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Commissioner of Income-tax, Gujarat-iii Vs. Minor Bababhai Alias Lavkumar Kantilal - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 183 of 1975
Judge
Reported in[1981]128ITR1(Guj)
ActsIncome Tax Act, 1961 - Sections 2(17), 2(47), 45, 45(1), 46(2), 48, 53, 54, 54B, 54D, 54E and 71
AppellantCommissioner of Income-tax, Gujarat-iii
RespondentMinor Bababhai Alias Lavkumar Kantilal
Appellant Advocate N.U. Raval, Adv.
Respondent Advocate K.C. Patel, Adv.
Excerpt:
direct taxation - extinguishments of rights - sections 2(47), 45, 46 (2), 48 and 71 of income tax act, 1961 - whether assessee entitled to short-term capital loss on ground that extinguishments of rights need not be from any extraneous source and that such extinguishments may be brought about by assessee's own action - assessee's rights in capital asset represented by defunct promissory note extinguished - said extinguishments supported by adequate consideration - assessee suffered short-term capital loss when he transferred his capital asset - said transfer backed up by consideration - all requirements of section 45 read with section 2 (47) and 48 fully complied with - in light of precedent question answered in affirmative. - - as per the said scheme, unsecured creditors like the.....majmudar, j.1. the income-tax appellate tribunal, ahmedabad, bench 'b', has referred to us a question of law for our opinion under s. 256(1) of the i.t. act, 1961, at the instance of the revenue. the said question reads as under : 'whether the tribunal was right in law in holding that the assessee was entitled to short-term capital loss of rs. 11,617 on the ground that the 'extinguishment of rights therein ' as contemplated under s. 45 read with s. 2(47) need not be from any extraneous source and that such extinguishment may be brought about by the assessee's own action ?'2. in order to appreciate the background against which the aforesaid question come to be referred to us, it is necessary to have a look at the relevant facts. the assessee is an individual. the year of assessment was.....
Judgment:

Majmudar, J.

1. The Income-tax Appellate Tribunal, Ahmedabad, Bench 'B', has referred to us a question of law for our opinion under s. 256(1) of the I.T. Act, 1961, at the instance of the revenue. The said question reads as under :

'Whether the Tribunal was right in law in holding that the assessee was entitled to short-term capital loss of Rs. 11,617 on the ground that the 'extinguishment of rights therein ' as contemplated under s. 45 read with s. 2(47) need not be from any extraneous source and that such extinguishment may be brought about by the assessee's own action ?'

2. In order to appreciate the background against which the aforesaid question come to be referred to us, it is necessary to have a look at the relevant facts. The assessee is an individual. The year of assessment was 1970-71 and the accounting period was the calendar year 1969. The assessee had advanced a sum of Rs. 25,000 to the New Commercial Mills Co. Ltd. on a promissory note. The said mill-company had suffered from financial difficulties and was taken in liquidation. A scheme of compromise and arrangement was approved by this court. As per the said scheme, unsecured creditors like the assessee had to get their claims verified by the auditors of the company, viz., M/s. C. C. Chokshi & Co. The assessee could realise only Rs. 13,323 from the said mill-company pursuant to the provisions of the scheme approved by this court in the winding-up proceedings. Balance of Rs. 11,617 was claimed by the assessee as capital loss suffered by him during the relevant assessment year. The ITO negative the said claim of the assessee on the ground that there was no transfer of capital asset involved in the said transaction.

3. In appeal, the AAC allowed the assessee's claim with regard to short-term capital loss on the ground that the amount advanced was definitely a capital asset in the hands of the assessee and the definition of the term 'transfer' in relation to a capital asset as per s. 2(47) included relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under may law, and directed the ITO to allow the assessee the short-term capital loss.

