The definition of "capital asset" under section 2(14) of the Income-tax Act, 1961 is not relevant for the purpose of construing section 46(2) of the Act, which deals with the distribution of assets by companies in liquidation. Therefore, the fact that agricultural lands are excluded from the definition of "capital asset" does not mean that they are not subject to tax under section 46(2) when received by a shareholder on the liquidation of a company.

Headnote:
INCOME TAX - Distribution of assets by companies in liquidation - Whether agricultural lands received by the assessee on the liquidation of a company can be charged to tax under section 46(2) of the Income-tax Act, 1961 - Whether the accumulated profits for the purpose of section 2(22)(c) of the Income-tax Act, 1961.
Fact of the Case:

The assessees, sisters and daughters of the late S. Kumaraswamy, were shareholders in Palkulam Estates (Private) Limited, Nagerkoil, which went into liquidation and distributed assets in specie to its shareholders. The assessees received 479.89 acres of agricultural land in the distribution. The Income-tax Officer invoked section 2(22), sub-clause (c), and section 46(2) of the Income-tax Act to bring to tax a sum of Rs. 24, 75, 070 as deemed dividend and the amounts in excess thereof under the head "Capital gains". The Commissioner held that the assessments had not been validly reopened in so far as the invocation of section 2(22)(c) of the Act was concerned, as that was a matter on which the Income-tax Officer had merely appeared to have changed his opinion. The Commissioner also held that even if section 2(22)(c) of the Act could be invoked, the amounts due to the company totalling Rs. 20, 37, 290 had been actually written off in the books, and that only a sum of Rs. 4, 37, 718 was available as accumulated profits and that the late, Kumaraswamy had already been assessed under section 2(6A)(e) of the Indian Income-tax Act, 1922, for the assessment years 1957-58 to 1959-60.
Finding of the Court:

The Tribunal held that the assessees had failed to disclose primary material facts fully and truly in their income-tax returns, and, therefore, the reopening of the assessment was amply justified. The Tribunal, however, on the merits, held that on a reading of sections 45, 46(2), and 48 of the Act, the assets mentioned in section 46(12) would mean capital assets and since section 47(viii) exempted transfer of agricultural lands from tax on capital gains under section 45, the agricultural lands were outside the scope of section 46(2) of the Act. The Tribunal upheld the order of the Commissioner on the merits in so far as section 2(22)(c) of the Act was concerned.
Issues: 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assets mentioned in section 46(2) would mean capital asset as defined in section 2(14) and that, consequently, the value of agricultural lands received by the assessee oil the liquidation of Palkulam Estates (Private) Limited cannot be charged to tax under section 46(2) of the Income-tax Act ? 2. Whether the Appellate Tribunal is correct in law and had valid materials to hold that the accumulated profits for the purpose of section 2(22)(c) of the Income-tax Act, 1961.
Ratio Decidendi: The term "asset" has not been defined in section 2 of the Act. Section 2(14) of the Act defined "capital asset" as meaning property of any kind held by an assessee whether or not connected with his business or profession. Section 2(14) expressly excludes, inter alia, agricultural lands in India, not being land situate in the jurisdiction of a municipality, corporation, notified area committee, town area committee, town committee or cantonment Board which has a population of not less than ten thousand according to the last preceding census, and any area within such district not being more than eight kilometres, from the local limits of any such municipality or other body to which reference is made in section 2(14)(iii)(a) of the Act. The exclusion of agricultural lands to the extent provided in section 2(14)(iii)(a) is, therefore, only for the purpose of not treating such lands as capital assets. The fact that agricultural lands are not capital assets to the extent provided in the definition does not, however imply that they are not assets at all. The need for exclusion to the extent provided in the definition clause arose only because they were assets, and would have been treated as such, but for the exclusion. Section 46(2) of the Act does not make any reference to capital assets. The invocation of section 2(14) of the Act is, therefore, wholly unnecessary for the purpose of construing section 46(2) of the Act, and the ambit of section 46(2) cannot be whittled down by excluding all assets excluded from the definition of "capital asset".
Final Decision: The court answered the first question referred to it in favor of the Revenue and against the assessee. The court also refused the assessee's application for leave to appeal to the Supreme Court.

