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IN THE HIGH COURT OF GUJARAT
R.K. Abichandani, R. Balla, JJ.
Commissioner of Income-Tax – Petitioner
Versus
Jaykrishna Harivallabhdas – Respondent
Income-tax Reference No. 29 of 1984
Decided On : 14-02-1997
INCOME TAX - Capital gains on distribution of assets by companies in liquidation - Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the assessee was entitled to claim capital loss of Rs. 27,154 under the provisions of section 46(2) of the Income-tax Act, 1961?
Fact of the Case:
The assessee claimed a loss of Rs. 27,154 being loss on shares of Indian Bearings Limited and H. K. Sons Private Limited under the head "Capital gains". The assessee's case was that the company with respect to whose shares the loss had been claimed had gone into voluntary liquidation and nothing was distributed by those companies to its members, therefore, the assessee received nil consideration for his holdings in the companies. He claims that capital loss should have been computed under section 46(2) read with section 48 and dealt with under the provisions of the Income-tax Act as such.
Finding of the Court:
The Tribunal found that the provisions of section 46(2) apply in the event of liquidation of Indian companies and the decision in R. M. Amin's case [1977] 106 ITR 368 (SC), which was rendered in the case of a foreign company, which was not governed by the provisions of section 46(2) of the Income-tax Act, was not applicable to the present case. In view thereof, it allowed the appeal of the assessee and held the capital loss to be considered for the purposes of computing the income taxable for the assessment year in question.
Issues: Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the assessee was entitled to claim capital loss of Rs. 27,154 under the provisions of section 46(2) of the Income-tax Act, 1961?
Ratio Decidendi: The court held that section 46(2) of the Income-tax Act, 1961 creates a legal fiction for the purposes of charging the transaction to tax under the head "Capital gains", which is otherwise not so. The fact that without invoking section 46, the position as prevailing under the 1922 Act continued is clear from the decision of the Supreme Court in Commissioner of Income Tax v. R. M. Amin [19771 106 ITR 368. Therefore, a reading of section 46 in the aforesaid light makes it clear that a legal fiction has been created. According to this legal fiction, firstly a shareholder of the company on liquidation of that company is chargeable to income-tax under the head "Capital gains", and, secondly, in respect of money received or the market value of other assets received on the date of distribution as reduced by the amount assessed as dividend within the meaning of section 2(22)(c), is to be deemed to be the full value of the consideration for the purpose of section 48.
Final Decision: The court answered the question referred to it in the affirmative, that is to say, in favour of the assessee and against the Revenue.
JUDGMENT :
Rajesh Balia, J.
1. At the instance of the Commissioner of Income-tax, the Income-tax Appellate Tribunal, Ahmedabad Bench A, has submitted the statement of case and referred the following question of law arising out of its order in ITA No. 1951/Ahd. of 1981 for the assessment year 1977-78 :
The assessee had claimed before the Income-tax Officer a loss of Rs. 27,154 being loss on shares of Indian Bearings Limited and H. K. Sons Private Limited under the head "Capital gains". The assessee's case was that the company with respect to whose shares the loss had been claimed had gone into voluntary liquidation and nothing was distributed by those companies to its members, therefore, the assessee received nil consideration for his holdings in the companies. He claims that capital loss should have been computed under section 46(2) read with section 48 and dealt with under the provisions of the Income-tax Act as such. The Income-tax Officer as well as the Commissioner of Income-tax (Appeals) held that on liquidation of the company, no event of transfer of asset either by the liquidator or by the shareholder takes place so as to give rise to the question of computation of capital loss chargeable under the head "Capital gains". Reliance was placed on a decision of the Supreme Court in the case of Commissioner of Income Tax v. R. M. Amin [19771 106 ITR 368. The Tribunal found that the provisions of section 46(2) apply in the event of liquidation of Indian companies and the decision in R. M. Amin's case [1977] 106 ITR 368 (SC), which was rendered in the case of a foreign company, which was not governed by the provisions of section 46(2) of the Income-tax Act, was not applicable to the present case. In view thereof, it allowed the appeal of the assessee and held the capital loss to be considered for the purposes of computing the income taxable for the assessment year in question.
2. It will be appropriate to produce section 46 which has remained unchanged as originally enacted.
(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."
There was no corresponding provision like the one referred to above in the Indian Income-tax Act, 1922, which was replaced by the Income-tax Act, 1961.
3. A brief preview of law relating to capital gains under the 1922 Act, in the context of the controversy will not be out of place. By the Income-tax and Excess Profits Tax (Amendment) Act, 1947, section 12B was inserted in the 1922 Act with effect from April 1, 1946, and capital gains arising after March 31, 1946, were subjected to income-tax. Prior to that capital gains were not chargeable to tax. In its first insertion, the third proviso to section 12B provided that any distribution of capital asset on the dissolution of a firm or other association of persons or on the liquidation of a company shall not for the purpose of section 12B be treated as sale, exchange or transfer of capital assets. Section 12B became inoperative with the commencement of the In
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