Madras High Court
T.R.Balasubramanium vs The Asst Commissioner on 30 April, 2025
Author: Anita Sumanth
Bench: Anita Sumanth
2025:MHC:1145
T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
IN THE HIGH COURT OF JUDICATURE AT MADRAS
RESERVED ON : 30.01.2025
PRONOUNCED ON : 30.04.2025
CORAM :
THE HONOURABLE DR.JUSTICE ANITA SUMANTH
and
THE HONOURABLE MR.JUSTICE G.ARUL MURUGAN
T.C.(A) Nos. 438 of 2008, 34 of 2009 & 5 of 2010
T.C.A.No. 438 of 2008
T.R.Balasubramanium .. Appellant
vs
The Asst Commissioner
Of Income Tax City Circle VII(2), Chennai. Respondent(s)
TCA NO. 34 of 2009
T.M.Ramaswamy (Since Deceased)
1.T.R.Natarajan
2.T.R.Viswanathan
3.T.R.Muthukrishnan
4.T.R.Srinivasan
5.T.R.Balasubramanian
6.Kanthimathi Santhanam
7.Lalitha Subramanium
8.Hema Subramanium
9.Praveena Goutham .. Appellants
Vs
The Assistant Commissioner
Of Income Tax City Circle VII (2), Chennai. .. Respondent
1/16
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
TCA NO. 5 of 2010
T.R.Srinivasan Appellant(s)
Vs
The Asst Commissioner
Of Income Tax City Circle- VII(2) Chennai- 34.
Respondent(s)
Prayer in T.C.A.No. 438 of 2008: Appeal filed under Section 260A of the
Income-Tax Act, 1961 against the order of the Income Tax Appellate Tribunal,
Madras 'C' Bench dated 22.12.2006 in ITA No.1714/MDS/1997 for AY 1991-
92.
Prayer in T.C.A.No. 34 of 2009: Appeal filed under Section 260A of the
Income-Tax Act, 1961 against the order of the Income Tax Appellate Tribunal,
Madras 'C' Bench dated 22.12.2006 in ITA No.1713/MDS/1997 for AY 1991-
92.
Prayer in T.C.A.No. 5 of 2010: Appeal filed under Section 260A of the Income-
Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Madras
'C' Bench dated 20.11.2009 in ITA No.1388/MDS/1998 for AY 1991-92.
(In all TCAs)
For Appellants : Mr. Varun Ranganathan
For Respondent : Mr.T.Ravi Kumar
Senior Standing Counsel
COMMON JUDGMENT
(Per :- Dr. ANITA SUMANTH.,J)
A common order is passed in respect of these three Tax Case (Appeals)
relating to Assessment Year (AY) 1991-92 filed at the instance of three
shareholders (hereinafter, referred to as ‘Appellants’) in a company called
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
Jupiter Press (P) Ltd (in short, ‘Company’). TC(A) Nos. 438 of 2008 and 34 of
2009 have been filed challenging an order of the Income Tax Appellate
Tribunal (Tribunal/ ITAT) dated 31.01.2007.
2. All three Appellants had been successful before the Commissioner of
Income tax (Appeals). Appeals had been filed at the instance of the Revenue
and the Tribunal initially had, vide order dated 09.03.2005 dismissed the appeal
filed in the case of Mr.T.R.Srinivasan. A Miscellaneous Petition had been filed
by the Revenue in respect of the aforesaid order that came to be allowed on
15.10.2006 recalling order dated 09.03.2005 and restoring the appeal to the file
of the Tribunal, ultimately to allow the appeal by order dated 20.11.2009
assailed in T.C.No. 5 of 2010.
3. In allowing the appeal as above, the Tribunal noted that co-ordinate
Benches of the Tribunal had, in the case of Mrs.Lakshmi Muthukrishnan,
allowed the Departmental appeals on 06.02.2006 and in the cases of
Mr.T.M.Ramasamy (another shareholder in whose case the appellate order has
attained finality) and Mr.T.R.Balasubramaniam, allowed the Departmental
appeals on 22.12.2006.
