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2025 (5) TMI 527 - HC - Income TaxComputation of cost of acquisition under the provisions of the Income Tax Act 1961 of an asset distributed on liquidation of the Company the asset being the immovable property that belonged to the Company - applicability of Sec. 55(2)(b)(iii) - Whether Section 55(2)(b)(iii) overrides the provisions of Section 49(1)(iii)(c) as the Appellants had acquired the shares of the Company prior to liquidation? HELD THAT - The provisions of Section 46(2) as applicable to shareholders states that where a shareholder on the liquidation of a company has received any money or asset from the company he shall be chargeable to tax under the head capital gains in respect of the money received or market value of the assets as on the date of distribution reduced by dividend received by him and the resultant sum shall be the full value of consideration for the purposes of Section 48 of the Act. Under Section 48 the expenditure incurred wholly and exclusively in connection with the transfer of the asset and the cost of acquisition and improvement of the asset shall be deducted to arrive at the capital gain. Applying the aforesaid provisions to the present case we find that the unique factor that has transpired in the assessee s case is that both Section 49(1)(iii)(c) and Section 55(2)(b)(iii) would stand attracted as the transfer of shares firstly by way of extinguishment right therein and in consideration of which the appellant received the asset from the company (transaction 1) and secondly by transfer of the asset received on liquidation and in consideration of which the assessee received actual money (transaction 2). Relevantly both transactions as aforesaid have taken place in the same financial year as the appellants have proceeded to sell their share of the property to MRL in the same year where the asset had been distributed to them fusing the applications of both applicable statutory provisions. In order to decide these appeals it would suffice to advert the order of the Tribunal in the case of T.R. Srinivasan 2009 (11) TMI 664 - ITAT CHENNAI as this is the speaking order which has analysed the provisions clearly and in a methodical manner. Tribunal proceeds to conclude adverse to the Appellant stating that it was bound by the conclusions of the earlier Benches of the Tribunal that had been decided adverse to the other two Appellants. In fact the Tribunal could well have referred the matter for the constitution of a Larger Bench as is normally done in such matters instead of which the Departmental appeal has come to be allowed. We are of the view that the procedure followed by the Tribunal in this case is incorrect particularly in view of the categorical discussion and conclusion in favour of the Assessee in the paragraphs extracted supra with which we concur. We are now concerned with the substantial question of law on this issue and for this purpose find that the manner of computation as adumbrated in Computation 4 above would be the proper methodology for computation of cost of acquisition. This is a case where one has necessarily to take note of the computations of capital gain both in regard to transactions 1 and 2 and the same have rightly been taken note of and stand encapsulated in computation 4 above. Decided against revenue.
The core legal questions considered by the Court revolve around the correct interpretation and application of provisions of the Income Tax Act, 1961, specifically concerning the computation of the cost of acquisition of assets distributed to shareholders upon the liquidation of a company. The principal issues are:
1. Whether the Income Tax Appellate Tribunal (ITAT) was correct in holding that earlier orders in related cases were not per incuriam despite those orders not considering the applicability of Section 55(2)(b)(iii) of the Income Tax Act. 2. Whether judicial discipline requires that orders deemed per incuriam be treated as binding precedents. 3. Whether, in the facts and circumstances, the cost of acquisition for assets distributed on liquidation should be determined under Section 49(1)(iii)(c) or Section 55(2)(b)(iii) of the Income Tax Act. 4. Whether the ITAT erred in applying the provisions relating to the cost of acquisition of shares when assets are received by a shareholder on liquidation. Detailed analysis of these issues is as follows: Issue 1 & 2: Binding Nature of Earlier Tribunal Orders and Applicability of Section 55(2)(b)(iii) The Court examined whether the ITAT was justified in relying on earlier decisions which did not consider Section 55(2)(b)(iii). The appellants contended that those orders were per incuriam because they overlooked a crucial statutory provision. The ITAT had declined to treat those orders as per incuriam and followed them, thereby allowing the Revenue's appeals. The Court noted that judicial