2003 (1) TMI 5 - SC - Income Tax

Supreme Court clarifies taxability of assets received by shareholders during company liquidation

N Bagavathy Ammal Versus Commissioner of Income-Tax And Another

The Supreme Court upheld the taxability of assets received by shareholders during a company's liquidation under section 46(2) of the Income-tax Act, ... Whether the word 'assets' in s. 46(2) must be understood according to the definition of 'capital assets' in s. 2(14) - to the extent that a shareholder assessee receives assets whether capital or any other from the company in liquidation, the assessee is liable to pay tax on the market value of the assets as on the date of the distribution as provided u/s 46(2) - the invocation of section 2(14) is unnecessary for purpose of construing s. 46(2). Issues:Interpretation of the term 'assets' in section 46(2) of the Income-tax Act, 1961.Analysis:The judgment addressed the question of whether the term 'assets' in section 46(2) of the Income-tax Act should be understood in line with the definition of 'capital assets' in section 2(14) of the Act. The case involved shareholders who received agricultural lands from a company in liquidation and disputed the taxability of these lands under capital gains. The Assessing Officer included the value of the agricultural lands as income subject to capital gains, but the Commissioner of Income-tax (Appeals) ruled in favor of the shareholders, considering the exemption of agricultural lands from capital gains under general provisions. However, the High Court reversed this decision, holding that the definition of 'capital assets' under section 2(14) was not relevant for interpreting section 46(2) and that the distribution of agricultural lands was taxable under section 46(2).The Tribunal, in its decision, emphasized that the term 'assets' in section 46(2) should be understood as referring to capital assets. It noted that since agricultural lands were exempt from capital gains tax under section 47(viii), it would be challenging to interpret section 46(2) as including agricultural lands. The High Court, on the other hand, ruled against the shareholders, stating that the definition of 'capital assets' was not significant in determining the taxability of agricultural lands received during the liquidation of a company.The Supreme Court analyzed the legislative context of section 46(2) in relation to earlier provisions and judicial interpretations. It highlighted the distinction between a transfer of assets and a distribution of assets on liquidation, emphasizing that section 46(2) was introduced to tax the receipt of assets by shareholders during a company's liquidation. The Court concluded that the term 'assets' in section 46(2) encompassed all kinds of assets, not just capital assets, and shareholders were liable to pay tax on the market value of assets received during liquidation. The judgment clarified that the definition of 'capital assets' in section 2(14) was not necessary for interpreting section 46(2), and shareholders were obligated to pay tax on the assets' market value at the time of distribution.In summary, the Supreme Court dismissed the appeals, upholding the taxability of assets received by shareholders during a company's liquidation under section 46(2) of the Income-tax Act, irrespective of whether the assets were classified as capital assets under section 2(14). The judgment emphasized the broad scope of section 46(2) in taxing all assets distributed during liquidation and clarified that the definition of 'capital assets' was not determinative in this context.