High Court Of Gujarat
CIT vs. Brahmi Investments (P) Ltd.
Sections 46(2), 47(v), 48, 49(1)(iii)(e), 55(2)(b)(ii)
Asst. Year 1988-89
D.A. Mehta & Ms. H.N. Devani, JJ.
IT Ref. No. 102 of 1995
7th/10th February, 2006
Counsel Appeared
B.B. Naik, for the Revenue : R.K. Patel, for the Assessee
JUDGMENT
D.A. Mehta, J. :
The Tribunal, Ahmedabad Bench ‘C’, has raised the following two questions under s. 256(1) of the IT Act, 1961 (‘the Act’) at the instance of the CIT : “1. Whether, the Tribunal is right in law and on facts in holding in view of s. 49(1)(iii)(e) capital gain should be computed by taking the cost in the hands of the previous owner, namely, KPPL ?
2. Whether, the Tribunal is right in law and on facts in holding that in spite of s. 46(2) capital gains chargeable to tax had not arisen in this case in view of fact that benefit of s. 47(v) would be available to the assessee ?” The assessment year is 1988-89 and the relevant previous year is financial year ended on 31st March, 1988. The assessee, a private limited company, received assets valued at Rs. 93,24,000 from one Aravalli Investments (P) Ltd. (Aravalli) on voluntary liquidation of Aravalli. The AO invoked s. 46(2) of the Act for bringing to tax the surplus under the head ‘Capital gains’ after deducting the amount paid by the assessee for acquisition of shares, i.e., Rs. 55,36,680. In the process, the claim of the assessee that nothing was liable to be taxed by virtue of provisions of s. 47(v) of the Act was rejected. The assessee had raised an alternative contention, that for the purposes of computing the capital gains chargeable to tax the cost of previous owner in terms of s. 49(1)(iii)(e) of the Act should be considered, also came to be rejected. The alternative contention was based on the fact that the assessee-company was a wholly-owned subsidiary of one Karamchand Premchand (P) Ltd. (KPPL). That originally KPPL had acquired all the 1,11,000 equity shares of Aravalli in July and August, 1973 at a total cost of Rs. 1,11,000 which was both the face value and paid-up value of the shares of Aravalli. As a consequence Aravalli had become wholly-owned subsidiary of KPPL. In December, 1973, all the 1,11,000 shares of Aravalli were transferred to the assessee by KPPL at a total consideration of Rs. 55,36,680. As a consequence Aravalli became wholly-owned subsidiary of the assessee-company. It was in this context that the plea of the assessee for benefit of s. 47(v) of the Act, and in the alternative, cost of acquisition to the previous owner under s. 49(1)(iii)(e) of the Act was based.
The assessee carried the matter in appeal before the CIT(A) who rejected the assessee’s plea of invoking and applying s. 47(v) of the Act. However, the CIT(A) accepted the alternative contention based on s. 49(1)(iii)(e) of the Act and held that capital gains under s. 46(2) of the Act had to be computed by taking the cost of acquisition of the shares in hands of the previous owner, i.e., KPPL. As the cost of shares in hands of KPPL was Rs. 1,11,00,000, on that basis capital gains liable to be taxed in hands of the assessee was nil, as the cost exceeded the value of the assets received by the assessee at the time of distribution on liquidation of Aravalli. Both the assessee and the Department carried the matter in appeal before the Tribunal. The assessee was aggrieved by rejection of its claim of relief under s. 47(v) of the Act and the Revenue was in appeal against the direction of the CIT(A) to compute the capital gains by applying the provisions of s. 49(1)(iii)(e) of the Act. The Tribunal, vide its impugned order dt. 21st July, 1993, allowed the appeal of the assessee while dismissing the appeal of the Revenue. Mr. B.B. Naik, learned standing counsel, appearing on behalf of the applicant-Revenue, submitted that s. 46(2) of the Act was a special provision and hence, was an exception to the general law of computation of capital gains tax. He, therefore, contended that s. 46 of the Act was a complete code, both as to the charge of capital gains tax and the procedure for computation of the same. Therefore, except for applicability of s. 48 of the Act, nothing more was required to be looked into and the Tribunal was in error in invoking s. 47(v) of the Act as well as s. 49(1)(iii)(e) of the Act which related to the cost of acquisition in the hands of the previous owner. According to him, once the Tribunal accepted that s. 46(2) of the Act was applicable, nothing more was required to be done and the computation made by the AO ought to have been upheld by the Tribunal.
