Varadarajan, J. - This tax case arises out of a reference made by the Income Tax Appellate Tribunal, Madras Bench, under S. 256(1) of the Income Tax Act, 1961 at the instance of the Revenue. The question referred for the opinion of this Court is this :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law, in holding that the sum of Rs. 4,06,591/- received by the assessee from the Liquidator of the Bank of Chettinad, Limited, in the form of shares in Ms. Chettinad Company Private Ltd., in the year of account 1966-67 cannot be included in the chargeable income of the assessee under the head Capital gains ?
The assessee, the late M.A.M. Muthiah Chettiar now represented by his legal representatives, was a shareholder in the Bank of Chettinad Ltd., which held certain shares in the Chettinad Company Private Ltd., and which went into liquidation on 21-9-1965. Some of those shares were allotted to the assessee in the liquidation proceedings. Some more shares were allotted to some other share-holders, including another assessee C.T. Oppilal Achi. The actual paid up value of the shares in the Chettinad Company Private Ltd., received by the assessee was Rs. 4,50,836/-. The assessee, however, estimated the value of the shares at 50 per cent of the paid up value, taking the market value at 50 per cent and arrived at the sum of Rs. 2,28,918/-. The assessee deducted a sum of Rs. 1,47,000/- from that sum of Rs. 2,28,918/-, as representing the cost of acquisition of the shares in the Bank of Chettinad Ltd., and returned the balance of Rs. 81,918/- as capital gains. The income tax Officer, however, held that the sum was dividend within the meaning of S. 2(22)(c) the Income-tax Act, 1961, which says that 'dividend' includes.
'any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not'.
The assessee took up the matter before the Appellate Assistant Commissioner and contended that the sum of Rs. 81,918/- does not fall within the category of dividend in terms of S. 2(22)(c). The Appellate Assistant Commissioner issued a notice of enhancement under S. 251 of the Act to the Assessee on the ground that the amount was properly chargeable not under the head dividends but under the head capital gains and that as per the balance sheet of Chettinad Company Private Ltd., the break up value of the shares was not 50 per cent of the paid up value, as the assessee contended before the Income-tax Officer, but 79.92 per cent so that the value of the shares of Chettinad Company Private Ltd., received by the assessee in liquidation proceedings, was Rs. 4,06,591/-and not Rs. 2,28,918/- as taken by the assessee, and therefore the entire sum of Rs. 4,06,591/- should be taken as capital gains and assessed to tax. In his reply dated 12-6-1968 the assessee had no objection to the computation of the value of the shares shares of Chettinad Company Private Ltd., received by him at Rs. 4,06,591/-; but he contended that the receipt was not a capital gain in terms of S. 46(2) read with S. 2(47) of the Act on the ground that there can be no liability to tax on capital gains unless S. 45 of the Act is attracted since according to the assessee, S. 46(2) by itself was not a charging section and the transaction, namely, distribution of the shares in the liquidation proceedings, does not constitute transfer within the meaning of S. 2(47) of the Act. The Appellate Assistant Commissioner declined to accept that contention as correct, and he directed delection of the sum of Rs. 81,918/- as dividend and directed the Income-tax Officer to include the entire sum of Rs. 4,60,591/- as income from long-term capital gains.
2. The legal representatives of the assessee took the matter before Income-tax Appellate Tribunal, Madras Bench. The only question raised in the appeal before the Tribunal was whether the sum of Rs. 4,06,491/- representing the value of the shares received by the assessee in the liquidation proceedings relating to the Chettinad Bank Ltd., could be included in the assessees assessment as representing long term capital gains. The other assessee, Oppilal Achi, referred to above, approached the same Tribunal in I.T.A. No. 702/MDS/1969-70 in similar circumstances and the question in that appeal was about the assessability of Rs. 4,11,800/- by way of capital agains.
3. The Tribunal had considered a similar case in an earlier I.T.A. No. 4051 of 1968-69. There the Tribunal held that
'Capital gains are converted into taxable item of income by a fiction of legislation; the deeming provisions contained under the various headings in Chapter IV cannot be themselves be considered as charging sections; S. 4 alone is the charging section; deeming provisions like S. 45(1)(a) and 46((2) cannot be read in isolation; the definition of income in S. 2(24) refers of s. 45 but not to S. 46(2); thus, unless there is a capital gain within the meaning of S. 45(1) which is specifically contrary to the provision of S. 46(1), a 'capital gain cannot be brought to charge relating only upon S. 46(2); it is significant that S. 10(3)(1) relating to income not included in total income refers to capital gains chargeable under the provisions of S. 45 but not to capital gain chargeable under S. 46(2); reading all the provisions together the contention of the Department that there is a chargeable capital gain referable to the receipt by share holder on the liquidation of the company is not acceptable'.
In Oppilal Achis appeal (I.T.A. No. 702 (MDS)/1969-70) the Tribunal held in favour of the assessee and against the Revenue, observing :
'We have to be guided more by the language and scheme of the provisions than by the fact that the interpretation may be contrary to the intention of the Legislature as indicated by the provisions such as S. 46(2), certain portions of S. 47 and 49. The reason for coming to the conclusion that a charge is not created by the provisions of S. 46(2) and that therefore, there is no justification in including in the taxable income by way of capital gain any such referable to a receipt from the Liquidator of the company such as in the present case which have been set out in the earlier order of the Tribunal remain valid '.
At the instance of the Revenue, a reference was made to this Court in Oppilal Achi case in T.C. No. 231 of 1972.
