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TMI Blog1975 (5) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the sum of rupees thirty-two lakhs, twenty-five thousand and five hundred and fifty was not assessable in the hands of the assessee ? " The assessee is a firm. The assessment year is 1956-57. The previous year ended on December 31, 1955. The assessment was made on a total income of Rs. 36,41,554 including a sum of Rs. 32,25,550 representing the surplus which the firm had received during the relevant previous year from the liquidator of Messrs. Chrestian Mica Company Ltd., which went into liquidation in 1955. The said assessment was confirmed on appeal by the Appellate Assistant Commissioner, but the second appeal was allowed by the Tribunal and the assessment order was set aside. It is unnecessary for us, as rightly said by Mr. Pal, the learned counsel for the revenue, to deal with the facts in detail, for question No. (ii) can be answered on the facts and circumstances as hereinafter stated and we need not answer question No. (i) in view of our answer to question No. (ii). The assessee is a regular dealer in shares. In 1945, the assessee purchased all equity shares of Chrestian Mica Co. Ltd., which was then a public limited company. The assessee took over the managemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to the ' legal requirements which are associated with the concept of trade or business '." But in that case the Supreme Court was not concerned with the effect of a fact admitted by the assessee which goes to the root of the matter. Further, in the case of Khan Bahadur Ahmed Alladin and Sons v. Commissioner of Income-tax [1968] 68 ITR 573, 578, 581 (SC) the Supreme Court says thus: " In other words, in reaching the conclusion that the transaction is an adventure in the nature of trade, the Appellate Tribunal has to find the primary evidentiary facts and then apply the legal principle involved in the statutory expression ' adventure, in the nature of trade ' used by section 2(4)of the Indian Income-tax Act, 1922. A question of this description is a mixed question of law and fact and the decision of the Appellate Tribunal thereon is open to challenge under section 66(1) of the Act. The question whether the transaction is an adventure in the nature of trade must be decided on a consideration of all the relevant facts and circumstances which are proved in the particular case. The answer to the question does not depend upon the application of any abstract rule, principle or fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had ceased to be the stock-in-trade of the assessee and there is no such finding of the Tribunal. Further, the assessee has made these shares its stock-in-trade after the company was converted into a private limited company whose articles of association is not on the record. Therefore, what was the actual restriction on the transfer of these shares is a matter of speculation and conjecture. Moreover, the assessee was the owner of all these shares and was also in the sole management of the company and, therefore, declaration of negligible dividends is of no consequence. Furthermore, merely because these shares were not quoted in the stock exchange it cannot be assumed that there was no market for these shares. In any event, no stock-in-trade can lose its nature, character and quality merely because there is no market in which it can be sold or it cannot be transferred at all. Hence, there is no merit in the contentions of Mr. Roy and we are of the opinion that the Tribunal was not justified in holding that these shares were not the stock-in-trade of the assessee. The submission of Mr. Pal on question No. (iii) is that the assessee has received the aforesaid sums from the liquida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation." In the same case, [1963] 41 TC 305, 333 ; [1964] 54 ITR 555, 565, Lord Evershed said as follows : " ......... I have, with all respect to the majority of the Court of Appeal, felt compelled to the conclusion that the pounds 58,108 received by the appellant-company from the liquidator of the mutual company did not lose its capital character when received by the appellant-company and cannot properly be regarded as a trading receipt. It cannot now be in doubt that surplus assets in the hands of the liquidator of a limited liability company--whether limited by share capital or by guarantee--are in his hands capital. Such a conclusion was laid down by the Court of Appeal in Commissioners of Inland Revenue v. George Burrell [1924] 9 TC 27 (CA), and it has never since been questioned." We will now refer to the decision of the Patna High Court in Dalmia Cement Paper Marketing Co. Ltd. v. Commissioner of Income-tax [1949] 17 ITR 141 (Pat.) on which reliance was placed by Mr. Pal. It has been held in that case that the two sums of money received by the assessee from the liquidator of the company were revenue receipts and were, therefore, assessable to income-tax, in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the shareholder from the company in liquidation is not a revenue but a capital receipt. It seems to us that that case was not properly argued before their Lordships of the Patna High Court and since we are not in agreement with their decision the contentions of Mr. Pal must also fail. We are also not impressed by his last contention noted earlier in view of the decision of Lord Evershed, already quoted--See [1963] 41 TC 305; [1964] 54 ITR 555 (HL). We now return our answer to question No. 2 in the negative and in favour of the revenue whereas question No. 3 is answered in the affirmative and in favour of the assessee. In the facts and circumstances of the case, we make no order as to costs. DIPAK KUMAR SEN J.--I respectfully agree with the conclusions of my learned brother recorded in his judgment just now delivered as also with the observations contained therein. I would like to add that law seems to be well-settled that on the liquidation of a company what the liquidator distributes by way of surplus assets cannot be deemed to include items of profits or dividends so that the same can be taxed in the hands of the recipient. In such a case the shareholders participate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the liquidator in distributing the surplus assets is realizing or redeeming the shares. In law, a shareholder may technically continue to be a shareholder even after he gets his share of the surplus. Till the company is struck off the register, he remains a shareholder in law. He retains his share scrips. By virtue of his holding, a shareholder is entitled to surplus assets on the liquidation of a company and such surplus assets, it appears to me, to be in the nature of an accretion to his shares. The Supreme Court in the case of Commissioner of Income-tax v. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC) considered the case of bonus shares and observed as follows : " The bonus shares, by the mere fact that they were received by the assessees in respect of their stock-in-trade, and as accretion thereto, did not become part of their stock-in-trade ; the bonus shares were received as capital and they could be converted by the assessees into their stock-in-trade or retained as their capital asset." Surplus assets are undoubtedly capital in the hands of the liquidator and when such assets reach the shareholders as accretion to the shares already held they may be deemed to ret ..... X X X X Extracts X X X X X X X X Extracts X X X X
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