TMI Blog1997 (2) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... by those companies to its members, therefore, the assessee received nil consideration for his holdings in the companies. He claims that capital loss should have been computed under section 46(2) read with section 48 and dealt with under the provisions of the Income-tax Act as such. The Income-tax Officer as well as the Commissioner of Income-tax (Appeals) held that on liquidation of the company, no event of transfer of asset either by the liquidator or by the shareholder takes place so as to give rise to the question of computation of capital loss chargeable under the head "Capital gains". Reliance was placed on a decision of the Supreme Court in the case of CIT v. R. M. Amin [1977] 106 ITR 368. The Tribunal found that the provisions of section 46(2) apply in the event of liquidation of Indian companies and the decision in R. M. Amin's case [1977] 106 ITR 368 (SC), which was rendered in the case of a foreign company, which was not governed by the provisions of section 46(2) of the Income-tax Act, was not applicable to the present case. In view thereof, it allowed the appeal of the assessee and held the capital loss to be considered for the purposes of computing the income taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w support from the change in the terminology of the proviso as was inserted in 1946 and as was made applicable in 1956. While the third proviso to section 12B, in 1946 stated that such distribution shall not be treated as a transfer of capital asset and subsequently in 1956 version of the provision, reference to distribution of assets or cash on liquidation of a company was omitted. This omission as per the Revenue indicated that the Legislature wanted to treat the distribution of capital assets on dissolution of a company in liquidation, as a case of transfer of capital asset, viz., shares. It appears that in the wake of this controversy specific provision came to be enacted in the Act of 1961 for the purpose of dealing with the case of distributions on liquidation of a company. While section 46(1) declared that so far as the company is concerned, notwithstanding anything contained in section 45, such distribution is not to be regarded as a transfer by the company for the purpose of section 45, sub-section (2) was enacted to subject the shareholders to the charge of capital gains on liquidation, on distribution of assets on the liquidation of a company. While sub-section (1) state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies in liquidation as are covered by the definition under section 2(17) of the Act. The definition of company under section 2(17) for the purposes of the Income-tax Act does not include a foreign company, therefore, the levy of tax on capital gains on distribution of assets by a foreign company in liquidation was not valid. The court further went on to hold : "The aforesaid section, in our view, was enacted both with a view to make shareholders liable for payment of tax on capital gains as well as to prescribe the mode of calculating the capital gains to the shareholders on the distribution of assets by a company in liquidation. But for that sub-section, as already mentioned, it would have been difficult to levy tax on capital gains to the shareholders on distribution of assets by a company in liquidation." Therefore, a reading of section 46 in the aforesaid light makes it clear that a legal fiction has been created. According to this legal fiction, firstly a shareholder of the company on liquidation of that company is chargeable to income-tax under the head "Capital gains", and, secondly, in respect of money received or the market value of other assets received on the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inarily operating section 45 to consider any transaction to be a transfer of capital asset by any of the modes referred to in section 2(47) of the Act, apart from the legal fictions created therein, envisage passing of consideration from one hand to another and passing of rights, notwithstanding extinguishment in the hands of the transferor to the transferee, whether in the form of tangible gain or augmentation of the existing rights of others. It was because of this, on liquidation return of corpus to the shareholders, who were otherwise entitled to the same as a matter of right, was not held to be transfer within the meaning of section 2(47), because on extinguishment of their rights in the shares and their having received cash or assets in the place of rights which they held in the shares, no corresponding rights accrue in any one for that consideration. However, once a legal fiction is created to treat the receipt or assets on distribution of liquidation in the hands of a shareholder, it inheres transfer of assets by extinguishment of rights, by the recipient of consideration and once that fiction comes into existence it must lead to its logical conclusion in the computation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is not that cash or value of the assets received by a shareholder on liquidation is to be charged to tax as a capital gains but makes it chargeable under the head "Capital gains" by further providing for computation under section 48 in respect of what is considered as consideration. Along with the charge the entire computation provisions for charging the capital gains are made applicable to such computation. Therefore, extinguishment, partly or fully of the right of the shareholder to surplus (capital asset for the purpose of section 46(2)) is to be treated as transfer and as and when such extinguishment takes place, treating such extinguishment as transfer, the net result of such transfer has to be worked out or computed as per section 48 of the Act. If the result of such computation under the head "Capital gains" is a positive balance, it is to be added in the total income chargeable to tax augmenting the same. If the balance is negative, it has to be treated under the Chapter titled, "Set off and carry forward losses" in accordance with the provisions to the extent the same are permissible. The contention submitted by Mr. Soparkar, one of counsel, who intervened for assistin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to