Income Tax Appellate Tribunal - Ahmedabad
Brahmi Investments (P.) Ltd. vs Assistant Commissioner Of Income-Tax on 21 July, 1993
Equivalent citations: [1993]47ITD387(AHD)
ORDER
R.N. Singhal, Accountant Member
1. These are cross appeals; hence, they are disposed of by this consolidated order.
2. In assessee's appeal first and foremost ground is directed against the rejection of its main contention in regard to capital gains. For this point, relevant facts lie in a very narrow compass. The assessee company is the wholly owned subsidiary of Karamchand Premchand Pvt. Ltd. (KPPL for short). In July and August 1973 KPPL and its nominees acquired all the 1,11,000 equity shares of Arvalli Investments Pvt. Ltd. ('Arvalli' for short) at a total cost of Rs. 1,11,00,000, that was the value and the paid up value of the said shares. Consequently, Arvalli became a wholly owned subsidiary of KPPL. In December 1973 the said 1,11,000 shares were transferred by KPPL to the assessee for a total consideration of Rs. 55,36,680. Consequently, Arvalli became a wholly owned subsidiary of the assessee. In June 1986, Arvalli went into voluntary liquidation and in July 1987 the assessee received assets of the value of Rs. 93,24,000 from Arvalli. The Assessing Officer computed capital gains in the hands of the assessee by invoking the provisions of Section 46(2) of the Income-tax Act by taking the excess of the value of assets received (viz., Rs. 93,24,000) over the amount paid by the assessee for acquiring the shares of Arvalli (i.e. Rs. 55,36,680). The CIT (Appeals) took note of the assessee's main contention that capital gains were not to be computed at all in view of Section 47(v) but rejected it after a very detailed and learned discussion in his order. He, however, accepted the assessee's alternative contention that in view of Section 49(1)(iii)(e) capital gains should be computed by taking the cost in the hands of the previous owner viz., KPPL which was Rs. 1,11,00,000. Obviously on that basis, capital gains would be Nil because the cost to the previous owner was higher than the value of the assets received by the assessee. The assessee is in appeal before the Tribunal against the rejection of its main contention of the provisions of Section 47(v) being applicable and the department is in appeal against the direction of the CIT(A) that in pursuance of Section 49(1)(iii)(e) cost to the previous owner should be substituted.
3. The learned advocate for the assessee explaining the background highlighted the incidental aspects. He submitted that in the hands of KPPL provisions of Section 47(iv) were regarded as applicable and hence loss under the head 'capital gains' was not claimed or computed when the shares of Arvalli were transferred to the assessee for a total consideration of Rs. 55,36,680 against original cost (to KPPL Rs. 1,11,00,000).'The second incidental point was that in December 1973 the consideration of Rs. 55,36,680 for transfer of shares from KPPL to the assessee was based on a valuation report. He emphasised that the valuation report was from an approved valuer and further that it was based on the principles which have since been approved by the Hon'ble Gujarat High Court in some other cases/matters.
4. After making these incidental points he took us straight to the basic scheme of the Act and emphasised that Chapter IV of the Income-tax Act deals with the computation of total income under different heads of which the head of 'capital gains' starts from Section 45. Elaborating further he submitted that Section 2(24) seeks to enumerate the items of income and Clause (vi) thereof refers only to 'capital gains chargeable under Section 45'. In this context, he submitted that though Section 46(2) may be regarded as a charging Section but it is only through the modality of Section 45 and Section 46(2) cannot stand in isolation without the modality of Section 45. He further submitted that Section 46(2) specifically takes note of the applicability of Section 48 which in turn talks of mode of computation and deductions. Elaborating further he submitted that actually, Section 49 also prescribes the modes of quantification of cost in specified types of cases and the CIT(A) has held that the provisions of Section 49(1)(iii)(e) would be applicable. He referred us to the relevant parts of the order of the CIT(A) and particularly paras 4.2 and 4.3 thereof. He cited the Hon'ble Madras High Court decision in T.M. Rangachari v. CIT [1976] 102 ITR 50 to say that the question of capital gains on receipt of money or other assets by a shareholder on the liquidation of a company arises merely and solely due to Section 46(2) and in absence of a corresponding provision under the old Act the Hon'ble Madras High Court held that the corresponding liability did not exist in assessment years 1960-61 and 1961-62 which were governed by the old Act. He also referred to the Hon'ble Madras High Court decision in CIT v. M.A. Chidambaram [1984] 147 ITR 180 : 17 Taxman 321 to buttress his argument that Section 46(2) is a charging Section but it can be referred to through