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Judgment
V. RAMASWAMI J. - 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 u/s 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"".
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
u/s 2(24). While there is such a specific mention of capital gains chargeable u/s 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 u/s 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.
At the instance of the revenue the following question has been referred :
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 8,331 received
by the assessee from the liquidator of M/s. Ajax Products Ltd. in the year of account relevant to the assessment year 1965-66 cannot be included
in the chargeable income of the assessee under the head capital gains ?
The learned counsel for the revenue contended that the sum of Rs. 8,331 is a profit or gain arising from the extinguishment and that in view of the
extended definition of the word ""transfer"" in section 2(47), such profits or gains arise from the transfer of the shares within the meaning of section
45 of the Act and accordingly liable to be included in the total income of the assessee. He also wanted to infer a legislative intention to treat the
distribution of the asset of a company among its shareholders on its liquidation as a transfer by a reference to section 46(1) of the Act.
Under section 45 any profits or gains arising from the transfer of a capital asset shall be chargeable to Income Tax under the head ""capital gains"".
The word ""transfer"" is defined in section 2(47) in relation to a capital asset as including ""sale, exchange or relinquishment of the asset, or
extinguishment of any rights therein or compulsory acquisition thereof under any law"". The word ""transfer"" was not defined under the Indian Income
Tax Act, 1922. But section 12B of the Act provided that tax shall be payable by an assessee under the head ""capital gains"" in respect of any
profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset. In cases arising u/s 12B of the old Act, the Supreme
Court in Commissioner of Income Tax, Madras Vs. Madurai Mills Co. Ltd., , approving the view of this court, held that the distribution of the
asset of a company in liquidation does not amount to a transaction of a sale, exchange, relinquishment or transfer so as to attract section 12B of the
Act,
It is true that the present definition of the word ""transfer"" includes the extinguishment of any rights also as a transfer. The question, therefore, for
consideration is whether such extinguishment of the rights will fall within the ambit of section 2(47) of the Act. A similar question directly arose for
consideration in Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), . Bhagwati C.J.,
holding that when a shareholder receives his share on a final distribution of the net assets of the company in liquidation, there was no transfer of
capital asset by him which would attract the charge of capital gains u/s 45, observed at page 202 :
Section 48 says that the income chargeable to tax as ""capital gains"" shall be computed by deducting from the full value of the consideration
received or accruing as a result of the transfer of the capital asset the following amounts, namely : (i) expenditure incurred wholly and exclusively in
connection with the such transfer; and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. The amounts
specified in clauses (i) and (ii) are to be deducted from the consideration received or accruing as a result of the transfer of the capital asset for the
purpose of determining the profits or gains chargeable to tax. The transfer that is contemplated by section 45 read with section 2(47) is, therefore,
a transfer as a result of which consideration is received by the assessee or accrues to the assessee. Substituting the words extinguishment of any
rights in the capital asset for the words transfer of the capital asset, the transaction, in order to attract the charge of tax as capital gains, must,
therefore, be such that consideration is received by the assessee or accrues to the assessee as a result of the extinguishment of the rights in the
capital asset. There must be an element of consideration for the extinguishment of the rights in the capital asset. Then only would it be a transfer
exigible to capital gains tax. Now, as we have already pointed out above, when a shareholder receives money representing his share on distribution
of the net asset of the company in liquidation, he 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 or rights in the share. The share merely represents the right to receive
moneys on distribution of the net assets of the company in liquidation and that right is satisfied and, by satisfaction, extinguished when such moneys
are received by the shareholder. Such moneys received by the shareholder do not represent any consideration received by him as a result of the
extinguishment of his rights in the share. It is not the extinguishment of his rights in the share for which consideration is received by him : it is rather
because moneys representing his share in the distribution are received by him that his rights in the share are extinguished.
We are respectfully, in entire agreement with this reasoning and conclusion. This decision also was followed by the Patna High Court in
Commissioner of Income Tax Vs. Vijoy Kumar Budhia, . Thus, even under the extended definition of the word ""transfer"", we are of the view that
the distribution of assets of the company in liquidation, does not amount to a transfer. The learned counsel for the revenue contended that
Parliament intended to treat even distribution of the assets on winding-up also as a transfer and for this argument, he relied on section 46(1), which
reads as follows :
Notwithstanding anything contained in section 45, where the assets of a company are distributed to its shareholders on its liquidation, such
distribution shall not be regarded as a transfer by the company for the purposes of section 45.
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, Madras Vs. Madurai Mills Co. Ltd., 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 u/s 45.
The learned counsel for the revenue next relied on section 46(2) and argued that the amount received by the assessee is chargeable to Income Tax
under the head ""capital gains"" to the extent it is not liable to be treated as dividend, as if arising out of a transfer of a capital asset. In other words,
according to the learned counsel, in such a case, Parliament deemed the amount received as profit or gain arising from transfer and, therefore,
chargeable u/s 45. This argument was advanced by the learned counsel for the revenue as one of the answers to the contention of the learned
counsel for the assessee which found favour with the Tribunal that only capital gains chargeable u/s 45 could be included in the total income and
not all cases of capital gains. We are not able to agree with the learned counsel for the revenue that section 46(2) deems the receipt of the money
or other assets on liquidation as profit or gain ""arising from transfer"" within the meaning of section 45. There are no words in section 46(2) which
create a fiction of transfer. What all section 46(2) provides is that the amount received by the shareholder shall be chargeable to Income Tax under
the head ""capital gains"" and the amount, to the extent it is not liable to be treated as dividend shall be deemed to be the full value of the
consideration for purposes of section 48. It is thus an independent provision making the amounts received also chargeable to Income Tax under
the head ""capital gains"" though it did not arise from transfer of a capital asset.
