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Judgment
Bhagwati, J.—This reference raises a very interesting question of law relating to the construction of section 45 read with section 2(47) of the
Income Tax Act, 1961. The question is whether a certain amount received by the assessee on liquidation of Kowolongojo Cinneries Ltd.,
Kamplal, a private limited company incorporated in Uganda (hereinafter referred to as the Uganda company), in respect of 192 shares held by him
in that company to the extent to which it exceeded the value of those shares on 1st January, 1954, represents capital gain within the meaning of
section 45 read with section 2(47) of the Act. The assessee held, in the share capital of the Uganda company, 192 shares of the aggregate face
value of shillings 1,92,000 that is , Rs. 1,28,000. The Uganda company went into voluntary liquidation by a special resolution dated 10th July,
1961, and in the liquidation, the assets of the Uganda company were sold by the liquidator and after payment of debts and liabilities, the final
account in respect of liquidation was drawn up by the liquidator on 31st August, 1961. The assessee, according to the statement of the case,
became entitled to receive shillings 4,68,489 at the rate of shillings 2,440.0492 per share as and by way of return of capital in respect of 192
shares held by him, the equivalent in terms of Indian currency being Rs. 3,12,326. The assessee thus obtained an excess of Rs. 1,84,326 over the
aggregate face value of the said 192 shares. The revenue sought to treat the amount of Rs. 1,84,326 as capital gain chargeable to tax u/s 45 on the
ground that it was profit or gain arising from relinquishment of a capital asset or the extinguishment of any rights in it within the meaning of section
2(47). Both the Income Tax Officer and, in appeal, the Appellate Assistant Commissioner took the view that the amount of Rs. 1,84,326
represented capital gain and was taxable as such u/s 2(47). The assessee thereupon preferred an appeal to the Tribunal and before the Tribunal
two contentions were advanced on behalf of the assessee : the first related to the applicability of section 45 read with section 2(47), and the other
related to the quantum of the capital gain in case it was found that capital gain chargeable to tax had arisen to the assessee. The Tribunal took the
view, disagreeing with the Income Tax Officer and the Appellate Assistant Commissioner, that the amount of Rs. 1,84,326 did not arise to the
assessee from relinquishment of any capital assets or extinguishment of any rights in it and there was, therefore, no capital gain chargeable to tax u/s
45 and that in any event even if any capital gain arose to the assessee which was taxable, it was only in the sum of Rs. 1,23,590 representing the
difference between the amount received by the assessee in respect of 192 shares and the value of those shares on 1st January, 1954., The
Commissioner was obviously dissatisfied with the view taken by the Tribunal and he, therefore, brought the present reference to this court
challenging the decision of the Tribunal.
There are two sections in the Act which levy the charge of capital gains tax. The first is section 45 which is the general charging section. It says
that :
Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53 and
54, be chargeable to Income Tax under the head ''capital gains'' and shall be deemed to be the income of he previous year in which the transfer
took palace.
The word ""transfer"", occurring in this section, is defined in section 2(47) in relation to a capital asset to include ""the sale, exchange or
relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law."" Section 46(1) and 47
carve out certain exceptions from the general rule of chargeability enacted in section 45. Section 47 is not material for our purpose but section
46(1) provides that 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 purpose of section 45. Section 46(2) is another charging
provision but that is applicable only in a certain specified situation. It deals with the case where a shareholder, on the liquidation of a company,
receives any money or other assets from the company and provides that in such a case :
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 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 the consideration for the purpose of section 48.
Now on a superficial reading, this provision would seem to cover the present case, for here also, the assessee received shilling 4,68,489 that is,
Rs. 3,12,326, as a shareholder of the Uganda company on its liquidation but if we look at the definition of ""company"" in section 2(17), it becomes
clear that this provision can have no application in the present case. The Uganda company was admittedly not a company within the meaning of the
definition in section 2(17) and the assessee could not be held chargeable to tax u/s 46(2) in respect of the moneys received by him on the
liquidation of the Uganda company. This indeed was not disputed by the learned Advocate-general on behalf of the revenue. But his contention
was that the present case fell within the scope and ambit of the general rule as to chargeability, enacted in section 45 and the difference between
shilling 4,68,489, that is Rs. 3,12,326, received by the assessee on liquidation of the Uganda company in respect of his 192 shares and the amount
representing the value of those shares on 1st January, 1954, was assessable to tax as profit or gain arising to the assessee from the transfer of
those shares which were his capita assets. Now we will assume with the revenue that when the assessee received shillings 4,68,489 that is, Rs.
