian, A.M. This appeal by the assessee relating to the assessment year 1989- 90 and arising out of the order of the Commissioner (Appeals), Madurai, dated 19-7-1990, is centred on a single point of levy of capital gains under section 45(4).
2. The assessing officer observed that the assessee-firm consisted of three partners. It was dissolved with effective from 31-12-1988, and a dissolution deed was drawn on the same date. The business of the firm was taken over by one of the partners Sri G. Kumaraswamy. The other two partners were Sri K. Ganesan and Sri G. Rajamanickam. Since the firm was dissolved the assessing officer considered the application of the provisions of section 45(4) for determining the liability of the firm to capital gains. The assessing officer came to the conclusion that there was transfer of property under section 45(4) as a result of dissolution of the firm. He adopted the market value of house property at No. 34, West Car St., Tenkasi, at Rs. 1,90,000 and after allowing deduction for the cost of building (Rs. 70,237) and deduction under section 48 of the Act at Rs. 64,882, the assessing officer determined the long-term gains at Rs. 54,881.
3. In appeal, the Commissioner (Appeals) confirmed the action of the assessing officer. The Commissioner (Appeals) also held that transfer of a capital asset by way of distribution of capital asset on the dissolution of the firm is chargeable to capital gains and the fair market value of the asset on the date of such transfer has to be the basis for computation of capital gains. The assessee felt aggrieved and has preferred the present appeal before the Tribunal.
4. It is argued by the learned counsel for the assessee that even though the firm has been dissolved the partners continued to hold the building concerned as joint owners and in such a situation there was no transfer of any asset to any partner and, therefore, the provisions of section 45(4) would not be applicable.
The learned counsel for the assessee relied on the decision of the Jabalpur Bench of the Tribunal in the case of Asstt. CIT v. Thermoflics India (1997) 60 ITD 554 (Jab-Trib), in support of his contentions.
The learned counsel for the assessee, therefore, contended that the long-term capital gains of Rs. 54,881 added by the assessing officer and as sustained by the Commissioner (Appeals) is without any justification.
5. On the other hand, the learned Departmental Representative supported the orders of the authorities below and urged that the claim of the assessee that there was no transfer involved in the transaction in without any merit and that the provisions of section 45(4) are clearly attracted in this case.
6. We have considered the facts of the case, rival submissions and material on record. For the sake of convenience the provisions of section 45(4) of the Income Tax Act, 1961 are reproduced below :
"45(4)The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other AOP or BOI (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.
It is clear from the provisions of section 45(4) that it is a charging section. For the purpose of imposing the charge of tax on the income of a firm being profits and gains arising from the transfer of capital asset by way of distribution of a capital asset on the dissolution of the firm or otherwise the Parliament has enacted the provisions of sub-section. (4) of section 45. The Parliament has also provided that the fair market value of the assets for the purpose of section 48 shall be deemed to be the full value of consideration received or accruing as a result of transfer. Thus, the provisions of section 45(4) is a separate code by itself providing for charging of tax on income being profits and gains on transfer of capital asset by way of distribution of such assets on the dissolution of the firm and computation of profits and gains by providing for the purpose of section 48 that the fair market value of the assets on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of transfer. The character of the computation provisions in each case bears a relationship to the nature of the charge. In the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC), at p. 299 the Hon'ble Supreme Court held as under :
"Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provisions at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by section 45 must fall under the governance of its computation provisions..."
At p. 300 it was also held by their Lordships that ordinarily the operation of the charging provision cannot be effected by the construction of a particular computation provision.