4. The revenue thereafter went in appeal to the Appellate Tribunal and challenged the decision of the AAC. Reliance was placed by the revenue on the judgment of this court in CIT v. R. M. Amin : [1971]82ITR194(Guj) for the proposition that there must be an element of consideration for the extinction of the rights in the capital assets before any gains or losses from such extinguishment can be brought for computation under the head 'Capital gains'. The Tribunal, however, held that the judgment in R. M. Amin's case : [1971]82ITR194(Guj) did not apply to the facts of the present case, in that the said case referred to entirely a different situation which pertained to the question of taxability of capital gains, that the shareholder (assessee) received certain amount in the liquidation of the company, in which he was a shareholder. The Tribunal took the view that in the present case there was extinguishment of the assessee's right in the capital asset and that had brought him a loss of Rs. 11,617. Consequently, the revenue's contention was rejected by the Tribunal. This order has resulted in the present reference at the instance of the revenue.

5. In order to appreciate the short controversy between the parties, which arises for our opinion in the present case, it is necessary to have a look at certain relevant provisions of the Act. Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in ss. 53, 54, 54B, 54D and 54E, 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 word, 'transfer' as defined by s. 2(47) of the Act provides that 'transfer', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition there under any law. Section 48 of the Act provides for the mode of computation of and deductions from capital gains and states that '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...' From a conjoint reading of ss. 45, 48 and 2(47), it appears clear that before any capital gains can be said to have arisen out of a transfer, capital asset is required to be transferred and that too for consideration. The assessee's contention is that as per the wide definition of the word 'transfer' as provided by s. 2(47), extinguishment of his right in the existing capital asset would be covered by the connotation of the word 'transfer'.

6. Mr. Raval, learned advocate appearing for the revenue, did not contest the proposition that the assessee was holding a capital asset in the form of a promissory note of Rs. 25,000 under which he was an unsecured creditor of the mill-company in the winding-up proceedings. Under the scheme of compromise and/or arrangement proposed in the winding-up proceedings of the mill-company, the assessee's right to receive the full amount of Rs. 25,000 with interest under the promissory note did get extinguished in part. The assessee contended that his right in the capital asset was extinguished at least to the extent of 55% as he was, under scheme, to receive only 45% and that too without interest. According to the assessee, this clearly amounted to transfer of the capital asset at the relevant time. The assessee contended that the said transfer instead of bringing capital gain brought him capital loss and the said short-term capital loss was required to be set off as per the provisions of s. 71 of the Act. The revenue challenges the said contention of the part of the assessee by contending that even if there was a transfer of a capital asset when the assessee's right therein got extinguished, even then, the said extinguishment was not backed up by any consideration, and that before it can be said that there was any transfer of a capital asset which may bring capital gain or capital loss, the requirement of s. 48 have got to be kept in view. Mr. Raval contends that as per s. 48 of the Act, the assessee concerned must have received a consideration for the concerned transfer of the capital asset. The contention of the revenue is that, in the present case, the assessee had a pre-existing right to receive Rs. 25,000 under the promissory note with interest and in satisfaction of the said pre-existing right of the assessee, as per the provisions of the scheme approved by this court in the winding-up proceedings of the company, the assessee agreed to receive only 45% of his total dues and that too without interest. Thus, what he received was towards the full satisfaction of his then existing claim against the company and it cannot be said to form any consideration for the extinguishment of the rest of the claim of the assessee against the company. Mr. Raval, therefore, submits that the main requirement of the provisions for the accrual of capital gains, viz., that the concerned transaction of transfer should be backed up by consideration which should be received or at least accrue to the assessee, is absent in the present case and, hence, the assessee's claim ought not to have been accepted by the Tribunal.

