GANGAL V H ITO Vs. CABLES AND WIRELESS LIMITED

JUDGEMENT

(1.) THE ITO, Companies Circle, Bombay, has filed this appeal against the judgment and order of K.K. Desai, J. whereby he quashed the assessment order passed by the appellant on 30th March, 1967. By the said order the petitioners were assessed to tax on capital gains in respect of the amount received by them as and by way of distribution of capital on liquidation of their subsidiary company by name Indian Radio & Cable Communication Co. Ltd. (hereinafter referred to as "the company"). The petitioners are a non resident company within the meaning of the IT Act, 1961 (hereinafter referred to as "the Act"). The petitioners held in the company 18,011 ordinary shares of Rs. 100 each, 20,508 bonus shares of Rs. 100 each and 15,335 deferred shares of Rs. 100 each. w.e.f. 1st Jan., 1947, the Government of India took over the business of the company and the company was taken into liquidation on 11th May, 1949. The liquidator of the company, inter alia, distributed the following amounts towards and in respect of distribution of capital, viz : Rs. 53,85,000 on 12th Sept., 1949. Rs. 25,07,001 on 6th Nov., 1953. Rs. 2,39,934 on 18th Sept., 1961.

(2.) THE petition was resisted by the ITO. The learned judge took the view that the year in which the ownership of the capital assets and/or moneys is transferred will be the previous year for assessment of capital gains made by the shareholder, that it was difficult to understand how the gains intended to be taxed would not have been made in the year in which the ownership of the assets and the moneys distributed was acquired by the shareholder. He further took the view that upon proper interpretation of S. 46(2) of the Act the liability created thereunder must arise on the dates of transfer of the deemed gains to shareholders by distribution made on liquidation. He also rejected the contention of the ITO that the petition was liable to be dismissed in limine on a preliminary ground that an appeal was preferred by the petitioners against the impugned order passed by the ITO. The learned judge on this ground quashed the impugned order of assessment dt. 30th March, 1967. It is this order passed by the learned judge that is under appeal in the present case.

(3.) IT is common ground that the sum of Rs. 53,85,400 was received by the petitioners on 12th Sept., 1949, and the sum of Rs. 25,07,001 on 16th Nov., 1953, when the Indian IT Act, 1922, was in force. Under the said Act there was no provision for payment of tax on capital gains at the time when the said amounts were received. The liability for payment of tax on capital gains, according to the ITO, had arisen by reason of S. 46(2) of the Act, because the last instalment of Rs. 2,39,934 towards distribution of capital was received by the petitioners on 18th Sept., 1961, i.e., during the accounting period for the relevant assessment year when the Act was in force. "Transfer" as defined in S. 2(47) of the Act in relation to a capital asset includes the sale, exchange or relinquishment of the asset or extinguishment of any rights therein or the compulsory acquisition thereof under any law. The general provision as regards chargeability to income tax in respect of capital gains is contained in S. 45 while a special provision is made in S. 46 for capital gains on distribution of assets by a company in liquidation. Under Sub S. (1) it is provided that, notwithstanding anything contained in S. 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 S. 45. The liability of the petitioners to pay tax on capital gains is claimed by the ITO by reason of the provisions of S. 46(2). It is as under :