1970 (10) TMI 13 - HC - Income Tax

Whether a certain amount received by the assessee on liquidation of a private limited company incorporated in Uganda in respect of 192 shares held by him in that company to the extent to which it exceeded the value of those shares represents capital gain within the meaning of section 45 read with section 2(47) of the Income-tax Act 1961 -

Issues Involved:
1. Applicability of Section 45 read with Section 2(47) of the Income-tax Act, 1961.
2. Determination of capital gain and its chargeability to tax.
3. Interpretation of the term "transfer" in the context of capital assets.
4. Applicability and interpretation of Section 46(2) in relation to the liquidation of a foreign company.

Issue-Wise Detailed Analysis:

1. Applicability of Section 45 read with Section 2(47) of the Income-tax Act, 1961:
The primary issue is whether the amount received by the assessee on the liquidation of a foreign company (Uganda company) in respect of shares held by him represents capital gain within the meaning of Section 45 read with Section 2(47) of the Income-tax Act, 1961. The revenue authorities argued that the excess amount received over the face value of the shares should be treated as capital gain and taxed accordingly. However, the Tribunal disagreed, stating that the amount did not arise from the relinquishment of any capital assets or extinguishment of any rights therein, and hence, no capital gain was chargeable under Section 45.

2. Determination of Capital Gain and Its Chargeability to Tax:
The revenue contended that the difference between the amount received by the assessee on liquidation and the value of the shares on January 1, 1954, should be taxed as capital gain. The Tribunal, however, held that even if any capital gain arose, it should be limited to the difference between the amount received and the value of the shares as of January 1, 1954. The High Court examined whether the transaction involved the "transfer of a capital asset" as defined under Section 2(47).

3. Interpretation of the Term "Transfer" in the Context of Capital Assets:
The court analyzed the definition of "transfer" under Section 2(47), which includes "the sale, exchange, or relinquishment of the asset or the extinguishment of any rights therein." The court noted that the term "transfer" was defined inclusively to cover a broader range of transactions. However, the court emphasized that for a transaction to be considered a transfer, there must be an element of consideration received by the assessee. In this case, the court concluded that the money received by the assessee was not consideration for the extinguishment of rights in the shares but rather a fulfillment of the right to receive a share in the distribution of the net assets of the company in liquidation.

4. Applicability and Interpretation of Section 46(2) in Relation to the Liquidation of a Foreign Company:
The court examined Section 46(2), which deals with the chargeability of capital gains tax when a shareholder receives money or other assets from a company upon its liquidation. The court noted that the Uganda company did not fall within the definition of "company" under Section 2(17) of the Act. Therefore, Section 46(2) was not applicable in this case. The court further reasoned that if the transaction was already covered under Section 45 read with Section 2(47), there would have been no need for the legislature to enact Section 46(2). This supported the conclusion that the transaction did not amount to a transfer of a capital asset within the meaning of Section 45.

Conclusion:
The High Court concluded that there was no transfer of capital asset within the meaning of Section 45 read with Section 2(47) when the assessee received the amount on the final distribution of the net assets of the Uganda company. Consequently, the amount received by the assessee was not chargeable to capital gains tax. The court answered the reference in the negative and directed the Commissioner to pay the costs of the reference to the assessee.

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