TMI Blog2003 (1) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... PAL J.- The question to be decided in these appeals is whether the word "assets" in section 46(2) of the Income-tax Act, 1961 (refer red to hereafter as the "Act") must be understood and construed according to the definition of the words "capital assets" in section 2(14) of the Act. The issue arises in respect of the assessment year 1970-71. The appellants in the two appeals which are disposed of by this judgment are sisters. They were share holders in Palkulam Estates (Private) Ltd., Nagarcoil (referred to here after as the "company"). The company went into liquidation in 1964. Pursuant to a compromise decree dated December 22, 1969, in litigation between the assessees and their brother (who was also a shareholder in the company), and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds or otherwise. The value of the share of agricultural lands transferred to each appellant was, therefore, included as income subject to capital gains and subjected to tax. The assessees' appeals before the Commissioner of Income-tax (Appeals) were allowed by holding that the scope of section 46(2) would have to be read in the light of the definition of the words "capital asset" in section 2(14) and that "having exempted agricultural lands from capital gains under the general provision, it was difficult to interpret section 46(2) as including agricultural land". The action of the Income-tax Officer in charging the income of the distribution of agricultural lands as capital gains under section 46(2) of the Act was accordingly set aside. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital assets" under section 2(14) of the Act is not of any relevance for the purpose of construing section 46(2) of the Act, and the fact that agricultural lands to the extent provided in section 2(14)(iii) of the Act are excluded from the definition did not have any impact on the taxability of the market value of the agricultural lands received by the assessee on the distribution of the assets of a company in liquidation. Before considering the correctness of the decision of the High Court the context in which section 46(2) came to be part of the Act needs to be considered. Section 12B of the Indian Income-tax Act, 1922 provided for payment of tax under capital gains "in respect of any profits or gains whatsoever from the sale, exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, whether or not connected with his business or profession, but does not include-... (iii) agricultural land in India;" It has been held by this court that the principle of Madurai Mills Co. Ltd.'s case [1973] 89 ITR 45 that a distribution of assets of a company in liquidation does not amount to a transfer continues to apply to the 1961 Act. The view in Madurai Mills Co. Ltd.'s case [1973] 89 ITR 45 (SC) has also been statutorily affirmed in section 46(1) which provides: "46. (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." In other w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 2(14) of the Act? If it does then, it is conceded by the Revenue, there is no question of subjecting the agricultural lands received by the assessees from the company in liquidation to capital gains. Indisputably, the object in introducing section 46(2) was to overcome the reasoning in Madurai Mills Co. Ltd.'s case [1973] 89 ITR 45 (SC) by broadening the base of the incidence of capital gains and expressly providing for receipt of assets of a company in liquidation by a shareholder as a taxable event. Section 46(2) is in terms an independent charging section. It also provides for a distinct method of calculation of capital gains. As said in CIT v. R.M. Amin [1977] 106 ITR 368 (SC): "The aforesaid section, in our view, was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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