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CASE NO.:

Appeal (civil) 2606-2607 of 2001

PETITIONER:

N. Bagavathy Ammal

RESPONDENT:

Commissioner of Income Tax, Madurai & Anr.

DATE OF JUDGMENT: 27/01/2003

BENCH:

Ruma Pal & B.N. Srikrishna.

JUDGMENT:

J U D G M E N T

RUMA PAL, J.

The question to be decided in these appeals is whether

the word 'assets' in Section 46(2) of the Income Tax Act, 1961

(referred to hereafter as the 'Act') must be understood and

construed according to the definition of the word 'capital

assets' in Section 2(14) of the Act.

The issue arises in respect of the assessment year

1970-71. The appellants in the two appeals which are

disposed of by this judgment are sisters. They were share

holders in M/s Palkulam Estate (Private) Ltd., Nagercoil

(referred to hereafter as the 'Company'). The Company went

into liquidation in 1964. Pursuant to a compromise decree

dated 22nd December 1969 in litigation between the

assessees and their brother (who was also a share holder in

the company), and the company represented by the liquidator,

the assets of the company which included agricultural lands

were distributed to the appellants and eight others. The

compromise decree stated:

"This Court doth further order and

decree that as far as liabilities of

Palkulam Estate Private Limited is

concerned, the immovable properties be

and hereby are distributed as indicated

in Schedule 'A' of the Compromise. The

respondents 1 to 5 and respondents 9 to

11 do get leased portions as shown in

the plans, signed by liquidator Mr.

K.M.Boothalingam Pillai and handed

over to the appellant this day."

The appellants thereby received 479.89 acres of the

agricultural lands prior to the end of the relevant accounting

year that was 31.3.70 . The assessment in respect of the year

1970-71 had been completed on 27.2.71. The Income Tax

Officer reopened the assessments under Section 148 of the

Act. The appellants filed their returns in respect of the two

notices under Section 148. The contention of the appellants

that in terms of the definition of 'assets' in Section 2(14),

agricultural lands were entitled to be excluded while

computing capital gains on assets received by the shareholder

from a company in liquidation under Section 46(2) was not

accepted. According to the assessing officer, Section 46(2)

refers only to money received on liquidation or the market

value of the assets on the date of distribution and it was

immaterial whether the asset was agricultural lands or

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otherwise. The value of the share of agricultural lands

transferred to each appellant was, therefore, included as

income subject to capital gains and subjected to tax. The

assessees' appeals before the Commissioner of Income Tax

(Appeals) were allowed by holding that the scope of Section

46(2) would have to be read in the light of the definition of the

word 'capital asset' in Section 2(14) and that "having

exempted agricultural lands from capital gains under the

general provision, it was difficult to interpret Section 46(2) as

including agricultural land". The action of the Income Tax

Officer in charging the income of the distribution of agricultural

lands as capital gains under Section 46(2) of the Act was

accordingly set aside.

The Revenue appealed before the Tribunal. The

Tribunal dismissing the Revenue's appeal held:

"On a combined reading of Section 45,

46(2) and 48 it will be clear, according to

our opinion, that assets mentioned in

Section 46(2) would mean capital

assets. In as much as Section 47 (viii)

exempts transfer of agricultural lands

from capital gain tax under Section 45,

we agree with the Commissioner of

Income Tax (Appeals) in coming to the

conclusion that it is difficult to interpret

Section 46(2) as including agricultural

lands which is outside the scope of the

Income Tax."

Of the two questions referred to the High Court by the

Tribunal under Section 256(1) at the instance of the Revenue

only one survives for our decision. The second question was

not pressed before the High Court. The first question which

was:

" Whether on the facts and in the

circumstances of the case, the Appellate

Tribunal is right in law in holding that the

assets mentioned in section 46(2) would

mean 'capital asset' as defined in

section 2(14) and that consequently,

the value of agricultural lands

received by the assessee on the

liquidation of Palkulam Estate (P) Ltd.

cannot be charged to tax under section

46(2) of the Income Tax Act, 1961?"

was answered by the High Court against the assessees and in

favour of the Revenue. The High Court construed the

provisions of Section 46(2) and held, reversing the decision of

the CIT(A) and the Tribunal, that the definition of 'capital

assets' under Section 2(14) of the Act is not of any relevance

for the purpose of construing Section 46(2) of the Act, and the

fact that agricultural lands to the extent provided in Section

2(14)(c) of the Act are excluded from the definition did not

have any impact on the taxability of the market value of the

agricultural lands received by the assessee on the distribution

of the assets of a company in liquidation.

Before considering the correctness of the decision of

the High Court the context in which Section 46(2) came to be

part of the Act needs to be considered.

Section 12-B of the Income Tax Act, 1922 provided for

payment of tax under capital gains 'in respect of any profits or

gains whatsoever from the sale, exchange, relinquishment or

transfer of a capital asset effected after 31st day of March

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1956, and such profits and gains shall be deemed to be

income of the previous year in which the sale, exchange,

relinquishment or transfer took place". Construing Section 12-

B of the Income Tax Act, 1922 this Court in Commissioner of

Income Tax, Madras V. Madurai Mills Co. Ltd. 1973 (89)

ITR 45 had held that when a shareholder receives money

representing his share on distribution of the net assets of the

company in liquidation, he receives that money in satisfaction

of the right which belonged to him by virtue of his holding the

shares and not by operation of any transaction which amounts

to sale, exchange, relinquishment or transfer within the

meaning of Section 12-B of the Act.