4. The Tribunal allowed the appeal preferred by the legal representatives of the assessee in this case (I.T.A. No. 717 (MDS) 1969-70) by a short order, observing :
'The very same question relating to the assessee MIS. C.T. Oppilal Achi came up for consideration before the Tribunal in I.T.A. No. 702/MDS/1969-70 for the assessment year 1966-67. The Tribunal considered the question elaborately and came to the conclusion that any such referable to a receipt from the liquidation of a Bank is not taxable in view of S. 46(1). Following the decision of the Tribunal, we hold that it is not open to the taxing authorities to included the sum of Rs. 4,06491/- in the total income of the assessee by way of capital gains'.
During the pendency of the reference made at the instance of the Revenue in Oppilal Achis case in T.C. No. 231 of 1972, the decision in Commissioner of Income Tax Gujarat vs. R. M. Amin, was rendered by the Supreme Court. In that case the assessee, who was an individual, held 192 shares of Kawlengoji Ginneries Ltd., Kampala, a private Limited Company incorporated in Uganda, for short the Uganda Company. The Uganga Company went into voluntary liquidation, and during 1961 the previous year for the assessment year 1962-63, the assessee received a sum of Rs. 1,84,326/- in excess of the amount he had paid for those shares. The question in that case was whether the excess of Rs. 1,84,326/- was taxable as capital gains in the assessees hands under S. 45 read with S. 2(47) of the Act. The Supreme Court has observed that there can be no dispute that the amount received by the assessee in respect of the 192 shares of the Uganda Company held by him in excess of the cost of acquisition of those shares constituted profits or gains. The question with which the Supreme Court was concerned was whether those profits or gains arose from a transfer of the capital assets. The contention that there was no transfer contemplated by law as to attract the levy of tax on the capital gains was accepted by the Supreme Court. The question as to whether the distribution of assets of a company which has gone into voluntary liquidation to its share-holders related to sale, exchange, relinquishment or transfer within the meaning of S. 12-B of the 1922 Act as amended in 1956, was considered by the Supreme Court in Commissioner of Income-tax vs. Madurai Mills Co. Ltd. The Supreme Court answered that question in the negative and 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 but merely entitled recognition of the legal rights which were in existence prior to the distribution. The Supreme Court observed in that case :
'When a share holder receives money representing his shares on 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 amounts to sale, exchange, relinquishment or transfer'.
The Supreme Court observed in Amins case, referred to above, thus :
'In the present appeal we are, however, concerned with the Act of 1961. It may be appropriate at this stage to refer to the relevant provisions of the Act at the meterial time. S. 2(14) of the Act defined capital assets to mean property of any kind held by an assessee, whether or not connected with his business or profession but does not include certain categories of property which need not be mentioned as we are not concerned with them. It is the common case of the parties that the shares held by the assessee in the Uganda Company constituted capital asset. Company has been defined in S. 2(17) of the Act to mean :
(1) any Indian company, or
(2) any association, whether incorporated or not and whether Indian or non-Indian which is or was assessable or was assessed under the Indian Income-tax Act, 1922 (XI of 1922) as a company for the assessment year commencing on the 1st day of April, 1947 or which is declared by general or special order of the Board to be a company for the purposes of this Act'.
Ismail and Sethuraman, JJ., who heard the reference made in Oppilal Achis case in T.C. No. 231 of 1972, were of the opinion that as the status of the company is fundamental and basic to the applicability of S. 46(2) and that necessarily has to be investigated before S. 46(2) of the Income Tax Act could be applied, the question referred to the Court in that case, namely -
'Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that any received by the assessee from the Liquidator of the Bank of Chettinad Ltd. in the form of shares in M/s. Chettinad Company (P) Limited in the year of account relevant to the assessment 1966-67 cannot be included in the chargeable income of the assessee under the head capital agains ?'
cannot be answered one way or the other without a finding as to the status of the company and returned the reference without answering the question, and they directed the Tribunal to dispose of the appeal afresh in the light of the judgment of the Supreme Court in Amins case, referred to above, after recording a finding as to the status of the company, namely the Bank of Chettinad Ltd., as to whether it was a company as defined in S. 2(17) of the Income-tax Act, 1961 or not.
5. The question that the Bank of Chettinad Ltd., was not a company as defined in S. 2(17) of the Act was raised by the learned counsel for the assessee for the first time only before the learned Judges and it was contended that the matter will have to be investigated by the Tribunal for the purpose of applying the decision of the Supreme Court in Amins, case. The learned counsel for the Revenue contended that the question did not arise before the Tribunal, and, therefore, this Court will not be justified in directing the Tribunal to investigate the question. The learned Judges declined to accept that contention urged on behalf of the Revenue, since they thought that the basic requirement for the application of S. 46(2) of the Act is the status of the company, namely, whether it would fall within the definition of company in S. 2(17) of the Act or not.
6. Since the Tribunal disposed of the appeal relating to the assessee in the present case in its short order on the basis of its order in the appeal relating to the other assessee, Oppilal Achi, and the question referred to this Court at the instance of the Revenue in that case was found by this Court in T.C. No. 231 of 1972 as one which could not be answered one way or the other without a finding as to the status of the company, the same course has to be adopted in this case also and the Tribunal will have be hear the appeal afresh after recording a finding as to the status of the Bank of Chettinad Ltd., that is, whether it is a company as defined in S. 2(17) of the Income-tax Act, 1961, or not in the light of the judgment of the Supreme Court in Amins case and on Ismail and Sethuraman, JJ. in T.C. No. 231 of 1972. We do so and remand the matter to the Tribunal for fresh disposal and direct the parties to bear their respective costs of this reference. The Tribunal shall consider also whether the amount or any part of it was chargeable as 'dividend', if not as 'capital gains'.