Patna High Court
Commissioner Of Income-Tax vs Murarilal Budhia on 23 August, 1978
Equivalent citations: [1983]139ITR410(PATNA)
JUDGMENT S.P. Sinha, J.
1. The Patna Bench of the I.T.A.T. has referred the under mentioned question for the opinion of this court.
"Whether, on the facts and in the circumstances of this case, the amount of Rs. 11,226 was assessable in the hands of the assessee under the head 'Capital gain' ?".
2. The relevant facts lie in a short compass.
3. The assessee, as a shareholder of M/s. Ganpati Properties (P.) Ltd., Ranchi, which went into voluntary liquidation on October 1, 1963, became entitled to receive 9/68ths share in the properties bearing municipal holding No. 368 inclusive of the construction and structure standing thereon. The value of the assessee's share as on January 1, 1954, was estimated by him at Rs. 3,996. The liquidator, however, valued the appellant's share, at Rs. 4,500. The ITO estimated the fair market value of the assessee's share in the capital asset as on October 1, 1963, at Rs. 15,222 and, after giving necessary deductions, included a sum of Rs. 11,226 in the total income of the assessee as income from capital gains.
4. The main contention which the assessee raised before the AAC in the appeal was that the assets received by him on the liquidation of the company did not arise from the transfer of a capital asset and consequently it could not be treated as a capital gain to him. The AAC rejected the contention, against which the assessee moved the ITAT. The Tribunal, relying upon a decision of the Gujarat High Court in the case of CIT v. R.M. Amin [1971] 82 ITR 194, accepted the assessee's contention that the assets received by the assessee on the said company going into voluntary liquidation did not tantamount to receiving any profit or gain" on the transfer of a capital asset". The inclusion of Rs. 11,226 in the assessee's total income (as income) from capital gain was, therefore, deleted.
5. At the instance of the Commissioner the Tribunal has stated a case on the aforesaid question of law under Section 256(1) of the I.T. Act, 1961.
6. The question raised here has already been answered by this court in the case of CIT v. Vijoy Kumar Budhia, [1975] 100 ITR 380. This case also arose out of the same transaction, in which the present assessee has received the capital gains which is the subject-matter of the reference. In that case the questions referred were :
"(1) Whether, on the facts and circumstances of the case, the amount received by the assessee as a shareholder on liquidation of the company was a transfer of capital asset within the meaning of Section 2(47) of the I.T. Act, 1961 ?
(2) Whether, on the facts and circumstances of the case, Rs. 48,335 was rightly included as capital gains in the total income of the assessee ?"
7. So far as the first question is concerned, this court held that the amount received by the assessee as shareholder on the liquidation of the company was not on the transfer of a capital asset within the meaning of Section 2(47) of the Act and, hence, the assessee was not chargeable to income-tax on capital gains under Section 45 of the Act; This court, while answering the second question, however, held that notwithstanding such a position, by virtue of the provisions contained in Section 46(2) of the Act, the amount of capital gain, which would otherwise have not become taxable, would be chargeable to income-tax as such. The decision by this court virtually answers the question which has been raised in this reference. In fact, the Supreme Court, while dealing with the aforesaid decision of the Gujarat High Court in the case of CIT v. R.M. Amin [1977] 106 ITR 368 (SC), has clearly observed (Headnote):
"When a shareholder received money representing his share 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 (as are the requirements stated in Sub-section (47) of Section 2 of the Act for treating a transaction as a transfer). 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."
8. Thus, even according to the decision of the Supreme Court, the money received by the assessee on the shares held by him in the company, which went into liquidation, would not fall within the category of "income" arising from the transfer of a capital asset, yet by virtue of Section 46(2) of the Act such receipt becomes taxable as income arising from capital gains. I may just reproduce what the relevant sections are :
"45. Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B and 54D, 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.
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 purpose 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."
9. On a plain reading of the aforesaid sections, it follows that, but for the provisions contained in Sub-section (2) of Section 46, the money received by a shareholder on the liquidation of a company could not have been treated as a profit and gain arising from transfer of a capital asset. The position is, however, changed because of the said provision being there.
10. Mr. Bharuka, appearing for the opposite party, drew my attention to the definition of the word "income" as occurring in Section 2(24) of the Act. Sub-clause (vi) thereof included only such capital gain as was chargeable under Section 45 in the category of "income". On this basis, Mr. Bharuka submitted that "income" which fell within the category of Section 46(2) of the Act would not be treated as an income for the purpose of being chargeable to income-tax.
11. I think the argument is clearly erroneous. All capital gains become chargeable to income-tax by virtue of Section 45 of the Act; Section 45, however, restricts only such profit or gains to be capital gains as arise from the transfer of assets effected in the previous year. If there is no transfer of assets any profit or gain arising from a capital asset (the section) will not spell out a chargeable capital gain. Now, therefore, the share in the assets of a company in liquidation received by a shareholder could not be a receipt arising from the transfer of a capital asset. But notwithstanding such a position, Section 46(2) makes a receipt of money or other asset by a shareholder, on the liquidation of a company, in respect of his share, a capital gain chargeable to income-tax as such. In other words, by virtue of the provisions contained in Section 46(2), the money or other asset received by the shareholder in respect of his share held in a company in liquidation, 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. It then becomes an income within the meaning of Section 2(24) of the Act. The argument of Mr. Bharuka has, therefore, to be rejected.
12. Regard being had to the discussions made above, the question is answered in the affirmative and against the assessee i.e., the amount of Rs. 11,226 was assessable in the hands of the assessee under the head "Capital gain".
13. Mr. Bharuka states that the assessee-opposite party had challenged the inclusion of the said sum of Rs. 11,226 in his income on certain other grounds also, which the Tribunal did not think necessary to consider, having regard to the view that it took on the matter. If that is so, the Tribunal may look into the other grounds raised, concerning this item, by the assessee.
14. In the circumstances of the case, there will be no order as to costs.