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PETITIONER: COMMISSIONER OF INCOME TAX GUJARAT-II, AHMEDABAD,

       Vs.

RESPONDENT: R.M. AMIN

DATE OF JUDGMENT26/11/1976

BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ SINGH, JASWANT

CITATION:  1977 AIR  999            1977 SCR  (2) 220  1977 SCC  (1) 691  CITATOR INFO :  E          1980 SC 176  (4)  C          1991 SC2104  (7)

ACT:            Income Tax Act 1961--Sec. 2(17), 2(47), 45,  46(2)--Capi-         tal gains-Distribution of assets by a liquidator of  company         in voluntary liquidation--If liable to capital gains tax--If         foreign company which is not a company within the meaning of         the Income Tax Act--Company--Meaning of--Transfer.

HEADNOTE:            The respondent assessee acquired before 1-1-1954  certain         shares  in a private limited company incorporated in  Uganda         for  Sh. 192002--Rs.1,28,000/-.  The said company went  into         voluntary  liquidation in the year 1961.   The  liquidators,         sold the assets of the company and the assessee received  an         amount equivalent to Rs.3,12,326/-.  The Income Tax  Officer         treated the difference between the amount received on liqui-         dation and the amount paid by the assessee for the  acquisi-         tion  of shares as capital gains liable to tax within s.  45         of  the Income Tax Act, 1961.  The Income Tax  Officer  held         that  since the Uganda company was not a company within  the         meaning  of s. 2(17) of the Act, the assessee was not  enti-         tled  to the benefit of s. 46(2) and, therefore, the  entire         amount was liable to. be taxed.  On an. appeal, the AAC held         that  the  transaction  amounted to a  transfer  within  the         meaning of s. 2(47) because there was extinguishment of  the         rights  in the capital assets as represented by the  shares.         The Tribunal held that it was not transfer within the  mean-         ing  of s. 2(47).  The High Court decided the  reference  in         favour of the assessee on the ground that when a shareholder         received  monies representing his share on  distribution  of         the  net assets of the company in liquidation,  he  receives         such  monies in satisfaction of the right which  belongs  to         him  by  virtue of his holding the share and not by  way  of         consideration  for  the extinguishment of his right  in  the         share.         Dismissing the appeal by certificate,            HELD: (1) The Uganda company is not a company within  the         meaning of s. 2(17).  There was no transfer as  contemplated         by the Act to attract  the. levy of capital gain tax.   This         Court in the case of Madurai Mills has already held that the

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       act of liquidation in distributing the assets of the company         which. had gone into voluntary liquidation did not result in         the creation of new rights.. It merely entailed  recognition         of  the  legal rights which were in existence prior  to  the         distribution.  [223 C, 224 E-F]             Commissioner of Income-tax, Madras v. Madurai Mills  Co.         Ltd., 89 ITR 45, followed.             (2) The legislature made express provisions in s.  46(2)         for levying capital gains tax in respect of distribution  of         assets of a company. But for the said provision distribution         of assets on the liquidation of a company would not  attract         the capital gains tax under s. 45.  Since the Uganda company         is  not a company within the meaning of the Act  the  provi-         sions  of s. 46(2) do  not apply to it.  The said  distribu-         tion, therefore, does not attract capital gains tax. Section         46(2) creates the liabality of a shareholder to pay the  tax         on capital  gains and also prescribes the mode of  calculat-         ing the capital gains.  [225 A-F]

