1976 (3) TMI 38 - HC - Income Tax

Issues Involved:

1. Validity of the assessment order dated March 30, 1967.
2. Interpretation of Section 46(2) of the Income-tax Act, 1961.
3. Timing of the taxable event for capital gains tax.
4. Consideration of amounts received in 1949 and 1953 under the Indian Income-tax Act, 1922.
5. Determination of capital gains and the cost of acquisition.
6. Relevance of interim distributions versus final distribution in liquidation.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order Dated March 30, 1967:

The Income-tax Officer assessed the petitioners on capital gains for amounts received as distribution of capital upon liquidation of their subsidiary company. The petitioners challenged the assessment order, leading to its quashing by K. K. Desai J. The judgment under appeal upheld the quashing of the assessment order, stating that the amounts received in 1949 and 1953 could not be taxed under the head "Capital gains" as the relevant provisions were not in force at that time.

2. Interpretation of Section 46(2) of the Income-tax Act, 1961:

The court examined Section 46(2), which stipulates that a shareholder receiving money or assets from a company in liquidation is chargeable to income-tax under the head "Capital gains" on the date of distribution. The court concluded that this section does not imply that interim distributions should be aggregated and taxed only upon final distribution.

3. Timing of the Taxable Event for Capital Gains Tax:

The court rejected the Income-tax Officer's contention that the taxable event occurred only upon the final distribution of Rs. 2,39,934 on September 18, 1961. The court held that each distribution should be considered separately for tax purposes, and amounts received in 1949 and 1953 could not be retroactively taxed under the 1961 Act.

4. Consideration of Amounts Received in 1949 and 1953 under the Indian Income-tax Act, 1922:

The court noted that the sums of Rs. 53,85,400 and Rs. 25,07,001 received in 1949 and 1953, respectively, were not subject to capital gains tax under the Indian Income-tax Act, 1922, as there was no provision for such tax at that time. Therefore, these amounts could not be taxed under the 1961 Act.

5. Determination of Capital Gains and the Cost of Acquisition:

The Income-tax Officer's assessment included determining the cost of acquisition of shares and calculating capital gains. The court found that the officer's method of aggregating interim distributions and taxing them upon final distribution was not justified. The proper approach would be to tax any excess amount received over the cost of acquisition as capital gains at the time of each distribution.

6. Relevance of Interim Distributions versus Final Distribution in Liquidation:

The court emphasized that interim distributions should not be treated as mere instalments leading up to a final taxable event. Each distribution should be evaluated independently for tax purposes. The court held that the Income-tax Officer's approach would result in undue hardship to the revenue and potential tax evasion by shareholders receiving substantial interim distributions before the final distribution.

Conclusion:

The court dismissed the appeal and upheld the quashing of the assessment order dated March 30, 1967. It directed the Income-tax Officer to pass a new assessment order considering only the amounts received as deemed dividend and the final distribution received on September 18, 1961. The court also granted liberty to the respondent's attorneys to withdraw the sum deposited towards costs of the appeal.

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