Appeal No 51 of 1972
From the judgment and order dated the 16th Oct 1970 of the
Gujarat High Court in IT Ref
No 4 of 1967 221 VS Desai J Ramamurthi and Girish Chandra for the appel lant
B Sen Mrs 4
K Verma KJ John and Shri Narain for the respondents
Judgment of the Court was delivered by KHANNA J
This appeal on certificate is against the judgment of Gujarat High Court whereby the High Court an swered the following question referred to it under section 2561 of the Income tax Act 1961 hereinafter referred to as the Act of 1961 in favour of the assessee respondent and against the revenue 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 247 of the Income tax Act 1961  The matter relates to the assessment year 1962 63 for which the accounting previous year was calendar year 1961
The assessee who is an individual held 192 shares of Kawelengoji Ginneries Ltd Kampala a private limited company incorporated in Uganda hereinafter referred to as the Uganda company
Those shares were acquired by the assessee sometimes before January 1 1954 and he paid Sh
1000 for each share
The amount thus paid by the assessee for the 192 shares was Sh
192000 equivalent to Rs28000
The said company went into voluntary liquidation as per special resolution dated July 10 1961
The liquida tors sold the assets of the company in due course and the liquidators account was finally drawn up on July 31 1961
As per this account the assessee became entitled to receive Sh
468489 at the rate of Sh
24400493 per share as return of capital
The above amount was equivalent to Rs312326
There was thus an excess of Rs184326
This amount was received by the assessee during the accounting year
The Income tax Officer treated the amount of Rs184326 as capital gains liable to tax within the meaning of section 45 of the Act of 1961
It was pointed out by him that the Uganda company was not a company within the meaning of section 217 of the Act of 1961 and the shareholders thereof could not be said to be entitled to the benefit provided under section 462 of the Act of 1961
Accord ingly the entire amount was liable to be taxed as above
On appeal before the Appellate Assistant Commissioner refer ence was made on behalf of the assessee to the definition of the word transfer in section 247 of the Act of 1961
according to which 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 thereof under any law
There was no dispute that the present was not a case of sale exchange or compulsory acquisition of capital asset within the meaning of section 247 of the Act of 1961
The only question was whether there was relinquishment of the asset or the extinguishment of any rights therein
The Appellate Assistant Commissioner held that for the relinquishment of an asset the asset must 222 continue to be in existence
Applying that criterion the Appellate Assistant Commissioner held that there was no relinquishment of the asset
There was however in the opinion of the Appellate Assistant Commissioner extinguish ment of the rights in the capital assets as represented by the shares and therefore the amount was liable to be taxed to capital gains tax
The appeal of the assessee was ac cordingly dismissed
On second appeal the assessee apart from contesting the taxability of the amount of Rs184326 as capital gains raised two other contentions
One of those contentions was that in any event the capital gains should have been computed by deducting the fair market value of the asset as on January 1 1954 from the amount received by the assessee
The other contention was that having regard to the provisions of section 114 of the Act of 1961 the levy of capital gains tax should have been much less than the amount actually calculated by the Income tax Officer
We are in the present case not concerned with the second con tention
The first of these two contentions was however accepted and it was held that taking into account the value of the shares as on January 1 1954 the capital gain if chargeable would work out to be Rs123590
The Tribunal then went into the question as to whether there was transfer of capital assets and came to the conclusion that there was no such transfer within the meaning of section 247 of the Act of 1961
The contention of the revenue that there had been extinguishment of the rights of the assessee was re pelled
In the result the appeal of the assessee was ac cepted
On the application made by the appellant the question reproduced above was then referred to the High Court
The High Court in answering the question referred to it in the negative held that the transfer contemplated by section 45 should be one as a result of which consideration is received by the assessee or accrues to him
When a shareholder receives moneys representing his share on dis tribution of the net assets of the company in liquidation he in the opinion of the High Court 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 in the share
The High Court accordingly concluded that when a shareholder receives his share on final distribution of the assets of the company in liquidation there is no transfer of capital assets by him which would attract the charge of capital gains tax
The judgment of the High Court is reported in Before proceeding further we may mention that tax on capital gains was charged for the first time by the Income tax and Excess Profits Tax AmendmentAct 1947 Act 22 of 1947 which inserted section 12 B in the Indian Income tax Act 1922
It taxed capital gains arising after March 31 1946
The tax on capital gains was virtually abolished by the Indian Finance Act 1949 which confined the operation of section 12 B to capital gains arising before April 1 1948
Capital gains tax was
however
revived with effect from April 1 1957 by the Finance No which insert ed new section 12 B instead of the old section 12 B in the Act of 1922
223 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 that Act at the material time
Section 214 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 Section 217 of the Act to mean i any Indian company or ii any association whether incorporated or not and whether Indian or non Indian which is or was assesable or was assessed under the Indian Income tax Act 1922 XI of 1922 as a company for the assessment year commencing_from the 1st day of April 1947 or which is declared by general of special order of the Board to be a company for the purposes of the Act
The learned counsel for the parties are agreed that the Uganda company was not a company within the meaning of the word company as given in the above provision
Transfer in relation to a capital asset has been defined in clause 47 of section 2 of the Act and the definition reads as under 47 transfer  in relation to a capi tal asset includes the sale exchange or relinquishment of the asset or the extin guishment of any rights therein or the compulsory acquisition thereof under any law Section 45 deals with the levy of tax on capital gains and reads as under 45 Capital gains
Any profits or gains arising from the transfer of a capital asset effected in the previous year shall save as otherwise provided in section 53 and 54 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
 Section 45 deals with the levy of tax on capital gains and reads as by companies in liquidation reads as under 46