Section 45. Then he cited the Hon'ble Gujarat High Court decision and the Hon'ble Supreme Court decision in the case of CIT v. R.M. Amin [1971] 82 ITR 194 and CIT v. R.M. Amin [1977] 106 ITR 368 respectively and referred us to some specific parts of these two decisions. In support of his above mentioned contention that Section 46(2) was the charging Section but through the modality of Section 45, he made brief reference also to the Hon'ble Patna High Court decision in Addl. CIT v. Uma Devi Budhia [1986] 157 ITR 478 : [1985] 21 Taxman 205 which has been heavily relied on by the CIT(A) on page 13 of his order. In this context he referred to yet another decision of the Hon'ble Patna High Court in the case of CIT v. Murarilal Budhia [1983] 139 ITR 410. Referring to the observations on pages 412 and 413 of the report (139 ITR) he submitted that liability envisaged under Section 46(2) must be 'deemed to arise from the transfer of the capital asset which squarely falls within the purview of Section 45'. He then referred us to the Tribunal's decision (Jaipur Bench) in the case of Ruby Trading Co. (P.) Ltd. v ITO [IT Appeal No. 291 (JP) of 1981. dated 18-6-1982] where in it was held that even when capital gains are computed under Section 46(2) the benefit of Section 54E was available to the assessee. He emphasised that in para 4 of that decision, the Tribunal had extracted relevant portion of the Hon'ble Patna High Court decision in the case of Murarilal Budhia (supra). He wound up by saying that the learned CIT(A) went clearly wrong in holding that for capital gains computed under Section 46(2) the benefit of Section 47(v) would not be available to the assessee.
5. The learned Departmental Representative, on the other hand, submitted that Section 47(v) was applicable to the transfers other than on liquidation of companies and Section 46(2) was applicable to receipts by the shareholders from the company on the liquidation of the latter. He relied on the Hon'ble Supreme Court decision in the case of R.M. Amin (supra) citing the observations on pages 373 and 374 of the reports (106 ITR) to say that Section 46(2) clearly is a charging Section and also prescribes the mode of quantification of capital gains. He relied also on the Hon'ble Madras High Court decision in CIT v. M.A. Alagappan [1977] 108 ITR 1000 and referred us to para marked 3 of the head-notes on page 1001 of the reports (108 ITR) to say that Section 46(2) was an independent provision making the amounts received chargeable to income-tax under the head 'capital gains' though they did not arise from a transfer of capital asset. He relied on certain observations of the Hon'ble Madras High Court decision in M.A. Chidambaram's case (supra) and tried to demolish the learned advocate's reliance on that decision. He submitted that after considering many other decisions including that of the Hon'ble Supreme Court in the case of R.M. Amin (supra), the Hon'ble Madras High Court had concluded that Section 46(2) could be "used as a charging Section without reference to Section 45" vide observations on page 184 of the reports (147 ITR). In regard to the learned advocate's reliance on the Jaipur Bench decision in the case of Ruby Trading Co. (P.) Ltd. (supra), he submitted that in that case the Tribunal was not considering the applicability of Section 47(v) to the cases covered under Section 46(2) and hence that decision did not support the assessee's case. He cited the provisions of Section 55(2)(b)(iii) to say that Legislature intended that capital gains would be computed and taxed in pursuance of Section 46(2).
6. In reply, the learned advocate for the assessee very strongly objected to the learned D.R's contention that Section 47(v) applied only to cases other than that of liquidation of companies and elaborated by saying that company under liquidation continues to be a company until it is wound up and its name is struck off from the records of the Registrar of Companies. He tried to draw indirect support from the Hon'ble Gujarat High Court decision in the case of CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 by relying on observations on pages 404 and 405 of the reports (91 ITR). In regard to the learned D.R's reference to Section 55(2)(b)(iii) the learned advocate for the assessee submitted that even that provision should be viewed to take into account the contingency of capital gains being not taxed in spite of Section 46(2).
7. Since the law point involved was extremely interesting and no decision was cited by either side directly on the point, we requested both the parties to examine the issue from a couple of other angles and submit their written notes thereon. The main points raised were as to whether the transactions envisaged in Sections 46(1) and 46(2) would be transfers even in the context of extended definition given in Section 2(47) and further whether Section 46(2) would be regarded as a self-contained code as Section 132 has been held to be one. The said notes have since been received and we would consider them and their contents appropriately hereinafter.
