1972 (6) TMI 13 - HC - Income Tax

In this petition under article 226 of the Constitution the petitioner-company has challenged the legality and correctness of the order, dated March 30, 1967, whereby the first respondent, Income-tax Officer, in computing the income-tax liability computed the capital gains made by the petitioner-company for the assessment year 1962-63 at Rs. 47,97,735 - The year in which the ownership of the capital is transferred will be the previous year for the assessment of capital gains by the shareholder - It is also not possible for me to make a finding that this petition is not well-founded, in view of the fact that the vires of section 46 are challenged in this petition. I have not found it necessary to decide this question because I was in favour of the assessee-company on the main question

Issues Involved:
1. Legality and correctness of the computation of capital gains.
2. Interpretation and application of sections 45, 46, and 48 of the Income-tax Act.
3. Constitutionality of section 46 of the Income-tax Act under article 14 of the Constitution.
4. Jurisdiction of the High Court under article 226 when a departmental appeal is pending.

Detailed Analysis:

1. Legality and Correctness of the Computation of Capital Gains:

The petitioner-company challenged the order dated March 30, 1967, by the Income-tax Officer, which computed the capital gains for the assessment year 1962-63 at Rs. 47,97,735. The petitioner received three payments from an Indian company in liquidation, aggregating to Rs. 81,32,335, which were distributed over several years. The Income-tax Officer held that the taxable event for these capital gains arose in the assessment year 1962-63, due to the final distribution of Rs. 2,39,934 in the previous year on September 18, 1961. The officer aggregated all distributions and assessed them as capital gains for the assessment year 1962-63, rejecting the petitioner's contention that only the final distribution should be considered.

2. Interpretation and Application of Sections 45, 46, and 48 of the Income-tax Act:

The court analyzed sections 45, 46, and 48 of the Income-tax Act. Section 45 states that profits or gains from the transfer of a capital asset are chargeable to income-tax in the year of transfer. Section 46(1) clarifies that the distribution of assets on liquidation is not regarded as a transfer by the company. Section 46(2) states that a shareholder receiving money or assets on liquidation is chargeable to income-tax under "Capital gains," reduced by any amount assessed as dividend. Section 48 outlines the computation of income chargeable under "Capital gains."

The court noted that the phrase "previous year" in section 45 indicates that taxable gains arise in the year of transfer. The distribution of assets by a liquidator does not involve any transfer by the shareholder, and the shareholder's shareholding is never transferred. The court emphasized that the year in which ownership of the capital assets or money is transferred to the shareholder is the "previous year" for assessing capital gains. The court rejected the respondent's argument that the full value of the consideration could only be determined upon the final distribution in liquidation.

3. Constitutionality of Section 46 of the Income-tax Act:

The petitioner argued that if section 46 was interpreted as per the Income-tax Officer's findings, it would be unconstitutional and violate article 14 of the Constitution. The court, however, did not find it necessary to decide on the constitutionality of section 46, as it ruled in favor of the petitioner on the main issue of the correct interpretation and application of the section.

4. Jurisdiction of the High Court under Article 226 When a Departmental Appeal is Pending:

The respondent contended that the petitioner was not entitled to file the petition as it had already instituted a departmental appeal. The court acknowledged this but noted that it was not appropriate to coerce the petitioner to withdraw its departmental appeal. The court highlighted the importance of the issue and the fact that the petition was admitted in 1967 and had reached hearing in 1972. Therefore, the court decided to entertain the petition despite the pending departmental appeal.

Conclusion:

The court made the rule absolute, quashing and setting aside the impugned order dated March 30, 1967. The respondents were ordered to pay the costs of the petition to the petitioner. The petitioner-company's undertaking given on June 19, 1967, was to continue for a further period of four months.

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