1990 (3) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Computation of capital gains under section 46(2) of the Income-tax Act, 1961.
2. Deduction of the cost of acquisition in the context of distributions by a liquidator.
3. Applicability of the Income-tax Act, 1961, to distributions made before its enactment.

Detailed Analysis:

1. Computation of Capital Gains under Section 46(2) of the Income-tax Act, 1961:
The core issue was whether the Appellate Tribunal was correct in holding that the capital loss qualifying for set-off was Rs. 13,99,887, despite the original assessment adopting a loss of Rs. 13,028 under the head "Capital gains." The Tribunal concluded that while computing the capital gain under section 46(2) for the assessment year 1968-69, the cost of acquisition should be deducted from the full value of consideration, which was the second and final distribution made by the official liquidator in March 1968. This computation led to an aggregate capital loss of Rs. 14,06,300, less a profit of Rs. 6,413 from Binny shares, resulting in a net capital loss of Rs. 13,99,887.

2. Deduction of the Cost of Acquisition in the Context of Distributions by a Liquidator:
The assessee contended that the cost of acquisition should be deducted from the full value of consideration during the second distribution in March 1968. The Tribunal agreed, stating that since the first distribution occurred in 1960, before the Income-tax Act, 1961, came into force, the cost of acquisition could not be deducted then. Therefore, the full cost of acquisition should be deducted during the second distribution in 1968. This was supported by the Tribunal's interpretation that the first occasion for such deduction arose only after the enactment of the 1961 Act.

3. Applicability of the Income-tax Act, 1961, to Distributions Made Before Its Enactment:
The Department argued that the cost of acquisition should have been deducted from the first distribution in 1960. However, the Tribunal and the court held that since the 1961 Act was not in force in 1960, the concept of capital gains and cost of acquisition did not apply. The court cited the Supreme Court decision in CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45, which held that the distribution of assets by a company in liquidation did not amount to a transaction of sale, exchange, relinquishment, or transfer under the 1922 Act. Thus, the first distribution in 1960 could not be considered for capital gains computation under the 1961 Act.

Conclusion:
The court upheld the Tribunal's decision, affirming that the cost of acquisition should be deducted from the full value of consideration during the second distribution in 1968. The reframed question was answered in the affirmative and against the Revenue, confirming that the Tribunal correctly computed the capital gains by deducting the cost of acquisition from the second distribution. The assessee was entitled to costs, with counsel's fee set at Rs. 500.