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Judgment
Sethuraman, J.—Under s. 256(1) of the I.T. Act, the Income Tax Appellate Tribunal has referred the following two questions :
(1) Whether, on the facts and in the circumstances of the case, in computing the capital gains arising out of the receipt by the assessee of Rs.
15,168 from the liquidator of the United India Life Insurance Company during the accounting year ending December 31, 1969, chargeable u/s
46(2) of the Income Tax Act, 1961, the proportionate cost of acquisition of the shares held by the assessee in the said company attributable to the
said sum of Rs. 15,168 is to be deducted ?
(2) Whether, on the facts and in the circumstances of the case, the assessee was entitled for the deduction permissible u/s 80G of the Income Tax
Act, 1961, in respect of the donation of Rs. 5,000 made by it to ''S.R.M.M.C.T.M. TIRUPPANI TRUST'' for the assessment year 1970-71 ?
The assessee, a private limited company, held 80 fully paid-up shares in the United India Life Insurance Company Ltd. That company went into
liquidation after the life insurance business was nationalised. The liquidator distributed certain amounts to all the shareholders in the course of the
winding-up. The assessee received Rs. 40,000 on August 5, 1958, Rs. 32,000 on February 17, 1959, and Rs. 15,168 on September 16, 1969.
We are concerned here with the last amount.
In the assessment for the assessment year 1970-71, the ITO brought to tax the whole of Rs. 15,168 received by the assessee as capital gains
under s. 46(2) of the I.T. Act. The assessee filed an appeal before the AAC. Before the AAC the contention of the assessee was that the said sum
of Rs. 15,168 was not at all taxable. The AAC held that s. 46(2) of the Act clearly applied, and, therefore, rejected the assessee''s contention.
The assessee appealed to the Tribunal and before the Tribunal an additional ground was taken, namely, that in computing the capital gains Rs.
9,379, being the cost of acquisition of the said shares, should be deducted. The Tribunal, following a decision of this court in T.M. Rangachari and
Others Vs. Commissioner of Income Tax, held that the contention of the assessee that the sum of Rs. 15,168 was not taxable under s. 46(2) was
not correct. It went into the contention of the assessee that in computing the capital gains, the cost of acquisition of the shares in question should be
deducted. It was held that s. 46(2) itself provided for the application of s. 48 under which the cost of acquisition of the concerned capital asset
should be deducted and that in the present case such cost of acquisition had to be deducted from the amount received by the assessee. As,
however, the taxing authorities had not considered the question in the light of s. 48, the Tribunal directed the ITO to compute the capital gains in
accordance with its finding. Aggrieved by this order of the Tribunal, the Department has come on reference raising the first question extracted
earlier. We shall deal with the second question separately.
Mr. Jayaraman, learned counsel for the Commissioner, contended that s. 46(2) had been held by the Supreme Court to be a charging section
and that we have to look only into that provision. In his submission, there is a provision for deduction, of the amount taxed as dividend, from the
amount received and except the amount so mentioned there is no scope for a deduction of any other amount. In other words, his point was that the
cost of acquisition of the shares ought not to be taken into account in this case where there is no transfer of shares. It is this contention which
requires to be examined now.
In The Commissioner of Income Tax, Gujarat II, Ahmedabad Vs. Shri R.M. Amin, L.R. of The Late Shri. Chunnibhai J. Amin, Baroda, ,
dealing with s. 46(2) of the 1961 Act, the Supreme Court pointed out at p. 374 :
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.
In the absence of a similar provision, it was held by the Supreme Court in Commissioner of Income Tax, Madras Vs. Madurai Mills Co. Ltd., ,
in construing the provision of s. 12B of the Indian I.T. Act, 1922, that the distribution of the assets of a company in liquidation did not amount to a
transaction of sale, exchange, relinquishment or transfer so as to attract s. 12B and that no capital gains arose to the shareholders of the company
therefrom. Only because of this statutory position the first two amounts received in 1958 and 1959 were not taxed. This lacuna was filled up by
enacting s. 46(2). As it has now been ruled by the Supreme Court that s. 46(2) is a charging provision, we do not think it necessary to go into the
nature of the charge any further.
