COMMISSIONER OF INCOME TAX Vs. JAYKRISHNA HARIVALLABHDAS

JUDGEMENT

(1.) AT the instance of CIT, the 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 asst. yr. 1977 78:

(2.) THE assessee had claimed before the ITO 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 S. 46(2) r/w S. 48 and dealt with under the provisions of IT Act as such. The ITO as well as the CIT(A) 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 CIT, vs. R.M. Amin 1977 CTR (SC) 27 : (1977) 106 ITR 368 (SC) : TC 21R.109. The Tribunal found that provisions of S. 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 S. 46(2) of the IT 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.) A brief preview of law relating to Capital gains under the 1922 Act, in the context of controversy will not be out of place. By Finance (Amendment) Act, 1947 S. 12B was inserted in the 1922 Act w.e.f. 1st April, 1946, and capital gains arising after 31st March, 1946 were subjected to Income tax. Prior to that, capital gains were not chargeable to tax in its first insertion third proviso to s. 12B provided that in distribution of capital asset on the dissolution of a firm or other AOP or on the liquidation of a company shall not for the purpose of S. 12B be treated as sale, exchange or transfer of capital assets. Sec. 12B became inoperative with the commencement of Indian Finance Act, 1949 but was revived by the Finance Act, 1956 and the proviso to S. 12B as inserted in the Act, in 1956 omitted reference to distribution of capital assets on liquidation of a company. The controversy arose under 1922 Act as to whether on distribution of assets or disbursement of cash on liquidation of a company amounts to a transfer or not, for the purposes of invoking the provisions of capital gains. The Revenue had been contending that it does amount to a transfer and, drew support from change in terminology of the proviso as was inserted in 1946 and as was made applicable in 1956. While third proviso to S. 12B, in 1946 stated that such distribution shall not be treated as a transfer of capital asset and subsequently in 1956 version of the provision reference to distribution of asset or cash on liquidation of company was omitted. This omission as per Revenue indicated that legislature wanted to treat the distribution of capital assets on dissolution of a company in liquidation, as a case of transfer of capital asset, viz., shares. It appears that in the wake of this controversy specific provision came to be enacted in Act of 1961 for the purpose of dealing with the case of distributions or liquidation of a company. While S. 46(1) declared that so far as the company is concerned, notwithstanding anything contained in S. 45 such distribution is not to be regarded as a transfer by the company for the purpose of S. 45, and sub s. (2) was enacted to subject the shareholders to the charge of capital gains on liquidation on distribution of assets on the liquidation of a company. While Sub S. (1) stated in no uncertain terms that such distribution shall not be regarded as transfer by the company for the purpose of S. 45 notwithstanding anything contained in S. 45. Sub s. (2) stated that it shall be chargeable to income tax under the head capital gains in respect of the money so received or other assets received from the company and also provided as to what shall be the value of full consideration for the purpose of computing capital gains under S. 48.