3,12,326, in respect of his 192 shares on the liquidation of the Uganda company, profit or gain arose to him : but the question is, whether such
profit or gain was the result of ""transfer of capita asset"" : was there a transfer of his 192 shares within the meaning of section 2(47) when he
received shillings 4,68,489, that is Rs. 3,12,326, in respect of those shares on the liquidation of the Uganda company. The learned Advocate-
General readily conceded with his usual fairness that this transaction did not involve any sale, exchange or relinquishment of 192 shares of the
assessee but he relied on the words ""extinguishment of any rights therein"" in section 2(47) and urged that these words which were not to be found
in section 12B of the old Act but which were introduced for the first time when the present Act was enacted were sufficiently wide to cover this
transaction. The question which, therefore, arises of consideration is as to what is the true connotation of the words ""extinguishment of any rights
therein"" : do they take in a case like the present where a shareholder receives moneys in respect of his shares on distribution of the net assets of a
company in liquidation ?
Before we examine the language of the provision it would be convenient first to ascertain the nature of the capital asset in respect of which
capital gain alleged to have arisen to the assessee is sought to be assessed. The capital asset here consists of 192 shares in the Uganda company
and it, therefore, becomes necessary to inquire what is the legal nature of a share. The word ""share"", as pointed out by Gower in his book on
Modern Company Law, third edition, at page 344 :
has become something of a misnomer for shareholders no longer share any property in common; at the most they share certain rights in respect of
dividends, return of capital on a winding up, voting, and the like.
Though for the purposes of the Sale of Goods Act a share is included in the definition of ""goods"" and it is in its true nature what the English law
calls, a chose-in-action which entitles its owner to certain rights in action as distinguished from rights in possession. What is the broad spectrum of
those rights in action is clear from the following passage from the judgment of Mukherjee J. in Chiranjitlal Chaudhari v. Union of India, where the
learned judge says :
His interest (that is, interest of a shareholder) is represented by the share he holds and the share is a movable property according to the Indian
Companies Act... Ordinarily, he is entitled to enjoy the income arising from the shares in the shape of dividends; the share like any other
marketable commodity can be sold or transferred by way of mortgage or pledge. The holding of the share in his name gives him the right to vote at
the election of directors and thereby take a part, though indirectly, in the management of the company''s affairs. If the majority of shareholders
sides with him, he can have a resolution passed which would be binding on the company and, lastly, he can institute proceedings for winding up of
the company which may result in a distribution of the net assets among the shareholders.
The share represents the interest of the shareholder in the company and this interest consists broadly of three distinct rights in action : (i) the right
to dividend out of the profits of the company; (ii) the right to attend and vote at meetings and thereby indirectly participate in the management of the
company; and (iii) the right to share in the distribution of the net assets on a winding up of the company. Vide Gower''s Company Law, page 349.
Now, the first two rights are available to a shareholder when the company is a going concern; they come to an end when the company goes into
liquidation. ON a winding - up of the company the third right becomes operative and by virtue of this right the shareholder becomes entitled to his
share on distribution of the assets of the company after satisfaction of its liabilities pari passu according to the rights and interests of the
shareholders in them. When the shareholder receives money or other assets representing his share on distribution of the net assets of the company
in liquidation, what he receive is in satisfaction of this right which belongs to him by virtue of his holding the share. The share held by him entitles
him to receive a share on distribution of the net assets of the company in liquidation according to the rights and interests of the shareholders and it is
in realization or fulfillment of this right, by way of working it out, that moneys or other assets representing his share in the distribution are received
by him. This right which inheres in him by virtue of his holding the share is entirely extinguished, buy the extinguishment takes place because it is
realised; it has fulfilled its purpose. Does such extinguishment of the right come within the ambit and coverage of section 2(47) ?