In the case of CIT v. R.M. Amin (1977) 106 ITR 368 (SC), the hon'ble Supreme Court considered the provisions of sections 2(17), 2(47), 45, 46(2) and section 48. Briefly stated, the facts of this case were that the assessee held 192 shares in a private company incorporated in Uganda, hereinafter referred to as Uganda company. The matter related to assessment year 1962-63. At the relevant time the provisions of section 46(2) were applicable in the case of a company, falling within the definition of `company' in section 2(17) of the Act. The Uganda company was not a company falling within the definition of `Company' in section 2(17). The company went into voluntary liquidation and during 1961, the previous year for the assessment year 1962-63, the assessee received Rs. 1,84,326 in excess of the amount he had paid for those shares. The question was whether the excess of Rs. 1,84,326 was taxable as capital gains in the assessee's hands under section 45 read with section 2(47) of the Act. Since the Uganda company did not fall within the definition of `company' in section 2(17) of the Act at the relevant time, the Supreme Court held that there was no transfer of capital asset within the meaning of section 2(47). It was also held that provisions of section 46 applied only to the distribution of assets by such companies in liquidation as were covered by the definition of the word `company' in section 2(17). The capital gains tax was not leviable when companies other than those which fell within the definition in section 2(17), distributed assets on liquidation to their shareholders. But the Apex Court also held that but for section 46(2) it would not have been possible to charge tax under the head "capital gains"on the money or other assets of a company received by its shareholder on its liquidation. Section 46(2) was enacted both with a view to making shareholders liable for payment of tax on capital gains as well as to prescribing the mode of calculating the capital gains to the shareholders on the distribution of assets by a company in liquidation. Normally when a shareholder receives money representing his share on the distribution of the net assets of a 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. But as held by the Supreme Court, under section 46(2) it was possible to charge tax under the head `capital gains' on the money or other assets of a company received by its shareholder on the liquidation. Before the hon'ble Supreme Court the assessee's counsel argued that there was no transfer contemplated by law to attract the levy of tax on capital gains, and that section 46(2) does not create liability of a shareholder to pay tax on capital gains which liability 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 shareholders. The Supreme Court was not impressed with the arguments of the revenue. The Supreme Court further held at p. 374 of ITR that "the aforesaid section (section 46(2)), 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 of assets by a company in liquidation. But for this sub-section, as already mentioned, it would have been difficult to levy tax on capital gains to the shareholder on distribution of assets in liquidation." The ratio of the aforesaid decision of the Supreme Court was followed by the hon'ble Madras High Court in the case of CIT v. M.A. Alagappan (1977) 108 ITR 1000 (Mad). In this case their Lordships considered the provisions of sections 2(47), 46(1), 46(2), 45 and 2(24)(vi). It was a case of a company which went into voluntary liquidation, namely, Ajax Products Ltd., in October, 1954. The assessee was a shareholder of this company. At the time of voluntary liquidation the assessee held 378 and 2/3rd shares of the face value of Rs. 100 each. 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 the original investment in the 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 Act. In first appeal the Appellate Assistant Commissioner held that when a company is taken into liquidation and the liquidation starts distribution of the assets of the company among the shareholders, there is a progressive extinguishment of the rights of the shareholders, with each distribution. The Appellate Assistant Commissioner 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 assessable as `capital gains'. On 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 a specific mention of such deemed income has to be made in the definition of the word `income' under section 2(24) of the Act. It was further stated that 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. After analysing various decisions of Supreme Court and other High Courts the Madras High Court held as under :
"(1) that the distribution of assets of the company in liquidation does not amount to a transfer even under the extended definition of the word `transfer' in section 2(47);
(2) Section 46(1) is merely intended to make it clear that the company would not be liable for payment of any capital gains;
(3) that section 46(2) provides 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 divided shall be deemed to be the full value of the consideration for the purposes of section 48 and, therefore, is an independent provision making the amounts received chargeable to income-tax under the head `capital gains' though it did not arise from transfer of a capital asset.
(4) Accordingly, even if capital gains of the nature falling under section 45 is alone included in the definition of income in section 2(24)(vi) and not any other kind of capital gains, section 46(2) makes the amount received by a shareholder on the liquidation of a company chargeable to Income Tax under the head `capital gains' and hence it will have to be included in the total income of the assessee. Therefore, the amount of Rs. 8,331received by the assessee is included in the chargeable income of the assessee under the head `capital gains'".
