Commissioner of Income Tax vs M.A. Chidambaram

Ramanujam, J.—The following question has been referred to us at the instance of the revenue u/s 256(1) of the income tax Act, 1961 (''the

Act''):

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 13,590 received in

excess of the original cost of the shares by way of dividends from the liquidator of M/s. Kanadukathan Electric Supply Corporation Ltd., could not

be included in the hands of the assessee as long-term capital gains ?

The assessee was holding 201 shares of Rs. 500 each in Kanadukathan Electric Supply Corporation, which went into liquidation some years back.

The assessee was receiving dividend from the liquidator of the company during the last few years prior to the assessment year 1969-70. In the

year of account relevant for the assessment year 1969-70, the assessee received by way of third and fourth dividends a total sum of Rs. 33,165,

which, along with the other dividends received previously, exceeded the original cost of the shares by Rs. 13,590. This was brought as ''capital

gains'' by the ITO.

On appeal, the AAC, relying on the decision of the Tribunal in the case of another assessee by name Smt. C.T. Oppilal Achi [IT Appeal No. 702

(Mad.) 1969-70 dated 28-8-1971] and also the decision of the Gujarat High Court in the case Commissioner of Income Tax, Gujarat II Vs. R.M.

Amin. (Legal representative of the Late Chunibai Amin), , upheld the assessee''s claim that the sum of Rs. 13,590 cannot be brought to charge as

capital gains.

The revenue took the matter in appeal to the Tribunal, contending that the amount received by the assessee in excess of the original cost by way

of dividends should be brought to charge. The Tribunal, however, following its own earlier decision in IT Appeal No. 702 (Mad.) of 1969-70,

dated 28-8-1971, and also following the decision of the Gujarat High Court in R M. Amin case (supra) held that the sum of Rs. 13,590, is not

liable to be treated as long-term capital gains. Aggrieved by the decision of the Tribunal, the revenue has obtained this reference on the above

question of law.

Mr. Jayaraman, the learned counsel for the revenue, submits that even if the sum of Rs. 13,590, being the dividends received in excess of the

original cost of the shares, is not chargeable u/s 45, the same can be brought to charge u/s 46(2) of the Act, as it can be invoked even when there

is no transfer of assets involved. In support of his submission that the sum of Rs. 13,590 is assess able and can be brought u/s 46(2), which

specifically brings to charge the amounts received by the shareholder under the head ''Capital gains'' to the extent the said sum exceeds the original

cost of acquisition of the shares, the learned counsel refers to the decisions of this Court in COMMISSIONER OF Income Tax, MADRAS-II

Vs. M. A. ALAGAPPAN., , Commissioner of Income Tax Vs. C.T. Oppilal Achi, and the decision of the Supreme Court in The Commissioner

of Income Tax, Gujarat II, Ahmedabad Vs. Shri R.M. Amin, L.R. of The Late Shri. Chunnibhai J. Amin, Baroda, which arose out of the judgment

of the Gujarat High Court in R.M. Amin''s case (supra) relied on by the Tribunal in this case.

In T.M. Rangachari and Others Vs. Commissioner of Income Tax, , a Division Bench of this Court, to which one of us was a party, had taken

the view that section 46(2) is a charging provision independent of section 45 and, therefore, even if a particular income cannot be brought to

charge u/s 45, the same can be brought to charge u/s 46(2), if the condition laid down in that section is satisfied. The said decision has been

referred to with approval and followed by a Division Bench of this Court in M.A. Alagappan''s case (supra) and the learned Judges have

expressed the view that section 46(2) is an express provision for charging as ''capital gains'' in respect of the moneys or assets received by a

shareholder of a company in liquidation. The same view was taken in C.T. Oppilal Achi''s case (supra). It is significant to note that the decision in

C.T. Oppilal Achi''s case (supra) was in respect of the decision rendered by the Tribunal in IT Appeal No. 702 (Mad.) of 1969-70, dated 28-8-

1971, which has been taken as the basis for its decision in this case by the Tribunal. In C.T. Oppilal Achi''s case (supra), there was a liquidation of

a bank and its shareholders were allotted shares in a private limited company in proportion to the shares held by them in the bank. The ITO was of

the view that the assessee shareholder was chargeable to capital gains tax in respect of the receipt of the shares in the company by reason of

section 46(2). The assessment was confirmed by the AAC. But the Tribunal held that no charge was created by section 46(2) and, hence there

was no justification in including in the taxable income of the assessee by way of capital gains any sum referable to the receipt from the liquidator of

the bank. This Court did not agree with the view of the Tribunal, but held that section 46(2) itself is a charging section and it will apply only in

relation to companies which fall within the scope of the definition of ''company'' in section 2(17) of the Act, since the Tribunal had not given its

decision on that question, this Court remitted the matter to the Tribunal for consideration of that question. Though this Court has remitted the

matter to the Tribunal, it clearly ruled that section 46(2) is a charging section apart from section 45 and that it will apply to all receipts from the

liquidator in the course of the liquidation of the company as dividends towards the shares held by them.

In this case the question as to whether the assessee-company is a company as defined in section 2(17) does not arise, as it has been con ceded

by the learned counsel for the assessee that it is a company as contemplated by section 2(17).

It is significant to note that the decision of the Supreme Court in R.M. Amin''s case (supra) was rendered on an appeal against the decision

rendered by the Gujarat High Court in R.M. Amin''s case (supra), which has been relied on by the Tribunal in this case. In that case the Supreme

Court has clearly held that section 46(2) was enacted both with a view to making 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 of assets by a company in liquidation and that since the

provisions of section 46(2) applied only to the distribution of assets by such companies in liquidation, as were covered by the definition of the word

''company'' in section 2(17), capital gains tax was not leviable when companies other than those which fell within the definition in section 2(17)

distributed assets on liquidation to their shareholders. It is significant to note that even the Gujarat High Court in R.M. Amin''s case (supra) has held

that section 46(2) is a charging section and that if the conditions laid down in that section applied, it can be invoked in respect of the distribution of

assets by companies in liquidation. But it held that the company in question was not a company as contemplated in section 2(17). With this finding,

it held against the revenue. The Supreme Court affirmed the decision of the Gujarat High Court and held that section 46(2), as a charging section,

can be applied for the amount received from the official liquidator; but the company in liquidation should be a company as contemplated in section

2(17).

As already stated, we are not now concerned with the question as to whether the company in liquidation is a company as defined in section

2(17). Thus, on the question as to whether Section 46(2) can be used as a charging section without reference to section 45 seems to be concluded

by the decisions referred to above. Though the Tribunal purported to follow the decision of the Gujarat High Court, it has not referred to section

46(2) and considered the question of its applicability to the facts of the case. In view of the fact that the company, which was in liquidation, is

admitted to be a company coming u/s 2(17), section 46(2) is straightway attracted on the facts of the case. Even as a matter of construction, on

the statute, section 45 is a general provision, while section 46(2) is confined to a special situation and being a special provision applicable to a

special situation, the applicability of that section cannot be excluded, merely because the general section, like section 45, does not apply. In this

view of the matter, we answer the question referred to us in the negative and against the assessee. The assessee will pay the costs of revenue.

Counsel''s fee Rs. 500.