Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1982-83, the following questions of law have been referred to this court :
R. A. No, 1475/(Cal) of 1986 :
'(1) Whether, on the facts and in the circumstances of the case, the Income-tax Officer was correct in law in holding that the investment in public sector undertakings was a capital asset within the meaning of Section 2(14) of the Income-tax Act, 1961 ?
(2) Whether the finding of the Tribunal that the assessee-trust had invested in the units of the Unit Trust of India during the relevant previous year was based on proper evidence and materials ?
(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the entire sale proceeds from shares were invested in the acquisition of other capital assets within the meaning of Section 11(1A) of the Income-tax Act, 1961?
(4) Whether the Income-tax Appellate Tribunal was justified in holding that the assessee-trust was entitled to exemption under Section 11(1A) of the Income-tax Act, 1961, in respect of the capital gains of Rs. 23,79,538 on the sale of shares ?'
R. A. No, 1476/(Cal) of 1986 :
'(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that there was extinguishment of the right of the assessee in the debenture-stock held by it in Messrs. Braithwaite and Co. (I.) Ltd., within the meaning of Section 2(47) read with Section 45 of the Income-tax Act, 1961, uponthe receipt of the letter from the Commissioner of Payments that nothing could be paid to it for the stock so held by it ?
(2) Whether the Tribunal was justified in law in holding that the assessee incurred capital loss of Rs. 1,30,000 (1ong-term) in respect of the debenture-stock held by it in Messrs. Braithwaite and Co. (I.) Ltd. ?'
2. Shortly stated, the facts are that the assessee in this case is a trust and the assessment year involved is 1982-83 for which the previous year ended on December 31, 1981. During the relevant previous year, the assessee-trust sold shares of various companies which formed the corpus of the trust fund for a net consideration of Rs. 37,78,640. On this transaction, the capital gains shown amounted to Rs. 23,79,538. The assessee claimed that the net consideration of the sale was utilised for acquiring new capital assets as under :
Date of utilisationAmount
Rs.Particulars
In 1981 : 29-12-198112,50,000Fixed deposit with Hindusthan Petroleum Corporation Ltd.29-12-19817,50,000Fixed deposit with Bharat Petroleum Corporation Ltd.29-12-19815,00,000Fixed deposit with Bharat Heavy Electricals Ltd.30-12-19815,88,149
48,130 units of the Unit Trust of India 30,88,149
In 1982 : 13-1-19824,00,000Fixed deposit with Bharat Petroleum Corporation Ltd.8-2-19823,00,000
Fixed deposit with Bharat Heavy Electricals Ltd. 7,00,000
3. Out of the above, a sum of Rs. 7,00,000 was invested after December 31, 1981, and an option was exercised under the Explanation to Section 11(1) requesting the Income-tax Officer to treat the above sum as deemed application during the year ended on December 31, 1981. It was. urged that the capital gains of Rs. 23,79,538 was, therefore, exempt from tax under Section 11(1) of the Income-tax Act, 1961.
4. The Income-tax Officer found that the assessee made fixed deposits with Central Government undertakings and further purchased 48,130 units of the Unit Trust of India. As regards the deposit of Rs. 12,50,000 as mentioned above, no confirmation from the Hindusthan Petroleum Corporation Ltd. had been filed. The Income-tax Officer was of the view that the investment in public sector undertakings was nothing but loans floated by these companies under their schemes and did not amount to the acquisition of capital assets. As regards unit trust investment, he found that the shares were not issued during the relevant year. The units were not marketable and the assessee did not become a registered holder of the units in the year under reference. He also found that the sum of Rs. 5,69,151 was included by the assessee in 'loans and advances' and had not been spent during the calendar year 1981.
5. The Income-tax Officer observed that the assessee could not get the benefit of deemed application under Section 11(1A) by utilising the net consideration in the subsequent year. The Income-tax Officer did not accept the assessee's contention that the net consideration for the sale of shares was utilised by it in acquiring new capital assets. He, therefore, did not allow exemption in respect of capital gains of Rs. 23,79,538 under Section 11(1A) of the Income-tax Act.
