Taxation Law

N. Bagavathy Ammal v. Commissioner of Income Tax

[2003] 259 ITR 678 (SC); (2003) 3 SCC 161

Facts

N. Bagavathy Ammal and her sister were shareholders of Palkulam Estate Private Ltd.
The company went into liquidation in 1964.
Following litigation among:
the shareholders;
their brother;
the company represented by its liquidator, a compromise decree was passed in December 1969.
Under the decree, the company’s assets were distributed among the shareholders.
The sisters received approximately 479.89 acres of agricultural land.
Their assessments for assessment year 1970–71 were subsequently reopened.
The Income Tax Officer treated the market value of the agricultural land received on liquidation as consideration taxable under section 46(2).
The assessees argued that agricultural land was excluded from the definition of “capital asset” under section 2(14).
The CIT(A) and Tribunal accepted that argument.
The High Court reversed them and ruled in favour of the Revenue.
The shareholders appealed to the Supreme Court.

Whether the expression “other assets” in section 46(2) meant only “capital assets” as defined in section 2(14).
Whether agricultural land received by a shareholder during company liquidation was covered by section 46(2), even though such land was excluded from the general definition of capital asset.

Section 46 creates a special statutory scheme for the distribution of company assets during liquidation.
Under section 46(1), distribution by the liquidating company is not treated as a transfer by the company.
Section 46(2), however, creates a separate taxable event in the shareholder’s hands when the shareholder receives:
money; or
other assets from the company on liquidation.
Section 46(2) is:
an independent charging provision; and
a separate computation provision.
Where Parliament uses different expressions in related provisions, the distinction must ordinarily be respected.
“Capital asset” is a narrower category within the wider expression “asset.”

The shareholders relied on the definition in section 2(14), which at the relevant time excluded agricultural land.
The Court held that this definition controlled provisions expressly referring to “capital assets.”
Section 46(2), however, deliberately used the broader expression “money or other assets.”
Parliament had referred expressly to “capital asset” in sections 45, 47 and 48.
Its choice not to use that expression in section 46 indicated that the broader word was intentional.
The purpose of section 46(2) was also important.
Under earlier law, distribution of a company’s assets on liquidation was not considered a sale, exchange or transfer.
Consequently, shareholders could receive valuable assets without the transaction falling within the ordinary capital-gains charge.
Section 46(2) was introduced specifically to make the shareholder’s receipt on liquidation taxable.
Restricting “assets” to the definition of “capital assets” would unnecessarily narrow that special charging provision.
An agricultural property might be excluded from “capital asset” under section 2(14), but it remained an “asset” in ordinary and statutory language.
Section 46(2) prescribed its own taxable amount:
money received; or
market value of other assets on the distribution date, after the required adjustments.
The general exclusion under section 2(14) therefore could not defeat the specific liquidation provision.

The Supreme Court dismissed the shareholders’ appeals.
It held that the word “assets” in section 46(2) was not limited to “capital assets” under section 2(14).
Agricultural land received on liquidation was covered by section 46(2).
The shareholder was liable to capital-gains tax on the market value of the land, calculated according to the provision.
The case establishes that a special charging provision may:
create an independent taxable event;
use a broader statutory expression;
operate notwithstanding exclusions applicable to the general capital-gains provision.