TMI Blog1993 (7) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiary of the assessee. In June 1986, Arvalli went into voluntary liquidation and in July 1987 the assessee received assets of the value of Rs. 93,24,000 from Arvalli. The Assessing Officer computed capital gains in the hands of the assessee by invoking the provisions of section 46(2) of the Income-tax Act by taking the excess of the value of assets received (viz., Rs. 93,24,000) over the amount paid by the assessee for acquiring the shares of Arvalli (i.e. Rs. 55,36,680). The CIT (Appeals) took note of the assessee's main contention that capital gains were not to be computed at all in view of section 47(v) but rejected it after a very detailed and learned discussion in his order. He, however, accepted the assessee's alternative contention that in view of section 49(1)(iii)(e) capital gains should be computed by taking the cost in the hands of the previous owner viz., KPPL which was Rs. 1,11,00,000. Obviously on that basis, capital gains would be Nil because the cost to the previous owner was higher than the value of the assets received by the assessee. The assessee is in appeal before the Tribunal against the rejection of its main contention of the provisions of section 47(v) b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 46(2) and in absence of a corresponding provision under the old Act the Hon'ble Madras High Court held that the corresponding liability did not exist in assessment years 1960-61 and 1961-62 which were governed by the old Act. He also referred to the Hon'ble Madras High Court decision in CIT v. M.A. Chidambaram [1984] 147 ITR 180 to buttress his argument that section 46(2) is a charging section but it can be referred to through section 45. Then he cited the Hon'ble Gujarat High Court decision and the Hon'ble Supreme Court decision In the case of ClT v. R.M. Amin [1971] 82 ITR 194 and CIT v. R.M. Amin [1977] 106 ITRR 368 respectively and referred us to some specific parts of these two decisions. In support of his abovementioned contention that section 46(2) was the charging section but through the modality of section 45, he made brief reference also to the Hon'ble Patna High Court decision in Addl. CIT v. Uma Devi Budhia [1986] 157 ITR 478 which has been heavily relied on by the CIT(A) on page 13 of his order. In this context he referred to yet another decision of the Hon'ble Patna High Court in the case of CIT v. Murarilal Budhia [1983] 139 ITR 410. Referring to the observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ruby Trading Co. (P.) Ltd. he submitted that in that case the Tribunal was not considering the applicability of section 47(v) to the cases covered under section 46(2) and hence that decision did not support the assessee's case. He cited the provisions of section 55(2)(b)(iii) to say that Legislature intended that capital gains would be computed and taxed in pursuance of section 46(2). 6. In reply, the learned advocate for the assessee very strongly objected to the learned D.R.'s contention that section 47(v) applied only to cases other than that of liquidation of companies and elaborated by saying that company under liquidation continues to be a company until it is wound up and its name is struck off from the records of the Registrar of Companies. He tried to draw indirect support from the Hon'ble Gujarat High Court decision in the case of CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 by relying on observations on pages 404 and 405 of the reports (91 ITR). In regard to the learned D.R.'s reference to section 55(2)(b)(iii) the learned advocate for the assessee submitted that even that provision should be viewed to take into account the contingency of capital gains being not taxed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of a capital asset by a subsidiary company, if-- (a) the whole of the share capital of the subsidiary company is held by the holding company, and (b) the holding company is an Indian company : " So, section 46(2) prescribes that receipt of any money or other assets by a shareholder on the liquidation of a company would be giving rise to capital gains. Section 47(v) prescribes that any transfer of capital asset by a subsidiary company to a holding company would not be caught by the mischief of section 45 ; in other words, capital gains would not be arising. Assessee's claim is that in view of section 46(2) capital gains would arise but in view of section 47(v) they would not arise and the net effect would be that capital gains would really not arise. Department's case is that in spite of section 47(v) capital gains would arise in view of section 46(2). Now, all the High Court and Supreme Court decisions cited before us really pertain to the issue of applicability of section 46(2) de hors the provisions of section 47(v). It means the question of interaction or the result of combined reading of sections 46(2) and 47(v) has not been considered in any of the High Court as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tending parties did not really provide any decisive guidance. It is all the more so because some observations in one set of decisions appear to be primafacie irreconcilable with the observations in the other set of decisions. 