7. The aforesaid statutory provisions to which we have already referred clearly show that before the provisions of s. 45 can be brought into force, the transfer of the capital asset must be backed up by consideration. The consideration must be received or must accrue to the assessee on account of the said transfer. Consequently, the short question which survives for our consideration is whether the assessee did receive some consideration or whether any consideration accrued to him when his capital asset of Rs. 25,000 reflected by the promissory note was subjected to transfer as the assessee's right therein got extinguished to the extent of 55% and his right to claim interest also got extinguished on account of the scheme of compromise and/or arrangement as approved by this court in the winding-up proceedings against the mill company. It is, necessary, therefore, to have a look at the relevant clauses of the scheme which was approved by this court in its original jurisdiction in Company Petition No. 14 of 1969, with Company Application No. 90 of 1963 and others in the matter of New Commercial Mills Co. Ltd. (In liquidation). This court had by its order, dated 2nd May, 1969, approved the scheme of compromise and/or arrangement so far as the said mill-company was concerned and as per the said approved scheme under the provisions of the Companies Act, 1956, for the unsecured creditors like the assessee it was provided that unsecured creditors notes and/or deposits other than specified creditors shown in para. II had to lodge their claims with the auditors, M/s. C. C. Chokshi & Co., with one month from the date of the sanction of the scheme by the court. The scheme further provided that the claims as verified by the auditors were to be binding on the company and the creditors, and in case any creditors was dissatisfied with the verification by the auditors, he was entitled to get direction of the court in that behalf. It was further provided that in case a creditors had failed to lodge his claim in the aforesaid manner, he was to be paid on the basis of his claim in the books of the company. Thereafter, followed the material part of the clause in the said scheme which pertained to the rights of the unsecured creditors like the assessee. Clause 3 of para. VII of the said scheme provided as under :

'(iii) The unsecured creditors to be paid 45% of their verified claims without interest in full satisfaction of their claims as under :

(i) 37 1/2% of their verified claims without interest to be paid within 8 months from the date of the final sanction of the scheme by the honourable High Court of Gujarat, provided, however, if the payment of 37 1/2% aforesaid is not made within 12 months from the date to final sanction of the scheme, the creditors aforesaid are entitled to claim full amounts of their respective verified claims without interest.

(ii) 7 1/2% to be paid after the dues of the labour which may be agreed to be paid by an agreement between the Textile Labour Association, Ahmedabad, and the new management is paid. The date of payment to be decided by the committee consisting of (i) Shri Ratilal Nathalal, shareholder, (ii) Shri Keshavlal Premchand, (iii) Shri Amritlal Brahmbhatt, and (iv) Shri Kanchanbhai B. Parikh, and the company taking into consideration the financial position of the company then existing. In case of dispute for the said date as payment between the said committed and the company, the matter shall be referred to an arbitrator to be selected by them, whose decision shall be binding on all the creditors and the company.

Issue of new equity share : The unsecured creditors, on the date of the final sanction of court to the scheme, will be allotted one equity share of Rs. 50 each to the extent of 5% of their verified claim without interest (excluding fraction of Rs. 50) if the has made an application in this behalf within one month of his claim being verified by the auditors, M/s. C. Chokshi & Co., Ahmedabad.'

8. Clause 12 of the sanctioned scheme provided that the said scheme shall be binding upon the company, its creditors and members and all proceeding against the company in respect of the claims of the creditors and the winding-up petition being company Petition No. 42 of 1968, shall be deemed to have been dismissed provided, however, that M/s. Protex Industries shall be entitled to prosecute its Summary Suits Nos. 500 and 501 of 1969, in the City Civil Court against the company in so far as it relates to adjudication of the claim and for recovery against the guarantor after giving credit for the amounts received from the company under this scheme.

9. Mr. Raval's contentions is that as per the aforesaid scheme, the assessee received in full satisfaction of his existing claim only 45% and that too without interest. But, thereby he had not received any consideration for the said transfer of his original capital asset. What he had received was towards the satisfaction of his pre-existing right, while Mr. K. C. Patel, learned advocate appearing for the assessee, on the other hand, contended that when the assessee, on account of the aforesaid novatio brought about by the provisions of the sanctioned scheme, was to be paid 45% of the verified claim and that too without interest, the said payment, of 45% of the verified claim, to the assessee and also the allotment to the assessee of equity shares of Rs. 50 each to the extent of 5% of his verified claim without interest, would constitute sufficient consideration for his relinquishing, 55% of his earlier claim against the company and his claim for interest. But for this consideration, there was no occasion for him to give up the rest of his claim and to allow it to get extinguished. Thus, the extinguishment of the rest of the claim for 55% of the dues with interest was backed up by sufficient consideration. Mr. Patel, therefore, submitted that this was a case of novatio by which new rights were created, old right were extinguished and the new rights were based on adequate consideration.