4. The substantial questions of law raised in T.C.(A) No. 5 of 2010,
admitted by this Court on 19.01.2010 are:-
1 )Whether in the facts and circumstances of the case, the
Income Tax Appellate Tribunal is right in holding that the
orders in the case of Lakshmi Muthukrishnan, T.M. Ramasamy
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
and T. R. Balasubramaniam are not per-incuriam when the
applicability of Sec. 55(2)(b)(iii) was not considered at all in
any of these cases as is apparent from the orders ?
2) Whether the judicial discipline would require orders that
are per-incuriam to be considered as binding precedents and
be followed subsequently ?
3) Whether in the facts and circumstances of the case, the
Income Tax Appellate Tribunal is right in holding that for the
assets distributed on liquidation, the cost of acquisition of the
asset, in the hands of the shareholders be determined by
applying Sec.49(1)(iii)(c), as against Sec. 55(2)(b)(iii) of the
Income-Tax Act, 1961?”
5. The substantial question of law admitted in T.C.No 438 of 2008 and
and T.C(A)No.34 of 2009 is extracted below:
Has not the Income Tax Appellate Tribunal erred in
wrongly applying the provision with reference to cost of
acquisition of shares in the case of assets received by a
shareholder on liquidation of a company?
6. The sole legal issues that arises relates to the computation of cost of
acquisition under the provisions of the Income Tax Act, 1961 (in short, 'Act') of
an asset distributed on liquidation of the Company, the asset being the
immovable property at 552, Mount Road, Madras (in short, ‘Asset’) that
belonged to the Company.
7. The appellants had purchased 120 shares of the Company at the rate of
Rs.21,000/- per share in the Company. The Company went into voluntary
liquidation on 21.05.1990. The asset had been valued at a sum of
Rs.1,36,51,000/- and the value thereof was distributed to the Appellants in
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
proportion to their share-holding, being 120 out of 500 shares amounting to
Rs.32,76,240/- or Rs.27,302/- per share.
8. In respect of AY 1991–92, returns of income were filed by the
Appellants declaring total income wherein, inter alia, capital gains was
computed at a sum of Rs.7,56,240/-. The computation canvassed by the
Appellants is in line with Section 55(2)(b)(iii) which, according to the
Appellants, ought to be the basis for the computation.
9. Intimations under Section 143(1)(a) of the Act were issued and the
matters taken up for scrutiny thereafter concluding in orders of assessment
accepting the returns in full. Proceedings for re-assessment were initiated
thereafter by notices issued under Section 148 of the Act. The proceedings for
re-assessment were finalized wherein the assessing authority computed the cost
of acquisition in terms of Section 49(1)(iii)(c) of the Act at a sum of Rs.
32,69,795/-.
10. Aggrieved with the above computation, a first appeal was filed
before the Commissioner of Income-Tax (Appeals) (CIT(A)), who allowed the
appeal on 16.03.1998. Aggrieved the Revenue filed appeals before the
Tribunal. One of the appeals came to be dismissed 09.03.2005 as against which
a Miscellaneous Petition had been moved by the Revenue. The Miscellaneous
Petition came to be allowed on 06.10.2006 recalling order dated 09.03.2005
and listing the appeal for hearing de novo.
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
11. Ultimately, the revenue’s appeal came to be allowed on 20.11.2009,
aggrieved with which, T.C.(A) No. 5 of 2010 has been filed by the Assessee.
As far as the remaining two Appellants are concerned, the appeals of the
Revenue came to be allowed on 06.02.2006 and 22.12.2006 as against which
the remaining two Tax Case (Appeals) have been filed.
