- (1.) ON an application filed under Section 256(1) of the Income-tax 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 the provisions contained in Section 54E of the Income-tax Act, 1961 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the order of the Commissioner of Income-tax passed under Section 263 and in holding that the order passed by the Income-tax Officer 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 Colaba Land and Mills Co. Ltd., since 1954. THE company, Colaba Land and Mills Co. Ltd., went into liquidation and the assessee-company realised the face value of the shares in the assessment year 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 assessee-company in the reserves of that company. THE company, thereafter, utilised the sum of Rs. 1,98,000 in purchasing 1,750 units of the 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 Section 54E. THE Income-tax Officer had invoked the provisions of Section 46(2) and accepted the claims of the assessee. The Commissioner of Income-tax thereafter, issued a notice to the assessee under Section 263 of the Act of 1961 for revising the order of the Assessing Officer as the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue. After hearing the assessee the Commissioner of Income-tax was of the view that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, Therefore, the Commissioner of Income-tax directed the Income-tax Officer to include Rs. 1,98,000 in the income of the assessee to tax that amount as a capital gain 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 Section 54E of the Act of 1961. Heard learned counsel for the parties. Mr. Singhi, learned counsel for the Revenue, submits that when there is a provision in the Act, i.e., Section 46(1) which provides that the distribution of assets on liquidation of the company to its share holders is not a transfer. Section 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 the apex court in the case of Vijay Kumar Budhia v. CIT [1993] 204 ITR 355.
(3.) 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 Section 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 the benefit of Section 54E of the Act of 1961. The provisions of Section 46(1) and (2) read as under : "46. (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 purposes of Section 48." It is true that the provisions of Sub-section (1) of Section 46 of the Act of 1961 provide that notwithstanding anything contained in Section 45 if the company distributes assets or money to its shareholders on liquidation that shall not be regarded as a transfer. Thus, Sub-section (1) of Section 46 has overriding effect over Section 45. It may be transferred but in this case one 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-section (2) of Section 46 provides that where the shareholder on liquidation of the company receives any money or other assets, he shall be chargeable to income-tax under the head of "Capital gains" and, therefore, that makes it clear that it is not treated as a transfer under Sub-section (1) of Section 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 gains. ;