COMMISSIONER OF INCOME TAX versus RAM KUMAR AGGARWAL AND BROS.

Citation: [1993] SUPP. 3 S.C.R. 502 · Decided: 02-11-1993 · Supreme Court of India · Bench: B.P. JEEVAN REDDY, S.P. BHARUCHA

Judgment (excerpt)

A 
COMMISSIONER OF INCOME TAX 
v. 
RAM KUMAR AGGARWAL AND BROS. 
NOVEMBER 2, 1993. 
B 
[B.P'. JEEVAN REDDY AND S.P. BHARUCHA, JJ.) 
. Income Tax Act, 1922 : Partnership fi~rchasing all equity shares 
of a company-Taking over its management-Shares of the company held as 
sto~k-in-trade-Liquiddtion of the company-Surplus received on liquida-
C tion--Whether includible in the total income of the assessee. 
Companies Act. 1956: Section 511-Shareholding in a company-Dis-
tribution of assets-Proportionate to shareholding-After distribution share-
holing comes to an end. 
D 
The respondent • Asessee, a partnership firm was dealing in shares. 
In the year 1945, it purchased all the equity shares of a company and took 
. over its management. In all the subsequent assessment years, he took the 
stand that he held the said sh'iires as his stock-in-trade and obtained 
.certain benefit on that basis. The Company went into liquidator and the 
E assessee received surplus amount from the liquidator in the previous year 
·relevant to AY 1956-57. In the assessment proceedings for the year 1956-
57, the assessee admitted again that the shares of the said company were 
held by it as stock-in-trade. On that basis, the Income Tax Officer included 
the surplus amount received by the assessee, from the liquidator of the 
company, in the total income of the assessee. 1be assessee prefered an 
F appeal to the Appellate Assistant Commissioner against this inclusion and 
the same was dismissed. But, on further appeal, the Income Tax Appellate 
Tribunal ordered the deletion of the addition made by the ITO. 
At the instance of the Revenue, a reference was made to the High 
G. !;_~urt on the questioknis whedther tdhe shhahres ohf the co
1
mpany were hel~ bdy 
......, assessee as stoc • n-tra e an w et er t e surp us amount receive 
on liquidation of that company was not includible in the total income of 
~e assessee. The High Court answered the questions in assessee's favour. 
Being aggreived by the judgment of the High Court, the Commis-
l:f stoner of Income Tax preferred the present appeal, contending that the 
502 
COMMR. OFl.T. v. R.K.AGGARWAL 
503 
assets which a shareholder received on the liquidation of a company was A 
in lieu of and on account of the shares held by him, that when a company 
went into liquidation and the liquidator distributed the assets among the 
shareholders the company ceased to exist, that it was not necessary that 
there should be a sale or transfer of shares for the in~me to arise and 
once the shares got converted into money (or other assets), by whatever 
means it may be, the money(or assets) received by the holder of such 
shares must be held to have realised the value of the said shares. 
B 
Allowing the appeal, this Court 
HELD : 1.1. The concluding words of section SU of the Companies C 
Act, 1956, indicate that the assets of a company, on its liquidation, shall 
be distributed among the shareholders according to their rights and 
interests in the company wtiich necessarily means according to their 
share-holding. What each shareholder gets is proportionate to his share-
holding in the company. Once the distribution takes place, the shares and D 
the share-holding come to an end. The fact that the shares may technically 
continue until the name of the company is struck otT the register of the 
company is of little significance. After the distribution of the assets, 
nothing remains of the shares. (508-F-H] 
1.2. So long as money is received in lieu of shares, there is a receipt E 
and where an assessee is a dealer in shares, any surplus amount received 
by him constitutes his income. Where a company goes into liquidation and 
the liquidator distributes the assets of the company among the 
shareholders, what each shareholder gets is in lieu of his shareholding. 
That is the worth, the value and the price of his shareholding. A F 
shareholder participates in the distribution of the assets of a company on 
its liquidation by virtue of, and because of, his shareholding. [509-B-D] 
1.3. The money received by the assessee in lieu of its share-holding 
partakes the same character in which he held the shares. If he held the 
share as stock-in-trade, the money received by it represents his income, G 
i.e., a revenue receipt in its hands. If it held them by way of investment, 
the money it receives represents a capital receipt by it. (509-E] 
Commissioner of Income Tax, U.P. v. Madan Gopal Radhey Lal, 73 
I.T.R. 652, Di

Excerpt shown. Read the full judgment & AI analysis in Lexace.