It was submitted by Mr. Naik that once cost actually incurred is available then reading ss. 46(2) and 48 together the only deduction permissible under s. 48 of the Act was of the cost which was known. That only in the event cost was not ascertainable under s. 48 of the Act could recourse be had to s. 47 of the Act. According to him, fiction envisaged by s. 47 of the Act was limited to treating the transfer in any one of the modes specified in the said section as not a transfer for the purposes of s. 45 of the Act and, therefore, not liable to capital gains tax. However, the said fiction cannot operate in a case where the transaction was deemed to be a transfer under s. 46(2) of the Act. That in the present case, the transaction between KPPL and Aravalli in the first instance was a transfer with consideration, but by virtue of s. 47(v) of the Act the same was not amenable to s. 45 of the Act and thus not liable to capital gains tax. He, therefore, submitted that neither s. 47(v) of the Act could be invoked, nor was the assessee entitled to seek the replacement of the actual cost of acquisition by the cost of acquisition of the previous owner. In this context he placed reliance on observations made at p. 3418, Vol. III of ‘D.M. Harish on Income-tax’.
7. Mr. R.K. Patel, learned advocate, appearing on behalf of the respondent-assessee, submitted in the first instance that s. 46(2) of the Act was not applicable to an assessee who was only a juristic person. Elaborating on the submission he placed emphasis on the use of the words ‘shareholder’ and ‘he’ which appear in the opening portion of the said provision. According to him, the provision was intended by the legislature to be applicable only in case of a living person, viz., individual shareholder and none else. Responding to the submissions made on behalf of the Revenue it was submitted that despite the fact that s. 46(2) of the Act had been held to be a charging section yet the other provisions of the Act had to be applied as and when applicable, and hence, the Tribunal had rightly applied s. 47(v) of the Act as well as s. 49(1)(iii)(e) of the Act. He also submitted that s. 48 of the Act which is a general provision cannot apply in isolation and once, admittedly, s. 47(v) of the Act becomes applicable to the facts, the only mode of computation of cost of acquisition is provided by s. 49(1)(iii)(e) of the Act. He placed reliance on various decisions on interpretation of statutes to submit that a harmonious construction must be made and where literal construction brings about manifestly an absurd result, such construction should be avoided. Lastly, it was submitted that, where two views are possible, one in favour of the assessee may be adopted.
8. Sec. 46 of the Act pertains to capital gains on distribution of assets by companies in liquidation. Under sub-s. (1) of s. 46 of the Act it is provided that where the assets of a company are distributed to its shareholders on liquidation of company, such distribution is not to be regarded as a transfer by the company for the purposes of s. 45 of the Act, notwithstanding anything contained in s. 45 of the Act.
9. Under sub-s. (2) of s. 46 of the Act, a provision is made for treatment of the receipt in hands of the shareholder of a company in liquidation. The said provision stipulates that where a shareholder receives any money or assets from the company, i.e., a company in liquidation, the shareholder shall be chargeable to income-tax under the head ‘Capital gains’, in respect of such monies or other assets received by the shareholder on the date of distribution, as reduced by the amount assessed as deemed dividend under s. 2(22)(e) of the Act; and the sum arrived at after the aforesaid stages are over shall be deemed to be the full value of the consideration for the purposes of s. 48 of the Act.
10. Therefore, s. 46(1) of the Act stipulates a fiction whereby even in a case where there is a transfer of assets on distribution by a company in liquidation such distribution of assets is not to be regarded as a transfer for the purposes of being exigible to capital gains tax under s. 45 of the Act. While under s. 46(2) of the Act a converse situation or the other end of the transaction is envisaged. In other words, the recipient shareholder is to be charged to capital gains tax by deeming the transaction as transfer and also deeming receipt of consideration upon such deemed transfer. However, after the amount of full value of consideration is arrived at, one has to go to s. 48 of the Act which deals with mode of computation and deductions.
