K. K. Desai, J.
1. 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.
2. The relevant facts are as follows :
3. The assessee-company, which is registered in the United Kingdom, held a substantial share capital of an Indian company of the name of Cable and Wireless Ltd. and carried on the business of this company as its subsidiary company. This Indian company was taken over by the Government of India with effect from January 1, 1947, and went into voluntary liquidation from May 11, 1949. Between September, 1949, and September, 1961, this Indian company in liquidation paid five different amounts aggregating to Rs. 1,10,26,921 to the assessee-company. Out of these, two payments were made out of accumulated profits and admittedly accounted for as dividend paid over to the assessee-company. Three other payments, being respectively of Rs. 53,85,400, Rs. 25,07,001 and Rs. 2,39,934, aggregating to Rs. 81,32,335 were distributed respectively on September 12, 1949, November 16, 1953, and September 18, 1961, to the assessee-company as these payments were made to the assessee-company because under the Companies Act contributories have a right to participate in the distribution of the assets of a company in liquidation. While submitting its return for the assessment year 1962-63, the assessee-company pointed out the fact of the receipt of the above last sum of Rs. 2,39,934 on the footing that in its opinion no capital gains arose on this last distribution.
4. While assessing the assessee-company under the impugned order dated March 30, 1967, the first respondent held that for each of the above three amounts of moneys received by the assessee-company respectively on September 12, 1949, November 16, 1953, and September 18, 1961, aggregating in all to Rs. 81,32,335, the taxable event for computation of capital gains arose in the year of assessment 1962-63 because the final distribution of moneys/assets was made by financial payment of Rs. 2,39,934 in the 'previous year' on September 18, 1961. He, therefore, held that the assessee-company was liable to pay income-tax for the above assessment year on the footing that the whole of the aggregate sum of Rs. 81,32,335 less the cost of purchase of shares was the capital gains made by the assessee-company in the above assessment year. In arriving at that finding the first respondent referred to the provisions of sections 46(2) and 48 of the Income-tax Act. He held that the assessee-company's right to receive the assets arose as a consequence of its being a shareholder of the company in liquidation. According to him the right to distribution 'cannot be said to have come to and end on in term distribution by the liquidator.... it is clear that the moneys received from time to time on distribution by a share-holder can acquire the character of capital gains only on the final distribution,....' In his opinion, 'the full value of the consideration ' received by the assessee-company by distribution of moneys by the company in liquidation could only be calculated upon the final distribution declared in liquidation. He rejected the contention made on behalf of the assessee-company that tax on capital gains having been levied (on distribution made in liquidation) under section 46(2) long after the company had gone into liquidation was not applicable to the assessee-company. He also rejected the contention that the liability created under the section could not be applied to distributions which were made to the assessee-company in 1949 and 1953. He rejected the contention that tax on the capital gains made on distribution of money in liquidation by a shareholder should be on the footing that the particular distribution was capital gain made in the year of distribution and that it was not permissible for the revenue to accumulate and aggregate all distributions differently made in different years in the last year of distribution. He rejected the contention that at the highest the revenue could consider the last distribution and payment of Rs. 2,39,934 as capital gains made by the assessee-company in the year of assessment.
5. The finding made by the first respondent are challenged in this petition various grounds, including the ground that if the construction and effect of section 46 of the Income-tax Act was in accordance with the findings made by the first respondent, the section was unconstitutional and contravened the petitioner's fundamental rights guaranteed under article 14 of the Constitution. The further submission was that under the scheme of section 46(2), read with other relevant sections of the Income-tax Act the relevant year for assessing and taxing capital gains made by a shareholder on receiving moneys from a company in liquidation was the 'previous year' in which the moneys are received and that, therefore, there was in law no basis for the contrary findings made by the first respondent.
6. On behalf of the respondent, Mr. Joshi contended that the assessee-company had instituted a departmental appeal and was accordingly not entitled to file this petition. By relying upon the relevant provisions in the Income-tax Act and the Companies Act he justified the findings made by the first respondent. In his submission the petitioner-company was not entitled to the relief of setting aside or quashing of the impugned order.
7. In connection with these rival contentions it is necessary to refer to the provisions in sections 45, 46 and 48 of the Income-tax Act which run as follows :
'45. Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54 and 54B, 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.
46. (1) Not withstanding 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.
(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 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.
48. The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :-
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.'
8. The phrase 'previous year' occurring in section 45 indicates that taxable gains arise on a transfer of capital asset and in the year of transfer. Under section 48 the difference between the full consideration received by the seller and the cost previously incurred by him in acquiring the capital asset ultimately transferred represents the amount of capital gains. It is therefore that under section 45 the gains are taxed on the footing of the date of the transfer. It is also clear that the assets of a company in liquidation would be of the ownership of the company and that the tax on capital gains made on transfer of such assets would be paid by the company itself. The assets would be diverse, different and situated at different places. The transfers of the assets by the liquidator would be also in normal circumstances on different dates and by different contracts and deeds. In respect of solvent companies only it would become possible for a liquidator, after payment of debts and discharging other liabilities, from time to time to distribute moneys received by him in liquidation by sale of the different assets at different times. It is also clear that the shareholder's only assets would be his shareholding. This shareholding is never transferred for any purpose by the shareholder even when the company is finally liquidated and dissolved. Assets and/or moneys received by a shareholder from a liquidator are not consideration for a transfer of shareholding. Distributed assets and/or moneys which in fact are not consideration and do not become payable on a transfer are under section 46(2) deemed to be and directed to be taxed as capital gains. This being the true position, the main submission on behalf of the petitioner-company was that on a true construction of the taxing provisions in section 46(2), read with section 45 and 48, there was no warrant for the finding that the taxable event for taxing the capital gains in respect of moneys received by the shareholder at different times arose only upon the final distribution made by the company in liquidation. The submission was that for computation of capital gains thus made the final distribution as such was irrelevant.
