1978 (12) TMI 90 - AT - Income Tax

Summary

Issues:
1. Computation of capital loss on extinguishment of rights in shares held by the assessee-company.
2. Interpretation of provisions under the IT Act, 1961 regarding transfer of capital assets.
3. Examination of rights of shareholders in a company undergoing voluntary liquidation.

Detailed Analysis:

Issue 1: The primary issue in this case revolves around the computation of capital loss following the extinguishment of rights in shares held by the assessee-company. The contention raised is that when the company went into voluntary liquidation, the rights in the shares held by the assessee became extinguished, leading to a capital loss that should be computed under section 45 of the IT Act, 1961. The rights in question included dominion over the shares, right to receive dividends, right to vote, and right to participate in the distribution of net assets upon liquidation.

Issue 2: The Accountant Member opined that as the company had not been dissolved, the assessee had not lost dominion over the shares, and the right to participate in the distribution of net assets had not been extinguished. The Judicial Member, however, held that the rights of the assessee in the shares had indeed been extinguished upon liquidation, emphasizing that there were no surplus assets for the assessee to participate in. The disagreement between the two members led to the issue being referred to a third member for resolution.

Issue 3: The third member analyzed the situation, considering arguments from both sides. The counsel for the assessee contended that all rights in the shares were extinguished upon the liquidator's report of no realizable assets, while the departmental representative argued that as long as the company was not dissolved, the rights of shareholders were not extinguished. The third member concluded that since the company had not been dissolved and no consideration was received for the extinguishment of rights, there was no transfer within the meaning of section 45, aligning with the decisions of the Gujarat and Madras High Courts regarding the necessity of consideration for a transaction to be considered a transfer for capital gains tax purposes.

In summary, the judgment delves into the intricacies of rights in shares upon company liquidation, the interpretation of relevant provisions under the IT Act, and the requirement of consideration for a transaction to be deemed a transfer for capital gains tax purposes. The decision ultimately rules against the assessee's claim of a capital loss, emphasizing the absence of consideration for the extinguishment of rights in the shares held by the company undergoing voluntary liquidation.