COMMISSIONER OF INCOME TAX Vs. ALAGAPPAN M A

JUDGEMENT

(1.) THE assessee was shareholder of a company called "Ajax Products Ltd." which went into voluntary liquidation on 30th October, 1954. At the time of voluntary liquidation, he held 378 and 2/3rd shares of the face value of Rs. 100 each. THE liquidator who was appointed to wind up the affairs of the company, sold some of its assets in February, 1955, to a new company and in pursuance of that sale, the shareholders of Ajax Products Ltd. were allotted fully paid up shares of the new company equal in number and face value to the share they held in the old company. THEreafter, the liquidator distributed from time to time various sums to the shareholders out of realisations in respect of the remaining assets. In the year of account, relevant to the assessment year 1965-66, the assessee received a sum of Rs. 8,331 at the rate of Rs. 22 per share. Since the assessee had already received the full value of his original investment in the form of shares in the new company at the very first distribution itself the Income-tax Officer brought this sum of Rs. 8,331, received by the assessee, as capital gains under section 46(2) of the Income-tax Act, 1961, hereinafter called the Act. THE assessee preferred an appeal to the Appellate Assistant Commissioner and contended that there was no transfers of a capital asset by the appellant in the previous year relevant to the assessment year under appeal to render him liable to be assessed in respect of any capital gains. THE Appellate Assistant Commissioner held that when a company is taken into liquidation and the liquidator starts distribution of the assets of the company among the shareholders, there is a progressive extinguishment of the rights of the shareholders with each distribution. He referred to the definition of the word "transfer" in section 2(47) of the Act which included relinquishment of the asset or the extinguishment of any right therein also coming within the meaning of the word "transfer". Inasmuch as the transfer in relation to a capital asset had been given an extended meaning to include an extinguishment of the rights therein, there is a transfer at each distribution. He was also of the view that by virtue of the provisions contained in sub-section (2) of section 46, the sum which the shareholders received from the liquidator is assessable to tax us "capital gains" to the extent it is not liable to be treated as dividend under clause (c) of sub-section (22) of section 2 of the Act. In the result, he held that the sum of Rs. 8,331 is taxable as "capital gains".

(2.) ON a further appeal, the Tribunal held that the disputed amount could not be included in the chargeable income of the assessee under the head "capital gains". According to the Tribunal, "capital gains" could not ordinarily be treated as a taxable income. But, by specific deeming provisions, certain kinds of gains arising from the transfer of a "capital asset" were treated as taxable income in order that such a deemed income is included in the chargeable income. According to the Tribunal, a specific mention of such deemed income has to be made in the definition of the word "income" under section 2(24). While there is such a specific mention of capital gains chargeable under section 45, in section 2(24), the omission of any reference to section 46 is conspicuous though both the sections had been enacted at the same time. The Tribunal also sought support for this view by a reference to section 19(3)(i) which again refers to only "capital gains" chargeable under section 45 and not section 46. The Tribunal, therefore, held that the capital asset could be brought to tax only if there is a transfer within the terms of the provisions of section 45 and the provisions of section 46 would not by themselves given authority for including the same in the total income.

(3.) ACCORDING to the learned counsel, if there was no transfer, there was no need for this specific provision not to regard the distribution as a transfer by the company. We are not able to agree with this contention. First of all, legislative assumptions cannot be treated as law. It has been clearly held by the Supreme Court in Commissioner of Income-tax v. Madurai Mills Co. Ltd., 1973 89 ITR 45 that there is no transfer when the assets of a company are distributed to its shareholders on its liquidation. There is no transfer either from the company or from the shareholder. Therefore, section 46(1) is only per curia and could not be treated as law. We are of the view that section 46(1) is intended to make clear that the company would not be liable for payment of any capital gains. We are, therefore, of the view that the sum of Rs. 8,331 could not be included in the chargeable income as capital gains under section 45.