C.A. Natarajan vs The Commissioner of Income Tax

V. Ramaswami, J.—The following questions have been referred at the instance of the Assessee--

Whether on the facts and circumstances of the case, the Tribunal was right in holding that the sum of Rs. 5,000 was not a capital loss within the

meaning of Section 12-B of the Income Tax Act, 1922.

Whether on the facts and circumstances of the case the Tribunal was right in law in holding that the provision of Section 12-B of the Income Tax

Act, 1922 did not apply to the transaction resulting in the loss of Rs. 53,761 incurred by the Assessee?

The Assessee who is a Chartered Accountant purchased in 1948, 50 cumulative preference shares in South India Sheet Metal Company Limited

at a cost of Rs. 5,000. He was receiving dividend from the said company upto the accounting year relevant for the assessment year 1952-53. In

1956 the company went into liquidation. On 8th December 1960 the Official Liquidator informed the Assessee that the assets of the company

were not sufficient even to pay off the secured creditors and that there was no possibility of the share. holders being paid any portion of their

capital investment therein. For the assessment year 1961-62 the Assessee submitted a return in which he claimed the cost of investment of Rs.

5,000 as capital loss u/s 12-B of the Income Tax Act, 1922 (hereinafter called the Act) relying on the receipt of the letter from the Official

Liquidator.

On 31st March 1953 the Assessee had advanced a sum of Rs. 25,000 to one Messrs. Meera Sahib and Brothers, a client of the Assessee. In

May 1954 he advanced a further sum of Rs. 50,000. The Assessee filed Civil Suit No. 23 of 1958 on the original side of the High Court for the

recovery of these advances and obtained a decree. But he could realise between 1958 and 1960 only a sum of Rs. 20,539. The Assessee claimed

a sum of Rs. 53,761 outstanding under the decree as a loss allowable u/s 12-B in the same assessment year 1961-62.

The income tax Officer held that the two claims in respect of Rs. 5,000 and Rs. 53,761 were not allow - able u/s 12-B as they were not losses

that arose from the sale, exchange, transfer or relinquishment of a capital asset. This view was confirmed by the Appellate Assistant Commissioner

and the Tribunal. In this reference the learned Counsel for the Assessee contended that there could be no doubt that as a result of the company

going into liquidation and the irrecoverability of the decree debt the Assessee had suffered a loss, that the loss incurred by him in these two

transactions amounts to a relinquishment within the meaning of Section 12-B and that, therefore, the Assessee was entitled to set off these losses

against his other capital gains in that year.

Shares are movable properties and they are capital assets admits of no doubt. Even in the case of winding up of a company the share-holder

who would be a contributory would have a right to participate in the residue after paying the liability. The question for consideration is whether in

view of the fact that the value of the shares have been reduced or became nil value because of the company going into liquidation and the Official

Liquidator finding that the assets of the company were not sufficient even to pay off the secured creditors, the aasesse could be said to have

suffered a capital loss. It is not every capital loss that is sustained by an Assessee that could be claimed as a set off against the capital gain. The

primary condition that there was a sale, exchange, relinguishment or transfer of a capital asset by the Assessee must be satisfied before he could

claim loss under the transaction. It is not the case of the Assessee that there was any sale, exhange or transfer but he contended that there was a

relinquishment. We are unable to accept this contention. Right through the Assessee held the shares as such. It might be that the value of the shares

in his hands became nil due to the company going into liquidation. Relinquishment implies that the person ceases to own the asset. The Assessee

owned the shares during the assessment year though its value might have been reduced. Capital gain or a capital loss is a gain realised or a loss

incurred and the loss or gain must be in the disposal of an asset in any one of the modes above referred to. There was no disposal in this case.

There was no relinquishment or parting with the right in the shares. As a share-holder when the company went into liquidation the Assessee

became entitled to receive any surplus that may remain after paying the liabilities He also has got certain other rights regarding the management of

the company and also taking part in the liquidation proceedings. These rights still continue to vest in the Assessee. Because the liquidator found that

the assets would not be sufficient even to pay off the secured creditors the Assessee does not cease to be a share-holder or a contributory nor any

of his rights as a share-holder or contributory are affected, though the share value might have been reduced to nil.

