Case: Vania Silk Mills Private Limited Vs. Commissioner of Income Tax, Ahmedabad

incorporeal 14. When the assets themselves are being distributed, it is correct to say that to the extent of distribution, they are wiped out. It is in that sense that the assets do not exist to the extent that they are distributed. When the companys assets are thus distributed, in a sense the assets which are converted into money and which, therefore, exist in the form of money are transferred from the liquidator to the shareholder. His rights in the assets come to an end when he receives his liquidated share of the asset. In such a case the assets do exist though in the converted form, viz., case and what is transferred is also the converted form of the asset. With respect, therefore, it is not correct to say that in such cases the capital asset does not exist and does not change hands as capital asset. That the receipt of his share in the asset brings about automatically the extinguishment of the shareholders rights in the asset cannot, however, be gainsaid. The decision of the Gujarat High Court in R.M. Amin case ( 1971 (82) ITR 194 (Guj)) was appealed against and this Court (CIT v. R.M. Amin, 1977 (1) SCC 691 : 1977 SCC(Tax) 234 ) while approving the ratio of the said decision further explained the nature of the money received by a shareholder on the liquidation of a company. This Court reiterating its earlier view in the case of CIT v. Madurai Mills Co. Ltd. ( 1973 (4) SCC 194 : 1973 SCC(Tax) 425 : 1973 (89) ITR 45 ) held that the act of the liquidator in distributing the assets of the company does not result in the creation of new rights. It merely recognises the legal rights which were in existence prior to the distribution. The shareholder receives money in recognition and satisfaction of his right and not by operation of any transaction which amounts to sale, exchange, relinquishment of asset or extinguishment of any of his right in such asset 15. So also when a partner retires from the partnership what he receives is his share in the partnership which is worked out and realised. It does not represent consideration received by him as a result of the extinguishment of his interest in the partnership assets. He has no share in any particular asset of the firm. Therefore, there is no transfer of interest in any particular asset of the firm on account of the receipt of his share by a retired partner. As held in CIT v. Mohanbhai Pamabhai ( 1973 (91) ITR 393 : (1973) 1 ITJ 55 (Guj)) no part of the amount received by the assessee as a retired partner is assessable to capital gains tax under Section 45 16. The High Court has explained these two decisions by giving reasons which do not appeal to us. The court has tried to distinguish them from the facts of the present case pointing out, firstly, that there was no foundation either in law or in fact to believe that the amount which the assessee received from M/s. Jasmine Mills was paid to it in satisfaction or in working out of its right if any, to recover damages under law or contract for the loss or damage caused to the machinery. We do not see any difficulty in holding that it was an amount received by the assessee as damages on account of the its machinery. It is difficult to describe it otherwise. The second reason given by the High Court is, with respect, equally fragile. It is held that the alleged right, if any, of the assessee to recover damages was not an absolute statutory right but one which was subject to a contract to the contrary and even if there was no such contract it was merely an inchoate or contingent right in respect of which some investigation or legal proceeding and settlement or adjudication would be necessary for its satisfaction or fulfilment. We do not agree with this reasoning as well. The facts clearly show that M/s. Jasmine Mills as a bailee had insured the machinery hired from the assessee, since it was liable to make good the loss of the machinery to the assessee. This is implied under a contract of bailment unless it is provided to the contrary. M/s. Jasmine Mills further admittedly paid the insurance amount pro rata to the assessee. In the circumstances, we are unable to appreciate the distinction sought to be made by High Court 17. We are also unable to see how it would make any difference to the point involved in the present case whether the Jasmine Mills had insured the assessees machinery as bailees or as agents of the assessee. There is further no dispute that the insurance policy contained the reinstatement clause requiring the insurer to pay the cost of the machinery as no the date of the fire. As we have pointed out earlier, in an insurance policy with the reinstatement clause, the insurer is bound to pay the cost of the insured property as on the date of the destruction or loss, and it matters very little if the amount so paid by the insurance company is invested for purchasing the destroyed asset or for any other purpose. In the circumstances, for the purposes of answering the question in hand, it was not necessary to inquire whether the amount received by the assessee was spent in replacement of the machinery or not18. For the reasons given above, the decision of the Allahabad High Court in CIT v. J.K. Cotton Spinning & Weaving Mills Co. Ltd. ( 1987 (164) ITR 18 : 1987 TaxLR 75) which proceeds on the same reasoning as the impugned judgment is also not a good law. Instead, we approve of the conclusion reached by the Madras High Court in C. Leo Machodo v. CIT ( 1988 (172) ITR 744 : 1988 Tax(LT) 1008 (Mad)) for the reasons given by us above

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 1

Reasoning from the judgment:
1[ds]11. It is true that the definition of "transfer" in Section 2(47) of the Act is inclusive, and therefore extends and transactions which may not otherwise be "transfer" according to its ordinary, popular and natural sense. It is this aspect of the definition which has weighed with the High Court and, therefore, the High Court has argued that if the words "extinguishment of any right therein" are substituted for the word "transfer" in Section 45, the claim or compensation received from the insurance company would be attracted by the said section. The High Court has, however, missed the fact that the definition also mentions such transactions as sale, exchange etc. to which the word "transfer" would properly apply in its popular and natural import. Since those associated words and expressions imply the existence of the asset and of the transferee, according to the rule of noscitur a sociis, the expression "extinguishment of any rights therein" would take colour from the said associated words and expressions, and will have to be restricted to the sense analogous to them. If the legislature intended to extend the definition to any extinguishment of right, it would not have included the obvious instances of transfer, viz., sale, exchange etc. Hence the expression "extinguishment of any right therein" will have to be confined to the extinguishment of rights on account of transfer and cannot be extended to mean any extinguishment of right independent of or otherwise than on account ofThe amount received by the assessee-shareholder does not represent any consideration received by him as a result of the extinguishment of his rights in the shares. The share merely represents the right to receive money on distribution of the net assets of the company in liquidation and it is by satisfaction of the right, that the right is extinguished when such monies are received by the shareholder. The consideration presumes quid pro quo and, therefore, transfer of the property or of the right in the property, whether the property is corporeal orWe are also unable to see how it would make any difference to the point involved in the present case whether the Jasmine Mills had insured the assessees machinery as bailees or as agents of the assessee. There is further no dispute that the insurance policy contained the reinstatement clause requiring the insurer to pay the cost of the machinery as no the date of the fire. As we have pointed out earlier, in an insurance policy with the reinstatement clause, the insurer is bound to pay the cost of the insured property as on the date of the destruction or loss, and it matters very little if the amount so paid by the insurance company is invested for purchasing the destroyed asset or for any other purpose. In the circumstances, for the purposes of answering the question in hand, it was not necessary to inquire whether the amount received by the assessee was spent in replacement of the machinery or not18. For the reasons given above, the decision of the Allahabad High Court in CIT v. J.K. Cotton Spinning & Weaving Mills Co. Ltd. ( 1987 (164) ITR 18 : 1987 TaxLR 75) which proceeds on the same reasoning as the impugned judgment is also not a good law. Instead, we approve of the conclusion reached by the Madras High Court in C. Leo Machodo v. CIT ( 1988 (172) ITR 744 : 1988 Tax(LT) 1008 (Mad)) for the reasons given by us above