1. In this reference made by the Tribunal to this court under section 66(1) of the Indian Income-tax Act, 1922, the following question has been referred for our opinion.
'Whether, on the facts and in the circumstances of this case, the finding of the Tribunal that the assessees in accordance with the scheme of arrangement became entitled to the shares (Madurai shares) on December 19, 1959, is justified in law ?'
2. The question raised really falls within a narrow compass, namely, as to from what date the Madurai shares, which were obtained by the two assessees in specie in a voluntary winding up in respect of their original shareholdings in that company, become of their ownership, whether they become of their ownership on the date of the voluntary liquidation or the date when these shares are actually handed over to the assessees or when they are actually transferred to their names in the register of shares of the company of which the shares in specie are given to them.
3. The short facts giving rise to the question are these : The two assessees, Mrs. D. M. Turner and Mrs. P.M. Gamble, were shareholders in a company called Harveys Private Ltd., each holding 1,000 shares. It appears that this company was possessed of several items of assets like cash, shares in other companies, etc. The members of that company though it advisable to wind up the affairs of that company voluntarily as members' winding up under section 484(1)(b) of the Companies Act. Accordingly, steps were taken by filing the necessary statements of affairs and declaration of solvency and notice was given for convening an extraordinary general meeting of the company. The extraordinary general meeting was actually convened on December 19, 1959, and in that meeting resolutions were passed winding up the company as members' voluntary winding up and appointing Mr. P. Krishna Rao, chartered accountant, as the liquidator of the company. Extracts from the minutes of the extraordinary general meeting of the shareholders held on 19th December, 1959, have been made annexure to the statement of the case. The articles of association of this company (article 110) provided for the distribution in specie of the assets of the company in the case of winding up, and since the liquidator considered that it would be most advantageous in the circumstances to make a distribution without incurring expenses to divide in specie the assets of the company among the members and creditors, the liquidator convened another extraordinary general meeting of the shareholders of the company for passing the necessary special resolution for making a distribution in specie as authorised by article 110 of the articles of association; at this meeting resolutions were passed authorising the liquidator to devise a scheme of distribution of the assets of the company among the creditors and members and to divide among the members the assets available for distribution, in specie, either in whole or in part, in a suitable manner. Pursuant to this resolution, the liquidator framed a scheme of distribution of the assets in specie. The assessees, inter alia, got from the liquidator 3,000 shares of Madurai each. In the assessment of the assessee for the assessment year 1961-62, corresponding to the accounting period being the year ending March 31, 1961, the Income-tax Officer considered the question of capital gains said to have been made by these assessees in respect of this distribution. According to the assessees, the difference between the valuation of Harveys shares as on January 1, 1954, and the valuation of 3,000 shares of Madurai as on December 19, 1959, represented the capital gain on which capital gains tax was leviable. The Income-tax Officer, however, took the view that, so far as the shares of Madura Mills were concerned, the shares were actually received by the two assessees from the liquidator on October 17, 1960, and actually they were transferred to the names of the assessees in the register of shares of Madura Mills as late as on October 31, 1960, and, therefore, for proper valuation of Madura shares, the relevant date would be either October 17, 1960, or October 31, 1960, and it was on this basis that he proceeded to compute the capital gains and levy tax thereon. The assessees preferred an appeal to the Appellate Assistant Commissioner and it was contended on their behalf that the Income-tax Officer was in error in taking the value of 3,000 Madura Mills shares as on October 17, 1960. The Appellate Assistant Commissioner accepted the said contention and held that the capital gain should be computed on the basis of the market value of the Madurai shares as on December 19, 1959. The department preferred an appeal to the Tribunal. The Tribunal relying upon the provisions of section 486 of the Companies Act, relevant article of the articles of association of Harveys company and the resolution by which the members decided to take the Harveys company into voluntary liquidation, upheld the order of the Appellate Assistant Commissioner. At the instance of the Commissioner of Income-tax, Bombay City I, the question mentioned at the commencement of this judgment has been referred to us for determination.