discipline does not mandate following orders that are per incuriam if they overlook relevant statutory provisions. The proper course in such circumstances is to refer the matter to a Larger Bench for authoritative determination rather than mechanically following earlier adverse orders. The Court found the ITAT's procedure in this case to be incorrect, particularly given the detailed and favorable analysis towards the appellants in the speaking order under consideration. Issue 3 & 4: Correct Provision for Computation of Cost of Acquisition on Liquidation The crux of the dispute was the interpretation and application of Sections 49(1)(iii)(c) and 55(2)(b)(iii) of the Income Tax Act concerning the cost of acquisition of an asset distributed on liquidation. Section 55(2)(b)(iii) states that where a capital asset becomes the property of the assessee on distribution of a company's assets on liquidation, and the assessee has been assessed to capital gains tax under Section 46 in respect of that asset, the cost of acquisition shall be the fair market value (FMV) of the asset on the date of distribution. Section 49(1)(iii)(c) provides that if the capital asset becomes the property of the assessee on distribution of assets on liquidation, the cost of acquisition shall be deemed to be the cost for which the previous owner acquired it, increased by any cost of improvement. Section 46 deals with the chargeability of capital gains on distribution of assets by companies in liquidation, specifying that the shareholder is chargeable to tax on the money or FMV of assets received, reduced by any dividend assessed. Section 48 prescribes the mode of computation of capital gains by deducting from the full value of consideration the expenditure incurred and the cost of acquisition/improvement. The appellants had purchased shares before liquidation and upon voluntary liquidation, received a proportionate share of an immovable property. They computed capital gains under Section 55(2)(b)(iii), taking the FMV of the asset on the date of distribution as the cost of acquisition. The Revenue contended that Section 49(1)(iii)(c) applied, which would result in a higher taxable capital gain. The Court relied heavily on the detailed reasoning in the Tribunal's speaking order in the case of one appellant, which methodically analyzed the transactions involved:
The Tribunal illustrated three computational scenarios with hypothetical figures:
In the present case, both transactions occurred in the same financial year, and the appellants offered capital gains arising from Transaction A for taxation in that year. Hence, Section 55(2)(b)(iii) applies, and the cost of acquisition for the asset should be the FMV on the date of distribution. The appellants' integrated computation (Computation 4) was correct, and the Revenue's contention (Computation 5) to apply Section 49(1)(iii)(c) was only appropriate where capital gains from Transaction A were postponed, which was not the case here. The Court emphasized that accepting the Revenue's view would impose an additional tax burden on the assessee for no fault of theirs, which would be unjust. Thus, the Court concluded that the proper methodology for computing the cost of acquisition in such cases is as per Section 55(2)(b)(iii), provided the capital gains on the transfer of shares (Transaction A) have been assessed to tax. The Court declined to delve into other cited cases, finding the detailed discussion in the Tribunal's speaking order to be sufficiently authoritative and persuasive. Significant Holdings The Court held: "If capital gains arising in transaction A are treated as assessed to tax earlier, then, whether the computations are separately done as per computation (1) and (2) or they are integrated into one as in computation (4), it makes no difference." "In our considered view, if this interpretation is to be accepted [by the Revenue], it would amount to saddling the assessee with higher tax liability for no fault of his." "The manner of computation as adumbrated in Computation 4 above, would be the proper methodology for computation of cost of acquisition." "The substantial questions of law are answered in favour of the appellant and against the revenue." The Court also underscored the procedural impropriety of the ITAT in not referring the conflicting decisions to a Larger Bench and instead mechanically following adverse precedents without considering the applicability of Section 55(2)(b)(iii). In conclusion, the Court allowed the appeals, holding that where a shareholder has been assessed to capital gains tax on the transfer of shares on liquidation, the cost of acquisition of the asset received on liquidation shall be the fair market value of the asset on the date of distribution under Section 55(2)(b)(iii), overriding the application of Section 49(1)(iii)(c).
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