JUDGMENT:         CIVIL APPELLATE JURISDICTION: Civil Appeal No. 51 of 1972.             (From  the judgment and order dated the 16th Oct.,  1970         of the. Gujarat High Court in I.T. Ref. No. 4 of 1967)         221         V.S. Desai, J. Ramamurthi and Girish Chandra, for the appel-         lant.             B.  Sen,  Mrs. ,4. K. Verma, K.J. John and  Shri  Narain         for  the respondents.         Judgment of the Court was delivered by               KHANNA, J.  This appeal on certificate is against  the         judgment  of Gujarat High Court whereby the High  Court  an-         swered  the following question referred to it under  section         256(1) of the Income-tax Act, 1961 (hereinafter referred  to         as the Act of 1961) in favour of the assessee-respondent and         against the revenue:                       "Whether on the facts and in the circumstances                       of  the     case, there was a  transfer  of  a                       capital  asset   within  the      meaning   of                       section   45 read  with section  2(47) of  the                       Income-tax Act, 1961 ?"             The  matter relates to the assessment year 1962-63,  for         which  the accounting previous year was calendar year  1961.         The  assessee  who  is an individual  held  192   shares  of         Kawelengoji   Ginneries   Ltd., Kampala, a  private  limited         company  incorporated in Uganda (hereinafter referred to  as         the  Uganda company).  Those  shares  were acquired  by  the         assessee  sometimes before January 1, 1954 and he  paid  Sh.         1000  for each share.  The amount thus paid by the  assessee         for   the  192  shares  was  Sh.  1,92,000,  equivalent   to         Rs.28,000. The said company went into voluntary  liquidation         as per special resolution dated July 10, 1961.  The liquida-         tors  sold the assets of the company in due course  and  the         liquidators  account was finally drawn up on July 31,  1961.         As per this account, the assessee became entitled to receive         Sh.  4,68,489  at the rate of Sh.  2440.0493  per  share  as         return  of  capital.   The above amount  was  equivalent  to         Rs.3,12,326. There was thus an excess of Rs.1,84,326.   This         amount  was received by the assessee during  the  accounting         year.             The Income-tax Officer treated the amount of Rs.1,84,326         as capital gains liable to tax within the meaning of section         45  of the Act of 1961.  It was pointed out by him that  the         Uganda  company  was  not a company within  the  meaning  of

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       section  2(17)  of  the  Act of 1961  and  the  shareholders         thereof  could  not be said to be entitled  to  the  benefit         provided  under section  46(2) of the Act of  1961.  Accord-         ingly,  the entire amount was liable to be taxed  as  above.         On appeal before the Appellate Assistant Commissioner refer-         ence   was made on behalf of the assessee to the  definition         of the word "transfer" in section 2(47) of the Act of  1961.         according  to which transfer in relation to a capital  asset         includes  the  sale,  exchange or  relinquishment   of   the         asset   or  the  extinguishment  of any rights  therein   or         the  compulsory  acquisition  thereof under any law.   There         was  no  dispute  that the  present was not a case of  sale,         exchange or  compulsory acquisition of capital asset  within         the  meaning of section 2(47) of the Act of 1961.  The  only         question was whether there was "relinquishment of the  asset         or the extinguishment of any rights therein".  The Appellate         Assistant  Commissioner held that for the relinquishment  of         an asset, the asset must         222         continue  to be in existence.  Applying that criterion,  the         Appellate  Assistant  Commissioner held that  there  was  no         relinquishment  of  the asset.  There was, however,  in  the         opinion of the Appellate Assistant Commissioner, extinguish-         ment of the rights in the capital  assets as represented  by         the  shares and therefore the amount was liable to be  taxed         to  capital gains tax.  The appeal of the assessee  was  ac-         cordingly  dismissed.  On second appeal the assessee,  apart         from contesting the taxability of the amount of  Rs.1,84,326         as  capital  gains, raised two other  contentions.   One  of         those  contentions was that in any event the  capital  gains         should have been computed by deducting the fair market value         of the asset as on January 1, 1954 from the amount  received         by the assessee. The other contention was that having regard         to the provisions of section 114 of the Act of 1961 the levy         of  capital  gains tax should have been much less  than  the         amount  actually calculated by the Income-tax  Officer.   We         are  in the present case not concerned with the second  con-         tention.   The first of these two contentions was,  however,         accepted and it was held  that taking into account the value         of  the shares as on  January 1, 1954 the capital  gain,  if         chargeable, would work out to be Rs.1,23,590.  The  Tribunal         then went into the question as to whether there was transfer         of capital assets and came to the conclusion that there  was         no such transfer within the meaning of section 2(47) of  the         Act  of 1961. The contention of the revenue that  there  had         been  extinguishment of the rights of the assessee  was  re-         pelled.   In the result the appeal of the assessee  was  ac-         cepted.   On  the  application made by  the  appellant,  the         question  reproduced  above was then referred  to  the  High         Court.             The High Court in answering the question referred to  it         in  the  negative, held that the  transfer  contemplated  by         section 45 should be one as a result of which  consideration         is  received  by  the assessee or accrues to  him.   When  a         shareholder  receives moneys representing his share on  dis-         tribution  of the net assets of the company in  liquidation,         he,  in the opinion of the High Court, receives such  moneys         in satisfaction of the right which belongs to him by  virtue         of  his holding  the share and not by way  of  consideration         for the extinguishment of his right in the share.  The  High         Court accordingly concluded that when a shareholder receives         his share on final distribution of the assets of the company         in  liquidation, there is no transfer of capital  assets  by         him  which  would attract the charge of capital  gains  tax.         The judgment of the High Court is reported in 82 ITR 194.

