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TMI Blog2006 (2) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. Rs. 55,36,680. In the process, the claim of the assessee that nothing was liable to be taxed by virtue of the provisions of section 47(v) of the Act was rejected. The assessee had raised an alternative contention, that for the purposes of computing the capital gains chargeable to tax the cost of the previous owner in terms of section 49(1)(iii)(e) of the Act should be considered, also came to be rejected. The alternative contention was based on the fact that the assessee-company was a wholly owned subsidiary of Karamchand Premchand P. Ltd. (KPPL). That originally KPPL had acquired all the 1,11,000 equity shares of Aravalli in July and August, 1973, at a total cost of Rs. 1,11,000 which was both the face value and paid up value of the shares of Aravalli. As a consequence Aravalli had become a wholly owned subsidiary of KPPL. In December, 1973 all the 1,11,000 shares of Ara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 cost which was known. That only in the event the cost was not ascertainable under section 48 of the Act could recourse be had to section 47 of the Act. According to him, the fiction envisaged by section 47 of the Act was limited to treating the transfer in any one of the modes specified in the said section as not a transfer for the purposes of section 45 of the Act and, therefore, not liable to capital gains tax. However, the said fiction cannot operate in a case where the transaction was deemed to be a transfer under section 46(2) of the Act. That in the present case, the transaction between KPPL and Aravalli in the first instance was a transfer with consideration, but, by virtue of section 47(v) of the Act the same was not amenable to section 45 of the Act and thus not liable to capital gains tax. He, therefore, submitted that neither section 47(v) of the Act could be invoked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as deemed dividend under section 2(22)(e) of the Act; and the sum arrived at after the aforesaid stages are over shall be deemed to be the full value of the consideration for the purposes of section 48 of the Act. Therefore, section 46(1) of the Act stipulates a fiction whereby even in a case where there is a transfer of assets on distribution by a company in liquidation such distribution of assets is not to be regarded as a transfer for the purposes of being exigible to capital gains tax under section 45 of the Act. While under section 46(2) of the Act a converse situation, or the other end of the transaction is envisaged. In other words, the recipient shareholder is to be charged to capital gains tax by deeming the transaction as transfer and also deeming receipt of consideration upon such deemed transfer. However, after the amount of full value of consideration is arrived at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited 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 legal prohibition on holding such shares the assessee-company could not have legally held such shares. Therefore, even in the contextual setting of section 46(2) of the Act, when one reads section 46(1) of the Act together, the submission does not merit acceptance. To appreciate the rival contentions it is necessary to recapitulate the basic facts. The controversy between the parties has arisen in relation to the taxability of the value of the assets received by the assessee on voluntary liquidation of Aravalli by applicability of section 46(2) of the Act. The claim of the assessee is that Aravalli being a wholly owned subsidiary of the assessee-company any transfer of a capital asset by such subsidiary to the holding company was not to be regarded as transfer. The alternative plea was that, even if for the purposes of section 46(2) of the Act, the transaction was to be regarded as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled 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) of the Act the same figure has to be taken for the purposes of section 48 of the Act. Section 48 of the Act merely prescribes the mode of computation of the income chargeable under the head "Capital gains" and in the process lays down permissible deductions, one of them being the cost of acquisition of the assets. The phrase "cost of acquisition" has been defined under section 55(2) of the Act for the purposes of sections 48 and 49 of the Act. Under section 55(2)(b)(ii) of the Act it is stipulated that where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49 of the Act, and the capital asset became the property of the previous owner before the 1st day of April, 1974, "cost of acquisition" means the cost of the capital assets to the previous owner or the fair market value of the property on the 1st day of April, 1974 at th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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