6. Being dissatisfied with the Income-tax Officer's order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), after referring to the circulars of the Central Board of Direct Taxes being Nos. 2-P(LXX-5) of 1963 and No. 52 dated December 30, 1970, came to the conclusion that the creation of fixed deposits in the Central Government undertakings amounted to acquisition of capital assets by the assessee-trust within the meaning of Section 11(1A) of the Income-tax Act. As regards the units of the Unit Trust of India, the Commissioner of Income-tax (Appeals) was of the opinion that these were purchased by the assessee and the delay in issuing the shares was made only by the issuing authority. He also observed that the amount of Rs. 5,69,151 which was received only in January, 1982, had been invested in the subsequent year and further for deemed application, the trust had exercised its option. The Commissioner of Income-tax (Appeals), therefore, came to the conclusion that the assessee fulfilled the conditions laid down in Section 11(1A) of the Act, and, therefore, capital gains realised on the sale of shares was exempt from tax under the said section.
7. Against the order of the Commissioner of Income-tax (Appeals), the Department preferred an appeal before the Tribunal. It was urged on behalf of the Revenue that the creation of fixed deposits did not amount to the acquisition of capital assets and it was only in the nature of loans. Reference was made to the observation appearing at page 435 of the Commentary on Taxation of Charitable Trusts by Sri M. P. Agarwal. It was further contended that the units were not registered in the name of the assessee and, therefore, the assessee could not get exemption even irrespective Of the units purchased during the relevant previous year. It was urged that the assessee was not entitled to the benefit provided in Section 11(1A) of the Income-tax Act, 1961. The assessee supported the order of the Commissioner of Income-tax (Appeals).
8. The Income-tax Appellate Tribunal, after considering the submissions made on behalf of the Revenue and the assessee, observed that the creation of the fixed deposit with the Central Government undertaking amounted to acquisition of property which became capital assets in view of the provisions of Section 2(14) of the Income-tax Act and, by creating fixed deposits, the assessee had fulfilled the conditions of Section 11(1A) of the Act.
9. As regards the investment made in the Unit Trust of India, the Tribunal observed that the money had been tendered by the assessee and, even if there was some delay in issuing the certificates, it could not be said that it had not acquired the capital assets. The Income-tax Appellate Tribunal did not accept the contention of the Revenue that the units were not acquired during the relevant year.
10. In view of the above and after considering the provisions of Section 13(5) of the Income-tax Act, the Tribunal held that the assessee was eligible for exemption in respect of capital gains. The Tribunal thus upheld the order of the Commissioner of Income-tax (Appeals) and dismissed the appeal filed by the Revenue.
11. The assessee-trust was having 730 debenture-stock of Messrs. Braithwaite and Co. (I.) Ltd. Messrs. Braithwaite and Co. (I.) Ltd. was taken over by the Government and the assessee was intimated that it could not get any amount out of the debenture-stock. The assessee claimed capital loss (long-term) of Rs. 1,30,000 on writing off of 7 3/4 debenture-stock as stated above. This was not allowed by the Income-tax Officer. On appeal, the Commissioner of Income-tax (Appeals) upheld the Income-tax Officer's action.
12. The assessee filed cross-objections and contended that the Income-tax Officer had not correctly computed the capital gains. It was urged on behalf of the assessee that it could not get any amount out of the debenture-stock and, therefore, there was extinguishment of the assessee's right in the assets and it thus suffered long-term capital loss of Rs. 1,30,000. The Tribunal observed that the debenture-stock held by the assessee was its capital assets and upon receipt of the letter from the Commissioner of Payments that nothing could be paid to the trust for the debenture-stock held by it, there was extinguishment of the right of the assessee in the capital stock. The Tribunal, accordingly, held that the assessee suffered long-term capital loss of Rs. 1,50,000 as a result of the extinguishment of rights as above. Since the capital gains had been held to be exempt from tax, the Tribunal dismissed the ground taken by the assessee in regard to relief under Section 80T of the Income-tax Act, 1961, as infructuous. The Tribunal thus allowed the assessee's cross-objections in part.
13. Before us, the contentions raised before the Tribunal have been reiterated. We have given our anxious consideration to the arguments advanced.
