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Commissioner of Income-tax Vs. C.T. Oppilal Achi - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 231 of 1972 (Reference No. 44 of 1972)
Judge
Reported in[1977]109ITR126(Mad)
ActsIncome Tax Act, 1961 - Sections 2(17) and 46(2)
AppellantCommissioner of Income-tax
RespondentC.T. Oppilal Achi
Appellant AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Respondent AdvocateR. Balasubramaniam, Adv.
Excerpt:
- .....proceedings were completed and the assessee was allotted 746 shares of rs. 1,000 each in m/s. chettinad company private ltd., pudukkottai, by the liquidator of the bank of chettinad ltd. the distribution of the shares in m/s. chettinad company private ltd., pudukkottai, was in proportion to the shares held by each of the shareholders in the bank of chettinad ltd. in the return of income-tax filed for the assessment year 1966-67, the assessee declared in section 'f' that she was allotted 746 shares in chettinad company private ltd. in lieu of her holdings in the bank of chettinad ltd. which went into liquidation. the income-tax officer held that under the provisions of section 46(2) of the income-tax act, the assessee was chargeable to capital gains tax in respect of the receipt of.....
Judgment:

Ismail, J.

1. The assessee in this case was a shareholder of the Bank of Chettinad Ltd., which went into liquidation on January 29, 1965. She held 1,510 shares in the said company at the time when the company went into liquidation. As a first instalment, the liquidator of the company paid the assessee in March, 1965, Rs. 200 each in respect of her entire shareholdings of 1,510 shares, viz., Rs. 3,02,000. Deducting the sum of Rs. 1,56,000 being the original cost, the balance of Rs. 1,46,000 was offered for assessment as 'capital gains' in the previous year for 1965-66 assessment. Consequently, at the beginning of the year of account relevant for assessment year 1966-67 the cost price of Rs. 300 each for 50 shares was outstanding pending adjustment. During the year of account relevant to assessment year 1966-67, now under consideration, the liquidation proceedings were completed and the assessee was allotted 746 shares of Rs. 1,000 each in M/s. Chettinad Company Private Ltd., Pudukkottai, by the liquidator of the Bank of Chettinad Ltd. The distribution of the shares in M/s. Chettinad Company Private Ltd., Pudukkottai, was in proportion to the shares held by each of the shareholders in the Bank of Chettinad Ltd. In the return of income-tax filed for the assessment year 1966-67, the assessee declared in Section 'F' that she was allotted 746 shares in Chettinad Company Private Ltd. in lieu of her holdings in the Bank of Chettinad Ltd. which went into liquidation. The Income-tax Officer held that under the provisions of Section 46(2) of the Income-tax Act, the assessee was chargeable to capital gains tax in respect of the receipt of 746 shares in M/s. Chettinad Company Private Ltd. He accordingly determined the market value of the shares of M/s. Chettinad Company Private Ltd. and computed the capital gains assessable to tax at Rs. 4,11,800. On appeal preferred by the assessee the Appellate Assistant Commissioner confirmed the assessment made by the Income-tax Officer. But the Appellate Assistant Commissioner directed the Income-tax Officer to verify what were alleged to be arithmetical mistakes in the calculation of the market value of the shares and include in the total income only the correct amount. Aggrieved by the order of the Appellate Assistant Commissioner, the assessee preferred an appeal to the Tribunal. The Tribunal allowed the assessee's appeal holding that a charge was not created by the provisions of Section 46(2) and that, therefore, there was no justification in including in the taxable income of the assessee by way of capital gains any sum referable to the receipt from the liquidator of the Bank of Chettinad Ltd. for the assessment year 1966-67. It is the correctness of this order of the Tribunal that is challenged in the form of the present reference in which the following question has been referred to this court for its opinion under Section 256(1) of the Income-tax Act, 1961.

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that any sum received by the assessee from the liquidator of the Bank of Chettinad Ltd. in the form of shares in M/s. Chettinad Company Private Ltd. in the year of account relevant to the assessment year 1966-67, cannot be included in the chargeable income of the assessee under the head 'capital gains'?'

