1993 (9) TMI 3 - SC - Income Tax

Liquidation of Company - assessee was a shareholder in a private limited company, received certain assets towards the shares held by him - in the light of the specific provision contained in sub-section (2) of section 46, the value of the assets received by the assessee was rightly and properly brought to capital gains tax.

Summary

Issues:
1. Interpretation of provisions regarding capital gains on distribution of assets by companies in liquidation.
2. Taxability of assets received by a shareholder in a private limited company during liquidation proceedings.

Analysis:
In the judgment of Supreme Court, the main issue revolved around the interpretation of provisions related to capital gains on the distribution of assets by companies in liquidation. The case involved two civil appeals where the taxpayers, shareholders in a private limited company that went into liquidation, received assets during the liquidation proceedings. The question was whether these assets could be treated as income by way of capital gains. The Income-tax Officer assessed the value of the assets received and levied tax on the same. The taxpayers contended that since there was no transfer of property, no capital gains should arise. However, the High Court ruled against the taxpayers, citing the specific provisions of section 46 of the Income-tax Act.

Section 46 of the Income-tax Act deals with capital gains on the distribution of assets by companies in liquidation. Subsection (2) of section 46 states that where a shareholder receives money or assets from the company during liquidation, they shall be chargeable to income-tax under the head 'Capital gains'. The subsection specifies that the amount assessed as dividend within the meaning of sub-clause (c) of clause (22) of section 2 should be deducted from the money or assets received. The sum arrived at after deduction is deemed to be the full value of consideration for the purposes of section 48, which allows deductions from the full value of consideration, including the cost of acquisition of the asset.

The court held that the assets received by the taxpayers were rightly brought under the capital gains tax as per the specific provision of sub-section (2) of section 46. The court also referred to a previous judgment in CIT v. R. M. Amin [1977] 106 ITR 368, supporting the taxability of such assets under capital gains. Therefore, the court dismissed the appeals, upholding the taxability of the assets received by the taxpayers during the liquidation proceedings.