1977 (1) TMI 33 - HC - Income Tax

Summary

Issues:
1. Assessment of capital gains tax on shares received by the assessee from the liquidator of a company in lieu of her holdings in another company that went into liquidation.

Detailed Analysis:

The judgment pertains to the assessment of capital gains tax on shares received by the assessee from the liquidator of a company in lieu of her holdings in another company that went into liquidation. The assessee held shares in a company that went into liquidation, and the liquidator paid her a sum for her shareholdings. Subsequently, the liquidator allotted shares of another company to the assessee in proportion to her holdings in the liquidated company. The Income-tax Officer assessed the market value of the shares received and computed the capital gains tax. The Appellate Assistant Commissioner and the Tribunal upheld the assessment. The central question was whether the sum received by the assessee in the form of shares should be included in her chargeable income under the head 'capital gains.'

The Tribunal, relying on a Supreme Court decision, held that there was no charge created by the provisions of section 46(2) of the Income-tax Act, and thus, the sum received should not be included in the taxable income as capital gains. However, the High Court found that the Tribunal's conclusion was erroneous as section 46(2) applies to companies falling within the definition of 'company' under the Act. Therefore, the status of the company distributing the assets in liquidation is fundamental to the application of section 46(2). The High Court emphasized that the Tribunal must investigate and determine whether the company in question meets the definition of a 'company' under the Act before applying section 46(2) for assessing capital gains tax.

The High Court highlighted that the Supreme Court's judgment emphasized the importance of the status of the company in determining the applicability of section 46(2) of the Income-tax Act. As the parties did not focus on this aspect due to the timing of the Supreme Court's decision during the reference, the High Court concluded that a finding on the status of the distributing company is essential before answering the question on the inclusion of the sum received in the assessee's chargeable income. Consequently, the High Court returned the reference without answering the question, directing the Tribunal to re-examine the appeal in light of the Supreme Court's judgment after determining the status of the distributing company.