1999 (3) TMI 48 - HC - Income Tax

Capital Gains Dividends Deemed Dividend Interpretation Of Taxing Statutes Appeal To Supreme Court Question Of Law

Issues Involved:
1. Interpretation of "assets" under Section 46(2) of the Income-tax Act.
2. Determination of accumulated profits for deemed dividend under Section 2(22)(c) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Interpretation of "assets" under Section 46(2) of the Income-tax Act:

The primary issue is whether agricultural lands received by the assessee on the liquidation of a company can be taxed under Section 46(2) of the Income-tax Act. Section 46(2) states that any money or other assets received by a shareholder from a company in liquidation shall be chargeable to income-tax under the head "Capital gains." The section does not specify "capital assets" but rather "other assets," indicating a broader scope.

The court emphasized that Section 46(2) is an independent charging section and should be construed on its own terms. The section creates a charge on the money or assets received by the shareholder, and the amount to be taxed is the market value of the asset on the date of distribution, reduced by any amount assessed as dividend under Section 2(22)(c). The court clarified that the term "assets" in Section 46(2) includes all kinds of assets, irrespective of whether they are considered "capital assets" under Section 2(14) of the Act.

The court further explained that the exclusion of agricultural lands from the definition of "capital assets" in Section 2(14) does not imply that they are not assets at all. The legislative intent of Section 46(2) is to tax the receipt of any asset by a shareholder from a company in liquidation, regardless of the nature of the asset. Therefore, the agricultural lands received by the assessee are taxable under Section 46(2).

2. Determination of accumulated profits for deemed dividend under Section 2(22)(c) of the Income-tax Act:

The second issue pertains to whether the accumulated profits for the purpose of Section 2(22)(c) should be taken at Rs. 4,57,780 after deducting Rs. 20,37,290 from the total accumulated profits of Rs. 24,75,070, and whether the amount already taxed under Section 2(6A)(e) of the Indian Income-tax Act, 1922, can be taxed again under Section 2(22)(c) of the Income-tax Act, 1961.

The Tribunal found that the company had written off the bulk of the accumulated profits before liquidation, and the remaining amount had already been assessed in the hands of the assessee's father. Therefore, there was no deemed dividend available for taxation. The court upheld the Tribunal's finding, stating that the Revenue did not seriously dispute the correctness of the order.

Conclusion:

The court answered the first question in favor of the Revenue, holding that the agricultural lands received by the assessee on the liquidation of the company are taxable under Section 46(2) of the Income-tax Act. The second question was resolved by upholding the Tribunal's finding that there was no deemed dividend available for taxation, as the accumulated profits had already been assessed in the hands of the assessee's father.

The court refused the application for leave to appeal to the Supreme Court, stating that the plain language of the provision does not support the construction sought by the assessee, and the mere interpretation of a provision of law does not constitute a substantial question of law warranting the Supreme Court's intervention.

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