1. The only point in this appeal by the assessee us whether the departmental authorities were right in refusing the deduction of Rs. 1,68,399/-in respect of the capital loss stated to have been incurred by the assessee in regard to the shares held by it in Aluminum Corporation of India Ltd. (ACIL for short) 2. The assessee is a Hindu Undivided Family. In this appeal we are concerned with the assessment year 1987-88 for which the previous year ended on 29-3-1987. In the return the assessee claimed deduction in respect of the aforesaid capital loss. The Income-tax Officer while completing the assessment under section 143 (3) observed that the assessee held 15390 equity shares in ACIL for Rs. 1,68,399 which figure was written off in the assessee's books and was claimed as capital loss. He was of the view that since there was no transfer in terms of section 45 read with section 2 (47) of the Act, the claim cannot be allowed. He referred to the judgments of the Madras High Court in the case of Sundaram Industries (p) Ltd. v. CIT (1969) 74 ITR 243 and in the case of C. A. Natarajan v. CIT (1973) 92 ITR 347.
3. It was contended in appeal before the CIT (Appeals) that the capital loss ought to have been allowed. In particular, it was contended that the assessee's rights in the shares were extinguished as a result of nationalisation of ACIL by the Govt. of India and, therefore, there was a transfer within the meaning of section 2 (47) of the Act. The CIT (Appeals) referred to the judgment of the Supreme Court in the case of CIT v. Madurai Mills Co. Ltd. (1973) 89 ITR 45 and rejected the assessee's contention. The disallowance of the capital loss was, therefore, confirmed.
4. In the further appeal Mr. Lahiri for the assessee submits that the loss is allowable under section 46 (2) read with section 48 of the Act.
He points out that as per the order of the High Court dated 21-11-1986, the ACIL has been ordered to be wound up under section 433 of the Companies Act and on liquidation the rights of the assessee in the shares became extinguished resulting in the capital loss. A copy of the order of the High Court was submitted as part of the paper book. It was further pointed out that ACIL was nationalised by the Govt. of the India by passing the Aluminum Corpn. of India Ltd. (Acquisition and transfer of Aluminium Undertaking) Act, 1984. Our attention was drawn to the net assets of ACIL as on 31-3-1976 as per the balance-sheet.
Relying on the figures appearing in the balance-sheet Mr. Lahiri submitted that the excess of liabilities over assets amounted to Rs. 2.
9 crores and, therefore, the shares had no value which prompted the assessee to write off the value thereof in its books and claim deduction as capital loss. Apart from the statutory provisions which we have referred to above, he relied on the following judgments of the Madras High Court in support of the claim : 5. The Ld D. R. submitted that the provisions of section 46 (2) were not applicable. He pointed out that it is not a provision enabling the assessee to claim capital loss. He further contended that at any rate the loss was not allowable in the present year. In support of his submission the Ld. D. R. strongly relied on the orders of the revenue authorities.
6. On a careful consideration of the rival contentions we are of the view that the assessee is not entitled to succeed in its claims. Under section 2 (47) of the Act, transfer in relation to a capital asset includes the sale, exchange or relinquishment of the asset of the extinguishment of the rights therein. Therefore, in order to claim capital loss it has to be established by the assessee that there was a transfer, of the capital asset in the relevant previous year. Under section 45 if there is a transfer of a capital asset as defined in section 2 (47), the capital gains or loss will have to be computed in the assessment in respect of the year in which the transfer took place.
We find that in the present case there is no transfer of the shares held by the assessee in ACIL. It is no doubt true that as per the Govt.
of India Act of 1984. (supra) the Aluminium Undertaking held by the ACIL was nationalised. But that is not the same thing as saying that the ACIL itself was nationalised or that the said company itself came to an end. The company continue to exist, though without the Aluminium Undertaking which was taken over by the Govt. The share holders remained shareholders of the company. The company continued to exist even thereafter.
Thus, there was no extinguishment of any rights of the assessee. The assessee continued to hold the shares in the company. That was precisely why the shares were continued to be shown in its books of account.
Merely because the liabilities of ACIL far exceeded the assets and, therefore, the value of the shares became nil, it cannot be stated that there was a transfer of the capital asset in the relevant previous year.
All that had happened was only a fall in the value of the shares and that does not justify the assessee's claim that there was a transfer of the capital asset. The order of the High Court dated 21-11-1986 on company petition no. 377 of 1974 is an order passed under section 433 of the Companies Act on the petition of M/s. Babulal Krishna Gopal, a partnership firm, which was a creditor of ACIL. The High Court has directed that the ACIL be wound up by the Court under the provisions of the Companies Act. The effect of this order is not that the Company has been finally dissolved. That result would follow only where an order is passed under section 481 of the Act dissolving the company, when the affairs of the company have been completely wound up. It is only the order passed by the High Court under section 481 of the Companies Act dissolving the company which puts an end to the existence of the company. Once such an order is passed, the company becomes a non-existent party. The order of the High Court under section 433 of the Companies Act only sets in motion the liquidation proceedings which have to culminate in an order of dissolution under section 481. Unless and until such an order of dissolution is passed, it is not possible to say that the rights of the shareholders have come to an end. The shares continue to exist with the shareholders. A detailed procedure is prescribed by the Companies Act where the winding up is ordered by the Court and such procedure is laid down by sections 433 to 447. The effect of liquidation proceedings on the rights of the shareholders has been stated by the Calcutta High Court in the case of CIT v. Associated Industrial Development Co. (P) Ltd. (1969) 73 ITR 50 at page 52 as under : "It is important to remember that a share in a company is the expression of a proprietary relationship, the shareholder is the proportionate owner of the company but he does not own the company's assets which belong to the company as a separate and independent legal entity. A share represents a bundle of rights. On liquidation, voluntary or compulsory, the holder's ownership over those rights are neither extinguished nor obliterated, only the contents of those rights and the manner of their exercise become altered." The above statement of the law by the jurisdictional High Court is binding on us and we have to, therefore, hold that the rights in the shares held by the assessee were not extinguished as soon as the order was passed by the High Court on 21-11-1986.