4. Mr. Joshi, appearing or the revenue, has contended before us that though the Harveys company was taken into voluntary liquidation as the members' winding-up by a resolution that was passed on December 19, 1959, the shares of Madurai Mills in specie were actually handed over to the assessees by the liquidator on October 17, 1960, and that the assessees' names were put on the register of Madura Mills Company Ltd. only on October 31, 1960, and that, therefore, either October 17, 1960, or October 31, 1960, should be taken to be the relevant date for the purpose of valuing Madurai shares which were obtained by the assessees. It is not possible to accept this contention of Mr. Joshi for the reasons which we shall presently indicate.
5. At the outset it may be stated even the assessees have proceeded on the assumption that capital gain did arise to them and tax was payable on such capital gain which arose to them by reason of they having been allotted 3,000 shares of Madura Mills in specie for their original shareholding in Harveys Company Ltd. It would not be possible for us to go into the question as to whether this assumption is correct or not for the parties proceeded on the basis that tax on capital gain was leviable and the only question that was debated before the taxing authorities as well as before the Tribunal was whether it was date of liquidation (December 19, 1959) or the date of actual handing over of Madurai shares in specie to the assessees (October 17, 1960) that would be the correct date for the purposes of valuing the shares in the hands of the assessees. Section 486 of the Companies Act, 1956, is quite clear on the point as the when voluntary winding up of a company commences and that section provides that a voluntary winding up shall be deemed to commence at the time when the resolution for voluntary winding up is passed. It was not disputed before us that, in the instant case, after notice of extraordinary general meeting was given to the shareholders of Harveys company, such meeting was actually convened on December 19, 1959, where such resolutions were passed winding up the company as members' winding up in accordance with section 484(1)(b) of the Companies Act and appointing Mr. Krishna Rao, chartered accountant, as a liquidator of the company. It is, therefore, clear that winding up of Harveys Private Ltd. must be deemed to have commenced on December 19, 1959, and it would be on that date that all the members of Harveys Private Ltd. would be entitled to get in distribution of the assets of the company either money or particular assets in specie as might be decided upon by the liquidator. While narrating the facts we have stated that article 110 of the articles of association of Harveys Private Ltd. provided for the distribution in specie of the assets of the company in the case of winding up and the liquidator, Mr. P. Krishana Rao, considered that it would be most advantageous to make a distribution by dividing in specie the assets of the company among the members and the creditors and since for this purpose the special resolution was required to be passed he convened another extraordinary general meeting of the shareholders of the company on February 17, 1960, where at the necessary special resolution was passed. It may also be stated that the members authorised the liquidator to devise the scheme of distribution of assets of the company among the creditors and members and to divide amongst the members the assets available for distribution in specie, either in whole or in part, in a suitable manner. Pursuant to this resolution a scheme of distribution of the assets in specie was prepared by the liquidator as on December 19, 1959, and it was in pursuance of this scheme of distribution that each of the two assessees, inter alia, received 3,000 shares of Madura Mills. It is true that actual handing over of these two shares of the two assessees was done much later by the liquidator and since the two assessees were non-residents, permission was required to be obtained both from the Exchange Control as well as the Reserve Bank of India, before the shares could be transferred in the name of the assessees and it was after obtaining the requisite permission of the Exchange Control as well as the Reserve Bank of India, that the shares were actually transferred to the names of the two assessees on October 31, 1960. It will be significant to mention, however, that dividend which had in the meantime been declared by the Madura Mills after December 19, 1959, was also passed on by the liquidator to the two assessees since the shares had been given to the two assessees in the distribution-cum-dividend. Having regard to the provisions of section 486 of the Companies Act, and having regard to the fact the that the resolution for voluntary winding up of Harveys Private Ltd. passed on December 19, 1959, and further having regard to the fact that even in the scheme of arrangement, the distribution for assets in specie was to be effective as from December 19, 1959, it is clear that the relevant date would be December 19, 1959, on which date the shares in Madura Mills could be said to have become of the ownership of the two assessees and as such it would be that date which would be relevant for valuing those shares for the purposes of computing capital gains.
6. In our view, right from December 19, 1959, up to the date the shares were either physically handed over to the assessees or the shares were transferred to their names in the books of Madura Mills the liquidator must be regarded as holding those shares for the two assessees. That being the position in law, in our view, the Tribunal was right in taking the view that the assessees, in accordance with the scheme of arrangement, became entitled to the Madura shares on December 19, 1959.
7. In the result, the question referred to us is answered in the affirmative, in favour of the assessees. The revenue will pay the costs of their application.