Section 2(47) gives a definition of the word ""transfer"" which occurs in the charging provision enacted in section 45. It is an inclusive definition. It
says that ""transfer"", in relation to a capita asset, shall include the sale exchange or relinquishment of the asset or the extinguishment of any rights
therein. Now there can be no doubt that the inclusive definition is intended to enlarger the meaning and connotation of the word ""transfer"". If we
look at section 12B of the old Act it sought to charge to tax profits or gains arising from the sale, exchange, relinquishment or transfer of a capita
asset. There was no definition on the word ""transfer"" in the old Act and it was, therefore, confined to its ordinary natural signification. But when the
present Act was enacted, the legislature adopted a slightly different legislative formula. It provided in the charging section that any profits or gains
arising from the transfer of a capita asset shall be chargeable to Income Tax and proceeded to give an inclusive definition of the word ""transfer"" as
used in the charging section. Now the word ""include"" in ordinarily used ""in order to enlarge the meaning of words or pharases occurring in the body
of the statute; and, when it is so used, these words or phrases must be construed as comprehending, not only such things as they signify according
to their natural import, but also those things which the interpretation clause declares that they shall include"". It gives an extended statutory meaning
to the word defined which is in addition to its ordinary popular and natural sense. Now sale and exchange would clearly be covered by the
ordinary natural meaning of the word ""transfer"" but relinquishment would not be so covered as held by the Supreme Court in Commissioner of
Income Tax v. Provident Investment Co. Ltd. The legislature, therefore, included relinquishment within the definition of ""transfer"" by an artificial
extension of the meaning of that word. Similarly, the legislature also introduced extinguishment of any rights in a capital asset within the artificial
definition of ""transfer"" so as to enlarge the meaning and content of the word ""transfer"" for the purpose of section 45. When the right in a capital
asset is extinguished and the right ceases to exist, it is difficult to assimilate this process to the juridical concept of transfer, for transfer a ordinarily
understood postulated the continued existence of the subject-matter transferred so that what belonged to one proper to the transfer vests in
another as a result of the transfer. To call extinguishment of a right in a capital asset as a transfer would be doing violence to the language but that is
expressly authorised by the inclusive definition of ""transfer"". The question is to what extent does this artificial definition go and how much does it
comprise ? The assessee contended that he crucial word in the expression ""extinguishment of any rights therein"" was ""therein"" : it postulated the
continued existence of the capital asset in which the rights are extinguished. The argument was that it was only if the capita asset continued to exist
that extinguishment of any rights in it could be regarded as ""transfer"" within the meaning of the inclusive definition. Here, the rights of the assessee in
his 192 shares were extinguished when he received his share in the distribution of the net assets of the Uganda company but simultaneously with the
extinguishment of the rights, the capital asset, namely, 192 shares, also became extinct and this transaction was, therefore, not covered by the
words ""extinguishment of any rights therein."" This argument was sought to be supported by reference to certain observation made in Mr.
Palkhivala''s book on Income Tax, sixth edition, at page 491, where the learned author says : ""... but the better view is that it does not involve
''extinguishment of any rights therein'' which expression seems to indicate the continued existence of the capital asset over which the rights of its
holder are extinguished"". We do not think this argue its well-founded. It seeks to read in the word ""therein"" much more than what it signifies. The
word ""therein"" undoubtedly refers to the capita asset mentioned earlier in the definition and what the expression ""extinguishment of any rights
therein"" contemplates in extinguishment of any rights in the capital asset. But the definition nowhere indicates that where the capita asset consists of
incorporeal property such as a chose-in-action and the bundle of rights which constitutes such incorporeal property is extinguished so that such
incorporeal property ceases to exist, the expression ""extinguishment of any rights therein"" should have no application. The words used by the
legislature are ""extinguishment of any rights"" and the word ""any"" is a word which ordinarily excludes limitation or qualification and it should be give
as wide a construction a possible, unless of course, there is any indication in the subject-matter or context to limit or qualify the ordinary wide
construction of that word. Vide the observations of Williams J. in Victorian Chamber of Manufacturers v. Commonwealth. There being no
contrary intention in the subject-matter or context, the words ""any rights"" must include all rights and, therefore, where a capital asset is incorporeal
property consisting of nothing but a bundle of rights and all such rights are extinguished, the words ""extinguishment of any rights therein"" would be
satisfied. The word ""therein"" means nothing more than ""in the capital asset"" and all that the definition requires is that there must be extinguishment of
rights the capital asset. It does not go further and say that despite extinguishment of the rights in the capita asset, the capital asset must continue to
exist. The continued existence of the capital asset is not a necessary since qua non even of the ""relinquishment"". Where, for example, as in the case
of Provident Investment Company a managing agency is relinquished by the assessee, the managing agency being a capital asset, there would be
relinquishment of the capital asset but on relinquishment, the capital asset would cease to exist. It is, therefore, not possible to accept the contention
of the assessee that the present transaction is not covered by the expression ""extinguishment of any rights therein"" on the ground that the capital
asset, namely, 192 shares, ceased to exist when the assessee received his share on final distribution of the net assets of the Uganda company.