In this connection it is useful to refer to the decision of this Court in Madurai Mills Company Ltd. Vs. Commissioner of Income Tax, . In that

case the Assessee was a share-holder in three private limited companies. The companies went into voluntary liquidation. As a result of the

distribution of the assets of the three companies, the Assessee company obtained cash or assets in the shape of shares in other companies and

immovable properties. The income tax Officer held that by reason of the distribution of the assets of the three companies under liquidation by the

Liquidator there had resulted a capital gain within the meaning of Section 12-B and brought to tax a sum of Rs. 95,944 as capital gain, as against

the loss of Rs. 59,104 worked out by the Assessee. This was affirmed by the Appellate Assistant Commissioner and the Tribunal. This Court held

that in the distribution or refunding of the assets in the liquidation, the Liquidator is performing only a statutory function. The payment of cash or

allotment of shares in the other companies was a recognition of the pre-existing legal rights and not a creation of new rights. In a case of voluntary

liquidation the property of the company does not vest in the Liquidator and, therefore, no relinquishment will arise. The transaction cannot,

therefore, be characterised as a transfer or sale or relinquishment. In the present case even that stage had not been reached. The only thing we

have is the Official Liquidator informing the Assessee that the assets of the company might not even be sufficient to pay off the creditors. Therefore,

this is an a fortiorari case and it could not be said that there was any relinquishment of any of the rights of the Assessee in the shares.

The learned Counsel for the Assessee also invited our attention to Section 481 of the Companies Act which states that when the affairs of the

company have been completely wound up or when the Court is of opinion that the Liquidator cannot proceed with the winding up of the company

for want of funds and assets or for any other reason whatsoever and it is just and reasonable in the circumstances of the case that an order of

dissolution of the company should be made, this Court shall make an order that the company be dissolved from the date of the order and the

company shall be dissolved accordingly. Relying on this provision the learned Counsel contended that the company shall be deemed to have been

dissolved and, therefore, there was a relinquishment of the shares. During the assessment year the winding up of the company was not over, nor an

order of dissolution was obtained from the Court. Therefore, the question whether the dissolution of the company would amount to a

relinquishment does not arise for consideration in this case. We are, therefore, of the opinion that the Assessee was not entitled to set off the sum

of Rs. 5,000 against the other capital gains.

In the case of decree debt against Meera Sahib and Brothers, the Assessee has written off in his books of account that the debt had become

irrecoverable and this, the Assessee contended, amounted to a relinquishment of the rights. We do not see how his unilateral act of writing it off in

his books could make it a relinquishment. The writing off was not done under any agreement with the debtor nor was the debtor even aware of it.

The decree debt has not been satisfied by payment or otherwise and, therefore, the decree would be executable always until the period of

limitation for its execution was over. The decree was of the year 1958 only and it is a decree of the High Court. The decree could be executed

within a period of 12 years. So during the assessment year 1961-62 the execution of the decree had not been barred by limitation. If the debtor

had become better in his financial position surely the Assessee would be entitled to execute the decree against the debtor and the debtor will not be

able to plead satisfaction of the decree merely because the Assessee chose to write it off in his books of account. The writing off in his books of

account might only suggest that in the opinion of the Assessee he might not be able to recover anything from the debtor. It would not, in our

opinion, amount to a relinquishment of the debt itself. It is true that relinquishment need not be in favour of the debtor. But still his rights and

obligations under the decree could not be said to have been relinquished by merely writing it off in his accounts. Being a decree of a Court, until the

satisfaction of the decree is entered into in a mode known to law, the decree will still be executable and the debtor will not be entitled to take

advantage of the entry made by the Assessee-creditor. We are, therefore, of the opinion that the sum of Us. 53,762 was also not entitled to be set

off against the Assessee''s other capital gains.

For the foregoing reasons, we answer both the questions referred to us in the affirmative and against the Assessee. But there will be no order as

to costs.