12. The issue arising for consideration in all three appeals is one and the
same. The stand of the Appellants is that Section 55(2)(b)(iii) overrides the
provisions of Section 49(1)(iii)(c) as the Appellants had acquired the shares of
the Company prior to liquidation. Hence it was appropriate, according to them,
that Section 55(2)(b)(iii) be adopted as a mode of computing the cost of
acquisition as against Section 49(1)(iii)(c).
13. We have heard the detailed submissions of Mr.Varun Ranganathan,
appearing for the appellant and Mr.T.Ravi Kumar, learned Senior Standing
Counsel, appearing for the respondent /Income-Tax Department.
14. The rival provisions which are sought to be invoked by the parties,
being Section 55(2)(b)(iii) and Section 49(1)(iii)(c), are extracted below:-
‘55. Meaning of ‘adjusted’, ‘cost of improvement’ and
‘cost of acquisition’.-
....
(2)For the purposes of sections 48 and 49, “cost of
acquisition”,—
....
(b) in relation to any other capital asset,—
....
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
(iii) where the capital asset became the property of the
assessee on the distribution of the capital assets of a
company on its liquidation and the assessee has been
assessed to income-tax under the head "Capital gains"
in respect of that asset under section 46, means the fair
market value of the asset on the date of distribution’
‘49. Cost with reference to certain modes of
acquisition.-
(1) Where the capital asset became the property of the
assessee-
....
(iii) . . . .
(c) on any distribution of assets on the liquidation of a
company’,
....
the cost of acquisition of the asset shall be deemed to be
the cost for which the previous owner of the property
acquired it, as increased by the cost of any improve-
ment of the assets incurred or borne by the previous
owner or the assessee, as the case may be.
Explanation.—In this sub-section the expression ‘previ-
ous owner of the property’ in relation to any capital as-
set owned by an assessee means the last previous owner
of the capital asset who acquired it by a mode of ac-
quisition other than that referred to in clause (i) or
clause (ii) or clause (iii) or clause (iv) of this sub-sec-
tion.
15. In addition, we extract below Section 46 that deals with the
computation of capital gains on the distribution of assets by companies in
liquidation and Section 48 that sets out the method of computation.
46. Capital gains on distribution of assets by companies in
liquidation.-
(1) Notwithstanding anything contained in section 45, where
the assets of a company are distributed to its shareholders
on its liquidation, such distribution shall not be regarded as
a transfer by the company for the purposes of section 45.
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
(2) Where a shareholder on the liquidation of a company
receives any money or other assets from the company, he
shall be chargeable to income-tax under the head "Capital
gains", in respect of the money so received or the market
value of the other assets on the date of distribution, as
reduced by the amount assessed as dividend within the
meaning of sub-clause (c) of clause (22) of section 2 and the
sum so arrived at shall be deemed to be the full value of the
consideration for the purposes of section 48.
48. Mode of computation.-
The income chargeable under the head "Capital gains" shall
be computed, by deducting from the full value of the
consideration received or accruing as a result of the transfer
of the capital asset the following amounts, namely:-
(i) expenditure incurred wholly and exclusively in connection
with such transfer;
(ii) the cost of acquisition of the asset and the cost of any
improvement thereto.
16. The provisions of Section 46(2) as applicable to shareholders, states
that where a shareholder, on the liquidation of a company, has received any
money or asset from the company, he shall be chargeable to tax under the head
'capital gains' in respect of the money received or market value of the assets as
on the date of distribution, reduced by dividend received by him and the
resultant sum shall be the full value of consideration for the purposes of Section
48 of the Act. Under Section 48, the expenditure incurred wholly and
exclusively in connection with the transfer of the asset, and the cost of
acquisition and improvement of the asset shall be deducted to arrive at the
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
capital gain.
17. Applying the aforesaid provisions to the present case, we find that the
unique factor that hass transpired in the assessee's case is that both Section
49(1)(iii)(c) and Section 55(2)(b)(iii) would stand attracted as, the transfer of
shares, firstly, by way of extinguishment right therein and in consideration of
which the appellant received the asset from the company (transaction 1) and
secondly, by transfer of the asset received on liquidation and in consideration of
which the assessee received actual money (transaction 2).
