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

. The appellants in the two appeals which are disposed of by this judgment are sisters. They were share holders in M/s Palkulam Estate (Private) Ltd., Nagarcoil (referred to hereafter as the Company). The Company went into liquidation in 1964. Pursuant to a compromise decree dated 22nd December, 1969 in litigation between the assessees and their brother (who was also a share holder in the company), and the company represented by the liquidator, the assets of the company which included agricultural lands were distributed to the appellants and eight others. The compromise decreeCourt doth further order and decree that as far as liabilities of Palkulam Estate Private Limited is concerned, the immovable properties be and hereby are distributed as indicated in Schedule A of the Compromise. The respondent 1 to 5 and respondents 9 to 11 do get leased portions as shown in the plans, signed by liquidator Mr. K.M. Boothalingam Pillai and handed over to the appellant this day.The appellants thereby received 479.89 acres of the agricultural lands prior to the end of the relevant accounting year that was 31.3.70. The assessment in respect of the year 1970-71 had been completed on 27.2.71. The Income Tax Officer reopened the assessments under Section 148 of the Act. The appellants filed their returns in respect of the two notices under Section 148. The contention of the appellants that in terms of the definition of assets in Section 2(14), agricultural lands were entitled to be excluded while computing capital gains on assets received by the shareholder from a company in liquidation under Section 46(2) was not accepted. According to the assessing officer, Section 46(2) refers only to money received on liquidation or the market value of the assets on the date of distribution and it was immaterial whether the asset was agricultural lands or otherwise. The value of the share of agricultural lands transferred to each appellant was, therefore, included as income subject to capital gains and subjected to tax. The assessees-appeals before the Commissioner of Income Tax (Appeals) were allowed by holding that the scope of Section 46(2) would have to be read in the light of the definition of the word capital asset in Section 2(14) and that "having exempted agricultural lands from capital gains under the general provision, it was difficult to interpret Section 46(2) as including agricultural land". The action of the Income Tax Officer in charging the income of the distribution of agricultural lands as capital gains under Section 46(2) of the Act was accordingly set aside.4. The Revenue appeals before the Tribunal. The Tribunal dismissing the Revenues appeala combined reading of Section 45, 46(2) and 48 it will be clear, according to our opinion, that assets mentioned in Section 46(2) would mean capital assets. In as much as Section 47(viii) exempts transfer of agricultural lands from capital gain tax under Section 45, we agree with the Commissioner of Income Tax Appeals) in coming to the conclusion that it is difficult to interpret Section 46(2) as including agricultural lands which is outside the scope of the Income Tax".Of the two questions referred to the High Court by the Tribunal under Section 256(1) at the instance of the Revenue only one survives for our decision. The second question was not pressed before the High Court. The first question whichon the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assets mentioned in section 46(2) would mean capital asset as defined in section 2(14) and that consequently, the value of agricultural lands received by the assessee on the liquidation of Palkulam Estate (P) Ltd. cannot be charged to tax under section 46(2) of the Income Tax Act,answered by the High Court against the assessees and in favour of the Revenue. The High Court construed the provisions of Section 46(2) and held, reversing the decision of the CIT(A) and the Tribunal, that the definition of capital assets under Section 2(14) of the Act is not of any relevance for the purpose of construing Section 46(2) of the Act, and the fact that agricultural lands to the extent provided in Section 2(14)(c) of Act are excluded from the definition did not have any impact on the taxability of the market value of the agricultural lands received by the assessee on the distribution of the assets of a company in liquidation.

Court's reasoning:
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).