Full Judgment Text
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CASE NO.:
Appeal (civil) 2606-2607 of 2001
PETITIONER:
N. Bagavathy Ammal
RESPONDENT:
Commissioner of Income Tax, Madurai & Anr.
DATE OF JUDGMENT: 27/01/2003
BENCH:
Ruma Pal & B.N. Srikrishna.
JUDGMENT:
J U D G M E N T
RUMA PAL, J.
The question to be decided in these appeals is whether
the word ’assets’ in Section 46(2) of the Income Tax Act, 1961
(referred to hereafter as the ’Act’) must be understood and
construed according to the definition of the word ’capital
assets’ in Section 2(14) of the Act.
The issue arises in respect of the assessment year
1970-71. The appellants in the two appeals which are
disposed of by this judgment are sisters. They were share
holders in M/s Palkulam Estate (Private) Ltd., Nagercoil
(referred to hereafter as the ’Company’). The Company went
into liquidation in 1964. Pursuant to a compromise decree
dated 22nd December 1969 in litigation between the
assessees and their brother (who was also a share holder in
the company), and the company represented by the liquidator,
the assets of the company which included agricultural lands
were distributed to the appellants and eight others. The
compromise decree stated:
"This Court doth further order and
decree that as far as liabilities of
Palkulam Estate Private Limited is
concerned, the immovable properties be
and hereby are distributed as indicated
in Schedule ’A’ of the Compromise. The
respondents 1 to 5 and respondents 9 to
11 do get leased portions as shown in
the plans, signed by liquidator Mr.
K.M.Boothalingam Pillai and handed
over to the appellant this day."
The appellants thereby received 479.89 acres of the
agricultural lands prior to the end of the relevant accounting
year that was 31.3.70 . The assessment in respect of the year
1970-71 had been completed on 27.2.71. The Income Tax
Officer reopened the assessments under Section 148 of the
Act. The appellants filed their returns in respect of the two
notices under Section 148. The contention of the appellants
that in terms of the definition of ’assets’ in Section 2(14),
agricultural lands were entitled to be excluded while
computing capital gains on assets received by the shareholder
from a company in liquidation under Section 46(2) was not
accepted. According to the assessing officer, Section 46(2)
refers only to money received on liquidation or the market
value of the assets on the date of distribution and it was
immaterial whether the asset was agricultural lands or
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otherwise. The value of the share of agricultural lands
transferred to each appellant was, therefore, included as
income subject to capital gains and subjected to tax. The
assessees’ appeals before the Commissioner of Income Tax
(Appeals) were allowed by holding that the scope of Section
46(2) would have to be read in the light of the definition of the
word ’capital asset’ in Section 2(14) and that "having
exempted agricultural lands from capital gains under the
general provision, it was difficult to interpret Section 46(2) as
including agricultural land". The action of the Income Tax
Officer in charging the income of the distribution of agricultural
lands as capital gains under Section 46(2) of the Act was
accordingly set aside.
The Revenue appealed before the Tribunal. The
Tribunal dismissing the Revenue’s appeal held:
"On a combined reading of Section 45,
46(2) and 48 it will be clear, according to
our opinion, that assets mentioned in
Section 46(2) would mean capital
assets. In as much as Section 47 (viii)
exempts transfer of agricultural lands
from capital gain tax under Section 45,
we agree with the Commissioner of
Income Tax (Appeals) in coming to the
conclusion that it is difficult to interpret
Section 46(2) as including agricultural
lands which is outside the scope of the
Income Tax."
Of the two questions referred to the High Court by the
Tribunal under Section 256(1) at the instance of the Revenue
only one survives for our decision. The second question was
not pressed before the High Court. The first question which
was:
" Whether on the facts and in the
circumstances of the case, the Appellate
Tribunal is right in law in holding that the
assets mentioned in section 46(2) would
mean ’capital asset’ as defined in
section 2(14) and that consequently,
the value of agricultural lands
received by the assessee on the
liquidation of Palkulam Estate (P) Ltd.
cannot be charged to tax under section
46(2) of the Income Tax Act, 1961?"
was answered by the High Court against the assessees and in
favour of the Revenue. The High Court construed the
provisions of Section 46(2) and held, reversing the decision of
the CIT(A) and the Tribunal, that the definition of ’capital
assets’ under Section 2(14) of the Act is not of any relevance
for the purpose of construing Section 46(2) of the Act, and the
fact that agricultural lands to the extent provided in Section
2(14)(c) of the Act are excluded from the definition did not
have any impact on the taxability of the market value of the
agricultural lands received by the assessee on the distribution
of the assets of a company in liquidation.
Before considering the correctness of the decision of
the High Court the context in which Section 46(2) came to be
part of the Act needs to be considered.