14. The first and third questions in R. A. No. 1475/(Cal) of 1986 are interconnected and converge on one issue, viz., whether the investment in public sector undertakings could constitute a capital asset and in that view, whether the exemption available under Sub-section (1A) of Section 11 with regard to capital gains arising from the transfer of any existing capital asset of a trust held wholly for charitable or religious purposes is available when the net consideration for the transfer is invested in a fixed deposit with a public sector company. In other words, the question is whether such fixed deposit with a public sector company is a capital asset and whether the deposit of the sale proceeds of the existing asset amounts to acquisition of a new asset within the meaning of that Sub-section (1A). The said sub-sections so far as is material for the case, reads as follows:
'(1A) For the purposes of Sub-Section (1),--
(a) where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely :--
(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain ;
(ii) where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset ;'
15. The two questions mentioned above need be dealt with conjointly as they are inseparable. In this case, the assessee claims that it sold the shares of various companies held by it as property under trust and with the net consideration received on such sale, it has acquired a new capital asset in the shape of fixed deposits with a number of public sector companies or Government companies. Thus, the assessee's contention is that the primary condition for exemption of the capital gains from taxation has been satisfied because with the proceeds of sale of the shares held as capital assets, a new capital asset being fixed deposits with the public sector companies have been acquired.
16. The contention of the Revenue is that the fund arising as the consideration for sale of the old capital asset continues to remain the same fund lying in deposit with the depositee-company and there is no conversion of the sale proceeds as a fund into a new capital asset. In other words, the Revenue contests that there has been any acquisition of new assets by mere funding of the sale proceeds in a deposit. If the consideration money remains consideration money only in deposit with a third party, such a transaction cannot amount to an acquisition of a fresh capital asset according to the Revenue.
17. In this connection, the Revenue relied on an instruction of the Central Board of Direct Taxes dated September 24, 1975, which declares that fixed deposits with a bank for a period of six months or above would be regarded as utilisation of the net consideration in acquiring a new capital asset within the meaning of Section 11(1A) of the Act. In CIT v. Hindusthan Welfare Trust : [1994]206ITR138(Cal) , where the judgment was delivered by this Bench on September 25, 1991, we have had occasion to go into the legality of the said circular of the Central Board of Direct Taxes particularly with regard to the stipulation of the minimum duration of such fixed deposits. According to the Board, an investment of the net consideration in fixed deposit with a bank for a period of six months or above is to be regarded as utilisation of the net consideration in acquiring another asset. But that point is not germane to the present situation. Here, the question is whether the Board's instruction could be read as exclusive of other investments, i.e., investment by fixed deposit otherwise than with banks and even if it be so, whether the Board could, by executive fiat, add on to the legislation. One argument could be that the Board was merely concerned with the investment of the net consideration in fixed deposit with banks and, therefore, its observation could not be construed as an embargo against deposits with non-banking entities. The said instruction is reproduced :
'Instruction No. 883
XXI/1/74-Section 11(1A).--'Another capital asset'--Scope of expression.--(1) Section 11(1A) of the Income-tax Act, 1961, provides that where a capital asset, being property held under trust wholly for charitable or religious purposes is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified therein.
2. The Board had occasion to examine whether investment of the net consideration in fixed deposit with banks would be regarded as utilisation of the amount of the net consideration for acquiring another capital asset within the meaning of Section 11(1A) of the Income-tax Act, 1961. The Board has been advised that investment of the net consideration in fixed deposit with a bank for a period of six months or above would be regarded as utilisation of the net consideration in acquiring another capital asset within the meaning of Section 11(1A) of the Income-tax Act, 1961.'
18. We have to consider the issue against the backdrop of various Direct Taxes Acts, the Wealth-tax Act, 1957, in particular, as also in the perspective of Sections 11 to 13 of the Income-tax Act.
19. Sub-section (5) of Section 11, in our view, is the keynote to the solution of the problem. The said section sets forth the various forms and modes in investing or depositing the fund of a trust for charitable or public religious purposes. The said Sub-section (5) of Section 11 reads as follows:
'The forms and modes of investing or depositing the money referred to in Clause (b) of Sub-section (2) shall be the following, namely:--
(i) investment in savings certificates as defined in Clause (c) of Section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government ;
(ii) deposit in any account with the Post Office Savings Bank ;
(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank):
Explanation.--In this clause, 'scheduled bank' means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959) ; a corresponding new bank constituted under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) ; (iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) ;
(v) investment in any security for money created and issued by the Central Government or a State Government ;
(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government ;
(vii) investment or deposit in any Government company as defined in Section 617 of the Companies Act, 1956 (1 of 1956) ;
(viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India and which is approved by the Central Government for the purposes of Clause (viii) of Sub-section (1) of Section 36 ;
(ix) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is approved by the Central Government for the purposes of Clause (viii) of Sub-section (1) of Section 36 ;
(x) investment in immovable property :
Explanation.--'Immovable property' does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth ; (xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964).'