10. In order to resolve the aforesaid controversy, it is necessary to look at certain decisions of which both the sides placed reliance in support of their respective contentions.

11. Mr. Raval for the revenue invited our attention to the decisions of the court in CIT v. R. M. Amin : [1971]82ITR194(Guj) . In the aforesaid case, the facts were that the assessee held, in the share capital of a private company in Uganda, 192 share of the aggregate face value of shillings 1,92,000, that is, Rs. 1,28,000. The Uganda Company went in voluntary liquidation. The assets of the company were sold by the liquidator and, after payment of taxes and liabilities, the assessee became entitled to receive shillings 4,68,489=Rs. 3,12,326 at the rate of shillings 2,440.0492 per share as and by way of return of capital in respect of the 192 share held by him. The assessee thus obtained an excess of Rs. 1,84,326 over the aggregate face value of the said 192 shares. The view of the ITO was that the amount of Rs. 1,84,326 represented capital gain and was taxable as such under s. 45 read with s. 2(47) of the I.T. Act, 1961, on the ground that it was profit or gain arising from the relinquishment of a capital asset or the extinguishment of any right in it within the meaning of s. 2(47). On appeal, the Appellate Tribunal took the view that the amount of Rs. 1,84,326 did not accrue to the assessee from the relinquishment of any capital asset or extinguishment of any rights in it and there was, therefore, no capital gain chargeable to tax under s. 45 and that, in any event, even if any capital gain arose to the assessee which was taxable, it was only in the sum of Rs. 1,23,500, representing the difference between the amount received by the assessee in respect of the 192 shares and the value of those share on January 1, 1954. On a reference to this court, it was held that there was no transfer of capital asset within the meaning of s. 45 read with s. 2(47) when the assessee received shilling 4,68,489, that is, Rs. 3,12,326, on final distribution of the net assets of the Uganda company. This court took the view that the transfer of the capital asset in that case that the case was not backed up by any consideration. It was observed that s. 48 says that the income chargeable to tax as 'capital gains' shall be computed by deducting from the 'full value of consideration received or accruing as a result of the transfer of the capital asset' certain amounts specified. The transfer is contemplated by s. 45 read with s. 2(47) is, therefore, a transfer as a result of which consideration is received by the assessee or accrues to the assessee. Substituting the word 'extinguishment of any right in the capital asset', for the words 'transfer of the capital asset', the transaction, in order to attract the charge of tax on capital gains, must, therefore, be such that the consideration is receive by the assessee or accrues to the assessee as a result of the extinguishment of the rights in the capital assets. It was further observed that when a shareholder receives moneys representing his share on the distribution of the net assets of the company in liquidation, he receives such moneys in satisfaction of the right which belongs to him by virtue of his holding the share and not by way of consideration for the extinguishment of his right or rights in the share. It is not the extinguishment of his rights in the share for which consideration is received by him ; it is rather because moneys representing his share in the distribution are received by him that his rights in the share are extinguished. Therefore, when a shareholders receives his share on the final distribution of the net assets of a company in liquidation, there is no transfer of capital asset by him which would attract the charge of capital gains tax under s. 45. It was further observed that if any other view was taken, it would render the provisions of s. 46(2) of the Act redundant. Mr. Raval placed strong reliance on the above observations and submitted that in the present case also, when the assessee agreed to receive 45% of his verified claim from the company in liquidation, what he received was not by way of way consideration for the rest of the claim given up by him but it was towards satisfaction of his claim for the full amount of the promissory note. It is difficult to accept the aforesaid submission of Mr. Raval. The aforesaid observations in this case [R. M. Amin's case : [1971]82ITR194(Guj) ] will have to be read in the light of the facts of the case. There, the shareholder who was already having shares in a foreign company, was paid certain amounts on the liquidation of the said company pursuant to his right in those shares. The foreign company had gone into voluntary liquidation. Thus, no change took place in nature of the share holder had in the company and, in the acceptance of his pre-existing right, he was given shilling 4,68,489. It is in the context of these peculiar facts that this court made the aforesaid observations. So far as the facts of the present case are concerned, they are entirely different. Here, it is found that the assessee, who was an unsecured creditor of the company in liquidation, was entitled to Rs. 25,000 with interest under the promissory note. In the proceedings for the winding up of the said company, a scheme of compromise and/or arrangement was sanctioned by this court. We have already extracted the relevant provisions of the scheme as applicable to the unsecured creditors. Pursuant to the said provisions of the scheme, a complete novatio between the parties took place. The existing right of the assessee in the promissory note amount got extinguished and new rights of the assessee in the promissory note amount got extinguished and new right accrued to him under the novatio reflected in the scheme of compromise and/or arrangement sanctioned by this court. The assessee let off 55% of his claim with interest and as the said right of the