Capital gains on distribution of assets by companies in liquidation 1 Notwithstanding anything contained in section 45 where the assets of a company are dis tributed to its shareholders on its liquida tion such distribution shall not be regarded as a transfer by the company for the purposes of section 45
2 Where a shareholder on the liquidi sation 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 224 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 tire consideration for the purposes of section 48
 Section 47 specifies some of the transactions which shall not be regarded as transfers
Section 48 prescribes the mode of computation and deductions in the matter of tax on capital gains
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 we are concerned is whether those profits or gains arose from a transfer of the capital assets
The argument of Mr Desai learned counsel for the appellant is that when the assessee received the sum of Sh
468489 in lieu of the 192 shares held by him in the Uganda company he received that amount as a result of transfer
The word transfer in relation to a capital asset
according to the learned counsel includes extinguishment of any rights therein
The words extinguishment of any rights therein it is submitted would cover the case of the assessee when he received the amount mentioned above on account of the shares held by him in the Uganda company
The above conten tion has been controverted by Mr Sen who was urged that there was no transfer contemplated by law as to attract the levy of tax on capital gains
After giving the matter our earnest consideration we are of the opinion that the con tention of Mr Sen is well founded
The question as to whether the distribution of assets of a company has gone into voluntary liquidation to its share holder would amount to sale exchange relinquishment or transfer within the meaning of section 12 B of the Act of 1922 as amended in 1956 was considered by this Court in the case of Commissioner of Income tax Madras vs Madurai Mills Co Ltd1 While answering that question in the negative this Court held that the act of the liquidators in distrib uting the assets of the company which had gone into volun tary 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
This Court further observed When a shareholder receives money representing his share 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 above observations though made in the context of sec tion 12 B of the Act of 1922 which related to capital gains in respect of profits or gains arising from sale exchange
relinquishment or transfer of capital assets in our opin ion would also cover the case of extinguishment of any rights in capital assets
1 225 The matter can also be looked at from another angle
In the case of Indian companies and the other companies falling within the definition of company as given in section 217 of the Act of 1961 the legislature has made
express provision in sub section 2 of section 46 of the Act that 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 certain amounts which need not be specified
But for this provision it would not have been possible in our opinion to charge tax under the head Capital gains on the money or other assets of a company received by its shareholder on its liquidation
The provisions of sub section 2 of section 46 as already mentioned apply only to the distribution of assets by such companies in liquidation as are covered by the definition of the word company in section 217 of the Act
The legislature having made no similar provision in respect of companies other than those which fall within the definition contained in section 217 we find it difficult to sustain the levy of tax on capital gains when such other companies distribute assets on liquidation to share holders
We are not impressed by the argument of Mr Desai that section 462 does not create liability of a share holder to pay tax on capital gains which liability according to the learned counsel arises because of section 45 but was enacted with a view to prescribe the mode of calculating capital gains in the event of distribution of the assets of a company in liquidation to its share holders
The afore said section in our view was enacted
both with a view to make shareholders liable for payment of tax on capital gains as well as to prescribe the mode of calculating the capital gains to the shareholders on the distribution assets by a company in liquidation
But for that sub section as already mentioned it would have been difficult to
levy tax on capital gains to the shareholders on distribution of assets by a company in liquidation
Mr Desai took us through the legislative history of the provisions relating to the levy of tax on capital gains
A similar attempt was made by the learned counsel for the revenue in the case
of Madurai Mills supra and this Court observed that consideration stemming from legislative histo ry cannot be allowed to override the plain words of a stat ute
As a result of the above we dismiss the appeal with costs
PHP Appeal dismissed


Summary:
The respondent assessee acquired before 1 1 1954 certain shares in a private limited company incorporated in Uganda for Sh
192002 Rs128000 
The said company went into voluntary liquidation in the year 1961
The liquidators sold the assets of the company and the assessee received an amount equivalent to Rs312326 
The Income Tax Officer treated the difference between the amount received on liqui dation and the amount paid by the assessee for the acquisi tion of shares as capital gains liable to tax within section 45 of the Income Tax Act 1961
The Income Tax Officer held that since the Uganda company was not a company within the meaning of section 217 of the Act the assessee was not enti tled to the benefit of section 462 and therefore the entire amount was liable to
be taxed
On an
appeal the AAC held that the transaction amounted to a transfer within the meaning of section 247 because there was extinguishment of the rights in the capital assets as represented by the shares
The Tribunal held that it was not transfer within the mean ing of section 247
The High Court decided the reference in favour of the assessee on the ground that when a shareholder received monies representing his share on distribution of the net assets of the company in liquidation he receives such monies 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 in the share
Dismissing the appeal by certificate HELD 1 The Uganda company is not a company within the meaning of section 217
There was no transfer as contemplated by the Act to attract the
levy of capital gain tax
This Court in the case of Madurai Mills has already held that the act of liquidation 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
223 C 224 E F Commissioner of Income tax Madras vs Madurai Mills Co Ltd  followed
2 The legislature made express provisions in section 462 for levying capital gains tax in respect of distribution of assets of a company
But for the said provision distribution of assets on the liquidation of a company would not attract the capital gains tax under section 45
Since the Uganda company is not a company within the meaning of the Act the provi sions of section 462 do not apply to it
The said distribu tion therefore does not attract capital gains tax
Section 462 creates the liabality of a shareholder to pay the tax on capital gains and also prescribes the mode of calculat ing the capital gains
225 A F