20. It may be observed that the investment or deposit in any public sector company appears as one of the permitted forms or modes of investment or deposit. Now, the very expression 'investment or deposit' can be very well argued to be a capital asset.
21. The expression 'capital asset' is defined in Clause (14) of Section 2 and the definition goes in the widest terms possible except for the specific exclusions. The said definition so far as is material is reproduced below:
''capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-
(i) any stock-in-trade, consumable stores or raw materials held for the purpose of his business or profession ;
(ii) personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him. . ..
(iii) agricultural land in India, ....
(iv) 6 1/2 per cent. Gold Bonds, 1977, (or 7 per cent. Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government) ;
(v) Special Bearer Bonds, 1991, issued by the Central Government ;'
22. Thus, capital asset includes property of any kind held by an assessee. 'Deposits or investments' are a kind of property and they do not fall in the exclusionary limb of the said definition.
23. The definition, when pitted against the definition of assets in Section 2(e) of the Wealth-tax Act, 1957, makes it absolutely clear that the very terms 'investments and deposits' are to be accepted as capital assets. Wealth-tax is a tax on the capital value of assets. Therefore, whatever is brought in the net of wealth-tax as an asset is to be ordinarily taken as a capital asset for income-tax assessment unless excluded by its definition in Section 2(14). Under Section 2(e) of the Wealth-tax Act, the expression 'assets' includes property of every description, movable or immovable, excepting those specifically excluded, e.g., agricultural land, farm house, animals, etc.
24. The Wealth-tax Act defines 'asset' in a similar vein as the Income-tax Act defines 'capital assets'. The assets both for Wealth-tax and the Income-tax Acts, barring the specified exclusions, include property of every description, movable or immovable. The Wealth-tax Act has also an exclusionary part, but the exclusions stated therein like the exclusions in the definition of capital assets do not touch any investments or deposits. On the other hand, the investments and deposits are, in the first instance, brought within the initial charge of wealth-tax and, afterwards, by special provisions, namely, Section 5, excludes from the charge of tax certain deposits and investments as enumerated in that section. References may be made in this connection to Clauses (xv), (xvi), (xxva), (xxvb), (xxvi), (xxvii), (xxviia), (xxviib), (xxviic), (xxviid), (xxixxx) of Section 5(1) of the Wealth-tax Act. Thus, it is clear that whatever comes within the definition of assets under the Wealth-tax Act in its Section 2(e) should likewise come under the definition of capital assets unless specifically excluded. The fixed deposit either with banks or with a public sector company is not an excluded asset under either of the two definitions, viz., the definition of 'capital assets' under Section 2(14) of the Income-tax Act, 1961, and 'assets' under Section 2(e) of the Wealth-tax Act, 1957.
25. What reinforces the assessee's case is the special mention in Sub-section (5) of Section 11 of deposits with public sector companies. This only shows that an investment or deposit in a public sector company is firstly an asset and secondly a capital asset and thirdly a permitted capital asset under the special law relating to the assessment of charitable or public religious trusts. Therefore, the contention of the Revenue that the investment by way of deposit in a public sector company cannot be treated as a new asset acquired with the net consideration in terms of Section 11(1A) is not tenable.
26. The third question has, however, one more facet. In the case as revealed in the statement of case, the two amounts of fixed deposits with such a public sector company as Bharat Petroleum Corporation Ltd., to the aggregate of Rs. 7 lakhs were on dates beyond the expiry of the calendar year 1981, which the assessee-trust follows as its accounting year. Therefore, the acquisition of new assets by way of such fixed deposits were not in the accounting year relevant to the assessment year 1982-83, but in the calendar year 1982 relevant to the assessment year 1983-84. The question is whether, despite the acquisition of the fresh capital asset not being within the accounting year relevant to the assessment year 1982-83, the exemption under Section 11(1A) shall relate back to the assessment year 1982-83 by reason of the fact that the assessee exercised an option under the Explanation to Section 11(1) requesting the Income-tax Officer to treat the above sum as deemed application during the year ended on December 31, 1981. The fact that the assessee exercised the option under the said Explanation is not disputed. What is questioned is whether such exercise of option is permissible and shall entitle the assessee to be deemed to have utilised the net consideration received on transfer of the existing asset for acquiring a new asset in the shape of the fixed deposits relatable to the assessment year 1982-83, and the assessee should be allowed exemption under Sub-section (1A) of Section 11.