11. Sec. 48(1) of the Act lays down the manner in which income chargeable under the head ‘Capital gains’ is to be computed. Under cl. (a) of sub-s. (1) of s. 48 of the Act legislature has provided that from the full value of consideration received or accruing, for the purposes of computing the capital gains chargeable to tax—(i) expenditure incurred wholly and exclusively in connection with such transfer; and (ii) the cost of acquisition of the asset and the cost of improvement to the asset are to be deducted. Sec. 48(1) envisages the cost of acquisition of the asset being deducted from the full value of consideration, viz., the cost incurred by an assessee for the purchase of the asset which is sold. In a case where s. 46(2) of the Act comes into play the full value of consideration has to be computed by the special mode laid down in the said provision and thereafter provisions of s. 48 of the Act have to be applied. Admittedly, in such a case there is no asset as such for which the shareholder- assessee can claim the cost of improvement nor could there be any claim for expenditure incurred in connection with such transfer, because the transaction, i.e., distribution of assets on liquidation itself is a deemed transfer and no expenditure in connection with such transfer is actually incurred. That leaves only the cost of acquisition which is required to be taken into consideration for the purposes of levying tax under the head ‘Capital gains’. For the present, it is not necessary to deal with either cl. (b) of sub-s. (1) or sub-s. (2) as well as other provisions of s. 48 of the Act as they are not material for the controversy in question.
The contention that s. 46(2) of the Act is not applicable to an assessee who is only a legal person cannot be accepted. Though the provision uses the word ‘shareholder’ followed by the word ‘he’ it is not possible to accept that legislature wanted to keep out shareholders who are otherwise falling within the definition of the term ‘person’ as per s. 2(31) of the Act. It is not even suggested that there is any prohibition for a limited company to hold shares of another limited company. Once there is no statutory prohibition for a company to hold such shares in another limited company it is not possible to accept the restrictive reading of s. 46(2) of the Act canvassed by the learned advocate for the assessee. He does not dispute the fact that the assessee, which is a limited company, was holding shares of the company which went into liquidation. If there was a legal prohibition on holding such shares the assessee-company could not have legally held such shares. Therefore, even in the contextual setting ofs. 46(2) of the Act, when one reads s. 46(1) of the Act together, the submission does not merit acceptance. To appreciate the rival contentions it is necessary to recapitulate the basic facts. The controversy between the parties has arisen in relation to the taxability of the value of the assets received by the assessee on voluntary liquidation of Aravalli by applicability of s. 46(2) of the Act. The claim of the assessee is that Aravalli being wholly-owned subsidiary of the assessee-company, any transfer of a capital asset by such subsidiary to the holding company was not to be regarded as transfer. Alternative plea was that, even if for the purposes of s. 46(2) of the Act, the transaction was to be regarded as a transfer the assessee was entitled to cost of acquisition of the assets to the previous owner by virtue of s. 49(1)(iii)(e) of the Act. In effect there are two transactions : the first transaction between KPPL and Aravalli and KPPL and the assessee on the one hand, and second between Aravalli and the assessee. Sec. 46(2) of the Act has been invoked and applied at the stage of the second transaction between the assessee and Aravalli, viz., when Aravalli went into voluntary liquidation and distributed assets valued at Rs. 93,24,000 in favour of the assessee. That is the point of time when the question of computing capital gains for the purposes of liability to tax arises in the hands of the assessee, and as a consequence, the figure of cost of acquisition is to be adopted for such computation. Therefore, the plea of the assessee that s. 47(v) of the Act applies to the transaction of distribution of assets on voluntary liquidation cannot be accepted. Sec. 46 of the Act is a complete code by itself for the purposes of transfer and working out the full value of consideration. This is not a case where the subsidiary company has, as such, transferred any capital assets to the holding company. Even if one can regard the transaction as amounting to transfer of assets, by virtue of s. 46(1) of the Act, the same is not to be regarded as a transfer by the company for the purposes of s. 45 of the Act. This is a case where the holding company, by virtue of being a shareholder, has received assets from the subsidiary company on the liquidation of the subsidiary company and thus becomes liable to tax under the head ‘Capital gains’ in respect of the value of the assets received on the date of distribution. Such value of the assets has to be deemed to be the full value of the consideration. That is the legislative mandate. Once s. 46(2) comes into play, there is no question of invoking provisions of s. 45 of the Act, and the deeming fiction under s. 47 of the Act operates only in relation to transfers amenable to provisions of s. 45 of the Act. This is abundantly clear from the opening portion of s. 47 of the Act. In the circumstances, insofar as the second question is concerned, the assessee cannot succeed and the Tribunal committed an error in accepting the plea of the assessee that the assessee would be entitled to benefit of s. 47(v) of the Act.