Section 12-B of the Income Tax Act, 1922 provided for
payment of tax under capital gains ’in respect of any profits or
gains whatsoever from the sale, exchange, relinquishment or
transfer of a capital asset effected after 31st day of March
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1956, and such profits and gains shall be deemed to be
income of the previous year in which the sale, exchange,
relinquishment or transfer took place". Construing Section 12-
B of the Income Tax Act, 1922 this Court in Commissioner of
Income Tax, Madras V. Madurai Mills Co. Ltd. 1973 (89)
ITR 45 had held that when a shareholder receives money
representing his share on distribution of the net assets of the
company in liquidation, he receives that money in satisfaction
of the right which belonged to him by virtue of his holding the
shares and not by operation of any transaction which amounts
to sale, exchange, relinquishment or transfer within the
meaning of Section 12-B of the Act.
Section 45(1) of the 1961 Act which substantially
corresponds with Section 12-B of the 1922 Act continues to
provide that:
"Any profits or gains arising from the
transfer of a capital asset effected in
the previous year shall, save as the
otherwise provided in Sections 54,
54B, 54D, 54E, 54EA, 54EB, 54F, 54G
and 54H be chargeable to income tax
under the head ’Capital gains’, and
shall be deemed to be the income of
the previous year in which the transfer
took place."
The words ’capital assets’ has been defined in Section
2(14) of the Act which as it stood at the relevant time, that is
prior to its amendment in 1972, provided:
"2. In this Act, unless the context
otherwise requires
(14) ’Capital assets’ means property of
any kind held by an assessee, whether
or not connected with his business or
profession, but does not include
(i)..
(iii) agricultural land in India
It has been held by this Court that the principle of
Madurai Mills that a distribution of assets of a company in
liquidation does not amount to a transfer continues to apply to
the 1961 Act. (See Commissioner of Income Tax V. R.M.
Amin: 1977 (1) SCC 691, 696.)
The view in Madurai Mills Co. Ltd. (supra) has also
been statutorily affirmed in Section 46(1) which provides:
46. (1) 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.
In other words a distinction is drawn between a
"transfer" of assets and a distribution of assets of the company
on liquidation. Where there is ’transfer’ of assets and not a
’distribution’ on liquidation then having regard to Section
47(viii) which provides that "Nothing contained in Section 45
shall apply to the following transfers:
(viii) any transfer of agricultural land in
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India effected before the 1st day of March
1970"
it may have been argued at least on behalf of the Company
that the ’transfer’ having been concluded in 1969 was exempt
from capital gains. This argument, however, is not available
to the shareholders who receive assets from the company on
distribution consequent upon liquidation because of Section
46(2) which was introduced to make the receipts of assets
from a company liquidation by its share holders a taxable
event for the first time . Section 46 (2) provides:
"46(2) where a shareholder on the
liquidation of a company receives any
money or other assets from the
company, he shall be chargeable to
income tax under the head ’Capital
gains’ in respect of the money so
received or the market value of the other
assets on the date of distribution, as
reduced by the amount assessed as
dividend within the meaning of sub-
clause (c) of clause (22) of section 2
and the sum so arrived at shall be
deemed to be the full value of the
consideration for the purposes of
section 48."
The question is does the words ’assets’ in Section 46(2)
mean ’capital assets’ as defined in Section 2(14) of the Act? If it
does then, it is conceded by the Revenue, there is no question
of subjecting the agricultural lands received by the assessees
from the company in liquidation to capital gains.
Indisputably, the object in introducing Section 46(2) was
to overcome the reasoning in Madurai Mills by broadening the
base of the incidence of capital gains and expressly providing
for receipt of assets of a company in liquidation by a
shareholder as a taxable event.
Section 46(2) is in terms an independent charging
Section. It also provides for a distinct method of calculation of
capital gains. As said in C.I.T. v. R.M. Amin (supra):
"The aforesaid section, in our view, was
enacted both with a view to make
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. But
for that sub-section as already
mentioned, it would have been difficult
to levy tax on capital gains to the
shareholders on distribution of assets by
a company in liquidation."
The Section does not make any reference to capital
assets either in connection with the imposition of capital gains
tax nor its computation.
Having referred to ’capital asset’ in Section 45(1), 47 and
48, Parliament appears to have deliberately chosen to use the
word ’asset’ in Section 46(1) and (2), the ostensible intention
being to bring assets of all kinds within the scope of the charge.
It is not necessary to refer to a dictionary to hold that capital
assets are a species of the genus ’assets’. If the words ’capital
assets’ and ’assets’ as used in Sections 45(1) and 46
respectively did not overlap then there was no need to provide
for a non obstante clause in Section 46(1) with reference to
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Section 45. As correctly held by the High Court, agricultural
land would have been a ’capital asset’ but for the exclusion
from the definition of ’capital asset’ and what is not a capital
asset may yet be an asset for the purposes of S.46(2).
Therefore, to the extent that a shareholder assessee
receives assets whether capital or any other from the company
in liquidation, the assessee is liable to pay tax on the market
value of the assets as on the date of the distribution as
provided under Section 46(2). That appears to be the plain
meaning of the section and we see no reason to construe it in
any other fashion. The invocation of Section 2(14) of the Act
which defines "Capital asset" is as such unnecessary for the
purpose of construing Section 46(2).
We accordingly dismiss the appeals without any order
as to costs.