27. Section 11(1) reads as follows :
'(1) Subject to the provisions of Sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-
(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India ; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent. of the income from such property ;
(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India ; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of twenty-five per cent. of the income from such property ; . . . .
Explanation.--For the purposes of Clauses (a) and (b),--
(1) in computing the twenty-five per cent. of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in Section 12 shall be deemed to be part of the income ;
(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of seventy-five per cent. of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount-
(i) for the reason that the whole or any part of the income has not been received during that year, or
(ii) for any other person, then,--
(a) in the case referred to in Sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount ; and
(b) in the case referred to in Sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount,
may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under Sub-section (1) or Sub-section (2) of Section 139, whether fixed originally or on extension for furnishing the return of income) be deemed to be income applied to such purposes, during the previous year in which the income was derived ; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in Sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in Sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.'
28. In our view, by reason of the option exercised under the Explanation to Section 11(1), the assessee is entitled to the benefit under Section 11(1A) inasmuch as the definition of income as contained in Section 2(24) of the Act includes capital gains as one of the species of income. That being so, the option as exercisable with regard to income should also avail to capital gains provided such option is exercised in writing before the expiry of the time allowed under Sub-section (1) of Section 139 for furnishing the return. Therefore, the amount of Rs. 7 lakhs utilised in acquiring fixed deposits with the Bharat Petroleum Corporation Ltd. and the Bharat Electronics Ltd. should also be allowed exemption under the said provision for the assessment year 1982-83.
29. For the reasons aforesaid, we answer the first and the third questions in R. A. No. 1475/(Cal) of 1986 in the affirmative and against the Revenue.
30. The second question relates to investment in the Unit Trust of India. The assessee utilised the sale proceeds of the shares held by it as property wholly for charitable purposes in purchasing 48,130 units of the Unit Trust of India. Though the investment was made on December 30, 1981, for the sum of Rs. 5,88,149 for those units, the shares were not issued during the relevant year. On the date of expiry of the accounting year, i.e., December 31, 1981, the assessee was not the registered holder of the units.
31. Therefore, the acquisition of the units of the value of the said sum of Rs. 5,88,149 could not be treated as new capital assets acquired during the accounting year relevant to the assessment year 1982-83, and, to that extent, the assessee-trust should not have been allowed exemption in terms of Section 11(1A). We, however, agree with the Tribunal in holding that, so long as the investments were actually made during the accounting period, the issue of the units after the expiry of the accounting year is immaterial. The same shall relate back to the date when the payments were made to the unit trust for the purchase of the units.
32. There can be no cause for the Revenue to agitate that the utilisation in acquisition of fresh capital assets by way of units of the Unit Trust of India did not take place during the relevant previous year. The Revenue has not brought any evidence to prove that the money for the units had not been tendered on December 30, 1981. Nor is the finding of fact by the lower authorities on that aspect in any manner questioned. Therefore, we answer question No. 2 in the affirmative and in favour of the assessee.
33. Question No. 4 is cumulatively consequential to the preceding three questions and shall have be necessarily answered in the affirmative and against the Revenue.
34. This takes us to the questions arising from the assessee's cross-objection, i.e., the questions in R. A. No. 147G/(Cal) of 1986. The facts relating to these questions are as under :
The assessee-trust was having 730 debenture-stock of Messrs. Braithwaite and Co. (I.) Ltd. Messrs. Braithwaite and Co. (I.) Ltd. was taken over by the Government and the assessee was intimated that it could not get any amount out of the debenture-stock. The assessee claimed capital loss (long-term) of Rs. 1,30,000 on writing off of 7 3/4 per cent. debenture-stock as stated above. This was not allowed by the Income-tax Officer. On appeal, the Commissioner of Income-tax (Appeals) upheld the Income-tax Officer's action.