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           Before  proceeding further, we may mention that  tax  on         capital gains was charged for the first time by the  Income-         tax  and  Excess Profits Tax (Amendment)Act, 1947 (Act 22 of         1947)  which inserted section 12 B in the Indian  Income-tax         Act,  1922.  It taxed capital gains arising after March  31,         1946.  The tax on capital  gains was virtually abolished  by         the Indian Finance Act, 1949 which confined the operation of         section 12 B to capital gains arising before April 1,  1948.         Capital  gains tax was. however.  revived with  effect  from         April 1. 1957 by the Finance (No. 3) Act, 1956 which insert-         ed  new section 12 B instead of the old section 12 B in  the         Act of 1922.         223           In the present appeal we are, however, concerned with  the         Act  of 1961.  It may be appropriate at this stage to  refer         to the relevant provisions of that Act at the material time.         Section  2(14)  of the Act defined capital  assets  to  mean         property  of any kind held by  an assessee, whether  or  not         connected  with  his business or profession,  but  does  not         include  certain  categories of property which need  not  be         mentioned  as  we are not concerned with them.   It  is  the         common  case  of  the parties that the shares  held  by  the         assessee  in the Uganda company constituted  capital  asset.         "Company"  has been defined in Section 2(17) of the  Act  to         mean                            (i)  any Indian company, or                           (ii) any association, whether incorporated                       or not and whether Indian or non-Indian, which                       is or was assesable or was assessed under  the                       Indian Income-tax Act, 1922 (XI of 1922), as a                       company     for    the     assessment     year                       commencing_from  the 1st day of  April,  1947,                       o.r  which is declared by general  of  special                       order  of  the Board to be a company  for  the                       purposes of the Act.              The learned counsel for the parties are agreed that the         Uganda  company was not a company within the meaning of  the         word "company" as given in the above provision.  Transfer in         relation to a  capital asset has been defined in clause (47)         of section 2 of the Act, and the definition reads as under:                             "(47) ’transfer’ in relation to a  capi-                       tal  asset,  includes the  sale,  exchange  or                       relinquishment  of  the asset or   the  extin-                       guishment  of  any  rights   therein   or  the                       compulsory acquisition thereof under any law;"                       Section  45  deals  with the levy  of  tax  on                       capital gains, and reads as under:                         "45   Capital gains.--Any profits o.r  gains                       ’arising  from                         the transfer of a capital asset effected  in                       the  previous   year shall, save as  otherwise                       provided in section 53 and 54, 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."                       Section  45  deals  with the levy  of  tax  on                       capital gains, and  reads  as by companies  in                       liquidation reads as under:                             "46.   Capital gains on distribution  of                       assets   by  companies  in   liquidation.--(1)                       Notwithstanding anything contained in  section                       45,  where the assets of a  company  are  dis-                       tributed  to its shareholders on its  liquida-                       tion, such distribution shall not be  regarded