The point that remains to be considered is whether the assessee is eligible for the deduction of the cost of acquisition of the assets, namely, the
shares, which gave rise to the right to obtain the amounts distributed by the liquidator. Section 46 runs as follows :
(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.
(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 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.
It may be seen that s. 46(1) specifically takes the cost of a distribution to the shareholders on the liquidation of a company outside the scope of
s. 45. Sub-section (2) levies a charge on the amount received from the liquidator, independently of s. 45. That the charge is not on the gross
receipts from the liquidator is clear from the provision itself. It contemplates the deduction of the amount assessed as dividends applying s. 2(22)(c)
of the Act. That provision deems the distribution by the liquidator to be dividends in so far as the company had accumulated profits. In other
words, the liquidator is deemed to have distributed dividends out of the accumulated profits to the extent of the available accumulated profits. But
for the deduction of the said amount of dividends, it would have been possible to tax the gross amount received from the liquidator. This is the first
deduction that is admissible under s. 46(2) itself. The closing words of s. 46(2), namely, ""the sum so arrived at shall be deemed to be the full value
of the consideration for the purposes of section 48"" go to show that having arrived at the capital gains in this manner, we have to look to s. 48 for
the mode of computation and the further deduction available under that provision. The amount received from the liquidator as reduced by the
amount assessed as dividend is taken to be the full value of the consideration for the purpose of s. 48. Section 48 runs as follows :
The income chargeable under the head ''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 capital asset the following amounts, namely :
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.
The deductions envisaged under s. 48 are : (i) expenditure incurred wholly and exclusively in connection with the transfer of a capital asset; and
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. As s. 46(1) itself has provided that the distribution by the
liquidator should not be regarded as a transfer by the company for the purpose of s. 45, the question of any expenditure incurred wholly and
exclusively in connection with the transfer would not come in for consideration. Therefore, in the case of the special category of capital gains taxed
under s. 46(2) the only other deduction that is permissible is the cost of acquisition of the capital asset and the cost of any improvement thereto. In
order to see what the cost of acquisition or the cost of improvements is, it may be necessary to go into the other definition provisions in the same
group of sections. For our present purpose it is unnecessary to go into those provisions. It is enough to mention that s. 48 furnishes the method of
computation of capital gains in the case of receipts from the liquidator also.
We have already extracted the relevant passage from the judgment of the Supreme Court in The Commissioner of Income Tax, Gujarat II,
Ahmedabad Vs. Shri R.M. Amin, L.R. of The Late Shri. Chunnibhai J. Amin, Baroda, . The Supreme Court has, if we may so with respect, quite
succinctly pointed out that s. 46(2) itself has been enacted both with a view to make shareholders liable for payment of tax on the capital gains
arising on a distribution of cash or assets in specie by the liquidator as well as to prescribe the mode of calculation of capital gains to the
shareholders. This is consistent with the general principle of law that tax cannot be levied on the gross receipts but only on such receipts as would
remain in the hands of the assessee after providing for the cost of obtaining such receipts. In the case of capital gains, if the gross amount itself is
taken for purpose of assessment, then it would result in the tax being levied on capital and not on income. Capital gains is only a species of income
and therefore, the concept of income would have to be applied in taxing the capital gains.
The learned counsel for the assessee appeared to contend that he would be eligible for the deduction of the cost of acquisition of the capital
asset at every point of time when there is a receipt from the liquidator. In other words, if the liquidator makes payments in driblets, as it often
happens, the assessee would on each occasion be entitled to get the deduction for the cost of acquisition of the asset, that is, as many times over as
there are receipts. The contention is patently wrong and difficult to accept. The cost of acquisition that is contemplated by s. 48 would have to be
taken into account at the time of the distribution when it is first taxed. If, in a case, there is a negative amount resulting from the distribution being
smaller than the cost of acquisition, then the assessee would be entitled to have the capital loss computed, and the capital loss would be set off
against further distribution made by the liquidator. When a positive figure emerges after such set-off then the assessee would be liable to be taxed
on the balance of the amount received from the liquidator. It is true that at the later stages it is only the amount received that would be liable to tax
without any deduction therefrom. But as the deduction has already been given, there is no question of any further deduction from the said amount.