Section 45(1) of the 1961 Act which substantially

corresponds with Section 12-B of the 1922 Act continues to

provide that:

"Any profits or gains arising from the

transfer of a capital asset effected in

the previous year shall, save as the

otherwise provided in Sections 54,

54B, 54D, 54E, 54EA, 54EB, 54F, 54G

and 54H be chargeable to income tax

under the head 'Capital gains', and

shall be deemed to be the income of

the previous year in which the transfer

took place."

The words 'capital assets' has been defined in Section

2(14) of the Act which as it stood at the relevant time, that is

prior to its amendment in 1972, provided:

"2. In this Act, unless the context

otherwise requires

(14) 'Capital assets' means property of

any kind held by an assessee, whether

or not connected with his business or

profession, but does not include

(i)..

(iii) agricultural land in India

It has been held by this Court that the principle of

Madurai Mills that a distribution of assets of a company in

liquidation does not amount to a transfer continues to apply to

the 1961 Act. (See Commissioner of Income Tax V. R.M.

Amin: 1977 (1) SCC 691, 696.)

The view in Madurai Mills Co. Ltd. (supra) has also

been statutorily affirmed in Section 46(1) which provides:

46. (1) Notwithstanding anything

contained in section 45, where the

assets of a company are distributed to

its shareholders on its liquidation, such

distribution shall not be regarded as a

transfer by the company for the

purposes of section 45.

In other words a distinction is drawn between a

"transfer" of assets and a distribution of assets of the company

on liquidation. Where there is 'transfer' of assets and not a

'distribution' on liquidation then having regard to Section

47(viii) which provides that "Nothing contained in Section 45

shall apply to the following transfers:

(viii) any transfer of agricultural land in

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India effected before the 1st day of March

1970"

it may have been argued at least on behalf of the Company

that the 'transfer' having been concluded in 1969 was exempt

from capital gains. This argument, however, is not available

to the shareholders who receive assets from the company on

distribution consequent upon liquidation because of Section

46(2) which was introduced to make the receipts of assets

from a company liquidation by its share holders a taxable

event for the first time . Section 46 (2) provides:

"46(2) where a shareholder on the

liquidation of a company receives any

money or other assets from the

company, he shall be chargeable to

income tax under the head 'Capital

gains' in respect of the money so

received or the market value of the other

assets on the date of distribution, as

reduced by the amount assessed as

dividend within the meaning of sub-

clause (c) of clause (22) of section 2

and the sum so arrived at shall be

deemed to be the full value of the

consideration for the purposes of

section 48."

The question is does the words 'assets' in Section 46(2)

mean 'capital assets' as defined in Section 2(14) of the Act? If it

does then, it is conceded by the Revenue, there is no question

of subjecting the agricultural lands received by the assessees

from the company in liquidation to capital gains.

Indisputably, the object in introducing Section 46(2) was

to overcome the reasoning in Madurai Mills by broadening the

base of the incidence of capital gains and expressly providing

for receipt of assets of a company in liquidation by a

shareholder as a taxable event.

Section 46(2) is in terms an independent charging

Section. It also provides for a distinct method of calculation of

capital gains. As said in C.I.T. v. R.M. Amin (supra):

"The aforesaid section, in our view, was

enacted both with a view to make

shareholders liable for payment of tax

on capital gains as well as to prescribe

the mode of calculating the capital gains

to the shareholders on the distribution of

assets by a company in liquidation. But

for that sub-section as already

mentioned, it would have been difficult

to levy tax on capital gains to the

shareholders on distribution of assets by

a company in liquidation."

The Section does not make any reference to capital

assets either in connection with the imposition of capital gains

tax nor its computation.

Having referred to 'capital asset' in Section 45(1), 47 and

48, Parliament appears to have deliberately chosen to use the

word 'asset' in Section 46(1) and (2), the ostensible intention

being to bring assets of all kinds within the scope of the charge.

It is not necessary to refer to a dictionary to hold that capital

assets are a species of the genus 'assets'. If the words 'capital

assets' and 'assets' as used in Sections 45(1) and 46

respectively did not overlap then there was no need to provide

for a non obstante clause in Section 46(1) with reference to

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Section 45. As correctly held by the High Court, agricultural

land would have been a 'capital asset' but for the exclusion

from the definition of 'capital asset' and what is not a capital

asset may yet be an asset for the purposes of S.46(2).

Therefore, to the extent that a shareholder assessee

receives assets whether capital or any other from the company

in liquidation, the assessee is liable to pay tax on the market

value of the assets as on the date of the distribution as

provided under Section 46(2). That appears to be the plain

meaning of the section and we see no reason to construe it in

any other fashion. The invocation of Section 2(14) of the Act

which defines "Capital asset" is as such unnecessary for the

purpose of construing Section 46(2).

We accordingly dismiss the appeals without any order

as to costs.