Balasubrahmanyan, J. - These two references deal with two dealers in company shares. This means that company shares are their stock-in-trade. They were being assessed to income-tax on the profits they were making year by year in the purchase and sales of shares as stock-in-trade. Some of the shares they held were in the Indian Bank Limited. Consequent on the nationalisation of the Bank, the Indian Bank Limited went into liquidation. The liquidator paid over to these two assessees certain sums as' dividends' in the winding up. In one case the amount was Rs. 3,376 and in the other it was Rs. 1,124.
2. The assessees claimed before the ITO that these amounts must be assessed under the head Capital gains. The Officer rejected this claim on the score that the assessees were dealers in shares and the Indian Bank shares were part of their stock-in-trade and nonetheless so for the fact that the company was under liquidation. He accordingly included the dividends distributed by the liquidator as part of the business profits of the two assessees assessable under the head business.
3. On appeal, the Tribunal accepted the position that the two assessees were dealers in shares and that the shares they held in the several companies were really trading stock and cannot be treated as capital assets. They also held that the Indian Bank shares which they held were part of their stock-in-trade. Nevertheless, the Tribunal held that the decision of the Gujarat High Court in CIT v. R. M. Amins case : 82ITR194(Guj) compelled them to hold that the receipts from the liquidator can only be brought to charge under s. 46(2) of the IT Act, 1961. In that view, they disagreed with the head of assessment under which the two amounts were brought to charge and directed the Officer to amend the assessment.
4. In these references at the instance of the CIT, the question of law is whether the amounts of Rs. 3,376 and Rs. 1,124 were liable to tax only under the head Capital gains in terms of s. 46(2) of the IT Act, notwithstanding that the assessees were dealers in shares.
5. The question of law which we have drawn up above is a combined version of the two different questions of law referred to us in the two cases. It is easy to see that the answer to the question is very much to be found to the text of the question itself. Once it is granted that the assessees are dealers in shares and the shares in question are part of their stock-in-trade, any receipt flowing therefrom can only be assessed as part of the assessees trading profits. Sec. 46(2), no doubt, says that where a shareholder receives any money or assets from a company in liquidation, he is to be charged to Income-tax under the head 'capital gains' in respect of the money so received as representing the full value of the consideration for the purpose of s. 48. Sec. 48 deals with the mode of computation of income chargeable under the head capital gains. The real charging section which brings to charge capital gains is s.45(1) which lays down that the tax under the head 'capital gains' shall be charged on any profits or gains arising from any transfer of a capital asset. The expression 'capital assets' is defined by s. 2(14) of Act to include property of any kind held by an assessee whether or not connected with his business or profession. But there is a specific exclusion from this definition of 'any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession'. These assets, in other words, shall not be regarded as capital assets for the purposes of the charge to capital gains. In this case, it is common ground that even during the previous year in which the assessees received the dividends from the liquidator of the Indian Bank the Indian Bank shares were held by the assessees only as the trading stock. There is no suggestion anywhere in the record that the assessees, by some process known to accountancy or revenue law, had converted these shares from their character of stock-in-trade into bearing a new character, namely that of capital investments. It is also impossible that it could have been so done, because at that time the company itself was in liquidation. An investment, normally, is one where income regularly flows or is expected to flow or is expected to flow from an item of property or actionable claim. At the moment of liquidation, these shares have one purpose alone to fulfill, namely to get the final dividends in the winding up before the dissolution of the company. Therefore, there is no possible way by which these shares which had been acquired and held by these assessees as part of their trading stock could have been converted, by any means known to law or accountancy as the assessees investments. They were continued to be held in the business of the assessees as stock-in-trade. This, therefore, at once excludes them from the definition of capital assets. If they are not capital assets, there can be no question at all of bringing to charge any dividends therefrom upon a winding up as the gains arising from capital assets under s. 45 read with s. 46(2) of the Act.
6. Mr. Srinivasan, ld. counsel for the assessee, cited the decision of the Supreme Court in R.M. Amins case (supra). This case went up on appeal from the Gujarat High Court to the Supreme Court. The decision of the Supreme Court is reported as CIT v. R. M. Amin : 106ITR368(SC) . He relied particularly on the following passage of the judgment of the Supreme Court :
'Section 46(2) was enacted both with a view to making shareholders liable for payment of tax on capital gains as well as to proceeding the mode of calculating the capital gains to the shareholders on the distribution of assets by a company in liquidation'.
With respect we entirely agree with the Supreme Courts summation of the rationale behind s. 46(2). We agree that s. 46(2) was a legislative measure introduced by way of neutralising the effect of an earlier decision of the Supreme Court in CIT v. Madurai Mills Co. Ltd. : 89ITR45(SC) . The provisions of s. 46(2) supplied two omissions which stood in the way of rendering receipts from the liquidator capital gains in the hands of the concerned shareholder or contributory. The two obstacles were there was no question of any transfer involved when the liquidator himself was occupying the position of an agent or a trustee of the contributories or shareholders and (2) there was no way by which the sale value or realisation value of the asset, namely the share, can be computed, since there was no sale at all of the share in a liquidation.
7. Both those handicaps were removed by Parliament by introducing the two fictions which are embedded in s. 46(2) of the Act. But notwithstanding the introduction of these statutory fictures in the scheme of capital gains taxation as respects dividends distributed to a shareholder by a liquidator, neither s. 46(2) nor any other provision under the capital gains chapter declares that any share held by a shareholder, irrespective of whether the share was held as trading stock or otherwise, shall be dealt with as capital assets. In the absence of a fiction dealing with all shares of all shareholders as capital assets, the reliance placed by the ld. counsel on the R. M. Amins case : 106ITR368(SC) (supra) cannot assist him in sustaining the order of the Tribunal in his favour.
8. We are satisfied that on the terms of the definition of the expression 'capital assets' which excludes trading stock and on the clear finding of the Tribunal that the assessees were share dealers and also from the uncontradicted fact that even the Indian Bank share in question continued to remain part of the trading stock of the assessee, the one and the only proper way to deal with the receipts from the liquidator was to include them in the trading profits chargeable under the head 'business'. They were rightly so charged by the ITO. The Tribunal was in error upsetting that assessment. Our answer to the question of law in these two cases is against the assessee and in favour of the department. The assessee in T.C. No. 311 of 1978 will pay the costs of the department. Counsels fee Rs. 500.