Commissioner of Income-tax, Tamil Nadu Vs. Inland Agencies P. Ltd. - Court Judgment

Sethuraman, J.

1. Under s. 256(1) of the I.T. Act, the Income-tax Appellate Tribunal has referred the following two questions :

'(1) Whether, on the facts and in the circumstances of the case, in computing the capital gains arising out of the receipt by the assessee of Rs. 15,168 from the liquidator of the United India Life Insurance Company during the accounting year ending December 31, 1969, chargeable under section 46(2) of the Income-tax Act, 1961, the proportionate cost of acquisition of the shares held by the assessee in the said company attributable to the said sum of Rs. 15,168 is to be deducted

(2) Whether, on the facts and in the circumstances of the case, the assessee was entitled for the deduction permissible under section 80G of the Income-tax Act, 1961, in respect of the donation of Rs. 5,000 made by it to 'S.R.M.M.C.T.M. TIRUPPANI TRUST' for the assessment year 1970-71 ?'

2. The assessee, a private limited company, held 80 fully paid-up shares in the United India Life Insurance Company Ltd. That company went into liquidation after the life insurance business was nationalised. The liquidator distributed certain amounts to all the shareholders in the course of the winding-up. The assessee received Rs. 40,000 on August 5, 1958, Rs. 32,000 on February 17, 1959, and Rs. 15,168 on September 16, 1969. We are concerned here with the last amount.

3. In the assessment for the assessment year 1970-71, the ITO brought to tax the whole of Rs. 15,168 received by the assessee as capital gains under s. 46(2) of the I.T. Act. The assessee filed an appeal before the AAC. Before the AAC the contention of the assessee was that the said sum of Rs. 15,168 was not at all taxable. The AAC held that s. 46(2) of the Act clearly applied, and, therefore, rejected the assessee's contention.

4. The assessee appealed to the Tribunal and before the Tribunal an additional ground was taken, namely, that in computing the capital gains Rs. 9,379, being the cost of acquisition of the said shares, should be deducted. The Tribunal, following a decision of this court in T. M. Rangachari v. CIT (T.C. Nos. 219 to 221 of 1968, judgment dated July 22, 1974), (reported in : [1976]102ITR50(Mad) ) held that the contention of the assessee that the sum of Rs. 15,168 was not taxable under s. 46(2) was not correct. It went into the contention of the assessee that in computing the capital gains, the cost of acquisition of the shares in question should be deducted. It was held that s. 46(2) itself provided for the application of s. 48 under which the cost of acquisition of the concerned capital asset should be deducted and that in the present case such cost of acquisition had to be deducted from the amount received by the assessee. As, however, the taxing authorities had not considered the question in the light of s. 48, the Tribunal directed the ITO to compute the capital gains in accordance with its finding. Aggrieved by this order of the Tribunal, the Department has come on reference raising the first question extracted earlier. We shall deal with the second question separately.

5. Mr. Jayaraman, learned counsel for the Commissioner, contended that s. 46(2) had been held by the Supreme Court to be a charging section and that we have to look only into that provision. In his submission, there is a provision for deduction, of the amount taxed as dividend, from the amount received and except the amount so mentioned there is no scope for a deduction of any other amount. In other words, his point was that the cost of acquisition of the shares ought not to be taken into account in this case where there is no transfer of shares. It is this contention which requires to be examined now.

6. In CIT v. R. M. Amin : [1977]106ITR368(SC) , dealing with s. 46(2) of the 1961 Act, the Supreme Court pointed out at p. 374 :

'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.'

7. In the absence of a similar provision, it was held by the Supreme Court in CIT v. Madurai Mills Co. Ltd. : [1973]89ITR45(SC) , in construing the provision of s. 12B of the Indian I.T. Act, 1922, that the distribution of the assets of a company in liquidation did not amount to a transaction of sale, exchange, relinquishment or transfer so as to attract s. 12B and that no capital gains arose to the shareholders of the company therefrom. Only because of this statutory position the first two amounts received in 1958 and 1959 were not taxed. This lacuna was filled up by enacting s. 46(2). As it has now been ruled by the Supreme Court that s. 46(2) is a charging provision, we do not think it necessary to go into the nature of the charge any further.

