2006 (2) TMI 129 - HC - Income Tax

Capital gain - 1. Whether the Appellate Tribunal is right in holding in view of section 49(1)(iii)(e) capital gain should be computed by taking the cost in the hands of the previous owner namely KPPL? - 2. Whether Tribunal is right in holding that in spite of section 46(2) capital gains chargeable to tax had not arisen in this case in view of fact that benefit of section 47(v) would be available to the assessee? Held that Tribunal was right in law in holding that capital gains tax was liable to be computed by taking into consideration the provisions of section 49(1)(iii)(e) of the Act i.e. taking the cost of acquisition of the assets in question to be the cost of acquisition in the hands of the previous owner i.e. KPPL. hence Question No. 1 is answered in the affirmative i.e. in favour of the assessee while question No. 2 is answered in the negative i.e. in favour of the Revenue and against the assessee

Summary

Issues Involved:
1. Whether the Appellate Tribunal is right in law and on facts in holding that capital gains should be computed by taking the cost in the hands of the previous owner, namely KPPL, under section 49(1)(iii)(e) of the Income-tax Act, 1961.
2. Whether the Appellate Tribunal is right in law and on facts in holding that, despite section 46(2), capital gains chargeable to tax had not arisen in this case due to the benefit of section 47(v) being available to the assessee.

Issue-wise Detailed Analysis:

Issue 1: Computation of Capital Gains Using the Cost in the Hands of the Previous Owner (Section 49(1)(iii)(e))

The assessee, a private limited company, received assets valued at Rs. 93,24,000 from Aravalli Investments Private Limited (Aravalli) upon its voluntary liquidation. The Assessing Officer invoked section 46(2) of the Income-tax Act, 1961, to tax the surplus under "Capital gains" after deducting the amount paid by the assessee for acquiring the shares (Rs. 55,36,680). The assessee contended that the cost of acquisition should be the cost in the hands of the previous owner, KPPL, as per section 49(1)(iii)(e).

The Commissioner (Appeals) accepted this alternative contention, stating that capital gains should be computed by taking the cost of acquisition of the shares in the hands of KPPL, which was Rs. 1,11,000. Consequently, the capital gains liable to be taxed in the hands of the assessee were NIL, as the cost exceeded the value of the assets received.

The Tribunal upheld this view, and the High Court agreed, noting that once the full value of consideration is arrived at under section 46(2), the same figure must be used for section 48 computations. Section 48 prescribes the mode of computation, allowing deductions for the cost of acquisition, which, under section 55(2)(b)(ii), includes the cost to the previous owner if the asset was acquired in a manner specified in section 49. The High Court concluded that the Tribunal was correct in holding that capital gains tax should be computed using the cost in the hands of the previous owner, KPPL.

Issue 2: Applicability of Section 47(v) Despite Section 46(2)

The assessee argued that the transaction should not be taxed under section 46(2) because section 47(v) exempts transfers of capital assets by a wholly-owned subsidiary company to its holding company. The Tribunal accepted this argument, but the High Court disagreed.

The High Court clarified that section 46(2) is a special provision for taxing capital gains on distribution of assets by companies in liquidation. It creates a fiction where the distribution is not regarded as a transfer for section 45 purposes but charges the recipient shareholder to capital gains tax. The Court emphasized that section 46 is a complete code for such scenarios, and section 47(v) cannot be invoked to negate the application of section 46(2).

The Court held that section 47(v) applies to transfers amenable to section 45, not to distributions under section 46(2). Therefore, the Tribunal erred in allowing the benefit of section 47(v) to the assessee. The High Court concluded that the assessee was not entitled to relief under section 47(v), and the Tribunal's decision on this point was incorrect.

Conclusion:

- Question 1: Affirmative, in favor of the assessee and against the Revenue. The Tribunal was correct in holding that capital gains should be computed by taking the cost in the hands of the previous owner, KPPL.
- Question 2: Negative, in favor of the Revenue and against the assessee. The Tribunal erred in holding that the benefit of section 47(v) was available to the assessee, negating the application of section 46(2).

The reference was disposed of accordingly, with no order as to costs.