The learned counsel for the assessee relied upon the decision of this court in CIT v. Express Newspapers Ltd. [1080] 124 ITR 117. But that
related to a wholly different situation and the decision was rendered in the light of the provisions of ss. 24, 36 and 38 and we do not consider that
there can be any analogy between the provisions considered therein and those under consideration. That case shows that under certain provisions
deduction may be available more than once for the same amount. We do not find s. 48 allowing such a double or multiple deduction.
If the cost of acquisition of the capital asset is not to be taken into account, then the position will be curious. The assessee is entitled to the
distribution only by virtue of his shareholding. What he receives is proportionate to his shareholding. Therefore, it is the share which gives rise to
the right to obtain money from the liquidator. If the cost of acquisition of the share ignored, then it would mean that the assessee is receiving an
amount not with reference to the share but with reference to some other intangible right. In the case of assets for which there is no cost of
acquisition, it has been held by this court in COMMISSIONER OF Income Tax, MADRAS Vs. K. RATHNAM NADAR., , which has been
approved by the Supreme Court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, , that there could be no levy of capital
gains. Therefore, the case of the Revenue would not be advanced by any such contention. As pointed out by the Supreme Court in Commissioner
of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, , what is contemplated is an asset in the acquisition of which it is possible to envisage a cost.
The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure
of money to a person seeking to acquire it. None of the provisions pertaining to the head ""Capital gains"" suggests that they include an asset in the
acquisition of which no cost at all can be conceived. In such a case, when the asset is sold and the consideration is brought to tax, what is charged
is the capital value of the asset and not any profit or gain. Therefore, in order to tax the capital gains, it is necessary to give the deduction for the
cost of the capital gains.
In the question referred, there is an assumption that the proportionate cost of acquisition of the shares held by the assessee could alone be
deducted. The proportionate cost obviously is taken to mean the proportion calculated with reference to each receipt. It will be difficult to work
out the proportionate cost of the acquisition of shares on any rational principle. The proportionate cost cannot be made to depend on the
instalments of dividends received from the liquidator and, for all one knows one may not be in a position to conceive of any future distribution at all
by the liquidator at any given point of time. Therefore, as indicated earlier, the cost of the shares, which have given rise to the right to the assessee
to obtain the distribution would have to be deducted in full from the first instalment to the extent possible and the later instalments to the extent
unabsorbed. The question is accordingly answered in favour of the assessee. The cost of the shares would be deducted from the gross capital
gains computed under s. 46(1).
We now turn to the second question. The assessee paid a sum of Rs. 5,000 to the ""Tiruppani Trust"" described in the question. The assessee
claimed the appropriate deduction applying the provisions of s. 80G. The ITO declined to grant the deduction on the ground that the trust did not
satisfy the conditions laid down in s. 80G. The AAC, however, upheld the assessee''s claim and, therefore, the Department filed an appeal before
the Tribunal. The Tribunal, by its order dated November 27, 1975, followed an earlier order of its dated January 31, 1974, in I.T.A. No. 906,
(Mds)/1973-74. The result was that the order of the AAC was affirmed and the the assessee''s claim accepted.
The eligibility of the Tiruppani Trust to fall within the scope of s. 80G has been considered in more than one decision of this court. In Addl.
Commissioner of Income Tax Vs. Reliance Motor Co. Pvt. Ltd., (Appx-I)(infra) the matter was sent back to the Tribunal as the relevant trust
deed had not been annexed to the statement of the case and, as, therefore, it was not possible to answer the question referred to therein. On the
same lines, in T.C. No. 22 of 1975, by judgment dated February 4, 1978 Commissioner of Income Tax Vs. Inland Agencies P. Ltd., (Appx. II)
infra), this court again remitted the matter for consideration by the Tribunal. It may be mentioned here that T.C. No. 22 of 1975 arose from the
order of the Tribunal dated January 31, 1974, which has been followed in the present case. As the matter has already been restored to the
Tribunal on earlier occasions, similarly in the present case also, we do not think it possible to answer the question referred. We, therefore, restore
the matter for reconsideration by the Tribunal in the light of the facts and in accordance with the law.
The assessee will be entitled to its costs, as it has succeeded on the main question that arose in the present reference. Counsel''s fee Rs. 500.
One set.