I.S. Israni, J. - (1.) THIS is an income-tax reference application under Section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), arising out of Income-tax Appeal No. 291 (JP) of 1981 decided on June 18, 1982, in which the petitioner moved a reference application before the Tribunal under Section 256(1) of the Act which was, however, rejected, vide order dated May 30, 1983.
(2.) THE assessee-company was holding 4,945 shares of Colaba Land & Mills Co. Ltd. THE said company went into liquidation and the assessee-company received back 100 per cent, of its investments in shares up to the assessment year 1978-79. In the accounting period relevant to the assessment year 1979-80, the official liquidator paid first return of surplus at the rate of Rs. 40 per share, i.e., Rs. 1,98,000, to the assessee-company. On March 9, 1978, the assessee-company invested this amount in purchase of 17,150, units from the Unit Trust of India, Bombay. THE surplus of Rs. 1,98,000 received by the assessee was treated by the Income-tax Officer as capital gains in the hands of the assessee-company in view of the provisions contained in Section 46(2) of the Act. THE Income-tax Officer accepted the plea of the assessee that exemption provided under Section 54E of the Act was available to the assessee as the amount had been invested in specific assets and thus no capital gains tax was charged by the Income-tax Officer on the capital gain of Rs. 1,98,000. THE Commissioner subsequently came to the conclusion that the benefit of Section 54E of the Act was not available to the assessee, inasmuch as there was no transfer of assets within the meaning of Section 45 of the Act and, therefore, the exemption allowed by the Income-tax Officer under Section 54E of the Act and thereby not computing any taxable capital gain from the above receipts of Rs. 1,98,000 by the assessee-company was erroneous and prejudicial to the interest of the Revenue. THE assessee thereupon went in appeal to the learned Tribunal. THE Tribunal held that the receipt of Rs. 1,98,000 was taxable as capital gains under Section 46(2) of the Act or deemed to arise from the transfer of capital assets, which squarely fell within the purview of Section 45 of the Act, and since Section 45 clearly provides for exemption under Section 54E of the Act, the assessee was entitled to the deduction of Rs. 1,98,000 from the capital gains computed under Section 46(2) of the Act. Thus, the Income-tax Officer's order was held not to be erroneous and prejudicial to the interest of the Revenue and the order of the Commissioner passed under Section 263 of the Act was cancelled. Being aggrieved by the said order of the Tribunal, the petitioner filed a reference application under Section 256(1) of the Act praying that statement of case be drawn up and the matter be referred to the High Court on the following questions of law : "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 under Section 263 and in holding that the order passed by the Income-tax Officer was not erroneous and prejudicial to the interest of the Revenue ? " This application was rejected by the Tribunal holding that no referable question of law arises. The contention of Shri Surolia, learned counsel for the Revenue, is that the learned Tribunal fell in error of law in holding that the Income-tax Officer's order was not erroneous and prejudicial to the interest of the Revenue. It is pointed out that Section 46(1) of the Act clearly states that distribution of the assets to its shareholders by a company in liquidation will not be regarded as a transfer by the company for the purposes of Section 45 of the Act. Section 46(2) of the Act is only an extension of Section 46(1) of the Act and, therefore, if Section 45 is not applicable to Section 46(1) of the Act, then it cannot be applicable to Section 46(2) of the Act also. He has further urged that the legal position is clear from a bare reading of Section 45 of the Act which deals with only those cases which are transfers in terms of Section 2(47) of the Act and Section 46 of the Act does not contemplate any transfer defined under Section 2(47) of the Act. Therefore, it has been contended by learned counsel that Section 54E of the Act was not applicable to the transaction mentioned in Section 46(2) of the Act and the capital gains tax was payable by the assessee-company on the receipts of Rs. 1,98,000. Learned counsel for the assessee, on the other hand, has supported the decision of the learned Tribunal and has contended that it does not call for any interference as no question of law arises out of the same. He has contended that when a company goes into voluntary liquidation and the assessee, a shareholder, receives his share in the capital assets, it does not amount to a receipt from the transfer of capital assets within the meaning of Section 45 of the Act. However, such a receipt is chargeable to capital gain under Section 45 of the Act, in view of the special provisions of Section 46(2) of the Act giving rise to an application under Section 2(24) of the Act. Shri Surolia, learned counsel for the Revenue, has urged that when the assessee holding certain shares of a company after it goes into voluntary liquidation, receives certain capital in excess over the actual investment, such capital gains do not arise from the transfer of capital assets. He, therefore, contends that no benefit under Section 46(2) of the Act was available to the assessee. It was pointed out that the act of the liquidator in distributing the assets of the company which had gone into voluntary liquidation did not result in the creation of a new right. It merely entailed recognition of the legal rights which were in existence prior to the distribution. The assessee receives that money in satisfaction of the right which belonged to him by virtue of his holding the shares and not by operation of any transaction which amounts to sale, exchange, relinquishment or transfer.
(3.) WE have given our thoughtful consideration to the rival contentions of both the parties. WE are of the view that prima facie the above referred two questions of law do arise from the order of the Tribunal for the consideration of this court. The Tribunal is asked to draw up a statement of the case and refer the same to this court for its consideration. Application allowed.;