TMI Blog2009 (11) TMI 664X X X X Extracts X X X X X X X X Extracts X X X X ..... f Jupiter Press (P.) Ltd. (JPPL) at Rs. 21,000 per share in 1989. The company went into voluntary liquidation and the liquidator distributed the immovable property at 552, Mount Road, Chennai belonging to the company in kind to all the shareholders in proportion to their shareholdings. Subsequently, the assessee along with other shareholders, sold the above property to MRL Ltd. The total sale consideration for the entire property is Rs. 1,36,51,000. The assessee s share is 120/500 of it. While computing capital gain the assessee had taken the cost of acquisition of the land on the basis of the value of shares purchased by it. The Assessing Officer was of the view that the capital asset became the property of the assessee on distribution of assets by the company on liquidation. Therefore, as per section 49(1)( iii )( c ) of the Act, the cost must be taken at which the previous owner, i.e., the company, acquired the land. Accordingly, the Assessing Officer recomputed the capital gains at Rs. 32,69,795 before granting exemption under section 54 and before granting deduction under section 48(2) of the Act as against Rs. 7,56,240 computed by the assessee. 3. The CIT(A) upheld the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The ld. counsel then took us through the historical aspect of the provision relating to the accrual of capital gains on distribution of assets on liquidation. The gist of this historical aspect is that provision similar to section 46(2) was not there in the 1922 Act and for the first time such a provision was enacted in the present Act. As a result of this enactment, three sections came into play for the first time and those were sections 46, 49 and 55. Coming to the brass stacks, the ld. counsel submitted that in reality there were two transactions and hence two taxable events under the head Capital gains . The first was the transfer of shares by way of extinguishment of rights therein and in consideration of which the assessee received the property from the company. The second transaction was the transfer of the property received on liquidation and in consideration of which the assessee received actual money. The peculiarity in the assessee s case was that both the transactions took place in the same financial year and therefore, the computation of capital gains submitted by the assessee was a fusion of both the transactions. Since both the transactions took place in the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ( 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 purposes of section 48. Section 49. (1) Where the capital asset became the property of the assessee ****** ( c )on any distribution of assets on the liquidation of a company, ****** the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner of the assessee, as the case may be. Section 55(1)****** (2) For the purposes of sections 48 and 49, "cost of acquisition", ( a )to ( ab )****** ( b )In relation to any other capital asset, - ( i )and ( ii ) ****** ( iii )where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head "Capital gains" in respect of that asset under section 46, means the fair market value of the asset on the date of distribution ;" 7. Now we proceed to see as to how each of these provisions come into play at each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l form by taking a hypothetical example. Let us assume the following : ( a ) cost of acquisition of shares by the assessee Rs. 100 ( b ) fair market value of property received Rs. 150 ( c ) sales consideration of property sold Rs. 170 ( d ) cost of acquisition of property to the company Rs. 80 Thus, transaction A will be as follows : Computation (1) Sales consideration for transfer of shares Rs. 150 (being fair market value of pro-perty on the date of distribution received on liquidation) Less : Cost of acquisition of shares Rs. 100 Rs. 50 capital gains chargeable to tax in assessment year 1991-92 It is presumed that the assessee has offered the above capital gain for taxation in assessment year 1991-92. 9. Now we come to the second transaction which we shall name it as transaction B. This pertains to the sale of property received by the assessee on liquidation. Though the assessee has sold the property in the same financial year, i.e., in 1990-91, yet for the time being let u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising in the year of its accrual. Let us take another situation. We retain presumption ( a ) as it is. So far as presumption ( b ) is concerned, let us presume that the assessee has not offered the capital gains for taxation in the year of its accrual. In that case, in our view, the cost of acquisition will be as per section 49(1)( iii )( c ), i.e., it will be the cost to the previous owner. In that case, the arithmetical presentation will be as follows : Computation (3) Sales consideration of the property Rs. 170 Less: Cost of acquisition to the company Rs. 80 Rs. 90 capital gains chargeable to tax in assessment year 1992-93 From the above three computations it can be seen that if the assessee offers capital gains for taxation as they arise, he will be paying tax on total capital gains of Rs. 70. However, if he has chosen to offer capital gains for tax only in the year of sale of property received on distribution, he will end up paying more tax, i.e., on capital gains of Rs. 90. This can be taken to be the additional tax burden invited by the assessee himself for not offering for tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the computations are separately done as per computations (1) and (2) or they are integrated into one as in computation (4), it makes no difference. However, the departmental view is as follows : Computation (5) Sales consideration of the property Rs. 170 Less: Cost of acquisition of the company Rs. 80 Rs. 90 capital gains chargeable to tax in assessment year 1991-92 The department is canvassing for the above computation despite the fact that capital gains arising in transaction A are being taxed as per computation (4). Again, in our view, computation (5) should be adopted only where the assessee has postponed the taxability of capital gains arising in transaction A. In the present case, the assessee has not postponed the taxability of capital gains but is offering it for tax in the same year in which the gains have accrued. Therefore, it would be just and proper to accept the computation made by the assessee. However, we may hasten to add that so far as this appeal is concerned, we are not accepting the same for the reasons that follow. 11. The argument of the ld. counsel is that the ..... 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