8. The point that remains to be considered is whether the assessee is eligible for the deduction of the cost of acquisition of the assets, namely, the shares, which gave rise to the right to obtain the amounts distributed by the liquidator. Section 46 runs as follows :

9. (1) Notwithstanding anything contained in section 45, where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of section 45.

(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 other assets on the date of distribution, as reduced by the amount assessed as dividend within the meaning of sub-clause (c) of clause (22) of section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purpose of section 48.'

10. It may be seen that s. 46(1) specifically takes the cost of a distribution to the shareholders on the liquidation of a company outside the scope of s. 45. Sub-section (2) levies a charge on the amount received from the liquidator, independently of s. 45. That the charge is not on the gross receipts from the liquidator is clear from the provision itself. It contemplates the deduction of the amount assessed as dividends applying s. 2(22)(c) of the Act. That provision deems the distribution by the liquidator to be dividends in so far as the company had accumulated profits. In other words, the liquidator is deemed to have distributed dividends out of the accumulated profits to the extent of the available accumulated profits. But for the deduction of the said amount of dividends, it would have been possible to tax the gross amount received from the liquidator. This is the first deduction that is admissible under s. 46(2) itself. The closing words of s. 46(2), namely, 'the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 48' go to show that having arrived at the capital gains in this manner, we have to look to s. 48 for the mode of computation and the further deduction available under that provision. The amount received from the liquidator as reduced by the amount assessed as dividend is taken to be the full value of the consideration for the purpose of s. 48. Section 48 runs as follows :

'The income chargeable under the head '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 the following amounts, namely :

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.'

11. The deductions envisaged under s. 48 are : (i) expenditure incurred wholly and exclusively in connection with the transfer of a capital asset; and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. As s. 46(1) itself has provided that the distribution by the liquidator should not be regarded as a transfer by the company for the purpose of s. 45, the question of any expenditure incurred wholly and exclusively in connection with the transfer would not come in for consideration. Therefore, in the case of the special category of capital gains taxed under s. 46(2) the only other deduction that is permissible is the cost of acquisition of the capital asset and the cost of any improvement thereto. In order to see what the cost of acquisition or the cost of improvements is, it may be necessary to go into the other definition provisions in the same group of sections. For our present purpose it is unnecessary to go into those provisions. It is enough to mention that s. 48 furnishes the method of computation of capital gains in the case of receipts from the liquidator also.

12. We have already extracted the relevant passage from the judgment of the Supreme Court in CIT v. R. M. Amin : [1977]106ITR368(SC) . The Supreme Court has, if we may so with respect, quite succinctly pointed out that s. 46(2) itself has been enacted both with a view to make shareholders liable for payment of tax on the capital gains arising on a distribution of cash or assets in specie by the liquidator as well as to prescribe the mode of calculation of capital gains to the shareholders. This is consistent with the general principle of law that tax cannot be levied on the gross receipts but only on such receipts as would remain in the hands of the assessee after providing for the cost of obtaining such receipts. In the case of capital gains, if the gross amount itself is taken for purpose of assessment, then it would result in the tax being levied on capital and not on income. Capital gains is only a species of income and therefore, the concept of income would have to be applied in taxing the capital gains.

13. The learned counsel for the assessee appeared to contend that he would be eligible for the deduction of the cost of acquisition of the capital asset at every point of time when there is a receipt from the liquidator. In other words, if the liquidator makes payments in driblets, as it often happens, the assessee would on each occasion be entitled to get the deduction for the cost of acquisition of the asset, that is, as many times over as there are receipts. The contention is patently wrong and difficult to accept. The cost of acquisition that is contemplated by s. 48 would have to be taken into account at the time of the distribution when it is first taxed. If, in a case, there is a negative amount resulting from the distribution being smaller than the cost of acquisition, then the assessee would be entitled to have the capital loss computed, and the capital loss would be set off against further distribution made by the liquidator. When a positive figure emerges after such set-off then the assessee would be liable to be taxed on the balance of the amount received from the liquidator. It is true that at the later stages it is only the amount received that would be liable to tax without any deduction therefrom. But as the deduction has already been given, there is no question of any further deduction from the said amount.

