1976 (3) TMI 34 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 8,331 received by the assessee from the liquidator can be included in the chargeable income under the head 'capital gains'.
2. Interpretation of "transfer" under section 2(47) of the Income-tax Act, 1961.
3. Applicability of section 46(2) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Inclusion of Rs. 8,331 in Chargeable Income under 'Capital Gains':
The primary issue was whether the amount of Rs. 8,331 received by the assessee from the liquidator of Ajax Products Ltd. during the voluntary liquidation could be included in the chargeable income under the head 'capital gains'. The Income-tax Officer had initially included this amount as capital gains under section 46(2) of the Income-tax Act, 1961. The Appellate Assistant Commissioner upheld this view, stating that each distribution by the liquidator resulted in a progressive extinguishment of the shareholder's rights, constituting a "transfer" under section 2(47) of the Act. The Tribunal, however, disagreed, arguing that capital gains could only be included in chargeable income if specifically mentioned in the definition of income under section 2(24), which did not explicitly include section 46.

2. Interpretation of "Transfer" under Section 2(47):
The court examined whether the distribution of assets by the liquidator constituted a "transfer" as defined under section 2(47) of the Act. The definition includes "sale, exchange or relinquishment of the asset, or extinguishment of any rights therein." The court referred to the Supreme Court's decision in Commissioner of Income-tax v. Madurai Mills Co. Ltd., which held that the distribution of a company's assets in liquidation does not amount to a sale, exchange, relinquishment, or transfer. The court also considered the Gujarat High Court's ruling in Commissioner of Income-tax v. R. M. Amin, which stated that receiving money on liquidation does not constitute a transfer attracting capital gains tax, as there is no consideration received for the extinguishment of rights.

3. Applicability of Section 46(2):
The court analyzed whether section 46(2) independently makes the amount received by a shareholder on liquidation chargeable under the head 'capital gains'. The section states that the amount received by the shareholder shall be chargeable to income-tax under the head 'capital gains' and shall be deemed the full value of the consideration for the purposes of section 48. The court rejected the revenue's argument that section 46(2) creates a fiction of transfer. Instead, it concluded that section 46(2) independently charges the amount received to income-tax under 'capital gains', even if it does not arise from a transfer of a capital asset.

Conclusion:
The court ultimately held that the sum of Rs. 8,331 received by the assessee from the liquidator is includible in the chargeable income under the head 'capital gains'. The court disagreed with the Tribunal's view that only capital gains under section 45 could be included in the total income. It clarified that section 46(2) independently makes the amount received on liquidation chargeable under 'capital gains', aligning with the scheme of the Act and the inclusive definition of income under section 2(24). The reference was answered in the negative and in favor of the revenue, with costs awarded to the revenue.