The learned counsel for the assessee contended that only capital gains which is chargeable u/s 45 is included in the definition of income in section
2(24)(vi) and that though section 46(2) provided for taxing the amount received under the head ""capital gains"" it had not been made part of the
income or total income and that, therefore, even if section 46(2) intended to charge to Income Tax the amount received on liquidation, this had not
been effectuated by reason of the non-inclusion of that income in the definition. This is the argument that was accepted by the Tribunal.
The emphasis in section 4 on charge to Income Tax is in respect of ""total income"" of the previous year. ""Total income"" is defined in section 2(45)
as meaning ""the total amount of income referred to in section 5 computed in the manner laid down in the Act"". Section 5 defines the range of total
income of any previous year. Section 14 classifies and enumerates the heads of income for the purpose of charge of Income Tax and computation
of total income. Section 15 to 59 are the computation provisions. It is now well-settled that :
The scheme of the Act is that although income is classified under different heads and the income under each head is separately computed in
accordance with the provisions dealing with that particular head of income, the income which is the subject-matter of tax under the Act is one
income which is the total income."" K.V.A.L.M. Ramanathan Chettiar by Lrs. Vs. Commissioner of Income Tax , Madras, .
The provisions of section 4 and 5 also clearly show that there is only one tax on the total income of the assessee as defined in section 2(15). As
pointed out by the Supreme Court in Commissioner of Income Tax (Central), Delhi Vs. Harprasad and Co. P. Ltd., the manner of computation is
also an integral part of the definition of ""total income"". Thus, if an income which is includible in the total income of an assessee u/s 5 and falls into a
specific source and the manner of computation is provided for the same, it would be chargeable even though it does not fall under any of the
enumerated clauses in the definition of income. It would also be seen that the definition of income u/s 2(24)(vi) is an inclusive definition and the
natural meaning of the word ""income"" could not be curtained with reference to the enumerated clauses of the inclusive portion. The Supreme Court
in Navinchandra Mafatlal Vs. The Commissioner of Income Tax, Bombay City, held that the word ""income"" in its ordinary, natural and
grammatical meaning would include ""capital gains"". Section 46 had provided expressly for charging to Income Tax under the head ""capital gains"" in
respect of the money received by the shareholder from the company on liquidation. The same provisions also provided for the manner of
computation by stating that the sum so arrived at shall be deemed to be the full value of the consideration for the purpose of section 48. Therefore,
even if capital gains of the nature falling u/s 45 is only included in the definition of income in section 2(24)(vi) and not any other kinds of capital
gains, section 46(2) made the amount received by the shareholder or liquidation of a company a chargeable income under the head ""capital gains
and, therefore, it will have to be included in the total income of the assessee. Thus, the definition of the word ""income"" understood in the light of the
scheme of the Act clearly included the amount chargeable to tax u/s 46. Some of the decisions which had referred to the provisions of section
46(2) also support our view. In Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), the
Uganda company which went into liquidation was not a company within the meaning of section 2(1) of the Act. Therefore, the assessee was held
not chargeable to tax u/s 46(2) in respect of the monies received by him on liquidation of the said Uganda company. But dealing with an
assessment u/s 45 and meeting the argument of the revenue that section 46(2) was enacted with a view only to exclude from the money or other
assets received by the assessee on liquidation of the company, the amounts assessed as dividend within the meaning of section 2(22)(c) so that the
assessee may not suffer double taxation in respect of the same amount, the learned Chief Justice observed that (page 204) :
Section 46(1) carves out an exception from the general rule as to chargeability enacted in section 45 while section 46(2) brings within the net of
taxation transaction which would not otherwise fall within it u/s 45. One sub-section performs the function of exclusion while the other performs the
function of inclusion. If the intention of the legislature were merely to provide the mode of computation in a case falling within section 46(2) so as to
avoid double taxation of the same amount, the legislature need not have used words appropriate to a charging provision, namely, he shall be
chargeable to Income Tax under the head ""capital gains"" in respect of the monies so received or the market value of the other assets on the date of
distribution. It would have been sufficient for the legislature to introduce a special provision in regard to computation of capital gain in any of the
succeeding section.
The Supreme Court in Commissioner of Income Tax, Madras Vs. Madurai Mills Co. Ltd., and this court in T.M. Rangachari and Others Vs.
Commissioner of Income Tax, referred to section 46(2) as an express provision for charging as capital gains the money or assets received by a
shareholder on the liquidation of a company. We are, therefore, of the view that the amount received by the assessee, in this case, is includible in
the chargeable income of the assessee under the head ""capital gains"". We, accordingly, answer the reference in the negative and in favour of the
revenue. The revenue will be entitled to its costs. Counsels fee Rs. 250.