1997 (2) TMI 65 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of section 46(2) of the Income-tax Act, 1961.
2. Determination of capital loss under section 46(2) read with section 48.
3. Interpretation of legal fiction created by section 46(2) regarding liquidation of companies.

Summary of Judgment:

1. Applicability of section 46(2) of the Income-tax Act, 1961:
The primary issue was whether the assessee was entitled to claim a capital loss of Rs. 27,154 u/s 46(2) of the Income-tax Act, 1961. The Tribunal concluded that the assessee was entitled to claim this loss. The Tribunal noted that section 46(2) applies in the event of liquidation of Indian companies, distinguishing it from the Supreme Court decision in CIT v. R. M. Amin [1977] 106 ITR 368, which dealt with a foreign company not governed by section 46(2).

2. Determination of capital loss under section 46(2) read with section 48:
The controversy under the 1922 Act regarding whether distribution of assets on liquidation amounts to a transfer was resolved by the Supreme Court in CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45, which held that such receipt is not a result of sale, exchange, relinquishment, or transfer. Section 46(2) creates a legal fiction to charge the transaction to tax under "Capital gains." This fiction must be carried to its logical conclusion, treating the extinguishment of shareholder's interest as a transfer, and computing capital gains or loss under section 48.

3. Interpretation of legal fiction created by section 46(2) regarding liquidation of companies:
The court held that the legal fiction created by section 46(2) must be fully realized. This includes treating the extinguishment of shareholder rights on liquidation as a transfer, and computing capital gains or losses accordingly. The court rejected the argument that section 46(2) only taxes surplus and not losses. The provision applies to all cases of extinguishment of rights, whether resulting in gain or loss.

Conclusion:
The court affirmed the Tribunal's decision, stating that the assessee was entitled to claim the capital loss under section 46(2). The judgment emphasized that the legal fiction in section 46(2) must be applied fully, ensuring equitable treatment of shareholders whether they receive some consideration or none. The question was answered in the affirmative, in favor of the assessee and against the Revenue. No costs were awarded.