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                     as a transfer by the company for the  purposes                       of section 45.                             (2) Where a shareholder on the  liquidi-                       sation  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                       224                       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 tire consideration for  the                       purposes of section 48."         Section  47 specifies some of the  transactions which  shall         not   be regarded as transfers.  Section 48  prescribes  the         mode  of computation and deductions in the matter of tax  on         capital gains.             There can be no dispute that the amount received by  the         assessee in respect of the 192 shares of the Uganda  company         held  by him in excess of the cost of acquisition  of  those         shares  constituted  profits or gains.   The  question  with         which  we  are concerned is  whether those profits or  gains         arose  from a transfer of the capital assets.  The  argument         of  Mr.  Desai, learned counsel for the appellant,  is  that         when  the assessee received the sum of Sh. 4,68,489 in  lieu         of  the  192 shares held by him in the  Uganda  company,  he         received  that  amount as a result of  transfer.   The  word         "transfer" in relation to a capital asset. according to  the         learned  counsel,  includes  extinguishment  of  any  rights         therein.  The words "extinguishment of any rights  therein",         it  is submitted, would cover the case of the assessee  when         he  received  the amount mentioned above on account  of  the         shares held by him in the Uganda company.  The above conten-         tion  has  been controverted by Mr. Sen who was  urged  that         there was no transfer  contemplated by law as to attract the         levy  of tax on capital gains.  After giving the matter  our         earnest  consideration, we are of the opinion that the  con-         tention of Mr. Sen is well-founded.             The question as to whether the distribution of assets of         a company has gone into voluntary liquidation to its  share-         holder  would  amount to sale, exchange,  relinquishment  or         transfer  within the meaning of section 12 B of the  Act  of         1922 as amended in 1956 was considered by this Court in  the         case of Commissioner of Income-tax, Madras v. Madurai  Mills         Co. Ltd.(1)  While answering that question in  the negative,         this Court held that the act of the liquidators in  distrib-         uting  the assets of the company which had gone into  volun-         tary  liquidation  did  not result in the  creation  of  new         rights.  It merely entailed recognition of the legal  rights         which  were  in existence prior to the  distribution.   This         Court further observed                             "When  a  shareholder  receives    money                       representing his share on distribution of  the                       net  assets of the company in liquidation.  he                       receives  that  money in satisfaction  of  the                       right  which belonged to him by virtue of  his                       holding  the shares and not by  operation   of                       any   transaction   which  amounts  to   sale,                       exchange, relinquishment or transfer."         The  above observations, though made in the context of  sec-         tion 12 B of the Act of 1922 which related to capital  gains         in respect of profits or gains arising from sale,  exchange.

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       relinquishment or transfer  of capital assets, in our  opin-         ion,  would  also cover the case of  extinguishment  of  any         rights in capital assets.         (1) 89 L T.R. 45.          225             The matter can also be looked at from another angle.  In         the case of Indian companies and the other companies falling         within the definition of company, as given in section  2(17)         of  the  Act  of 1961, the legislature,  has  made.  express         provision  in sub-section (2) of section 46 of the Act  that         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         certain amounts which need not be specified.   But for  this         provision, it would not have been possible, in our  opinion,         to charge tax under the head "Capital gains" on the money or         other assets of a company received by its shareholder on its         liquidation.   The provisions of sub-section (2) of  section         46, as already mentioned, apply only to the distribution  of         assets  by such companies in liquidation as are  covered  by         the definition of the word "company" in section 2(17) of the         Act.    The legislature having made no similar provision  in         respect of companies other than those which fall within  the         definition contained in section 2(17), we find it  difficult         to  sustain  the levy of tax on capital   gains   when  such         other  companies distribute assets on liquidation to  share-         holders.             We  are not impressed by the argument of Mr. Desai  that         section 46(2) does not create liability of a share-holder to         pay  tax on capital gains which liability, according to  the         learned  counsel,  arises  because of section  45,  but  was         enacted  with  a view to prescribe the mode  of  calculating         capital gains in the event of distribution of the assets  of         a  company in liquidation to its share-holders.  The  afore-         said section, in our view, was enacted. both with a view  to         make shareholders liable for payment of tax on capital gains         as well as to prescribe the mode of calculating the  capital         gains  to the shareholders on the distribution assets  by  a         company  in  liquidation.   But for that   sub-section,   as         already mentioned, it would have been difficult to. levy tax         on  capital  gains to the shareholders  on  distribution  of         assets by a  company in liquidation.         Mr.  Desai  took us through the legislative history  of  the         provisions relating to the levy of tax on capital gains.   A         similar  attempt  was made by the learned  counsel  for  the         revenue in the case. of Madurai Mills (supra) and this Court         observed that consideration stemming from legislative histo-         ry cannot be allowed to override the plain words of a  stat-         ute.         As a result of the above, we dismiss the appeal with costs.         P.H.P.                                                Appeal         dismissed.         16--1458SCI/76         226