Rajasthan H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding in law that the assessee was entitled to the benefit of provisions contained in s. 54E of the IT Act, 1961 ?

High Court Of Rajasthan : Jaipur Bench

CIT vs. Ruby Trading Co. (P) Ltd.

Sections 46, 54E, 263

Asst. Year 1978-79

Y.R. Meena & Shashi Kant Sharma, JJ.

IT Ref. No. 32 of 1987

9th July, 2002

Counsel Appeared

J.K. Singhi & Anuroop Singhi, for the Petitioner : Anant Kasliwal, for the Respondent

JUDGMENT

BY THE COURT :

On an application filed under s. 256(1) of the IT Act, 1961 (hereinafter referred to as ‘The Act’ of 1961), the Tribunal has referred the following questions for our opinion :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding in law that the assessee was entitled to the benefit of provisions contained in s. 54E of the IT Act, 1961 ?

2. Whether, on the facts and in the circumstances of case the Tribunal was justified in cancelling the order of the CIT passed under s. 263 and in holding that the order passed by the ITO was not erroneous and prejudicial to the interests of the Revenue ?”

2. The relevant facts of the case are that the assessee-company held 4,945 shares of M/s Colaba Land and Mills Co. Ltd. since 1954. The company M/s Colaba Land & Mills Co. Ltd. went into liquidation and the assessee- company realised the face value of the share in asst. yr. 1978-79 and during the accounting year relevant to the assessment year under reference the official liquidator paid the assessee-company a sum of Rs. 1,98,000 representing the share of the assesseecompany on the reserves of that company. The company thereafter, utilised the sum of Rs. 1,98,000 in purchasing 1,750 units of Unit Trust of India at Rs. 11.55 per unit. The assessee claimed that there was no capital gains as the amount received had been invested as per the provisions contained in s. 54E. The ITO had invoked the provisions of s. 46(2) and accepted the claims of the assessee.

The CIT thereafter, issued a notice to the assessee under s. 263 of the Act of 1961 for reviewing the order of the AO as the order of AO is erroneous and prejudicial to the interest of Revenue. After hearing the assessee the CIT was of the view that the order of the ITO is erroneous insofar as it is prejudicial to the interest of Revenue; therefore, the CIT directed the ITO to include Rs. 1,98,000 in the income of the assessee to tax that amount as a capital gains and to charge the tax accordingly.

In appeal before the Tribunal, the Tribunal has allowed the appeal holding that when there was a capital gain tax on receipt of the amount and if the assessee has invested that amount in the specified assets, the assessee is entitled for the benefit provided under s. 54E of the Act of 1961. Heard learned counsel for the parties.

Mr. Singhi, learned counsel for the Revenue, submits that there is a provision in the Act, i.e. s. 46(1) which provides that the distribution of assets on liquidation of the company to its shareholders is not a transfer. Sec. 46(2) provides that if there is any gain out of the distribution of the assets or money by the company in liquidation that gain shall be taxed under the head of “Capital gains”. Learned counsel placed reliance on the decision of apex Court in the case of Vijay Kumar Budhia vs. CIT (1994) 116 CTR (SC) 138 : (1994) 204 ITR 355 (SC) : TC 21R.128.

On the other hand, Mr. Kasliwal, learned counsel for the assessee-company submits that when the assessee has received the amount against the shares of the company on its liquidation and if there is any gain under s. 46(2) of the Act, i.e., taxable under the head of “Capital gains”. Once it is taxed as capital gains and if that amount is invested in the specified assets then the assessee is entitled for benefit of s. 54E of the Act of 1961. The provisions of s. 46(1) and (2) read as under : “Sec. 46(1)—Notwithstanding anything contained in s. 45, where the assets of a company are distributed to its shareholder on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of s. 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 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-cl. (c) of cl. (22) of s. 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of s. 48.” It is true that the provisions of sub-s. (1) of s. 46 of the Act of 1961 provides that notwithstanding anything contained in s. 45 if the company distributes assets or money to its shareholders on liquidation that shall not be regarded as a transfer. Thus, sub-s. (1) of s. 46 has overriding effect over s. 45. It may be transferred but this is case of distribution of the assets or money by the company on liquidation to its shareholders and it cannot be said to be a transfer. Sub-s. (2) of s. 46 provides that where the shareholder on liquidation of the company receives any money or other assets, he shall be chargeable to the income-tax under the head of “Capital gains” therefore, that makes it clear that it is not treated as a transfer under sub-s. (1) of s. 46 of the Act of 1961 but at the same time the intention of the legislature is that if the assessee has gained anything out of the assets and money received from the company on liquidation, that can be taxed as a capital gain tax.

Mr. Kasliwal, also brought to our notice a question of Gujarat High Court in the case of CIT vs. Jay Krishna Hari Vallabh Das (1998) 146 CTR (Guj) 342 : (1998) 231 ITR 108 (Guj) : TC S21.2295 wherein the provisions of s. 46(1) and (2) are considered, where the Court has taken the decision that for the computation of capital gains, if assessee receives money in positive balance, i.e., taxable under the head of “Capital gains” sub-s. (2) of s. 46 shows that if assessee suffers loss that loss be treated as a loss entitled to set off and carried forward that loss. Though there is no reference regarding loss but that has no relevancy in our case as in the case in hand, we are only concerned with the issue that on receipt of money on liquidation of company, if the assessee has any gain and thereafter he invests that gain in the specified assets whether the assessee is entitled for the benefit of s. 54E of the Act, that has not been considered in the aforesaid decision of Gujarat High Court referred by Mr. Kasliwal, learned counsel for the assessee.

9. In the case of Vijay Kumar Budhia vs. CIT (supra), wherein their Lordships of the Hon’ble Supreme Court have taken the view that sub-s. (2) of s. 46 provides that any income received by the assessee on liquidation that was not on account of transfer of property even though that has been taxed that is by creation of fictions of law. The relevant observation reads as under : “It is sub-s. (2) which is particularly relevant in the present case. Even though the income received by the assessee in the liquidation proceedings was not on account of any transfer of property, yet Parliament has chosen to treat such receipt as capital gains, subject of course to certain specified deduction. May be, it is a case of fiction created by Parliament may be not. The validity of the provision is not questioned nor is it in issue herein. The sub-section says that where a shareholder receives certain amounts or other assets from the company on its liquidation, he shall be charged to income-tax under the head “Capital gains” in respect of the money so received or on the market value of the assets received as on the date of thedistribution.”

10. When the intention of the legislature that the distribution of the assets or money on liquidation of the company to its shareholders, it shall not be treated as transfer and that sub-s. (2) of s. 46 provides that in spite of that gain be taxed under the head of ‘Capital gain’ that is the intention of the legislature though by creation of fiction of law we have to go by the provisions of law. For the purpose of benefit of s. 54E transfer is a condition precedent and when it is not treated as a transfer the assessee is not entitled to benefit of s. 54E, therefore, the CIT has rightly revised the order of ITO under s. 263 of the Act. The Tribunal has committed an error treating the amount so received from the company as transfer under the existing provisions of the Act.

In the result, we answer both the questions referred to this Court in negative i.e., in favour of the Revenue and against the assessee.

Reference so made stands disposed of accordingly.

[Citation : 259 ITR 54]

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