IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No 29 of 1984 For Approval and Signature:

Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE R.BALIA.

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1. Whether Reporters of Local Papers may be allowed to see the judgements?

2. To be referred to the Reporter or not?

3. Whether Their Lordships wish to see the fair copy of the judgement?

4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5. Whether it is to be circulated to the Civil Judge?

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COMMISSIONER OF INCOME TAX Versus JAYKRISHNA HARIVALLABHDAS --------------------------------------------------------------

Appearance:

MR MJ THAKORE FOR MR MANISH R BHATT for Petitioner MR SN SOPARKAR AND DA MEHTA appear as Amicus Curie --------------------------------------------------------------

CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE R.BALIA.

Date of decision: 14/02/97 ORAL JUDGEMENT (Per Rajesh Balia, J)

1.(cid:9)At the instance of Commissioner of Income Tax, the Income Tax Appellate Tribunal, Ahmedabad Bench A has submitted the statement of case and referred the following questions of law arising out of its order in ITA No. 1951/Ahd/81 for the assessment year 1977-78:

"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"

2.(cid:9)The assessee had claimed before the Income Tax Officer a loss of Rs.27,154/- being loss on shares of M/s. 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 Income Tax Act as such. The Income Tax Officer as well as the C.I.T.(Appeals) held that on liquidation of the company, no event of transfer of asset either by 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 C.I.T. Gujarat vs. R.M.Amin reported in 106 ITR 306. The Tribunal found that provisions of Section 46(2) apply in the event of liquidation of Indian Companies and the decision in R.M. Amin's case, which was rendered in the case of foreign company, which was not governed by the provision 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.

3.(cid:9)It will be appropriate to produce Section 46 which has remained unchanged as originally enacted.

"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 shal