It is clear from the aforesaid decision of the jurisdictional High Court that though the distribution of assets of company in liquidation does not amount to a transfer even under the extended definition of the word `transfer' in section 2(47), and that section 46(1) is merely intended to make it clear that the company would no be liable to payment of any capital gains. But under section 46(2) the amount received by the shareholder shall be chargeable to income-tax under the head `capital gains'. It was held by the hon'ble Madras High Court that section 46(2) is an independent section making the amount received chargeable to Income Tax under the head `capital gains' though it did not arise from transfer of a capital asset.
Similarly in the case of CIT v. C.T. Oppilal Achi reported in (1977) 109 ITR 126 (Mad), the hon'ble Madras High Court followed the decision of the Supreme Court in the case of CIT v. R.M. Amin (supra) and held that section 46(2) is the charging section but it will apply only in relation to companies which fall within the scope of the definition of `company' in section 2(17) of the Act, at the relevant time.
The Hon'ble Madras High Court in the case of CIT v. M.A. Chidambaram (1984) 147 ITR 180 (Mad) held in connection with applicability of sections 45 and 46 of the Act, as under :
"Section 46(2) of the Act is a charging section and if the conditions laid down in that section applied, it can be invoked in respect of the distribution of assets by companies in liquidation.
In view of the liquidation of a company of which the assessee was a shareholder, the assessee received during the year of account relevant of the assessment year 1969-70, a dividend of Rs. 33,165 which, along with the dividends received earlier, exceeded the original cost of the shares by Rs. 13,590, which sum was brought to tax by the Income Tax Officer as capital gains. The Appellate Assistant Commissioner upheld the assessee's claim that this sum of Rs. 13,590 could not be brought to charge as capital gains. This was confirmed by the Tribunal. On a reference :
Held, that in view of the company in liquidation being a company as defined in section 2(17) of the Income Tax Act, 1961, section 46(2) would stand attracted and, as section 46(2) can be used as a charging section without reference to section 45, the Tribunal was in error and the sum of Rs. 13,590was liable to tax as capital gains."
7. The following proposition of law had been laid down in the abovementioned decisions of the Supreme Court as well as the three decisions of the jurisdictional High Court :
(1) A transaction may not amount to a `transfer' within the definition of the word `transfer' in section 2(47) of the Act, but still the amount received by a shareholder on the liquidation of the company as a result of distribution of assets is chargeable to tax under the head `capital gains'.
(2) Section 46(2) is an independent section making the amount received chargeable to income-tax under the head `capital gains' though it does not arise from the transfer of a capital asset.
(3) No existing principle or provision at variance with charging section can be applied for determining the chargeable profits and gains B.C. Srinivasa Setty (supra). Operation of the charging provision cannot be effected by the construction of a particular computation provision.
8. Now, if we look at the provisions of section 45(4) it is clear from the expression `profits and gains arising from the transfer of a capital asset by way of distribution of capital asset on the dissolution of the firm... or otherwise, shall be chargeable to tax as the income of the firm" used in that section that for the purpose of charging tax on the transfer of a capital asset by way of distribution of capital assets on the dissolution of the firm, we need not look into the definition of the term "transfer" as mentioned in section 2(47) of the Act. Section 2 starts with the words. "In this Act, unless the context otherwise requires". The definition in section 2 is subject to an overall restrictive clause. That is expressed in the opening words of the section itself i.e., "unless the context otherwise requires"CIT v. B.C. Srinivasa Setty (supra). Therefore since the provisions of section 45(4) clearly direct charging of tax on the profits and gains arising from transfer of a capital asset by way of distribution of capital asset, we need not look into the definition of the term `transfer' in section 2(47) because section 45(4) is a charging section. In the case of R.M. Amin (supra), reference was made to an earlier decision of the hon'ble Supreme Court in the case of CIT v. Madurai Mills Co. Ltd. (1973) 89 ITR 45 (SC), in which it was held by their Lordships that: "When a shareholder received money representing his shares on the distribution of the net assets of the company in liquidation, he received that money in satisfaction of the right which belonged to him by virtue of his holding the shares and not by any operation of any transaction which amounted to sale, exchange, relinquishment, transfer of a capital asset or extinguishment of any rights in capital assets". It means that there was no transfer of capital asset when a shareholder receives money representing his share on distribution of net assets of a company in liquidation. But at the same time the Supreme Court pointed out that in the case of companies falling within the definition `company' as given in section 2(17) of the Act, the legislature has made express provision in sub-section (2) of section 46 to the effect that where a shareholder on the liquidation of the 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 other assets on the date of distribution, as reduced by certain amounts which need not be specified.