assessee in the existing capital asset was extinguished, in consideration he received 45% of the balance and that too without interest and also subject to the scheme of instalments. He also became entitled to equity shares of Rs. 50 each to the extent of 5% of his verified claim without interest. Thus, the advantage which the assessee received under the scheme clearly formed a valid consideration for the extinguishment of the assessee's pre-existing rights under the promissory note. There was a causal connection between the extinguishment of the assessee's right in the capital asset and receipt of the amount of 45% without interest and his being entitled to equity shares. Thus, by a subsequent event, the old contractual rights between the parties got substituted by new rights as a result of the novatio. In fact, a capital asset which earlier existed in favour of the assessee no longer remained operative at all. It was made subject to the overriding provisions of the scheme. The creditors like the assessee, who was an unsecured creditor, could not then resort to the ordinary remedy of civil law of for the enforcement of their prior claims. They were all wiped off and were superseded by the supervening provisions of the sanctioned scheme of this court in the winding-up proceedings against the mill-company. Consequently, it cannot be said that there was no consideration backing up the transfer of the capital asset in the present case as reflected by an extinguishment of the assessee's right in the earlier existing capital asset. It is, therefore, not possible to agree with Mr. Raval that the ratio of this court in R. M. Amin's case : [1971]82ITR194(Guj) applies to the facts of the present case. Mr. Raval further submitted that the aforesaid decisions of this court in R. M. Amin's case : [1971]82ITR194(Guj) has been confirmed by the Supreme Court in the case of CIT v R. M. Amin : [1977]106ITR368(SC) . The decision of the Supreme Court in that case also makes the legal position year clear. It has been in terms laid down by the Supreme Court in this case that when a shareholder received money representing his share on the distribution of the net assets of the company in liquidation, he received that money in satisfaction of the right which belonged to him by virtue of his holding the share and not by the operation of any transaction which amounted to the sale, exchange, relinquishment, transfer of a capital asset or the extinguishment of any rights in capital assets. But for s. 46(2) it would not have been possible to charge tax under the head 'capital gains' on the money or other assets of a company received by its shareholder on its liquidation. Section 46(2) was enacted both with a view to making a shareholder liable for the payment of tax on capital gains as well as prescribing the mode of calculating the capital gains accruing to the shareholders on the distribution of assets by a company in liquidation. Since the provisions of s. 46(2) applied only to the distribution of assets by such companies in liquidation as were covered by the definition of the word 'company' in s. 2(17), capital gains tax was not leviable when companies other than those which fell within the definition in s. 2(17) distributed assets on liquidation to their shareholders. The Supreme Court for arriving at the aforesaid view, placed reliance on its earlier decisions in the case of CIT v. Madurai Mills CO. Ltd. : [1973]89ITR45(SC) and observed that the question as to whether the distribution of assets of a company, which had gone into voluntary liquidation, amongst its shareholders, would amount to sale, exchange relinquishment or transfer within the meaning of s. 12B of the Act of 1922, as amended in 1956, was considered by that court in the case of Madurai Mills : [1973]89ITR45(SC) . While answering that question in the negative, the court held that the act of the liquidator in distributing the assets of the company which had gone into voluntary liquidation did not result in the creation of new rights. It merely entailed recognition of the legal rights which were in existence prior to the distribution, and the court further observed in that case that when a shareholders receives money representing his share on the 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 amounted to a sale, exchange, relinquishment or transfer. Thus, the facts of R. M. Amin's case : [1977]106ITR368(SC) were entirely different. There, the shareholder did not receive anything pursuant to the creation of new right. He had received money in satisfaction of his pre-existing right by virtue of his holding share and he was entitled to receive that amount in liquidation. No subsequent event had taken place which had resulted in the creation of new rights and/or obligations. In the present case, even though earlier the assessee had become an unsecured creditor of the mill-company by advancing to the mill-company Rs. 25,000 on the basis of the promissory note and the said amount was payable to the assessee with interest, on account of the supervening and subsequent event of the sanctioning of a scheme by this court, the old existing rights and obligations of the parties were superseded and by way of novatio, new rights were created and only under those rights, the assessee could claim and get 45% of his dues from the company and that too subject to the provisions and procedure of payment was prescribed and sanctioned by this court's scheme to which we have made a detailed reference. The assessee also became entitled to the allotment of equity shares to which he could never have become entitled under the earlier promissory note dues. Consequently, it cannot be said that there was no consideration behind the transfer of the capital asset in the present sase when the assessee's interest in the capital asset got extinguished. In that view of the matter, the aforesaid decisions of this court as well as of the Supreme Court cannot be of assistance to Mr. Raval.

