TMI Blog1980 (8) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... ed a sum of Rs. 25,000 to the New Commercial Mills Co. Ltd. on a promissory note. The said mill-company had suffered from financial difficulties and was taken in liquidation. A scheme of compromise and arrangement was approved by this court. As per the said scheme, unsecured creditors like the assessee had to get their claims verified by the auditors of the company, viz., M/s. C.C. Chokshi Co. The assessee could realise only Rs. 13,323 from the said mill-company pursuant to the provisions of the scheme approved by this court in the winding-up proceedings. Balance of Rs. 11,617 was claimed by the assessee as capital loss suffered by him during the relevant assessment year. The ITO negatived the said claim of the assessee on the ground that there was no transfer of capital asset involved in the said transaction. In appeal, the AAC allowed the assessee's claim with regard to short-term capital loss on the ground that the amount advanced was definitely capital asset in the hands of the assessee and the definition of the term "transfer" in relation to a capital asset as per s. 2(47) included relinquishment of the asset or the extinguishment of any rights therein or the compulsory ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts... " From a conjoint reading of ss. 45, 48 and 2(47), it appears clear that before any capital gains can be said to have arisen out of a transfer, capital asset is required to be transferred and that too for consideration. The assessee's contention is that as per the wide definition of the word " transfer " as provided by s. 2(47), extinguishment of his right in the existing capital asset would be covered by the connotation of the word " transfer ". Mr. Raval, learned advocate appearing for the revenue, did not contest the proposition that the assessee was holding a capital asset in the form of a promissory note of Rs. 25,000 under which he was an unsecured creditor of the mill-company in the winding-up proceedings. Under the scheme of compromise and/or arrangement proposed in the winding-up proceedings of the mill-company, the assessee's right to receive the full amount of Rs. 25,000 with interest under the promissory note did get extinguished in part. The assessee contended that his right in the capital asset was extinguished at least to the extent of 55% as he was, under the scheme, to receive only 45% and that too without interest. According to the assessee, this clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al asset of Rs. 25,000 reflected by the promissory note was subjected to transfer as the assessee's rights therein got extinguished to the extent of 55% and his right to claim interest also got extinguished on account of the scheme of compromise and/or arrangement as approved by this court in the winding up proceedings against the mill company. It is, necessary, therefore, to have a look at the relevant clauses of the scheme which was approved by this court in its original jurisdiction in Company Petition No. 14 of 1969, with Company Application No. 90 of 1963 and others, in the matter of New Commercial Mills Co. Ltd. (In liquidation). This court had by its order, dated 2nd May, 1969, approved the scheme of compromise and/or arrangement so far as the said mill-company was concerned and as per the said approved scheme under the provisions of the Companies Act, 1956, for the unsecured creditors like the assessee it was provided that unsecured creditors including the creditors whose dues had been converted into promissory notes and/or deposits other than specified creditors shown in para. II had to lodge their claims with the auditors, M/s. C. C. Chokshi Co., within one month from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned scheme provided that the said scheme shall be binding upon the company, its creditors and members and all proceedings against the company in respect of the claims of the creditors and the winding-up petition being Company Petition No. 42 of 1968, shall be deemed to have been dismissed provided, however, that M/s. Protex Industries shall be entitled to prosecute its Summary Suits Nos. 500 and 501 of 1969, in the City Civil Court against the company in so far as it relates to adjudication of the claim and for recovery against the guarantor after giving credit for the amounts received from the company under this scheme. Mr. Raval's contention is that as per the aforesaid scheme, the assessee received in full satisfaction of his existing claim only 45% and that too without interest. But, thereby he had not received any consideration for the said transfer of his original capital asset. What he had received was towards the satisfaction of his pre-existing right, while Mr. X. C. Patel, learned advocate appearing for the assessee, on the other hand, contended that when the assessee, on account of the aforesaid novatio brought about by the provisions of the sanctioned scheme, was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, even if any capital gain arose to the assessee which was taxable, it was only in the sum of Rs. 1,23,500, representing the difference between the amount received by the assessee in respect of the 192 shares and the value of those shares on January 1, 1954. On a reference to this court, it was held that there was no transfer of capital asset within the meaning of s. 45 read with s. 2(47) when the assessee received shillings 4,68,489, that is, Rs. 3,12,326, on final distribution of the net assets of the Uganda company. This court took the view that the transfer of the capital asset in