35. The assessee filed cross-objections and contended that the Income-tax Officer had not correctly computed the capital gains. It was urged on behalf of the assessee that it could not get any amount out of the debenture-stock and, therefore, there was extinguishment of the assessee's right in the assets and it thus suffered long-term capital loss of Rs. 1,30,000. The Tribunal observed that the debenture-stock held by the assessee was its capital assets and, upon the receipt of the letter from the Commissioner of Payments that nothing could be paid to the trust for the debenture-stock held by it, there was extinguishment of the right of the assessee in the capital stock. The Tribunal, accordingly, held that the assessee suffered long-term capital loss of Rs. 1,30,000 as a result of the extinguishment of its rights as above. Since the capital gains had been held to be exempt from tax, the Tribunal dismissed the ground taken by the assessee in regard to relief under Section 80T of the Income-tax Act, 1961, as infructuous. The Tribunal thus allowed the assessee's cross-objection in part.
36. It is an admitted position that the assessee's assets as and by way of aforesaid debenture-stock has been rendered valueless by reason of the insolvency of Braithwaite and Co. (I.) Ltd. Therefore, the assessee's contention that there has been extinguishment of the assessee's assets is a contention that has to be accepted. But the assessee's claim goes a step further in that the assessee claims the loss to be a loss under the head 'Capital gains' and to be treated as such in the computation of its income. This claim is not tenable. What was extinguished in the assessee's case is not the assessee's right to the assets but it is a case of extinguishment of assets per se. Any loss arising from extinguishment of an asset cannot be treated as a loss under the head 'Capital gains' inasmuch as no transfer is involved. The definition of 'transfer' in Clause (47) of Section 2 includes extinguishment but that extinguishment refers not to the extinguishment of the asset itself but to the extinguishment of the holder's right to the assets. This position is finally settled by the Supreme Court in its decision in Vania Silk Mills P. Ltd. v. CIT : [1991]191ITR647(SC) . In that case, a fire broke out in the mill's premises causing extensive damages to the mill including its machinery. The Revenue brought to tax the difference between the insurance amount received by the appellant and the original cost of the machinery as capital gains on the ground that extinguishment of the machinery by fire is also transfer within the definition of transfer in Section 2(47) of the Income-tax Act, 1961. The action of the Revenue was upheld by the Gujarat High Court but the said decision of the Gujarat High Court was reversed by the Supreme Court, which held that the definition in Section 2(47) necessarily implies the existence of the assets and of a transferee, according to the rule of noscitur a sociis. The expression 'extinguishment of any rights' would take its colour from its companion words, that is, 'sale', 'exchange', etc. In the view of the Supreme Court, where the assets are destroyed, there is no question of their transfer to others, there is a capital loss but it is not on account of any transfer, but it is on account of disappearance of the asset itself. The said principle applies here. When an assessee finds his valuable assets like debenture-stock valueless merely for the inability of the debtor-company to pay any part of such debenture-stock, the assessee's asset in the form of debenture-stock disappears. This is a position which the assessee admits not only by declaration but also by conduct. The assessee has written off the assets as loss to it for good. That being the case, here also we cannot say that there is any transfer involved. It is purely a case of disappearance of the asset itself. It is not that the assessee has transferred its right to the assets in favour of a third party whereby the right has extinguished. The asset itself is extinguished. In view of the decision of the Supreme Court in Vania Silk Mills P. Ltd.'s case : [1991]191ITR647(SC) , we are unable to sustain the view taken by the Tribunal. Consequently, we cannot uphold the conclusion of the Tribunal that the assessee incurred any long-term loss under the head 'Capital gains' in respect of the said debenture-stock. If the very asset is irretrievably lost, it cannot be said that the assessee suffered loss under the head 'Capital gains', long-term or short-term. The extinction or loss of the asset does not fall within the import of the expression 'extinguishment of the rights' occurring in Section 2(47). For the reasons aforesaid, we answer both questions Nos. 1 and 2 arising from R. A. No. 1476/(Cal) of 1986 in the negative, against the assessee and in favour of the Revenue.
37. There will be no order as to costs.
Shyamal Kumar Sen, J.
38. I agree.