Commissioner of Income Tax, Tamil Nadu-I vs M.A. Chidambaram

Ramanujam, J.—The following question has been referred to us at the instance of the Revenue under s. 256(1) of the I.T. Act, 1961 :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 13,590 received in

excess of the original cost of the shares by way of dividends from the liquidator of M/s. Kanadukathan Electric Supply Corporation Ltd. could not

be included in the hands of the assessee as long-term capital gains ?

The assessee was holding 201 shares of Rs. 500 each in Kanadukathan Electric Supply Corporation, which went into liquidation some years

back. The assessee was received dividend from the liquidator of the company during the last few years prior to the assessment years 1969-70. In

the year of account relevant for the assessment year 1969-70, the assessee received by way of the third and fourth dividends a total sum of Rs.

33,165 which, along with the other dividends received previously exceeded the original cost of the shares by Rs. 13,590. This was brought as

capital gains"" by the ITO.

On appeal, the AAc relying on the decisions of the Tribunal the case of another assessee by name Smt. C. T. Oppilal Achi in I. T. A. No.

702/Mds/69-70, dated August 28, 1971 and also the decision of the Gujrat High Court in the case of Commissioner of Income Tax, Gujarat II

Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), , upheld the assessee''s claim that the sum of Rs. 13,590 cannot be brought to

charge as capital gains.

The revenue took the matter in appeal to the Tribunal, contending that the amount received by the assessee in excess of the original cost by way

of dividends should be brought to charge. The Tribunal, however, following its own earlier decision in I. T. A. No. 702/Mds/69-70, dated August

28, 1971, and also following the decision of the Gujrat High Court in Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal

representative of the Late Chunibai Amin), , held that the sum of Rs. 13,590 is not liable to be treated as long-term capital gains. Aggrieved by the

decision of the Tribunal, the Revenue has obtained this reference on the above question of law.

Mr. Jayaraman, the learned counsel for the Revenue, submits that even if the sum of Rs. 13,590 being the dividends received in excess of the

original cost of the shares, is not of the Act, as it can be invoked even when there is no transfer of assets involved. In support of his submission that

the sum of Rs. 13,590 is assessable and can be brought under s. 46(2) of th e Act, which specifically brings to charge the amounts received by the

shareholders under the head Capital gains to the extent the said sum exceeds the original cost of the acquisition of the shares, the learned counsel

refers to the decisions of this court in T.M. Rangachari and Others Vs. Commissioner of Income Tax, , COMMISSIONER OF Income Tax,

MADRAS-II Vs. M. A. ALAGAPPAN., , Commissioner of Income Tax Vs. C.T. Oppilal Achi, and the decision of the Supreme Court in the

case of The Commissioner of Income Tax, Gujarat II, Ahmedabad Vs. Shri R.M. Amin, L.R. of The Late Shri. Chunnibhai J. Amin, Baroda,

which arose out of the judgment of the Gujarat High Court in Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal representative of

the Late Chunibai Amin), , relied on by the Tribunal in this case.

In T.M. Rangachari and Others Vs. Commissioner of Income Tax, , a Division Bench of this court to which one of us was a party had taken the

view that s. 46(2) is a charging provision independent of s. 45 and, therefore, even if a particular income cannot be brought to charge under s. 45

of the Act, the same can be brought to charge under s. 46(2) of the Act if the condition laid down in that section is satisfied. The said decision has

been referred to with approval and followed by a Division Bench of this court in COMMISSIONER OF Income Tax, MADRAS-II Vs. M. A.

ALAGAPPAN., , and the learned judges have expressed the view that s. 46(2) is an express provision for charging as capital gains in respect of

the monies or assets received by a shareholder of a company in liquidation. The same view was taken in Commissioner of Income Tax Vs. C.T.

Oppilal Achi, . It is significant to note that the decision in Commissioner of Income Tax Vs. C.T. Oppilal Achi, was in respect of the decision

rendered by the Tribunal in I. T. A. No. 702/Mds/69-70, dated August 28, 1971, which has been taken as the basis for its decision in this case by

the Tribunal. In CIT v. C. T. Oppilal Achi, there was a liquidation of a bank and its shareholders were allotted shares in a private limited company

in proportion to the shares held by them in the bank. The ITO was of the view that the assessee-shareholder was chargeable to capital gains tax in

respect of the receipt of the shares in the company by reason of s. 46(2) of the I.T. Act, 1961. The assessment was confirmed by the AAC. But

the Tribunal held that no charge was created by s. 46(2) and hence there was no justification including in the taxable income of the assessee by

way of capital gains any sum referable to the receipt from the liquidator of the bank. This court did not agree with the view of the Tribunal, but held

that s. 46(2) itself is a charging section and it will apply only in relation to companies which fall within the scope of the definition of ""company"" in s.

2(17) of the I.T. Act, 1961. Since the Tribunal had not given its decision on that question, this court remitted the matter to the Tribunal for

consideration of that question. Though this court has remitted the matter to the Tribunal, it clearly ruled that s. 46(2) is a charging section apart

from s. 45 and that it will apply to all receipts from the liquidator in the course of the liquidation of the company as dividends towards the shares

held by them.

In this case the question as to whether the assessee-company is a company as defined in s. 2(17) of the Act does not arise as it has been

conceded by the learned counsel for the assessee that it is a company as contemplated by s. 2(17) of the I.T. Act.

It is significant to note that the decision 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, , was rendered on an appeal against the decision rendered by the Gujarat High Court in

Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), which has been relied on by the

Tribunal in this case. In that case the Supreme court has clearly held that s. 46(2) was enacted both with a view to making shareholders liable for

payment of tax on capital gains as well as to prescribed the mode of calculating the capital gains to the shareholders on the distribution of assets by

a company in liquidation and that since the provisions of s. 46(2) applied only to the distribution of assets by such companies in liquidation as were

covered by the definition of the word ""company"" in s. 2(17), capital gains tax was not leviable when companies other than those which fell within

the definition in s. 2(17) distributed assets on liquidation to their shareholders. It is significant to note that even the Gujarat High Court in

Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), , had held that s. 46(2) is a charging

section and that if the conditions laid down in that section applied it can be invoked in respect of the distribution of assets by companies in

liquidation. But held that the company in question was not a company as contemplated in s. 2(17) of the Act. With this finding it held against the

Revenue. The supreme court affirmed the decision of the Gujarat High Court and held that s. 46(2), as a charging section can be applied for the

amount received from the official liquidator; but the company in liquidation should be a company as contemplated in s. 2(17) of the Act.

As already stated, we are not concerned with the question as to whether the company in liquidation is a company as defined in s. 2(17) of the

Act. Thus, the question as to whether s. 46(2) can be used as a charging section without reference to s. 45 seems to be concluded by the decision

referred to above. Though the Tribunal purported to follow the decision of the Gujarat High Court, it has not referred to s. 46(2) and considered

the question of its applicability to the facts of the case. In view the fact that the company, which was in liquidation, is admitted to be a company

coming under s. 2(17) of the Act, s. 46(2) is s traightway attracted to the facts of the case. Even as a matter of construction of the statue s. 45 is a

general provision, while s. 46(2) is confined to a special situation and being a special provision applicable to a special situation, the applicability of

that section cannot be excluded merely because the general section, like s. 45, does not apply.

In this view of the matter, we answer the question referred to us in the negative and against the assessee. The assessee will pay the costs of the

revenue. Counsel''s fee Rs. 500.