1. The Income-tax Officer, Companies Circle, Bombay, has filed this appeal against the judgment and order of K. K. Desai J. whereby he quashed the assessment order passed by the appellant on March 30, 1967. By the said order the petitioners were assessed to tax on capital gains to respect of the amount received by them as and by was of distribution of capital on liquidation of their subsidiary company by name Indian Radio & Cable Communication Co. Ltd. (hereinafter referred to as 'the company'). The petitioners are a non-resident company within the meaning of the Income-tax Act, 1961 (hereinafter referred to as the Act). The petitioners held in the company 18,011 ordinary shares of Rs. 100 each, 20,508 bonus shares of Rs. 100 each and 15,335 deferred shares of Rs. 100 each. With effect from January 1, 1947, the Government of India took over the business of the company and the company was taken into liquidation on May 11, 1949. The liquidator of the company, inter alia, distributed the following amounts towards and in respect of distribution of capital, viz :
Rs. 53,85,400 on September 12, 1949.
Rs. 25,07,001 on November 16, 1953.
Rs. 2,39,934 on September 18, 1961.
2. In addition to the above amounts a sum of Rs. 25,07,001 was received as deemed dividend under section 2(6A) of Income-tax Act, 1922, on August 1, 1953, and a sum of Rs. 3,87,585 on September 18, 1961. The Act came into force on April 1, 1962. As the last amount towards distribution of capital, namely, Rs. 2,39,934, was received by the petitioners on September 18,1961, i.e., during the accounting period for the assessment year 1962-63, the Income-tax Officer wanted to tax the petitioners in respect of all the amounts received by them towards distribution of capital on September 12, 1949, November 16, 1953 and September 18, 1961. By his letter dated September 16, 1966, the Income-tax Officer wrote to Messrs. A. F. Ferguson & Co., chartered accountants of the petitioners, that a sum of Rs. 2,39,934 (being the last amount received towards distribution of capital) he proposed to include as capital gain in the hands of the petitioners for the assessment year 1962-63. After the receipt of the said letter the chartered accountants of the petitioners saw the Income-tax Officer and ultimately wrote a letter on October 5, 1966 inter alia, stating that no capital gains tax was payable in respect of the sum of Rs.2,39,934 by the petitioners. That letter was replied to by the Income-tax Officer by his letter dated February 7,1967. In this letter he referred to the various amounts received by the petitioners in respect of distribution of capital as well as dividends and he stated that an aggregate sum of Rs. 28,06,655 (this figure on verification is found to be inaccurate) was in respect of distribution of dividends and an aggregate sum of Rs. 1,18,48,555 was received as value of sale consideration in respect of the shares held by the petitioners in the company and the said amount was liable to be deemed capital gains for the purpose of section 46(2) of the Act. By the letter dated May 28, 1967, the chartered accountants of the petitioners informed the Income-tax officer why the said amount could not be deemed to be capital gains as suggested by the Income-tax Officer. Ultimately, for the assessment year 1962-63 on March 30, 1961, an assessment order was passed by the Income-tax Officer wherein he held that the sum of Rs.2,39,934 was received by the petitioners in the accounting period as final distribution of the assets from the liquidator and that the earlier amounts received in the years 1949 and 1953 were merely received as instalments paid towards final realisation of assets which took place in the year 1961; that the moneys received from time to time on distribution by a shareholder can acquire the character of capital gains only on the final distribution and that when the final distribution took place, the moneys received by the shareholder on liquidation from time to time will have to be considered for deeming the full value of consideration under section 46(2) for ascertaining the capital gains. He, accordingly, took the view that as the earlier amounts received in the years 1949 and 1953 were merely in the nature of instalments, the final taxable event occurred only when the final distribution of Rs. 2,39,934 was made. Accordingly, he took the view that the entire realisation by the petitioners on liquidation of the company would have to be taken into account as full value of consideration for the purpose of computing capital gains under section 46(2). The Income-tax Officer also rejected the contention of the petitioners that the fair market value as on January 1, 1954, of the capital assets could be arrived at after taking into consideration past realisations before January 1, 1954. He also took the view that the value of bonus shares would be excluded from the cost of acquisition of the total shareholdings of the petitioners. He also took the view that the cost of acquisition of the shares would be determined at Rs. 33,34,600 in the aggregate and on that footing he treated that a sum of Rs. 47,97,735 would be capital gains (long-term). On the basis of this assessment order on March 31, 1967, a notice of demand under section 156 of the Act was issued requiring the petitioners to pay a sum of Rs. 14,60,910.16 for the assessment year 1962-63 after taking into account the amount that was already deducted at source. The petitioners by the present petition presented on April 27,1967, challenged the validity of the assessment order dated March 30,1967, for the assessment year 1962-63 on various grounds.
3. The petition was resisted by the Income-tax Officer. The learned judge took the view that the year in which the ownership of the capital assets and or moneys is transferred will be the previous year for assessment of capital gains made by the shareholder, that it was difficult to understand how the gains intended to be taxed would not have been made in the year in which the ownership of the assets and the moneys distributed was acquired by the shareholder. He further took the view that upon proper interpretation of section 46(2) of the Act the liability created there-under must arise on the dates of transfer of the deemed gains to shareholders by distribution made on liquidation. He also rejected the contention of the Income-tax Officer that the petition was liable to be dismissed in limine on a preliminary ground that an appeal was preferred by the petitioners against the impugned order passed by the Income-tax Officer. The learned judge on this ground quashed the impugned order of assessment dated March 30, 1967. It is this order passed by the learned judge that is under appeal in the present case.