8. We have very carefully considered the rival submissions and very carefully perused the decisions cited before us. As already indicated the law point involved is very interesting and no reported decision of any High Court or even Tribunal is directly on the point. Further, the point is predominantly falling in the arena of interpretation of statutes. So far considering the point involved, let us start with the statutory provisions directly involved viz., Sections 46 and 47(v). Excluding the irelevant parts, they (along with marginal headings) would read as follows:
Capital gains on distribution of assets by companies in liquidation.
46(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 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 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 the consideration for the purposes of Section 48.
Transactions not regarded as transfer.
47. Nothing contained in Section 45 shall apply to the following transfers:
(i) ....
(ii) ....
(iii) ....
(iv) ....
(v) any transfer of a capital asset by a subsidiary company, if-
(a) the whole of the share capital of the subsidiary company is held by the holding company, and
(b) the holding company is an Indian company.
So, Section 46(2) prescribes that receipt of any money or other assets by a shareholder on the liquidation of a company would be giving rise to capital gains. Section 47(v) prescribes that any transfer of capital asset by a subsidiary company to a holding company would not be caught by the mischief of Section 45; in other words, capital gains would not be arising. Assessee's claim is that in view of Section 46(2) capital gains would arise but in view of Section 47(v) they would not arise and the net effect would be that capital gains would really not arise. Department's case is that in spite of Section 47(v) capital gains would arise in view of Section 46(2). Now, all the High Court and Supreme Court decisions cited before us really pertain to the issue of applicability of Section 46(2) de hors the provisions of Section 47(v). It means the question of interaction or the result of combined reading of Sections 46(2) and 47(v) has not been considered in any of the High Court as Supreme Cour decisions. Actually, on this point in all there are only six decisions cited on behalf of the parties to the dispute before us. A further analysis shows that in only two of those six decisions Section 46(2) has been held to be inapplicable while in all the remaining four decisions it is held that in view of Section 46(2) chargeable capital gains do arise. Two decisions in favour of the assessee are T.M. Rangachari's case (supra), wherein it is held that receipt of money or assets by a shareholder on liquidation of a company gives rise to chargeable capital gains only in view of the specific provision under Section 46(2) which is operative for and from assessment year 1962-63 and hence the said receipt would not be chargeable to capital gain in the preceding years viz., assessment years 1960-61 and 1961-62. The other case is that of R.M. Amin's case (supra) wherein it is again held that Section 46(2) is the only provision which gives rise to chargeable capital gains on receipt of money or assets by a shareholder on liquidation of a company but the word 'company' in that Section should be understood in accordance with the definition given in the Income-tax Act. At that time word 'company' as defined in the Income-tax Act did not include a company in Uganda and hence receipt of money on assets by the shareholder on liquidation of a company of Uganda was not caught by the mischief of Section 46(2). Obviously, both these decisions are rendered on the special facts and in the special circumstances of the respective cases but they emphasise one cardinal principle that Section 46(2) was the only provision under which capital gains chargeable to tax would arise.
9. In all the other four decisions (viz.) M.A. Alagappan's case (supra), Murarilal Budhia's case (supra), M.A. Chidambaram's case (supra) and Uma Devi Budhia's case (supra) the results are against the respective assessees and it is held that in view of Section 46(2) chargeable capital gains do arise on receipt of money or other assets by a shareholder on liquidation of a company.
10. Thus, all the six decisions are rendered on the aspect of capital gains arising in view of Section 46(2). In our case, this aspect is not in dispute and in view of the ratio decidendi of all the six decisions noted above, it cannot be in dispute also. Therefore, various observations recorded in these six decisions and relied upon before us on behalf of the contending parties did not really provide any decisive guidance. It is all the more so because some observations in one set of decisions appear to be prima facie irreconcilable with the observations in the other set of decisions.
11. Actually, though applicability of Section 46(2) as such is not in dispute in this case and only the impact of Section 47(v) is viewed differently by the contending parties before us, a little deeper analysis of the four decisions (upholding levy under Section 46(2) would not be out of place. A careful study of those four decisions reveals that the main arguments of the respective assessees were on two points. One point was that transaction envisaged in Section 46(2) is not a transfer even within the extended meaning given to the word 'transfer' as per Section 2(47) of the IT Act and hence in spite of this specific provision of Section 46(2) capital gains cannot arise. As already noted, this argument was rejected not only in these four decisions which were against the assessees but also in the other two decisions in which the respective assessees had succeeded due to other attendant circumstances. In the four decisions which went against the respective assessees, yet another argument taken on behalf of the assessees was that Section 2(24) defines income wherein Clause (vi) says that 'capital gains chargeable under Section 45' would be included in income and the argument was that if Section 46(2) was a charging section independent of Section 45 the omission to mention Section 46(2) separately in Section 2(24) should result in relief to the assessee. Actually, it is for repelling this argument that different decisions had adopted different lines of argument. More particularly, some of them have said that definition of income in Section 2(24) is merely inclusive and not exhaustive while others have said that Section 46(2) in spite of being a charging Section "the receipt is deemed to arise from the transfer of a capital asset which squarely falls within the purview of Section 45 of the Act" (refer Murarilal Budhia's case (supra).
