Ruma Pal, J. - (1.) The question to be decided in these appeals is whether the word assets in Section 46(2) of the Income-tax Act, 1961 (referred to hereafter as the Act) must be understood and construed according to the definition of the words capital assets in Section 2(14) of the Act.
(2.) The issue arises in respect of the assessment year 1970-71. The appellants in the two appeals which are disposed of by this judgment are sisters. They were shareholders in M/s. Palkulam Estate (Private) Ltd., Nagercoil (referred to hereafter as the Company). The Company went into liquidation in 1964. Pursuant to a compromise decree dated 22nd December, 1969 in litigation between the assessees and their brother (who was also a shareholder in the company) and the company represented by the liquidator, the assets of the company which included agricultural lands were distributed to the appellants and eight others. The compromise decree stated: "This Court doth further order and decree that as far as liabilities of Palkulam Estate Private Limited is concerned, the immovable properties be and hereby are distributed as indicated in Schedule A of the Compromise. The respondents 1 to 5 and respondents 9 to 11 do get leased portions as shown in the plans, signed by liquidator Mr. K.M. Boothalingam Pillai and handed over to the appellant this day."
(3.) The appellants thereby received 479.89 acres of the agricultural lands prior to the end of the relevant accounting year that was 31-3-1970. The assessment in respect of the year 1970-71 had been completed on 27-2-71. The Income-tax Officer reopened the assessments under Section 148 of the Act. The appellants filed their returns in respect of the two notices under Section 148. The contention of the appellants that in terms of the definition of assets in Section 2(14), agricultural lands were entitled to be excluded while computing capital gains on assets received by the shareholder from a company in liquidation under Section 46(2) was not accepted. According to the Assessing Officer, Section 46(2) refers only to money received on liquidation or the market value of the assets on the date of distribution and it was immaterial whether the asset was agricultural lands or otherwise. The value of the share of agricultural lands transferred to each appellant was, therefore, included as income subject to capital gains and subjected to tax. The assessees appeals before the Commissioner of Income-tax (Appeals) were allowed by holding that the scope of Section 46(2) would have to be read in the light of the definition of the words capital asset in Section 2(14) and that "having exempted agricultural lands from capital gains under the general provision, it was difficult to interpret Section 46(2) as including agricultural land". The action of the Income-tax Officer in charging the income of the distribution of agricultural lands as capital gains under Section 46(2) of the Act was accordingly set aside.;