11. Actually, though applicability of section 46(2) as such is not in dispute in this case and only the impact of section 47(v) is viewed differently by the contending parties before us, a little deeper analysis of the four decisions (upholding levy under section 46(2) would not be out of place. A careful study of those four decisions reveals that the main arguments of the respective assessees were on two points. One point was that transaction envisaged in section 46(2) is not a transfer even within the extended meaning given to the word 'transfer' as per section 2 (47) of the IT Act and hence in spite of this specific provision of section 46(2) capital gains cannot arise. As already noted, this argument was rejected not only in these four decisions which were against the assessees but also in the other two decisions in which the respective assessees had succeeded due to other attendant circumstances. In the four decisions which went against the respective a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any distribution on partition of HUF) which are not transfers and even the transactions envisaged in sections 46(1) and 46(2) are perhaps not transfers even in terms of the extended meaning given to the word 'transfer' in section 2(47) of the IT Act. Even then, they are assumed to be transfers as per the phraseology used in the Act. Of course, legislative assumptions cannot be treated as law (vide M.A. Alagappan's case). 14. Against all this background, we may now come to our reasoning proper. The view propounded on behalf of the department may be in a way regarded as canvassing a literal interpretation of section 46(2). This is so because solely on the basis of phraseology used in section 46(2) department wants to exclude the application of section 47(v). We are inclined to think that perhaps even on the literal interpretation the department's stand cannot be upheld. However, more important aspect against the department is the applicability of the principle of harmonious construction rather than that of literal interpretation. In this particular matter harmonious construction is certainly warranted : this is so because the phraseology of sections 46 and 47 leaves some grey ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. (P.) Ltd. goes to support the assessee's case. 19. Last but not the least, is the aspect that in the domain of interpretation of statutes even if two views are equally possible the one favourable to the subject should be adopted. In our considered view the two opposing views canvassed before us are not equally possible. In our view, the view propounded on behalf of the assessee has a greater force. Therefore, that view should prevail. Hence, we would uphold the view propounded on behalf of the assessee and hold further that in spite of section 46(2) capital gains chargeable to tax had not arisen in this case in view of the fact that benefit of section 47(v) would be available to the assessee. 20. For the facility of exposition it would be better to consider here and now the Department's ground of appeal on this point though strictly speaking it may be viewed as a digression. As already indicated the CIT (Appeals) had accepted the assessee's alternative contention that in view of section 49(1)(iii)(e) quantification of capital gains in the hands of the assessee should be done by substituting the cost to the previous owner. One of the grounds of appeal is directed against this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. In the course of discussion, our attention was also drawn to the Hon'ble Madras High Court decision in the case of G. Padmanabha Chettiar Sons v. CIT [1990] 182 ITR 1 to say that assessee is not entitled to adopt cash system for credits and accrual system or mercantile system for debits. The learned advocate for the assessee drew our attention to pages 29 to 35 of the paper book and then to pages 77 to 80 of the paper book and ultimately to pages 201 and 203 of the paper book for emphasising that the cash system for credits for interest account was adopted and accepted for preceding two years viz., assessment years 1986-87 and 1987-88 on one hand and in the last completed assessment for assessment year 1990-91 also. He submitted that only for the intervening period viz. assessment years 1988-89 and 1989-90 the department was disputing this aspect. At one stage it was suggested that the matter may be restored to the file of the Assessing Officer to ascertain whether the debits on interest account were also accounted for on cash basis but in the meantime the assessee's counsel brought to our notice the statement of income furnished for this year which bears the following note ..... X X X X Extracts X X X X X X X X Extracts X X X X
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