N. BAGAVATHY AMMAL versus COMMISSIONER OF INCOME TAX, MADURAI AND ANR.

Citation: [2003] 1 S.C.R. 614 · Decided: 27-01-2003 · Supreme Court of India · Bench: RUMA PAL · Disposal: Dismissed

Judgment (excerpt)

A 
N. BAGA VA THY AMMAL 
v. 
, 
~ 
COMMISSIONER OF INCOME TAX, MADURAI AND ANR. 
JANUARY 27, 2003 
B 
[RUMA PAL AND B.N. SRIKRISHNA, JJ.] 
~ 
... 
Income Tax Act, 1961; Sections 2 (14), 45, 46(2), 47, 48 and 256(1): 
Agricultural land received by assesseelshareholder on distribution of assets of 
c a company in liquidation-Exclusion of value of such agricultural lands in 
computing capital gains from levying of Income tax-Held, object of introducing 
Section 46(2) was to broaden the base of incidence of capital gains and 
expressly providing for receipts of assets on distribution of share by a company 
in liquidation as taxable event-Hence, assessee is liable to pay tax on the 
D 
market value of such agricultural lands-Income Tax Act, 1922 s.12-B. 
Transfer and distribution of assets of the company in liquidation-
Distinction between-Discussed 
The Appellant-assessees were sisters. They received their share 
,~
including agricultural lands by distribution of the assets of a company in 
t"
E liquidation during the assessment year 1970-71. The Assessing officer 
included value of such agricultural lands, in the income of assessees subject 
to capital gains and accordingly levied income tax thereon. The 
Commissioner of Income Tax (Appeals) allowed the appeals. The Income 
Tax Appellate Tribunal negatived the appeal of the Revenue. At the 
F instance of the Revenue, the Tribunal referred two questions of law on 
.--.....
the issue of inclusion of the value of agricultural lands received as share 
by distribution of assets of a company in liquidation, whether such income 
be included in the income of assessees subject to capital gains and levying 
of tax thereon. However, only one of the questions was pressed which was 
G 
decided by the High Court in favour of Revenue. Hence the present appeal. 
The question which arises in these appeals is whether the term 
'assets' in Section 46(2) of the Act must be understood and construed 
>---.. 
according to the definition of the term capital assets in Section 2(14) of 
the Income· Tax Act. 
H 
614 
N. BAGAVATHY AMMALv.C.l.T. 
615 
Dismissing the appeals, the Court 
A 
HELD: I.I. Section 12-B of the lacome Tax Act, 1922 pro\'ided for 
payment of tax under capital gains 'in respect of any profits or gains 
whatsoe\'er from the sale, exchange, relinquishment or transfer of a ca vital 
assets, and such profits and. gains shall be deemed to be income of the 
previous year in \'Vhich the sale, exchange, relinquishment or transfer took B 
place. Section 45(1) of the Income Tax Act, 1961 continues to pro\'ide the 
same. 1618-D-FI 
1.2. The object in introducing Section 46(2) in the Income Tax Act, 
1961 was to broaden the base of the incidence of capital gains and to 
expressly provide for receipt of assets of a company in liquidation by a C 
shareholder as a taxable event. Section 46(2) is an independent charging 
Section. 1620-DI 
Commissioner of Income Tax v. Madurai Mills Co. ltd, (1973) 89 ITR 
45 and Commissioner of Income Tax v. R.M Amin, 119771 I SCC 691, 696, D 
relied on. 
1.3. A distinction is drawn between a transfer of assets and a 
distribution of assets of the company on liquidation. Where there is 
•transfer' of assets and not a 'distribution' on liquidation then having 
regard to Section 47(viii), a transfer of agricultural land by the company E 
may arguably be exempt from capital gains. However, such exemptions 
are not available to shareholders who receive assets from the company 
on distribution consequent upon liquidation because of provisions of 
Section 46(2) of the Act which was introduced to make the receipts of assets 
from a company in liquidation by its share holders a taxable event for 
the first time. 1619-D-F-G-HI 
F 
1.4. Having referred to the use of the phrase •capital asset' in 
Sections 45(1), 47 and 48 of the Act, Parliament appears to have 
deliberately chosen to use the word 'asset' in Section 46(1) and (2) of the 
Act, the ostensible intention being to bring assets of all kinds within the G 
scope of the charge. The High Court rightly held that agricultural land 
would have been a 'capital asset' but for the exclusion from the definition 
of 'capital asset' and what is not a capital asset may yet be an asset for 
the purposes of Section 46(2) of the Act. Therefore, to the extent that a 
shareholder assessee receives assets whether capital or any other from the 
company in liquidation, thr assessee is liable to pay tax on the market value H 
616 

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