However, when it comes to applicability of provisions of s. 49(1)(iii)(e) of the Act the order of the Tribunal requires to be upheld. As already noticed hereinbefore, once full value of consideration is arrived at under s. 46(2) of the Act the same figure has to be taken for the purposes of s. 48 of the Act. Sec. 48 of the Act merely prescribes the mode of computation of the income chargeable under the head ‘Capital gains’ and in the process lays down permissible deductions, one of them being the cost of acquisition of the assets. The phrase ‘cost of acquisition’ has been defined under s. 55(2) of the Act for the purposes of ss. 48 and 49 of the Act. Under s. 55(2)(b)(ii) of the Act it is stipulated that where the capital asset became the property of the assessee by any of the modes specified in sub-s. (1) of s. 49 of the Act, and the capital asset became the property of the previous owner before 1st April, 1974, ‘cost of acquisition’ means the cost of the capital assets to the previous owner or the fair market value of the property on 1st April, 1974 at the option of the assessee. Meaning thereby, even if the contention of the Revenue is to be accepted that cost of acquisition has to be taken only under s. 48 of the Act, going by the definition of the term ‘cost of acquisition’ laid down in s. 55(2)(b)(ii) of the Act, once mode of acquisition is any one of the modes specified in s. 49 of the Act, the cost of acquisition of the capital assets, even for the purposes of s. 48 of the Act, has to be the cost of the capital assets to the previous owner on the day the capital assets became the property of the previous owner. The assessee has not based the claim on the exercise of option stipulated by the provisions and, hence, it is not necessary to go into the same.
Apart from the aforesaid legislative scheme, it is necessary to bear in mind the fact that s. 49 of the Act stipulates cost of acquisition with reference to the specified modes of acquisition. In the present case, admittedly, the mode of acquisition so far as the assessee is concerned, is under s. 47(iv) of the Act, i.e., the transfer of capital asset by holding company to its subsidiary company when KPPL transferred shares of Aravalli to assessee, there being no dispute as to fulfilment of the other conditions of the provisions. Thus, once by virtue of a legal fiction the transfer in question has not been regarded as transfer for the purposes of s. 45 of the Act, viz., the holding company has not been subjected to capital gains tax under s. 45 of the Act. Therefore, when the subsidiary company disposes of the asset, the cost of acquisition in hands of subsidiary company cannot be any other cost but the cost in hands of the previous owner, viz., the holding company in the present case. Secs. 47 and 49 of the Act go together and have to be read as part of one scheme, the legislative intent being that when the first transaction is not brought to charge, the assessee having benefited once should not benefit once again by claiming a higher cost at the time of subsequent transaction. This would be so in the normal course of events. However, merely because in the facts of the present case, incidentally, the cost at the second stage is of a figure less than the cost of previous owner, that by itself cannot be the criterion for giving a go-by to the legislative intent and scheme of the Act which unfolds on a conjoint reading of ss. 47, 49 and s. 55(2)(b)(ii) of the Act. There is an additional reason also. Secs. 47 and 49 of the Act are part of a scheme containing special provisions as against ss. 45, 48 and other connected sections, which may be termed as general provisions. Therefore also, the special provisions must prevail over the general provisions.
In the circumstances, the Tribunal was right in law in holding that capital gains tax was liable to be computed by taking into consideration provisions of s. 49(1)(iii)(e) of the Act, i.e., taking the cost of acquisition of the assets in question to be the cost of acquisition in the hands of the previous owner, i.e., KPPL. Question No.1 is, therefore, answered in the affirmative, i.e., in favour of the assessee and against the Revenue, while question No. 2 is answered in the negative, i.e., in favour of the Revenue and against the assessee. The reference stands disposed of accordingly, with no order as to costs.
[Citation : 286 ITR 66]