12. On the other hand, Mr. Patel for the assessee has invited our attention to another decision of this court in case of CIT v. Vania Silk Mills (P.) Ltd. : [1977]107ITR300(Guj) . A similar question had arisen before this court in the aforesaid case. The facts in that case were that the assessee had purchased machinery worth Rs. 2,81,741 and gave it on hire to the Jasmine Mills at annual rent of Rs. 33,900. On August 11, 1966, a fire broke out in the premises of the mills and the assessee's machinery was damaged to such an extent that it could not any longer be put to use as such. The mills had insured the assessee's machinery along with its own machinery and on a settlement of the insurance claim, it received a certain amount out of which it paid a sum of Rs. 6,32,533 to the assessee on account of the destruction of its machinery. The difference between the actual costs of the machinery and its written down value worked out to Rs. 2,62,781 and in the assessment proceeding for the assessment year 1967-68, the assessee returned the amount of Rs. 2,62,871 as profit chargeable to tax. The ITO subjected to tax the additional amount of Rs. 3,50,792, being the different between the original cost of Rs. 2,81,741 and the amount of Rs. 6,32,533 received from the mills, as 'capital gains' chargeable under s. 45 of the I.T. Act. The assessee had contended before the ITO that no question of capital gains arose since no transfer of capital asset was effected within the meaning of s. 45 read with s. 2(47) of the Act. The ITO negatived the contention. Ultimately, in appeal, the Tribunal set aside the order of the ITO holding, inter alia, that unless the transfer of a capital assets is effected by an assessee, s. 45 would not be attracted and since, in the present case, there was no such voluntary act on the part of the assessee, effecting a transfer, one of the conditions for levying the charge of capital gain was not satisfied. Thereafter, at the instance of the revenue, a reference came to be made to this court. The revenue contended that capital gains did not arise to the assessee on the facts of that case. The said contention of the revenue was accepted by this court and it was held that, on the facts of that case, capital gains did arise to the assessee, and then made the following pertinent observations in this connection (pp. 300, 301) :

'Section 45 provides that any profits or gains arising from the transfer of a capital asset effected.... shall be chargeable to income-tax under the head 'capital gains'. Section 2(47) says that 'transfer', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition therefore under any law.

