Case: N. Bagavathy Ammal Vs. Commissioner of Income Tax, Madurai &amp; Another

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 within the meaning of Section 12-B of the Act. 8. Section 45(1) of the 1961 Act which substantially corresponds with Section 12-B of the 1922 Act continues to provide that: "Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as the otherwise provided in Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H 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". 9. The words capital assets has been defined in Section 2(14) of the Act which as it stood at the relevant time, that is prior to its amendment in 1972, provided: "2. In this Act, unless the context otherwise requires(14) "Capital assets means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include,(i)........................................(ii) agricultural land in India10. It has been held by this Court that the principle of Madurai Mills that a distribution of assets of a company in liquidation does not amount to a transfer continues to apply to the 1961 Act. (See Commissioner of Income Tax vs. R.M. Amin; 1977(1) SCC 691, 696).11. The view of Madurai Mills Co. Ltd. (supra) has also been statutorily affirmed in Section 46(1) which provides:46. (1) Notwithstanding anything contained in section 45, where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of section 45.12. In other words a distribution is drawn between a "transfer" of assets and a distribution of assets of the company on liquidation. Where there is transfer of assets and not a distribution on liquidation then having regard to Section 47(viii) which provides that "Nothing contained in Section 45 shall apply to following transfers:(viii) any transfer of agricultural land in India effected before the 1st day of March 1970". it may have been argued at least on behalf of the Company that the transfer having been concluded in 1969 was exempt from capital gains. This argument, however, is not available to the shareholders who receive assets from the company on distribution consequent upon liquidation because of Section 46(2) which was introduced to make the receipts of assets from a company liquidation by its share holders a taxable event for the first time. Section 46(2) provides: "46(2) 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 the amount assessed as divided 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 the consideration for the purposes of section 48". 13. The question is does the words assets in Section 46(2) mean capital assets as defined in Section 2(14) of the Act? If it does then, it is conceded by the Revenue, there is no question of subjecting the agricultural lands received by the assessees from the company in liquidation to capital gains. 14. Indisputably the object in introducing Section 46(2) was to overcome the reasoning in Madurai Mills by broadening the base of the incidence of capital gains and expressly providing for receipt of assets of a company in liquidation by a shareholder as a taxable event. 15. Section 46(2) is in terms an independent charging Section. It also provides for a distinct method of calculation of capital gains. As said in C.I.T. vs. R.M. Amin (supra): "The aforesaid 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 of 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." 16. The Section does not make any reference to capital assets either in connection with the imposition of capital gains tax nor its computation. 17. Having referred to capital assets in Section 45(1), 47 and 48, Parliament appears to have deliberately chosen to use the ward asset in Section 46(1) and (2), the ostensible intention being to bring assets of all kinds within the scope of the charge. It is not necessary to refer to a dictionary to hold that capital assets and assets as used in Sections 45(1) and 46 respectively did not overlap then there was no need to provide for a non obstante clause in Section 46(1) with reference to Section 45. As correctly held by the High Court, agricultural land would have been a capital asset but for the exclusion from the definition of capital asset and what is not a capital asset may yet be an asset for the purposes of S.46(2).18. Therefore, to the extent that a shareholder assessee receives assets whether capital or any other from the company in liquidation, the assessee is liable to pay tax on the market value of the assets as on the date of the distribution as provided under Section 46(2). That appears to be the plain meaning of the section and we see no reason to construe it in any other fashion. The invocation of Section 2(14) of the Act which defines "Capital asset" is as such unnecessary for the purpose of construing Section 46(2).

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]17. Having referred to capital assets in Section 45(1), 47 and 48, Parliament appears to have deliberately chosen to use the ward asset in Section 46(1) and (2), the ostensible intention being to bring assets of all kinds within the scope of the charge. It is not necessary to refer to a dictionary to hold that capital assets and assets as used in Sections 45(1) and 46 respectively did not overlap then there was no need to provide for a non obstante clause in Section 46(1) with reference to Section 45. As correctly held by the High Court, agricultural land would have been a capital asset but for the exclusion from the definition of capital asset and what is not a capital asset may yet be an asset for the purposes of S.46(2).18. Therefore, to the extent that a shareholder assessee receives assets whether capital or any other from the company in liquidation, the assessee is liable to pay tax on the market value of the assets as on the date of the distribution as provided under Section 46(2). That appears to be the plain meaning of the section and we see no reason to construe it in any other fashion. The invocation of Section 2(14) of the Act which defines "Capital asset" is as such unnecessary for the purpose of construing Section 46(2).