Commissioner of Income Tax vs G. Rajam and Another

Balasubrahmanyan, J.—These two references deal with two dealers in company shares. This means that company shares are their stock-in-

trade. They were being assessed to Income Tax on the profits they were making year by year in the purchase and sales of shares as stock-in-

trade. Some of the shares they held were in the Indian Bank Limited. Consequent on the nationalisation of the Bank, the Indian Bank Limited went

into liquidation. The liquidator paid over to these two assessees certain sums as"" dividends"" in the winding up. In one case the amount was Rs.

3,376 and in the other it was Rs. 1,124.

The assessees claimed before the ITO that these amounts must be assessed under the head ''Capital gains''. The Officer rejected this claim on

the score that the assessees were dealers in shares and the Indian Bank shares were part of their stock-in-trade and nonetheless so for the fact that

the company was under liquidation. He accordingly included the dividends distributed by the liquidator as part of the business profits of the two

assessees assessable under the head ''business''.

On appeal, the Tribunal accepted the position that the two assessees were dealers in shares and that the shares they held in the several

companies were really trading stock and cannot be treated as capital assets. They also held that the Indian Bank shares which they held were part

of their stock-in-trade. Nevertheless, the Tribunal held that the decision of the Gujarat High Court in Commissioner of Income Tax, Gujarat II Vs.

R.M. Amin. (Legal representative of the Late Chunibai Amin), compelled them to hold that the receipts from the liquidator can only be brought to

charge under s. 46(2) of the IT Act, 1961. In that view, they disagreed with the head of assessment under which the two amounts were brought to

charge and directed the Officer to amend the assessment.

In these references at the instance of the CIT, the question of law is whether the amounts of Rs. 3,376 and Rs. 1,124 were liable to tax only

under the head ''Capital gains'' in terms of s. 46(2) of the IT Act, notwithstanding that the assessees were dealers in shares.

The question of law which we have drawn up above is a combined version of the two different questions of law referred to us in the two cases.

It is easy to see that the answer to the question is very much to be found to the text of the question itself. Once it is granted that the assessees are

dealers in shares and the shares in question are part of their stock-in-trade, any receipt flowing therefrom can only be assessed as part of the

assessee''s trading profits. Section 46(2), no doubt, says that where a shareholder receives any money or assets from a company in liquidation, he

is to be charged to Income Tax under the head ""capital gains"" in respect of the money so received as representing the full value of the consideration

for the purpose of s. 48. Section 48 deals with the mode of computation of income chargeable under the head capital gains. The real charging

section which brings to charge capital gains is s. 45(1) which lays down that the tax under the head ""capital gains"" shall be charged on any profits

or gains arising from any transfer of a capital asset. The expression ""capital assets"" is defined by s. 2(14) of Act to include property of any kind

held by an assessee whether or not connected with his business or profession. But there is a specific exclusion from this definition of ""any stock-in-

trade, consumable stores or raw materials held for the purposes of his business or profession"". These assets, in other words, shall not be regarded

as capital assets for the purposes of the charge to capital gains. In this case, it is common ground that even during the previous year in which the

assessees received the dividends from the liquidator of the Indian Bank the Indian Bank shares were held by the assessees only as the trading

stock. There is no suggestion anywhere in the record that the assessees, by some process known to accountancy or revenue law, had converted

these shares from their character of stock-in-trade into bearing a new character, namely that of capital investments. It is also impossible that it

could have been so done, because at that time the company itself was in liquidation. An investment, normally, is one where income regularly flows

or is expected to flow or is expected to flow from an item of property or actionable claim. At the moment of liquidation, these shares have one

purpose alone to fulfill, namely to get the final dividends in the winding up before the dissolution of the company. Therefore, there is no possible

way by which these shares which had been acquired and held by these assessees as part of their trading stock could have been converted, by any

means known to law or accountancy as the assessee''s investments. They were continued to be held in the business of the assessees as stock-in-

trade. This, therefore, at once excludes them from the definition of capital assets. If they are not capital assets, there can be no question at all of

bringing to charge any dividends therefrom upon a winding up as the gains arising from capital assets under s. 45 read with s. 46(2) of the Act.

Mr. Srinivasan, ld. counsel for the assessee, cited the decision of the Supreme Court in R.M. Amin''s case (supra). This case went up on appeal

from the Gujarat High Court to the Supreme Court. The decision of the Supreme Court is reported as The Commissioner of Income Tax, Gujarat

II, Ahmedabad Vs. Shri R.M. Amin, L.R. of The Late Shri. Chunnibhai J. Amin, Baroda, . He relied particularly on the following passage of the

judgment of the Supreme Court :

Section 46(2) was enacted both with a view to making shareholders liable for payment of tax on capital gains as well as to proceeding the mode

of calculating the capital gains to the shareholders on the distribution of assets by a company in liquidation"".

With respect we entirely agree with the Supreme Court''s summation of the rationale behind s. 46(2). We agree that s. 46(2) was a legislative

measure introduced by way of neutralising the effect of an earlier decision of the Supreme Court in Commissioner of Income Tax, Madras Vs.

Madurai Mills Co. Ltd., . The provisions of s. 46(2) supplied two omissions which stood in the way of rendering receipts from the liquidator

capital gains in the hands of the concerned shareholder or contributory. The two obstacles were there was no question of any transfer involved

when the liquidator himself was occupying the position of an agent or a trustee of the contributories or shareholders and (2) there was no way by

which the sale value or realisation value of the asset, namely the share, can be computed, since there was no sale at all of the share in a liquidation.

Both those handicaps were removed by Parliament by introducing the two fictions which are embedded in s. 46(2) of the Act. But

notwithstanding the introduction of these statutory fictures in the scheme of capital gains taxation as respects dividends distributed to a shareholder

by a liquidator, neither s. 46(2) nor any other provision under the capital gains chapter declares that any share held by a shareholder, irrespective

of whether the share was held as trading stock or otherwise, shall be dealt with as capital assets. In the absence of a fiction dealing with all shares

of all shareholders as capital assets, the reliance placed by the ld. counsel on the The Commissioner of Income Tax, Gujarat II, Ahmedabad Vs.

Shri R.M. Amin, L.R. of The Late Shri. Chunnibhai J. Amin, Baroda, cannot assist him in sustaining the order of the Tribunal in his favour.

We are satisfied that on the terms of the definition of the expression ""capital assets"" which excludes trading stock and on the clear finding of the

Tribunal that the assessees were share dealers and also from the uncontradicted fact that even the Indian Bank share in question continued to

remain part of the trading stock of the assessee, the one and the only proper way to deal with the receipts from the liquidator was to include them

in the trading profits chargeable under the head ""business"". They were rightly so charged by the ITO. The Tribunal was in error upsetting that

assessment. Our answer to the question of law in these two cases is against the assessee and in favour of the department. The assessee in T.C.

No. 311 of 1978 will pay the costs of the department. Counsel''s fee Rs. 500.