9. On behalf of the respondent, in this connection main reliance was placed on the phrase 'the sum so arrived at shall be deemed to be the full value of consideration for the purpose of section 48' in the last content of sub-section (2) of section 46. It was pointed out that for the purpose of computation of capital gains the full value of the consideration received by the assessee must be ascertained and this can be done for the purpose of the capital gains made by a shareholder only upon considering the total moneys and/or the total value of the assets received by the shareholder on the liquidation of a company. For this purpose to arrive at the full value of the consideration it was absolutely necessary for the revenue to wait till the final distribution of moneys and/or assets was declared in liquidation. The submission was that the full value of the consideration can only be arrived at when the right of the shareholder to receive moneys and assets is completely extinguished by declaration of financial distribution. The submission was made on the footing that the extinction of the rights of a
10. In connection with these submissions it requires to be remembered that under section 45 the relevant previous year for assessing the tax under the heading 'capital gains' is the year in which ownership of the capital asset is transferred, the dates of payment of the consideration, whether at one time only or in instalments, being always irrelevant. It is also clear that the distribution of capital asset or the moneys by a liquidator to a shareholder does not involve any transfer by a shareholder nor any consideration. The transfer by the liquidator of the capital asset to a shareholder is by reason of statutory rights created in favour of a contributory under the Companies Act. In fact, sub-section (1) of section 46 states that the distribution of assets by a company in liquidation to its shareholders 'cannot be regarded as a transfer' by the company. It is also clear that distribution of more that one item of capital assets is liable to be made and can justifiably be made by a liquidator from time to time. The distribution of asset and moneys made from time to time by a liquidator would fully and completely transfer the ownership thereof to its shareholders fully and completely at diverse different dates of distribution. The capital gains thus made by shareholders are in fact made by them in the year in which the capital assets and/or moneys are distributed to each of them and each becomes owner thereof. Thus, the year in which the ownership of the capital and/or the moneys is transferred will be 'the previous year' for assessment of capital gains made by a shareholder. It is difficult to understand how the gains intended to be taxed will not have been made in the year in which the ownership of the assets and the moneys distributed is acquired by a shareholder.
11. In this connection some assistance can be found in the provision in sub-section (2) of section 46 which provides that the market value would be of the date of distribution. The transaction on which the capital gains arise is the transaction of distribution of money and/or assets by liquidator. This transaction is very extremely remotely connected with the transaction of becoming a shareholder and the expenses and price in incurred for that purpose. Towards distribution of capital assets and/or moneys by liquidator the shareholder does not make any transaction with him. The distribution is the consequence of statutory provisions which create rights in contributories. The shareholder continues to be the owner of his shareholding even whilst the company is in liquidation and the final distribution is declared and the ultimate dissolution is ordered. His capital asset in the shape of shareholding is continued in his possession and ownership but is rendered entirely worthless. It is clear that under section 46(2) a shareholder is made liable to be taxed for capital gains without his transferring any capital asset of his ownership. I have, therefore, not understood the phrase 'his rights becoming extinguished'. I understand clearly that his capital asset is rendered useless and ceases to be productive. These facts have nothing to do with the liability to pay tax on capital gains under sub-section (2) of section 46.
12. The question is as to what is the meaning of the phrase 'and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48' as contained in sub-section (2) of section 46. It first requires to be noticed that the phrase 'consideration' in section 48 has direct connection with the phrase 'as a result of the transfer of the capital asset' in the same section. That the distribution of money and assets to shareholders does not involve any 'consideration' as known to law is abundantly clear. That the cost of acquisition of the capital asset, sale proceeds where of are distributed to shareholders, is entirely irrelevant in this context is also clear. That the shareholder does not deal with and transfer the capital asset of his ownership being his shareholding nor makes any transaction at all and is even so directed to be taxed for 'capital gains' made is also clear. It is for this reason that in sub-section (2) of section 46 of the phrase 'be deemed to be' is included in the last part of the above phrase on which reliance is placed on behalf of the respondents. The purpose of the phrase is to provide for the manner of computation of deemed capital gains. I do not find any provision in section 46 and 48 which justified the finding of the first respondent that the liability under sub-section (2) of section 45 could arise only when the final distribution of money and/or assets is declared in liquidation. On the contrary, it is clear that the liability created under section 46(2) must arise on the dates of transfer of the deemed gains to shareholders by distribution made in liquidation.
13. Now it is true that the assessee-company was not entitled to have resort to this court in writ jurisdiction and also to maintain the departmental appeal filed by it. It is, however, not possible for me to coerce the assessee-company to withdraw its departmental appeal because it is quite possible that in an appeal from this decision this court may force the assessee-company to resort to the departmental appeal only. 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.
14. The question now decided is of considerable importance. The petition was admitted in 1967 and had reached hearing in June, 1972. In those circumstances it would not be appropriate to reject this petition merely on preliminary grounds.
15. In the result, the rule is made absolute. The impugned order dated March 30, 1967, is quashed and set aside. The respondents will pay the costs of this petition to the petitioner.
16. The petitioner-company's undertaking given on June 19, 1967, will continue for a further period of four months.