But even so the question still remains to be considered whether the present transaction would fall within the expression ""extinguishment of any
rights therein"" so as to amount to transfer of a capital asset within the meaning of section 2(47). Now it is well settled that every statute must be
construed ex vigoenibus actus, that is within the four corners of the Act. When the court is called upon to construe the terms of any provision found
in a statute the court should not confine its attention only to the particular provision which falls for consideration but the court should also consider
other parts of the statute which throw light on the intention of the legislature and serve to show that the particular provision ought not to be
construed as if it stood alone and apart from the rest of the statute. Every clause of a statute should be construed with reference to the context and
other clauses of the statute so as, as far as possible, to make a consistent enactment of the whole statute. Bearing in mind this well known rule of
interpretation let us examine the scheme of taxation of capital gains of which section 45 forms a vital provision. Section 45 provides that any profits
or gains arising from the transfer of a capital asset in the previous year shall be chargeable to income tax under the head ""capital gains"". But what is
the meaning of the words ""profits or gains arising from the transfer of a capital asset ?"" How are they to be computed ? Section 48 says that the
income chargeable to tax as ""capital gains"" shall be computed by deducting from the ""full value of the consideration received or accruing as a result
of the transfer of the transfer of the capital asset"" the following amounts namely : (i) expenditure incurred wholly and exclusively in connection with
such transfer; and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. The amounts specified in clauses (i) and
(ii) are to be deducted from the ""consideration received or accruing as a result of the transfer of the capital asset"" for the purpose of determining
the profits or gains chargeable to tax. The transfer that is contemplated by section 45 read with section 2(47) is therefore a transfer as a result of
which consideration is received by the assessee or accuse to the assessee. Substituting the words ""extinguishment of any rights in the capital asset
for the words ""transfer of the capital gains must therefore be such that consideration is received by the assessee or accrues to the assessee as a
result of the extinguishment of the rights in the capital asset. There must be an element of consideration for the extinguishment of the rights in the
capital asset. Then only would it be a transfer exigible to capital gains tax. Now, as we have already pointed out above when a shareholder
receives money representing his share on distribution of the net asset of the company in liquidation he receives such money in satisfaction of the
right in the share. The share merely represents the right to receive money on distribution of the net assets of the company in liquidation and that
right is satisfied and by satisfaction extinguished when such moneys are received by the shareholder. Such money received by the shareholder do
not represent any consideration received by his as a result of the extinguishment of his rights in the share. It is not the extinguishment of his rights in
the share for which consideration is received by him : it is rather because moneys representing his share in the distribution are received by him that
his rights in the share are extinguished. We are therefore, of the view that when a shareholder receives his share on final distribution of the net
assets of the company in liquidation there is no transfer of capital asset by him which would attract the charge of capital gains tax u/s 45.
There is also inherent evidence in the Act to show that the view we are taking is the correct on. It is only on the postulate of the correctness of
this view that the enactment of section 46(2) can be explained. The view canvassed on behalf of the revenue would render section 46(2) super
fluous and meaningless. If a case where a shareholder on liquidation of a company receives any money or other assets of the company is already
covered by section 45 read with section 2(47) as contended on behalf of the revenue there is no reason why the legislature should have indulged in
the futile exercise of enactment of section 46(2). It is well settled that a construction which imputes to the legislature tautology or superfluity in the
use of language must as far as possible be avoided. The court should always prefer a construction which will give some meaning and effect to
futility. It is only by interpreting section 45 read with section 2(47) in the manner in which we have done that we can give meaning and effect to
section 46(2). The learned Advocate-General faced with this difficulty sought to extricate the revenue out of it by saying that section 46(2) was not
intended to be a charging provision bringing to tax profits or gains which would otherwise have been outside the net of taxation cast by section 45
but it was enacted for the benefit of the assessee with a view to excluding from the money or other assets revived by the assessee on the liquidation
of the company, the amount assessed as ""dividend"" within the meaning of section 2(22)(c) so that the assessee may not suffer double taxation in
respect of the same amount of once by including it in the amount of capital gain u/s 45 and again by including it as ""dividend"" in section 2(22)(c).
But this argument ignores the language as well as the setting of the provision in section 46(2). Section 46 is not a section intended to provide the
mode of computation of capital gain. That function is entrusted by the legislature to other sections namely, sections 48 to 56. Section 46(1) carves
out an exception from the general rule as to chargeability enacted in section 45 while section 46(2) bring within the net of taxation transaction which
would not otherwise fall within it u/s 45. One sub section performs the function of exclusion while the other performs the function of inclusion. If the
intention of the legislature were merely to provide the mode of computation in a case falling within section 46(2) so as to avoid double taxation of
the same amount the legislature need not have used word appropriate to a charging provision namely, ""he shall be chargeable to income tax under
the head ''capital gains'' in respect of the moneys so received or the market value of the other assets on the date of distribution"". It would have
been sufficient for the legislature to introduce a special provision in regard to computation of capital gain in any of the succeeding section. The
enactment of section 46(2) therefore clearly supports the construction which we are inclined to place on section 45 read with section 2(47).
We are therefore, of the view that there was no transfer of capital asset within the meaning of section 45 read with section 2(47) when the
assessee received shillings 4,68,489, that is Rs. 3,12,326 on final distribution of the net assets of the Uganda company. Our answer to the question
referred to us for out opinion must accordingly be in the negative. The Commissioner will pay the costs of the reference to the assessee.