capital gain, by treating it to be consideration. Consideration in the ordinary sense means something in lieu of or exchange of. It does not provide, that on computation of capital gain as per section 48, the surplus if any only is to be charged to tax as capital gains. This is how it was suggested to us to read the provision. On the contrary, the provision in question section 46(2) does not provide any such further inhibition against treatment of the balance. Such balance resulting as per computation made in accordance with section 48 has to be subjected to charge of tax as per the provisions of the Act. Section 71 of the Act envisages where computation under any head of income is a loss, the assessee is entitled to set off such loss against computation of income assessable under other head for that year. Section 74 specifically provides that where in respect of any assessment year, the net result of computation under the head "Capital gains" is a loss to the assessee, the same may be carried forward, if it cannot be set off against income of that year. Thus the computation of income under any head, including under the head "Capital gain", envisages a situation where such com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Dictionary about the word "on", it has been stated, "Though 'on', or 'upon' a date or event may, prima facie, have an inclusive meaning, yet either word will mean 'before', 'simultaneously with', or 'after', according to the context and subject-matter". In the present case, we are concerned with return of capital of shareholder, which is a final act in the process of winding up. The conclusion to which we have reached is that even extinguishment of the right of a shareholder amounts to transfer for the purposes of section 48. In this context, the words "on liquidation" must necessarily refer to the date on which the company was wound up or the winding up process is complete. Liquidation simpliciter in the context of winding up of company may mean winding up of a corporation where the assets are distributed to those entitled to receive them, the process of reducing assets to cash, discharging the liabilities and dividing the surplus or loss amongst contributories or members. As we have noticed, the stage of distribution of surplus amongst contributories or members, so called owners of the company, is the final stage of liquidation, as until discharge of the liabilities and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dissolution is made. These provisions referred to above also make us think that statutorily it is not possible to read company in liquidation for "company on liquidation", to make the provisions of section 46 applicable, on the date of commencement of liquidation proceedings, when the order for winding up is made or resolution for voluntary winding up is made and the winding up proceedings commence as the company on such commencement of winding up, becomes a company in liquidation and at least until the stage is reached to distribute the surplus. In the case of piecemeal distribution of cash or assets which have been left surplus after the discharge of liabilities, it cannot be said that the rights of the shareholders are extinguished before the affairs of the company are wound up, so as to give effect to the expression "full value of consideration" for the purpose of section 48. "Full value of consideration" and its adjustment against cost of acquisition of asset deemed to have been transferred (in the present case by extinguishment of rights to receive surplus, if any), are two essential ingredients for computation of capital gains under section 48. In that situation, the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company the extinction of rights, would result in total loss with no consequence. That is to say on receipt of some cost, however insignificant it may be, the entire gamut of computing capital gains for the purpose of computing under the head "Capital gains" is to be gone into, computing income under the head "Capital gains", and loss will be treated under the provisions of Act, but where there is nil receipt of the capital, the entire extinguishment of rights has to be written off, without treating under the Act as a loss resulting from computation of capital gains, The suggested interpretation leads to such incongruous result and ought to be avoided, if it does not militate in any manner against object of the provision and unless it is not reasonably possible to reach that conclusion. As discussed above, once a conclusion is reached that extinguishment of rights in shares on liquidation of a company is deemed to be transfer for operation of section 46(2) read with section 48, it is reasonable to carry that legal fiction to its logical conclusion to make it applicable in all cases of extinguishment of such rights, whether as a result of some receipt or nil receipt, so as to trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration fixed for transfer, a fiction is created to work out the full value of consideration for the purpose of the mode of computation and deductions in respect of the income chargeable under the head "Capital gains". Where the net result of the computation under the head "Capital gains" is a loss to the assessee, the loss can be set off or carried forward in light of the provisions of sections 71 and 74 as may be applicable. Therefore, even if the sum received on such distribution of the assets of the company to the shareholders is negligible, say one rupee, and loss is worked out as a result of the computation under the head "Capital gains", such shareholder-assessee will get the benefit of set off against income or carry forward as the case may be. The thrust of the provisions of section 46(2) is that though there is no transfer of the asset on its distribution by the company on its liquidation and such distribution cannot be computed under the head "Capital gains", the same even has to be computed under that head, when it comes to assessing the shareholder. A shareholder who has incurred total loss in a transaction of sale of shares would be entitled to claim set off or ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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