7. In the case of C. A Natarajan (supra) the Madras High Court held at page 351 that if the winding up proceedings of the company were not over of an order of dissolution under section 481 of the companies Act is not passed by the High Court in the relevant accounting year, the question whether the assessee would be entitled to claim capital loss on the alleged extinguishment of his rights in the shares would not arise for consideration.
8. Therefore, we hold that there is no extinguishment of the assessee's rights in the shares on the passing of the order of the High Court 21-11-1986.
9. The other judgments of the Madras High Court cited by Mr. Lahiri do not touch the present controversy and, therefore, they are not applicable.
10. As regards the claim that the capital loss is allowable under section 46 (2) read with section 48 of the LT. Act, we are of the view that these provisions are not applicable at all. Under section 46 (2) where a shareholder on the liquidation of a company receives any money or other assets from the company, he shall be chargeable to income-tax under the head 'Capital gains' in respect of the money so received or the market value of the assets on the date of distribution, as reduced by the amount assessed as dividend under section 2 (22)(c), and the sum so arrived at shall be deemed to be the full value of the consideration for the transfer for the purposes of section 48 of the Act. Now this section comes into operation only when the assessee receives any money or other assets from the company under liquidation. Section 46 (2) has been held by the Madras High Court in the case of M. A. Alagappan (supra), a decision referred to by Mr. Lahiri himself, as an independent provision making the amounts received chargeable to Income-tax as provided therein. The charge arises once it is shown that the assessee has received some money or assets from the company under liquidation. In the present case the provisions are not attracted at all since it has not been shown-in fact the assessee has no such case - that it has received any money from the liquidator. Mr. Lahari contended that the assessee did not receive any thing from the company which according to him means that he received Rs. nil from the company and, therefore, the said Rs. nil should be taken as full value of consideration for the purpose of section 48 and from this figure of Rs. nil the cost of acquisition of the shares had to be deducted under section 48 which would give a negative figure, which must be treated as capital loss and allowed. We are afraid that such an interpretation of the section is wholly untenable. As already stated, the section comes into play only when the shareholder assessee receives in point of fact any money or other assets from the company under liquidation. In the absence of any such receipt, the provisions remain dormant and unactivated. The provision does not permit the interpretation suggested on behalf of the assessee, though we must concede that it is an ingenious argument. As held by the Supreme Court in the case of K. P.Varghese v. ITO (1981) 131 ITR 597, we have to avoid the interpretation which would reduce the statutory provision to absurdity and result in manifestly unreasonable consequence. The acceptance of the interpretation suggested on behalf of the assessee regarding section 46 (2) would result precisely in the same. We must, therefore, reject it.
11. The judgment of the Madras High Court in the case of C. A.Natarajan (supra) to which we have already referred to arises out of more or less similar facts. There the assessee held shares in a company which went into liquidation. The liquidator also informed the assessee that he cannot expect any payment towards the shares. It was contended by the assessee that there was relinquishment of his right over the shares upon liquidation and the value of the shares should be allowed to him as capital loss. The Madras High Court held firstly with reference to section 12B of the 1922 Act that there was no relinquishment of the capital assets by the assessee. It was next held that merely because the official liquidator had found that the assets would not be sufficient to pay the secured creditors and, therefore, the assessee cannot expect to receive any thing from him, the assessee did not cease to be a shareholder or contributory nor are any of his rights as a shareholder or contributory affected, though the value of the shares may be reduced to nil. On this basis it was held that the assessee was not entitled to the allowance of capital loss. This decision squarely applies to the present case. Though the Madras High Court was concerned with section 12B of the old Act where the word "transfer" did not include extinguishment of the rights of the assessee in the capital asset while section 2 (47) of the 1961 Act includes it, the second reason given by the High Court is equally applicable to the present case with regard to the rights of the shareholders, vis-a-vis the liquidation proceedings of the company. It must be remembered that in the same judgment the High Court had also observed that in the absence of any order of dissolution under section 481 of the Companies Act, there was no transfer which can give rise to capital loss. Though in the present case the assessee has contended that his rights in the shares were extinguished, we have already seen that such a contention cannot be accepted, having due regard to the position of a shareholder of a company which has been ordered to be wound up but in which case no order under section 481 of the Companies Act has passed. We have already seen that until such an order is passed, the rights of the shareholders continue to remain alive. In this connection we have also referred to the judgment of the Calcutta High Court to the effect that on liquidation only the contents of the shareholder's rights and the manner in which they would be exercised become altered. Thus, we hold that in the present case there is no extinguishment of the assessee's rights in the shares held in ACIL by virtue of the order of the High Court dated 21-11-1986.
12. We have not been referred to any other order passed by the High Court in the liquidation proceedings.
13. For the aforesaid reasons, we confirm the orders of the departmental authorities rejecting the assessee's claim and dismiss the appeal.