9. Similarly, though the distribution of capital assets by a company in liquidation does not amount to `transfer' within the meaning of section 2(47), but in view of the specific provisions of section 46(2) of the Act, the jurisdictional High Court in the aforesaid cases of M.A. Alagappan (supra), C.T. Oppilal Achi (supra) and M.A. Chidambaram (supra) has held that the amount received by the shareholder on the liquidation of a company is chargeable to income-tax under the head `capital gains'. We, therefore, need not look into the definition of the term `transfer' in section 2(47) of the Act, which is a restrictive clause for the purpose of charging tax on capital gains arising from the transfer of capital asset by way of distribution of capital asset on the dissolution of the firm and the ratio laid down by the hon'ble Supreme Court in the cases of B.C. Srinivasa Setty (supra) and R.M. Amin (supra) and by the jurisdiction High Court in the aforesaid three decision, are clearly applicable to the facts of the present assessee's case.
10. In the case of Thermoflics India (supra) decided by the Jabalpur Bench of the Tribunal and relied upon by the assessee's counsel, the aforesaid judgments of the hon'ble Supreme Court and the Madras High Court were not considered and, therefore, the real nature of the provisions of section 45(4) could not be analysed. For the purpose of charging tax on capital gains arising from transfer of capital asset by way of distribution of capital asset on the dissolution of the firm, we need not look into the definition of `transfer' at all because the said definition of `transfer' is irrelevant under section 45(4) which is a charging section. Moreover,r the expression used in section 45(4) viz., "transfer of a capital asset by way of distribution of capital assets" clearly indicate that distribution of capital assets on the dissolution of the firm, was considered as `transfer' within the meaning of sub-section (4) of section 45.
11. In the case of CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 196 ITR 149 (SC), it was held that if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention. Nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The purpose of enacting provisions of sub-section (4) of section 45 is to charge tax on the profits and gains arising from transfer of a capital asset by way of distribution of capital asset. The language of the section is clearly unambiguous and the purpose or legislative intention cannot be defeated by reference to the definition of `transfer' given in section 2(47) of the Act, which is a restrictive definition and not applicable to the provisions of section 45(4), because it is a charging section, charge of tax and intention of legislature cannot be defeated by referring to the definition of the term `transfer' in section 2(47) in view of the proposition of law laid down at p. 299 in the case of B.C. Srinivasa Setty (supra) wherein it was pointed out by the apex Court that no existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. Therefore, all the transactions encompassed by sub-section (4) of section 45 must fall under the governance of its computation provisions.
12. In view of the decisions of the hon'ble Supreme Court and the Madras High Court referred to and discussed above, we differ with respects from the decision of the Jabalpur Bench of Tribunal in the case of Asstt. CIT v. Thermoflics India (supra), relied on by the learned counsel for the assessee, which in our humble opinion, does not lay down the correct legal principles. We, therefore, reject the grounds raised by the assessee.
13. It may be mentioned that if the interpretation of provisions of section 45(4) as per decision of the Jabalpur Bench of the Tribunal in the case of Thermoflics India (supra) is accepted, the provisions of section 45(4) would become completely meaningless or redundant. The principle of statutory construction is well settled that no statute should be interpreted in such a manner as to render any provision completely meaningless or redundantCIT v. Bhagat Swarup Charanjit Singh & Co. (1982) 133 ITR 13 (Del). Therefore, the interpretation of section 45(4) of the Income Tax Act, 1961, by the Jabalpur Bench of the Tribunal has to be avoided because it makes the provisions of section 45(4) enacted by Parliament completely meaningless and redundant, which is against the principle of statutory construction.
14. In the result, the assessee's appeal is dismissed.