Parties to the case: Petitioner: Commissioner of Income Tax, Madras Vs.
Respondent: M/S Madurai Mills Co. Limited
Bench: Khanna, Hans Raj
Voluntary Liquidation: When a company decides to voluntarily dissolve itself the proper consultation of the shareholders. The dissolution of the company is not ordered by the court.
Distribution of assets of the company: When a company winds up all its assets and all of them are sold and payment is made for all the remaining liabilities in that case there are two types of distribution made:
1. Distribution of assets to the shareholders: In this case, there is no capital gain as no transfer is made.
2. Distribution of assets by shareholders: In this case, there is a capital gain as a transfer is made
Assessee: Section 2(7) of the income tax act defines ‘assessee’ as a person who pays a certain amount as tax.
Transfer of Capital Assets: Transfer of Capital Asset
Transfer of the capital asset includes;
1. Sale, exchange, or relinquishment of the asset
2. Extinguishment of any rights.
3. Compulsory acquisition thereof under any law.
4. An asset converted by the owner or treated by him as stock-in-trade of a business carried on by him, such convenience or treatment
5. Maturity or redemption of zero-coupon bonds.
6. Any transaction involving the allowing of the possession of any immovable property to be taken or retained
7. Any transaction which has the effect of transferring or enabling the enjoyment of any immovable property.
Transactions not amounting to transfer of capital assets: Transfer of Capital Asset
1. Assets of the company are distributed to its shareholders on liquidation of a company are distributed to its shareholders on liquidation of a company; such distribution shall not be regarded as a transfer in the hands of the company.
Headnote:
In this case, there are 3 companies that went into voluntary liquidation, and then during the proceedings of the liquidation, the company distributed its assets to an assessee company, the company then gained some profit by these assets which the revenue calculated and put a tax on a gain of 95,944 rupees, the assessee company then went to the income tax officer, he failed there and then went to an appellate assistant commissioner who also ruled that the assessee as liable to the mentioned tax.
Then the madras high court ruled that the assessee was not liable for the tax, which the tax commission appealed against the judgement of the madras high court. Then the court cleared all the queries and the appeal was not accepted and dismissed.
Brief of the facts:[i]
1. These private limited companies went into voluntary liquidation in December 1959.
2. The three companies that went into voluntary liquidation are:
· The mills supply company(Private)
· Harveys (Private)
· Pandyan Weaving mills (Private)
3. The liquidators then made a distribution of the assets of the company during the liquidation proceedings.
4. The assessee company got cash or assets in exchange of amount, Rs. 4, 57, 858, Rs. 1,41,739 and Rs. 1,83,175 respectively for all the companies
5. The revenue took the view that, after the distribution of assets, there had been a gain of 96,735.85 rupees from the two companies.
6. The assessee company said that the capital gain was of Rs. 95,944 but there was a loss of 59,104 rupees on the basis that cost of the shares distributed by the liquidators should be taken at the figure at which they have been acquired by the companies which distributed the shares.
7. The assessee then went to the income tax officer who then calculated that the capital gain as 95,944 rupees.
8. The assessee again appealed to the appellate assistant commissioner and failed there too.
9. Then he appealed before the Income Tax appellate tribunal who put forward the view that the gain arose out of the exchange of shares and thus that surplus should be brought to tax.
12. Then the assessee’s application was referred to the High Court.
Question of the case?
The main question that arose during the appeal was
· Whether the transaction in question, was involved or was not involved under sale, exchange, relinquishment or transfer?
· The amount gained on the question was capital gain or not under Section 12B of the act?
Judgement:
The high court answered all the questions on behalf of the assessee as;
· When a liquidator is distributing his assets of his company which is under voluntary liquidation, he is performing a legal function where there is no element of sae, exchange or relinquishment.
· Sub section (1) of section 12B that capital gains that are liable to pay tax arise only if the assessee makes profits or gains out from the sale, exchange, relinquishment or transfer of capital asset effected after March 31, 1956. Here the transaction made, was ruled as, liquidators distributing the assets of the company which has undergone voluntary liquidation did not create any new rights, rather it was just an recognition of the pre existing legal rights which was there before the distribution.
· Further the judgement stated that, when a shareholder receives certain money from the distribution of net assets of the liquidated company, then the money received is for the satisfaction of the right, for holding the shares and not by transaction of any sort.
· Thus the court finds it difficult to hold the assessee company liable to pay tax on capital gains under section 12B of the act, the amount, 95,944.
· Thus the appeal filed by the income tax company against the order of Madras High court was dismissed.
Comment:
1. Was the court’s decision correct?
Let’s take the different points given out by the court in favour of the assessee:
“The distribution is not a transfer in the above case”
Ø According to the section 46(1) of Income tax act, when the assets of a liquidated company is distributed among the share holders, then it is not regarded as transfer in the hands of the company. Then in such case the distribution of the assets over here is not a transfer according to the act.
“By considering the requirements to tax capital gain, the above case doesn’t fulfil all the requirements and thus cannot be taxed”
Ø The condition when capital gain can be taxed:
a) There must be a capital asset
b) There must be a transfer of such asset.
c) There must be a gain from such a transfer
In this case, when ab initio there is no transfer/sale/exchange of the capital asset the requirements are not being fulfilled and thus the tax cannot be charged.
Secondly, if the liquidators distribute the assets merely among its shareholder, then there cannot be any capital gain made. Here in the above case the assessee company received assets in place of cash, therefore the assessee cannot be liable tax.
According to the provision a capital gain on transfer can only be claimed if there is end of any rights in the property, but if we see in the case, there was no formation of any new rights.
Thus the court approach is right in the case, though the income tax officer took the view of the case, as there was a sale or exchange or relinquishment, but going through the provisions and statues, the case ceased to fulfil any requirements to be a transfer or to attain capital gain.
[i] SSC online web edition, Tuesday, December 22, 2020