Judgment :-

R. JAYASIMHA BABU, J.

Two questions have been referred to us at the instance of the Revenue. They are,

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assets mentioned in section 46(2) would mean capital asset as defined in section 2(14) and that, consequently, the value of agricultural lands received by the assessee oil the liquidation of Palkulam Estates (Private) Limited cannot be charged to tax under section 46(2) of the Income-tax Act ?

2. Whether the Appellate Tribunal is correct in law and had valid materials to hold that the accumulated profits for the purpose of section 2(22)(c) of the Income-tax Act, 1961.

The assessees, who are sisters and are daughters of one the late S. Kumaraswamy were shareholders in Palkulam Estates (Private) Limited, Nagerkoil, which went into liquidation, and in the process of liquidation, distributed assets in specie to its shareholders. The assessees in such distribution received 479.89 acres of agricultural land. That distribution not having been disclosed initially by the assessees, and having subsequently come to the notice of the Income-tax Officer, the assessments made for the assessment years 1970-71 and 1971-72 were reopened. After such reopening, the Income-tax Officer invoking section 2(22), sub-clause (c), and section 46(2) of the Income-tax Act brought to tax a sum of Rs. 24, 75, 070 as deemed dividend and the amounts in excess thereof under the head "Capital gains". On appeal the Commissioner held that the assessments had not been validly reopened in so far as the invocation of section 2(22)(c) of the Act was concerned, as that was a matter on which the Income-tax Officer had merely appeared to have changed his opinion. In so far as resort had been made to section 46(2), the Commissioner held that the section was inapplicable as agricultural lands did not come within the purview of that provision. The Commissioner also held that even if section 2(22)(c) of the Act could be invoked, the amounts due to the company totalling Rs. 20, 37, 290 had been actually written off in the books, and that only a sum of Rs. 4, 37, 718 was available as accumulated profits and that the late, Kumaraswamy had already been assessed under section 2(6A)(e) of the Indian Income-tax Act, 1922, for the assessment years 1957-58 to 1959-60The Revenue, having carried an appeal against the order of the Commissioner to the Tribunal, the Tribunal held that the assessees had failed to disclose primary material facts fully and truly in their income-tax returns, and, therefore, the reopening of the assessment was amply justified. The Tribunal, however, on the merits, held that on a reading of sections 45, 46(2), and 48 of the Act, the assets mentioned in section 46(12) would mean capital assets and since section 47(viii) exempted transfer of agricultural lands from tax on capital gains under section 45, the agricultural lands were outside the scope of section 46(2) of the Act. The Tribunal upheld the order of the Commissioner on the merits in so far as section 2(22)(c) of the Act was concerned.

We may dispose of question No. 2 first. It is not in dispute that the amounts regarded by the Income-tax Officer as accumulated profit, the company had written off the bulk of that amount prior to the liquidation, and that the remaining amount has been assessed in the hands of the father of the assessees. The finding of the Tribunal that there was no deemed dividend available for taxation is upheld. The Revenue also did not seriously dispute the correctness of that order.

So far as the first question is concerned, the answer to that question would depend upon the true scope of section 46(2) of the Act. Section 46 of the Act, which occurs in Chapter IV dealing with the computation of the total business income and in Schedule E thereof under the sub-head "Capital gains", reads as under,

"Capital gains on distribution of assets by companies in liq

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1999 Supreme(Mad) 323

High Court of Judicature at MadrasTHE HONOURABLE MR. JUSTICE R. JAYASIMHA BABU & THE HONOURABLE MRS. JUSTICE A. SUBBULAKSHMYCommissioner of Income Tax - AppellantVersusN. Bhagavathy Ammal and Another - RespondentsTC No. 292 and 293 of 1988, REF No. 225 and 226 of 1988Decided On : 25 March 1999