14. The learned counsel for the assessee relied upon the decision of this court in CIT v. Express Newspapers Ltd. [1080] 124 ITR 117. But that related to a wholly different situation and the decision was rendered in the light of the provisions of ss. 24, 36 and 38 and we do not consider that there can be any analogy between the provisions considered therein and those under consideration. That case shows that under certain provisions deduction may be available more than once for the same amount. We do not find s. 48 allowing such a double or multiple deduction.

15. If the cost of acquisition of the capital asset is not to be taken into account, then the position will be curious. The assessee is entitled to the distribution only by virtue of his shareholding. What he receives is proportionate to his shareholding. Therefore, it is the share which gives rise to the right to obtain money from the liquidator. If the cost of acquisition of the share ignored, then it would mean that the assessee is receiving an amount not with reference to the share but with reference to some other intangible right. In the case of assets for which there is no cost of acquisition, it has been held by this court in CIT. v. Rathnam Nadar : [1969]71ITR433(Mad) , which has been approved by the Supreme Court in CIT v. B. C. Srinivasa Setty : [1981]128ITR294(SC) , that there could be no levy of capital gains. Therefore, the case of the Revenue would not be advanced by any such contention. As pointed out by the Supreme Court in CIT v. B. C. Srinivasa Setty : [1981]128ITR294(SC) , what is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. None of the provisions pertaining to the head 'Capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain. Therefore, in order to tax the capital gains, it is necessary to give the deduction for the cost of the capital gains.

16. In the question referred, there is an assumption that the proportionate cost of acquisition of the shares held by the assessee could alone be deducted. The proportionate cost obviously is taken to mean the proportion calculated with reference to each receipt. It will be difficult to work out the proportionate cost of the acquisition of shares on any rational principle. The proportionate cost cannot be made to depend on the instalments of dividends received from the liquidator and, for all one knows one may not be in a position to conceive of any future distribution at all by the liquidator at any given point of time. Therefore, as indicated earlier, the cost of the shares, which have given rise to the right to the assessee to obtain the distribution would have to be deducted in full from the first instalment to the extent possible and the later instalments to the extent unabsorbed. The question is accordingly answered in favour of the assessee. The cost of the shares would be deducted from the gross capital gains computed under s. 46(1).

17. We now turn to the second question. The assessee paid a sum of Rs. 5,000 to the 'Tiruppani Trust' described in the question. The assessee claimed the appropriate deduction applying the provisions of s. 80G. The ITO declined to grant the deduction on the ground that the trust did not satisfy the conditions laid down in s. 80G. The AAC, however, upheld the assessee's claim and, therefore, the Department filed an appeal before the Tribunal. The Tribunal, by its order dated November 27, 1975, followed an earlier order of its dated January 31, 1974, in I.T.A. No. 906, (Mds)/1973-74. The result was that the order of the AAC was affirmed and the the assessee's claim accepted.

18. The eligibility of the Tiruppani Trust to fall within the scope of s. 80G has been considered in more than one decision of this court. In Addl. CIT v. Reliance Motor Co. Pvt. Ltd. (T.C. No. 292 of 1972, judgment dated 6 December 1976) : [1983]143ITR193(Mad) (Appx-I)(infra) the matter was sent back to the Tribunal as the relevant trust deed had not been annexed to the statement of the case and, as, therefore, it was not possible to answer the question referred to therein. On the same lines, in T.C. No. 22 of 1975, by judgment dated February 4, 1978 (CIT v. Inland Agencis P. Ltd. : [1983]143ITR195(Mad) (Appx. II) infra), this court again remitted the matter for consideration by the Tribunal. It may be mentioned here that T.C. No. 22 of 1975 arose from the order of the Tribunal dated January 31, 1974, which has been followed in the present case. As the matter has already been restored to the Tribunal on earlier occasions, similarly in the present case also, we do not think it possible to answer the question referred. We, therefore, restore the matter for reconsideration by the Tribunal in the light of the facts and in accordance with the law.

19. The assessee will be entitled to its costs, as it has succeeded on the main question that arose in the present reference. Counsel's fee Rs. 500. One set.