12. Actually, the first line of argument viz. the definition of income under Section 2(24) being inclusive appears to be too simplistic one. The reason is that the inclusive definition of Section 2(24) does not mention the items which are regarded as income in common parlance but the very purpose of giving definition under Section 2(24) is to include and mention the items which are not regarded as income in common parlance. We have already mentioned that on the other prong of arguments taken on behalf of the respective assessees in the aforesaid four decisions some diametrically opposite observations have been recorded but the net effect is that they do not provide any decisive guidance.
13. Before embarking upon our reasoning proper, we should highlight a few more aspects also. First aspect is regarding statutory phraseology of Sections 46 and 47. Marginal heading of Section 47 is "transactions not regarded as transfer" and the dictate in Section 46(1) is that that particular transaction would not be regarded as a transfer. So, the moot point is why the transaction envisaged in Section 46(1) was not listed in Section 47 with many others listed therein but was instead separately taken as 46(1)? Obviously, the Legislature thought it more appropriate to put together (in Section 46) the effects of receipt of money or other assets by a shareholder on liquidation of a company. The other aspect is that there are many transactions envisaged in some clauses of Section 47 (e.g. in Clause (i) being any distribution on partition of HUF) which are not transfers and even the transactions envisaged in Sections 46(1) and 46(2) are perhaps not transfers even in terms of the extended meaning given to the word 'transfer' in Section 2(47) of the IT Act. Even then, they are assumed to be transfers as per the phraseology used in the Act. Of course, legislative assumptions cannot be treated as law (vide M.A. Alagappan's case (supra).
14. Against all this background, we may now come to our reasoning proper. The view propounded on behalf of the department may be in a way regarded as canvassing a literal interpretation of Section 46(2). This is so because solely on the basis of phraseology used in Section 46(2) department wants to exclude the application of Section 47(v). We are inclined to think that perhaps even on the literal interpretation the department's stand cannot be upheld. However, more important aspect against the department is the applicability of the principle of harmonious construction rather than that of literal interpretation. In this particular matter harmonious construction is certainly warranted; this is so because the phraseology of Sections 46 and 47 leaves some grey areas as pointed out in the immediately preceding para. A harmonious construction would certainly favour the view propounded by the assessee.
15. Yet another aspect of the matter is whether Section 46(2) is a self-contained code as Section 132 has been held to be one. Clear-cut answer is that it is not. It is so because Section 46(2) itself specifically takes us to Section 48 which in turn may in some cases take us to Section 49. Still more important point is that Section 55(2)(b)(iii) specifically covers the aspects pertaining to the transactions envisaged in Section 46(2). So, if some other provisions of Chapter IV-E (Sections 45 to 55 etc.) are relevant for Section 46(2), one at once faces a problem of bifurcating all those provisions into those which are relevant on one hand and those which are not relevant on the other. Since, no such rational bifurcation or demarcation is possible it is imperative that all the provisions - including Section 47(v) - would apply to the transactions envisaged in Section 46(2) unless context requires otherwise.
16. Yet another aspect is that Section 46(2) levies tax on capital gains by creating an artificial situation in the sense that the transaction envisaged under Section 46(2) is really not a transfer (vide Supreme Court decision in R. M. Amin's case (supra). Now, if the benefit of Section 47(v) is denied to the transaction envisaged in Section 46(2) it would mean that a benefit available on real transfers and real capital gains would not be available on transactions which are artificially roped in for computation of capital gains. This would obviously be an absurd situation.
17. Yet another aspect is that by taking a view favourable to the assessee on this point, we are not rendering provisions of Section 46(2) as otiose. This is so because Section 46(2) would still be effectively operative for noncorporate assessees as well as those cases of companies in which the relationship of holding and subsidiary does not exist. By putting the interpretation in favour of the assessee we are excluding from the operation of Section 46(2) only a few cases of shareholders which are companies and in which the relationship of holding and subsidiary exists.
18. While still on this point, we would agree with the learned Advocate for the assessee that the ratio decidendi of the Tribunal's Jaipur Bench decision in the case of Ruby Trading Co. (P.) Ltd. (supra) goes to support the assessee's case.
