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HIGH COURT OF PATNA
N.L. UNTWALIA & LALIT MOHAN SHARMA, JJ,
The Commissioner of Income Tax, Bihar, Patna - Petitioner
Versus
Messrs Vijoy Kumar Budhia, Ranchi - Opp. Party
Tax Case No.77 of 1972
Decided on: 16th August 1974
INCOME TAX - Capital gains - Distribution of assets of a company in liquidation - Whether a transfer of capital asset - Whether chargeable to income-tax on capital gain under Section 45 of the Income-tax Act, 1961 - Whether the Income-tax Officer had power to impose tax on the assessee under Section 46(2) of the Act - Whether he could determine the market value of the assets distributed in exercise of that power.
Fact of the Case:
The assessee, a shareholder in a private limited company, received a share of the company's property on its liquidation. The Income-tax Officer determined the market value of the property and assessed the assessee to income-tax on capital gain under Section 45 of the Income-tax Act, 1961. The Appellate Assistant Commissioner deleted the addition, holding that the Income-tax Officer had no power to enhance the value of the property as determined by the liquidator. The Tribunal upheld the Appellate Assistant Commissioner's decision, relying on a Gujarat High Court judgment.
Finding of the Court:
The Court held that the distribution of assets of a company in liquidation does not amount to a transfer of capital asset within the meaning of Section 45 of the Income-tax Act, 1961. Therefore, the assessee was not chargeable to income-tax on capital gain under Section 45. However, the Court held that the assessee was chargeable to income-tax on capital gain under Section 46(2) of the Act, which provides for the taxation of capital gains on the distribution of assets of a company in liquidation. The Court also held that the Income-tax Officer had the power to determine the market value of the assets distributed to the assessee.
Issues: 1. Whether the distribution of assets of a company in liquidation amounts to a transfer of capital asset within the meaning of Section 45 of the Income-tax Act, 1961? 2. Whether the assessee was chargeable to income-tax on capital gain under Section 45 of the Act? 3. Whether the assessee was chargeable to income-tax on capital gain under Section 46(2) of the Act? 4. Whether the Income-tax Officer had the power to determine the market value of the assets distributed to the assessee?
Ratio Decidendi: 1. The Court held that the distribution of assets of a company in liquidation does not amount to a transfer of capital asset within the meaning of Section 45 of the Income-tax Act, 1961, relying on the judgments of the Calcutta and Gujarat High Courts and the Supreme Court. 2. The Court held that the assessee was not chargeable to income-tax on capital gain under Section 45 of the Act, as the distribution of assets of the company in liquidation did not amount to a transfer of capital asset. 3. The Court held that the assessee was chargeable to income-tax on capital gain under Section 46(2) of the Act, which provides for the taxation of capital gains on the distribution of assets of a company in liquidation. 4. The Court held that the Income-tax Officer had the power to determine the market value of the assets distributed to the assessee, as it was inherent in the exercise of the power to compute the income chargeable under the head 'Capital gains' under Section 48 of the Act.
Final Decision: The Court answered the reframed question in the affirmative, holding that the sum of Rs.48,335/- was rightly included by the Income-tax Officer as capital gain in the total income of the assessee and the inclusion is well sustainable under Section 46(2) read with Sections 48 and 49 of the Act.
Untwalia, J.
This reference under Section 256 (1) of the Income Tax Act, 1961 (hereinafter called the Act) made by the Income-tax Appellate Tribunal Patna Bench, demonstrates how some cases including the present one, which have come to my knowledge, are not properly handled at the hands of the departmental authorities or representatives or when the case goes before the Tribunal. As I proceed to state the facts of the case and the points involved in this reference, there will be sufficient warrant for the remark which I have just made in the beginning.
2. The assessee Shri Vijoy Kumar Budhia of Ranchi has been assessed under Section 143(3) of the Act as an individual. He was a share-holder in a private limited company known as Ganpati Properties (P) Ltd., Ranchi. The company went into voluntary, liquidation. The voluntary liquidator valued the company's property situated at Patna at Rs. 1,53,000/-. The assessee received 83/510th share in the said property of the company. The value of his share, therefore, came to Rs. 24,900/-. The Income-tax Officer found that the value of the property assessed by the liquidator was highly inadequate. He accordingly assessed the market value of the property of the company at Rs. 4,50,000/-. Thus, the value of the share of the assessee in the property of the company distributed to, and received by, him was determined at Rs. 73,235/-. The assessee's stand that he was not chargeable for income from any capital gain on account of his receipt of the company's property was not accepted by the Income-tax Officer. He took the value of the company’s property at Rs.1,53,000/- as prevailing on 1.1.54. Deducting the said value from the market value of Rs. 4,50,000/-, the capital gain in the hands of the assessee was determined at Rs. 48,335/-, i.e., 83/510th share in the sum of Rs. 2,97,000/-. A copy of the ORDER :of the income-tax Officer is Annexure A to the statement of the case and forms part of it.
3. The assessee preferred an appeal before the Appellate Assistant Commissioner of Income-tax. He also rejected the stand of the assessee that in a matter like this there was no capital gain in the hands of the assessee, namely the share-holder. However, the Appellate Assistant Commissioner accepted the contention put forward on behalf of the assessee in appeal that the Income-tax Officer was not competent to enhance the value of the property as determined by the liquidator. He, therefore, deleted the addition of Rs 48,335/- from the total Income of the assessee as determined by the Income-tax Officer. A copy of the ORDER :of the Appellate Assistant Commissioner is Annexure B and it also forms parts of the statement of the case.
4. The Department preferred in appeal before the Tribunal. It was contended by the Department that the provisions of Section 52 of the Act were not applicable as was the view of the Appellate Assistant Commissioner but then he should have upheld the market value of the property determined by the Income-tax Officer under Section 46(2) of the Act, hence, deletion of the sum of Rs. 48,335/- from the total income of the assessee was not justified. The assessee argued before the Tribunal that there was no transfer of capital assets within the meaning of Section 45 of the Act read with Section 2(47), when the assessee received his share of the property on distribution by the voluntary Liquidator of the company; hence, he was not liable to pay any tax on the allegedly capital gains.
5. The Tribunal relying upon a Bench decision of the Gujrat High Court in (1) Commissioner of Income-tax, Gujrat II V.R.M. Amin (82 I.T.R. 194) held that there was no transfer of any capital asset within the meaning of Section 45 of the Act read with Section 2(47); hence, the Income-tax Officer was wrong in including the sum of Rs. 48,335/- on the basis of the fair market value of the share of the assessee in the property distributed as being chargeable to income-tax on capital gain. A copy of the ORDER :o
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