2. Pending this reference on the file of this court the Supreme Court has rendered a decision on November 26,1976, in Civil Appeal No. 51 of 1972 (Commissioner of Income-tax v. R.M. Amin : [1977]106ITR368(SC) . Both sides relied on this judgment as supporting their respective contentions. In the decision referred to above the question which the Supreme Court considered was 'whether, on the facts and in the circumstances of the case, there was a transfer of a capital asset within the meaning of Section 45 read with Section 2(47) of the Income-tax Act, 1961?' In that case, the assessee held shares in Kawelengoji Ginneries Ltd., Kampala, a private limited company incorporated in Uganda, The judgment of the Supreme Court points out that in that case both sides agreed that such a company was not a company within the meaning of the word 'company' as defined in Section 2(17) of the Income-tax Act, 1961. On this basis the Supreme Court held in favour of the assessee on two mutually exclusive grounds. The first ground was that the definition of the word 'transfer' occurring in Section 2(47) of the Income-tax Act, 1961, will not take in such distribution of assets of a company in voluntary liquidation by the liquidator. The Supreme Court while coming to this conclusion affirmed its earlier judgment dealing with the relevant provisions of the Indian Income-tax Act, 1922, rendered in Commissioner of Income-tax v. Madurai Mills Co. Ltd. : [1973]89ITR45(SC) . The second ground on which the Supreme Court held that the assessee was not liable to capital gains tax in respect of the amount in question was that though Section 46(2) of the Income-tax Act, 1961, is a charging section it will apply only to companies as defined in Section 2(17) of the Income-tax Act, 1961, and will not apply to the company with which the Supreme Court was dealing as the parties had agreed that that was not a company as denned in the Act. As far as the present reference is concerned, the order of the Tribunal shows that no argument was advanced before it based upon the definition of the term 'transfer' occurring in Section 2(47) of the Income-tax Act, 1961. The argument that would appear to have been addressed before the Tribunal is that Section 46(2) itself is not a charging Section, and it is only Section 45 which is the charging section. The Tribunal accepted this contention advanced on behalf of the assessee. In the light of the decision of the Supreme Court referred to above, this conclusion of the Tribunal is erroneous. At the same time, we are not in a position to answer the question referred to this court in favour of the revenue straightaway. As we pointed out already, the Supreme Court in the decision referred to above has held that Section 46(2) will apply only in relation to companies which come within the scope of the definition of the word 'company' contained in Section 2(17) of the Income-tax Act, 1961. Cgnse-quently, even when the Tribunal is in error in holding that Section 46(2) is not a charging section, still the assessee can be held liable under that section only if it is established that the Bank of Chettinad Ltd. is a 'company' as denned in Section 2(17) of the Income-tax Act, 1961. The learned counsel for the assessee contends that the Bank of Chettinad Ltd. is not a company as defined in Section 2(17) of the Income-tax Act, 1961. Consequently, the matter will have to be investigated into by the Tribunal for the purpose of applying the decision of the Supreme Court to the case in question. However, Mr. Jayaraman, learned counsel for the revenue, contends that that question did not arise before the Tribunal, and, therefore, we will not be justified in directing the Tribunal to investigate the question. We are unable to accept this contention of the learned counsel for the revenue. The judgment of the Supreme Court makes it clear that but for the provisions contained in Section 46(2) the distribution of the assets of a company in liquidation would not constitute transfer as defined in Section 2(47) of the Income-tax Act, 1961, and Section 46(2) will apply only to companies as defined in Section 2(17) of the Income-tax Act, 1961. Consequently, the basic requirement for the application of Section 46(2) is the status of the company as to whether it is a company falling within the definition of the term 'company' as contained in Section 2(17) of the Income-tax Act, 1961, or not. Since the judgment of the Supreme Court itself came to be rendered only during the pendency of this reference the parties did not concentrate their attention on this aspect of the matter which is essential and basic for the application of Section 46(2) of the Income-tax Act, 1961, and under those circumstances we cannot accept the contention of the learned counsel for the revenue that since the question does not arise out of the order of the Tribunal, we will not be justified in directing the Tribunal to go into the question. As we pointed out already, the status of the company is fundamental and basic to the applicability of Section 46(2) and that necessarily has to be investigated before Section 46(2) of the Income-tax Act, 1961, could be applied. In these circumstances, we hold that the question referred to this court cannot be answered one way or the other without there being a finding as to the status of the company and, consequently, we return the reference without answering the question referred to this court. The result of this will be that the Tribunal will have to restore the appeal preferred by the assessee to its file and dispose of the appeal afresh in the light of the judgment of the Supreme Court after recording a finding as to the status of the company, viz., the Bank of Chettinad Ltd. as to whether it is a company as defined under Section 2(17) of the Income-tax Act, 1961, or not. No costs.


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