19. Last but not the least, is the aspect that in the domain of interpretation of statutes even if two views are equally possible the one favourable to the subject should be adopted. In our considered view the two opposing views canvassed before us are not equally possible. In our view, the view propounded on behalf of the assessee has a greater force. Therefore, that view should prevail. Hence, we would uphold the view propounded on behalf of the assessee and hold further that in spite of Section 46(2) capital gains chargeable to tax had not arisen in this case in view of the fact that benefit of Section 47(v) would be available to the assessee.
20. For the facility of exposition it would be better to consider here and now the Department's ground of appeal on this point though strictly speaking it may be viewed as a digression. As already indicated the CIT (Appeals) had accepted the assessee's alternative contention that in view of Section 49(1)(iii)(e) quantification of capital gains in the hands of the assessee should be done by substituting the cost to the previous owner. One of the grounds of appeal is directed against this direction of the CIT (Appeals). Actually, in view of our decision on this point in assessee's appeal, department's this ground would become redundant. All the same, in the interest of completeness, we would deal with this point also on merits.
21. The learned D.R. took us through the relevant parts of the assessment order on page 18 thereof and then through para 3.4 etc. on pages 14,15 and 18 of the order of the CIT (Appeals). He submitted that provisions of Section 49(1)(iii)(e) applied only when the assets were acquired by the assessee from the previous owner without paying any consideration. He submitted that in this case the assessee had paid a consideration and therefore, provisions of Section 49(1)(iii)(e) were not applicable and actual cost (to the assessee) only was required to be adopted. The learned advocate for the assessee, on the other hand, submitted that provisions of Section 49(1)(iii)(e) were not restricted to the cases where no consideration had passed but covered all the cases irrespective of whether the consideration had passed or not.
22. On careful consideration, we do not find any error in the view taken by the CIT (Appeals) on this point. Department's this ground is rejected.
23. Reverting to the assessee's appeal, grounds marked II and III in terms state that the CIT (Appeals) had not given any finding or the assessee's grounds against levy of interest under Sections 139(8) and 215 respectively. The learned advocate for the assessee submitted that the grounds were taken before the CIT (Appeals) and he should have dealt with them. The learned D.R., on the other hand, submitted that these grounds do not arise from the order appealed against. Taking totality of circumstances into account, we would hold that the assessee would be free to approach the CIT (Appeals) for seeking his decision on these points if it deems it fit and it is otherwise permissible in law. For statistical purposes, these two grounds of the assessee are treated as rejected.
24. In department's appeal first ground is directed against interest income being directed to be taxed on cash basis as per the method of accounting. The learned D.R. took us through para 2 of the order of CIT (Appeals) and submitted that for receipts of interest cash basis is directed to be adopted without ascertaining as to whether for debits cash system or mercantile system is adopted. In the course of discussion, our attention was also drawn to the Hon'ble Madras High Court decision in the case of G. Padmanabha Chettiar & Sons v. CIT [1990] 182 ITR 1 to say that assessee is not entitled to adopt cash system for credits and accrual system or mercantile system for debits. The learned advocate for the assessee drew our attention to pages 29 to 35 of the paper book and then to pages 77 to 80 of the paper book and ultimately to pages 201 and 203 of the paper book for emphasising that the cash system for credits for interest account was adopted and accepted for preceding two years viz., assessment years 1986-87 and 1987-88 on one hand and in the last completed assessment for assessment year 1990-91 also. He submitted that only for the intervening period viz. assessment years 1988-89 and 1989-90 the department was disputing this aspect. At one stage it was suggested that the matter may be restored to the file of the Assessing Officer to ascertain whether the debits on interest account were also accounted for on cash basis but in the meantime the assessee's counsel brought to our notice the statement of income furnished for this year which bears the following note:-
...The company being under voluntary liquidation, it follows cash system of accounting for all income and expenses.
In view of this categorical statement right from the initial stage, it is obvious that the Hon'ble Madras High Court decision cited above also does not come to the department's rescue. This aspect coupled with the fact that in preceding two years cash system had been adopted and accepted we would reject the department's this ground.
25. Department's second ground is in the context of recomputation of capital gains which we have dealt with here in above and we have rejected the same.
26. Department's third ground is directed against deletion of addition out of service charges. We find that service charges were shown at Rs. 2,000 only. We agree with the CIT (Appeals) that no disallowance is called for on this score.
27. In effect, assessee's appeal is partly allowed and department's appeal is dismissed.