TMI Blog2006 (2) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... the court was delivered by D.A. Mehta J.- The Income Tax Appellate Tribunal, Ahmedabad Bench "C", has raised the following two questions under section 256(1) of the Income-tax Act, 1961 ("the Act") at the instance of the Commissioner of Income-tax: "1. Whether, the Appellate Tribunal is right in law and on facts in holding in view of section 49(1)(iii)(e) capital gain should be computed by taking the cost in the hands of the previous owner namely, KPPL? 2. Whether, the Appellate Tribunal is right in law and on facts in holding that in spite of section 46(2) capital gains chargeable to tax had not arisen in this case in view of fact that benefit of section 47(v) would be available to the assessee?" The assessment year is 1988-89 and the relevant previous year is financial year ended on March 31, 1988. The assessee, a private limited company, received assets valued at Rs. 93,24,000 from one Aravalli Investments Private Limited (Aravalli) on voluntary liquidation of Aravalli. The Assessing Officer invoked section 46(2) of the Act for bringing to tax the surplus under the head "Capital gains" after deducting the amount paid by the assessee for acquisition of the shares i.e. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 993, allowed the appeal of the assessee while dismissing the appeal of the Revenue. Mr. B.B. Naik, learned standing counsel appearing on behalf of the applicant-Revenue, submitted that section 46(2) of the Act was a special provision and hence, was an exception to the general law of computation of capital gains tax. He, therefore, contended that section 46 of the Act was a complete code, both as to the charge of capital gains tax and the procedure for computation of the same. Therefore, except for the applicability of section 48 of the Act, nothing more was required to be looked into and the Tribunal was in error in invoking section 47(v) of the Act as well as section 49(1)(iii)(e) of the Act which related to the cost of acquisition in the hands of the previous owner. According to him, once the Tribunal accepted that section 46(2) of the Act was applicable, nothing more was required to be done and the computation made by the Assessing Officer ought to have been upheld by the Tribunal. It was submitted by Mr. Naik that once the cost actually incurred is available then reading sections 46(2) and 48 together the only deduction permissible under section 48 of the Act was of the cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harmonious construction must be made and where literal construction brings about manifestly an absurd result, such construction should be avoided. Lastly, it was submitted that, where two views are possible, one in favour of the assessee may be adopted. Section 46 of the Act pertains to capital gains on distribution of assets by companies in liquidation. Under sub-section (1) of section 46 of the Act it is provided that where the assets of a company are distributed to its shareholders on liquidation of company, such distribution is not to be regarded as a transfer by the company for the purposes of section 45 of the Act, notwithstanding anything contained in section 45 of the Act. Under sub-section (2) of section 46 of the Act a provision is made for treatment of the receipt in the hands of the shareholder of a company in liquidation. The said provision stipulates that where a shareholder receives any money or assets from the company, i.e., a company in liquidation, the shareholder shall be chargeable to income-tax under the head "Capital gains", in respect of such monies or other assets received by the shareholder on the date of distribution, as reduced by the amount assessed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en into consideration for the purposes of levying tax under the head "Capital gains". For the present, it is not necessary to deal with either clause (b) of sub-section (1) or sub-section (2) as well as other provisions of section 48 of the Act as they are not material for the controversy in question. The contention that section 46(2) of the Act is not applicable to an assessee who is only a legal person cannot be accepted. Though the provision uses the word "shareholder" followed by the word "he" it is not possible to accept that the Legislature wanted to keep out shareholders who are otherwise falling within the definition of the term "person" as per section 2(31) of the Act. It is not even suggested that there is any prohibition for a limited company to hold shares of another limited company. Once there is no statutory prohibition for a company to hold such shares in another limited company it is not possible to accept the restrictive reading of section 46(2) of the Act canvassed by the learned advocate for the assessee. He does not dispute the fact that the assessee, which is a limited company, was holding shares of the company which went into liquidation. If there was a lega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a shareholder, has received assets from the subsidiary company on the liquidation of the subsidiary company and thus become liable to tax under the head "Capital gains" in respect of the value of the assets received on the date of distribution. Such value of the assets has to be deemed to be the full value of the consideration. That is the legislative mandate. Once section 46(2) comes into play, there is no question of invoking the provisions of section 45 of the Act, and the deeming fiction under section 47 of the Act operates only in relation to transfers amenable to the provisions of section 45 of the Act. This is abundantly clear from the opening portion of section 47 of the Act. In the circumstances, in so far as the second question is concerned, the assessee cannot succeed and the Tribunal committed an error in accepting the plea of the assessee that the assessee would be entitled to the benefit of section 47(v) of the Act. However, when it comes to the applicability of the provisions of section 49(1)(iii)(e) of the Act the order of the Tribunal requires to be upheld. As already noticed hereinbefore, once the full value of consideration is arrived at under section 46(2) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s tax under section 45 of the Act. Therefore, when the subsidiary company disposes of the asset, the cost of acquisition in the hands of subsidiary company cannot be any other cost but the cost in the hands of the previous owner, viz., the holding company in the present case. Sections 47 and 49 of the Act go together and have to be read as part of one scheme, the legislative intent being that when the first transaction is not brought to charge, the assessee having benefited once should not benefit once again by claiming a higher cost at the time of subsequent transaction. This would be so in the normal course of events. However, merely because in the facts of the present case, incidentally, the cost at the second stage is of a figure less than the cost of previous owner, that by itself cannot be the criterion for giving a go-by to the legislative intent and scheme of the Act which unfolds on a conjoint reading of sections 47, 49 and section 55(2)(b)(ii) of the Act. There is an additional reason also. Sections 47 and 49 of the Act are part of a scheme containing special provisions as against sections 45, 48 and other connected sections, which may be termed as general provisions. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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