The Legislature, in order to effectuate its intention, has deliberately chosen the language of the widest amplitude by using the expression 'the extinguishment of any rights therein' in section 2(47). It covers every possible transaction which results in the destruction, annihilation, extinction, termination, cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights-qualitative or quantitative-which the assessee has in a capital asset, whether such asset is corporeal or incorporeal. However, in order to subject any profit or gain received by or accruing to the assessee to the charge of 'capital gains', the sine qua non is that the receipt or accrual must have originated in a 'transfer' within the meaning of section 45 read with section 2(47). This requirement clearly flows from the words 'any profits or gains arising from the transfer of a capital asset' in section 45. There must, therefore, be a causal nexus between the 'transfer', that is, the extinguishment of any rights in a capital asset and the profit or gain accruing to or received by the assessee. In other words, it is such extinguishment which must have occasioned the profit or gain and not any other independent transaction as a result of which some different rights are terminated by satisfaction or otherwise. The transaction, in order to attract the charge of tax as capital gains, must be such that consideration is received by the assessee of accrues to the assessee as a result of the extinguishment of the rights in the capital assets.'

It was further held by this court (p. 301) :

'...there was an extinguishment of the proprietary interest of the assessee in the capital asset, namely, the machinery, and profit arose to it consequence of the payment made for such extinguishment. On account of fire, the machinery was so extensively damaged that, for all practical purpose, it ceased to be useful as such. Since the entire machinery in premises of the insured was covered by insurance, the insurer paid the value of the machinery to the insured and took away the damaged machinery. The insured, in its turn, paid the proportionate amount out of the compensation received from the insurer to the assessee and, in the course of this transaction, the bundle of proprietary right which the assessee had in the machinery, including the right to claim its possession back from the hirer on the termination of the contract of hire and to hold, enjoy and dispose it of, came to an end. Thus, there was a clear extinguishment of the rights of the assessee in the capital asset and consideration was received by it as a result of such extinguishment. Therefore, no other conclusion than that there was a 'transfer' of the capital asset within the meaning of section 45 read with section 2(47) and that profit arose out of such 'transfer' is possible.'

13. The ratio of the decision of this court in Vania Silk Mills : [1977]107ITR300(Guj) squarely applies to the facts of the present case. In the present case also, there was an extinguishment of the assessee's rights in the earlier existing capital asset represented by the promissory note of Rs. 25,000 with interest. His rights in the said asset were extinguished on account of the novatio which came into force as per the terms of the sanctioned scheme of compromise and/or arrangement. As per those terms, the assessee was paid consideration represented by 45% of the original claim without interest and he was given an entitlement to the allotment of equity shares on his having agreed to relinquish and to suffer extinguishment of his rights in the original capital asset. The promissory note dues thereafter became extinguished. No rights could flow in favour of the assessee on the basis of that defunct promissory note which had then got only historical significance. There was a causal connection between the payment of 45% (of the company's dues) and the allotment of equity shares with the extinguishment of the assessee's rights under the promissory note. It is, therefore, clear that when the assessee's rights in the capital asset represented by the promissory note were extinguished, the said extinguishment was supported by adequate consideration. In the view of the matter, it has got to be held that the assessee had suffered short-term capital loss when he transferred his capital asset and that the said transfer was backed up by consideration. Thus, all the requirements of s. 45 read with ss. 2(47) and 48 were fully complied with in the present case.

14. As a result of the aforesaid discussion, the question referred to us for our opinion has to be answered in the affirmative, that is, in favour of the assessee and against the revenue. The Commissioner to pay costs of this reference to the assessee.


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