that case was not backed up by any consideration. It was observed that s. 48 says that the income chargeable to tax as " capital gains " shall be computed by deducting from the " full value of the consideration received or accruing as a result of the transfer of the capital asset " certain amounts specified. The transfer that is contemplated by s. 45 read with s. 2(47) is, therefore, transfer as a result of which consideration is received by the assessee or accrues to the assessee. Substituting the words " extinguishment of any rights in the capital asset ", for the words " transfer of the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und that the assessee, who was an unsecured creditor of the company in liquidation, was entitled to Rs. 25,000 with interest under the promissory note. In the proceedings for the winding up of the said company, a scheme of compromise and/or arrangement was sanctioned by this court. We have already extracted the relevant provisions of the scheme as applicable to the unsecured creditors. Pursuant to the said provisions of the scheme, a complete novatio between the parties took place. The existing right of the assessee in the promissory note amount got extinguished and new rights accrued to him under the novatio reflected in the scheme of compromise and/or arrangement sanctioned by this court. The assessee let off 55% of his claim with interest and as the said right of the assessee in the existing capital asset was extinguished, in consideration he received 45% of the balance and that too without interest and also subject to the scheme of instalments. He also became entitled to equity shares of Rs. 50 each to the extent of 5% of his verified claim without interest. Thus, the advantage which the assessee received under the scheme clearly formed a valid consideration for the extinguishm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he mode of calculating the capital gains accruing to the shareholders on the distribution of assets by a company in liquidation. Since the provisions of s. 46(2) applied only to the distribution of assets by such companies in liquidation as were covered by the definition of the word company " in s. 2(17), capital gains tax was not leviable when companies other than those which fell within the definition in s. 2(17) distributed assets on liquidation to their shareholders. The Supreme Court, for arriving at the aforesaid view, placed reliance on its earlier decision in the case of CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 and observed that the question as to whether the distribution of assets of a company, which had gone into voluntary liquidation, amongst its shareholders, would amount to sale, exchange, relinquishment or transfer within the meaning of s. 12B of the Act of 1922, as amended in 1956, was considered by that court in the case of Madurai Mills [1973] 89 ITR 45 (SC.). While answering that question in the negative, the court held that the act of the liquidator in distributing the assets of the company which had gone into voluntary liquidation did not result in the cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in that case Were that the assessee had purchased machinery worth Rs. 2,81,741 and gave it on hire to the jasmine Mills at an annual rent of Rs. 33,900. On August 11, 1966, a fire broke out in the premises of the mills and the assessee's machinery was damaged to such an extent that it could not any longer be put to use as such. The mills had insured the assessee's machinery along with its own machinery and on a settlement of the insurance claim, it received a certain amount out of which it paid a sum of Rs. 6,32,533 to the assessee on account of the destruction of its machinery. The difference between the actual cost of the machinery and its written down value worked out to Rs. 2,62,781 and in the assessment proceedings for the assessment year 1967-68, the assessee returned the amount of Rs. 2,62,871 as profit chargeable to tax. The ITO subjected to tax the additional amount of Rs. 3,50,792, being the difference between the original cost of Rs. 2,81,741 and the amount of Rs. 6,32,533 received from the mills, as " capital gains " chargeable under s. 45 of the I.T. Act. The assessee had contended before the ITO that no question of capital gains arose since no transfer of capital as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee. In other words, it is such extinguishment which must have occasioned the profit or gain and not any other independent transaction as a result of which some different rights are terminated by satisfaction or otherwise. The transaction, in order to attract the charge of tax as capital gains, must be such that consideration is received by the assessee or accrues to the assessee as a result of the extinguishment of the rights in the capital asset." It was further held by this court (p. 301) : " ...there was an extinguishment of the proprietary interest of the assessee in the capital asset, namely, the machinery, and profit arose to it in consequence of the payment made for such extinguishment. On account of fire, the machinery was so extensively damaged that, for all practical purposes, it ceased to be useful as such. Since the entire machinery in the premises of the insured was covered by insurance, the insurer paid the value of the machinery to the insured and took away the damaged machinery. The insured, in its turn, paid the proportionate amount out of the compensation received from the insurer to the assessee and, in the course of this transaction, the bundl ..... 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