4. Mr. Joshi on behalf of the Income-tax Officer contended that for the purposes of section 46(2) of the Act, the real taxable event occurred on the date when the final dividend was received by the petitioners; that as the final amount of Rs. 2,39,934 was received by the petitioners on September 18, 1967, i.e., during the accounting year, the petitioners were liable to pay tax on capital gains under the Act even though substantial amounts to the tune of Rs. 53,85,400 and Rs. 25,07,001 were received in the years 1949 and 1953, respectively. He submitted, that the assets of the company on its winding-up are to be applied in satisfaction of its liability pari passu and subject to such application and, unless the articles of association otherwise provided, have to be distributed amongst the members according to the rights and interests of such members and that amongst the principal rights which shareholder has in a company is the right in the wishing-up of the company after payment of debts to receive a proportionate part of the capital or otherwise to participate in the distribution of assets of the company; that the aforesaid right of a shareholder in the distribution of the assets of the company is not extinguished till the entire assets of the company are exhausted by satisfaction of all its liabilities and for by distributing the same amongst the members of the company and that such right cannot be said to have come to an end by interim distribution by the liquidator inasmuch as the member has still a right to further participate in the distribution of the company's assets. He also submitted that the earlier distribution of moneys was merely in the nature of instalments paid by the liquidator in the course of his realisation of assets and the final taxable event occurred only when the final distributing was made inasmuch as with the final distribution only the assessee's right as a shareholder was extinguished. He, therefore, submitted that the learned judge was in error in the view taken by him in quashing the impugned assessment order.
5. It is common ground that the sum of Rs. 53,85,400 was received by the petitioners on September 12, 1949, and the sum of Rs. 25,07,001 on November 16, 1953, when the Indian Income-tax Act, 1922, was in force. Under the said Act there was no provision for payment of tax on capital gains at the time when the said amounts were received. The liability for payment of tax on capital gains according to the Income-tax Officer, had arisen by reason of section 46(2) of the Act, because the last instalment of Rs. 2,39,934 towards distribution of capital was received by the petitioners on September 18, 1961, i.e., during the accounting period for the relevant assessment year when the Act was in force. 'Transfer' as defined in section 2(47) of the Act in relation to a capital asset includes the sale, exchange or relinquishment of the asset or extinguishment of any rights therein or the compulsory acquisition thereof under any law. The general provision as regards chargeability to income-tax in respect of capital gains is contained in section 45 while a special provision is made in section 46 for capital gains on distribution of assets by a company in liquidation. Under sub-section (1) it is provided that, 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 purpose of section 45. The liability of the petitioners to pay tax on capital gains is claimed by the Income-tax Officer by reason of the provisions of section 46(2). It is as under :
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 purpose of section 48 .
47. Section 48 provides for the mode of computation and deductions in determining the income chargeable under the head 'Capital gains'.
48. It is clear from the provisions of section 46(2) that where a shareholder on liquidation of a company receives any money from the company he shall be chargeable to income-tax under the head Capital gains in respect of the money so received on the date of distribution as reduced by the amount as therein provided. The chargeability under this section is in respect of money received or the market value of other assets on the date of distribution. As the sum of Rs. 53,85,400 was received on September 12, 1949, and the sum of Rs. 25,07,001 was received on November 16, 1953, the said amounts could not be brought for levy of income-tax under the head 'Capital gains', because on the dates of distribution of these amounts, there was no provision in the Indian Income-tax Act, 1922, to levy income-tax under the head 'Capital gains'. It is undoubtedly true that the final dividend towards distribution of capital, namely, the sum of Rs. 2,39,934 was received by the petitioners on September 18, 1961, i.e., during the relevant accounting period for the assessment year 1962-63. However, there is nothing in section 46(2) to indicate that such receipt of the amount during the relevant accounting period will by itself be sufficient to render the other amounts which were received by the assessee in the years 1949 and 1953 subject to liability for Income-tax under the head 'Capital gains', because both in the year 1949, as well as in the year 1953, when the amounts were distributed by the company and received by the petitioners there was no provision under the Income-tax Act for levy of income-tax on 'Capital gains'. It is not possible for us to accept the contention of Mr. Joshi on behalf of the Income-tax Officer that the taxable event occurs only when the final dividend is received by a shareholder who is an assessee. Such a contention is not warranted by the language of section 46(2). Even otherwise it is quite apparent that if such a contention was accepted, it would work considerable hardship to the revenue even in cases where after the Act came into force interim amounts were received by way of distribution upon liquidation of a company and the aggregate of the amounts so received exceed the cost of acquisition as contemplated by section 55(2) and the actual capital gain is made by a shareholder simply on the ground that the final dividend is not declared. Such a contention, on the contrary, will result in an assessee escaping the liability to pay income-tax on capital gains after the Act came into force even though he had received the total cost of acquisition and something more merely because the last instalment had not been received by him upon final distribution of the assets of the company in liquidation. Once the cost of acquisition is recouped by the shareholder upon receipt of dividend or dividends any excess amount so received by him will be capital gain on the date on which it is received by him and such receipt will be subject to payment of income-tax under the head 'Capital gains' for the relevant assessment year and the chargeability cannot be postponed until the final dividend is received by the assessee on liquidation of the company. Thus, in our view, the learned judge was right in taking the view that the impugned order of assessment was not justified having regard to the provisions of section 46(2) of the Act.
49. In that view of the matter, it is unnecessary to consider the other contentions which have been taken on behalf of the petitioners in the petition for challenging the validity of the assessment order. In the result the appeal fails and is dismissed with costs. Since the impugned assessment order dated March 30, 1967, is set aside by us we direct that the concerned Income-tax Officer should pass a proper assessment order for payment of Income-tax having regard to the sum of Rs. 3,87,585 received as deemed dividend and the sum of Rs. 2,39,934 received by way of distribution of capital on September 18, 1961.
50. Liberty to the respondent's attorneys to withdraw the sum of Rs. 500 deposited towards costs of the appeal.