18. Relevantly both transactions, as aforesaid have taken place in the
same financial year as the appellants have proceeded to sell their share of the
property to MRL in the same year where the asset had been distributed to them,
fusing the applications of both applicable statutory provisions.
19. In order to decide these appeals, it would suffice to advert the order
of the Tribunal in the case of T.R.Srinivasan as this is the speaking order,
which has analysed the provisions clearly and in a methodical manner. The
operative portion of that order is extracted below:
8. Section 46(2) provides that when a shareholder receives
money or any other asset from a company on its liquidation,
then such shareholder shall be charged to capital gains tax.
This capital gain is on account of transfer of shares effected
by extinguishment of rights in the shares. The section further
provides that sales consideration for the purpose of computing
capital gains will be money actually received or fair market
value of the asset on the date of distribution, as the case may
be. The said sales consideration will be as reduced by the
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
amount assessed u/s.2(22)(c). In our case there is no such
amount assessed and therefore, for the sake of brevity, in this
order reference to fair market value of the asset on the date of
distribution will be presumed to be after such reduction and
no further reference will be made to sec.2(22)(C). Again, for
the sake of brevity, let us name this transaction, l.e. the
transaction of transfer of shares as transaction A. The transfer
of shares in this case is the first taxable event and since the
assessee has received an asset other than money on
liquidation, capital gains will be computed by deducting the
cost of shares from the fair market value of the asset. The
shares have been acquired by the assessee himself and
therefore, there is no question of adopting any cost to the
previous owner. The year of taxability will be the year in
which the distribution of assets has taken place, i.e. the year in
which the assessee received the asset. In the present case, the
assessee has received the asset in financial year 1990-91 and
hence capital gains would be taxed in assessment year 1991-
92. This entire transaction A can be presented in arithmetical
form by taking a hypothetical example. Let us assume the
following :
1. cost of acquisition of shares by the assessee Rs.100/-
2. fair market value of property received Rs.150/-
3. sales consideration of property sold Rs.170/-
4.cost of acquisition of property to the company Rs. 80/-
Thus, transaction A will be as follows:
Computation (1)
Sales consideration
for transfer of shares Rs. 150/- (being fair market
value of property on
the date of
distribution received
on liquidation)
Less: Cost of acquisition
of shares Rs.100/-
Rs. 50/- capital gains
chargeable to
tax in assessment
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
year 1991-92
It is presumed that the assessee has offered the above capital
gain for taxation in assessment year 1991-92.
Now we come to the second transaction which we shall name
it as transaction B. This pertains to the sale of property
received by the assessee on liquidation. Though the assessee
has sold the property in the same financial year, i.e. in 1990-
91, yet for the time being let us presume that it is sold in
financial year 1991-92, l.e. in the subsequent financial year.
The property is sold for Rs.170/-• The question which now
arises is as to what should be the cost of acquisition of the
asset to compute capital gains. For this purpose, there are two
provisions, viz., section 49(1)(il)(c) and section 55(2)(b)(iii),
both of which are extracted above. Sec.49(1)(iii)(c) provides
that where a capital asset becomes the property of the
assessee on distribution of asset on the liquidation of a
company, the cost of acquisition of the asset shall be deemed
to be the cost to the previous owner. Sec.55(2)(b)(iii) provides
that where the asset becomes the property of the assessee on
the distribution of assets on liquidation, and if the assessee
has been assessed to capital gains tax in respect of that asset
under sec.46, the cost of acquisition would be the fair market
value of the asset on the date of distribution. It will be noticed
that both the provisions provide for the cost of acquisition of
an asset which becomes the property of the assessee on the
distribution of assets by a company on its liquidation.
However, the applicability, of either of the provisions would
depend on the situation in each case. If the assessee has been
charged to capital gains tax on receipt of the property, then,
as per sec.55(2)(D)(ii), the cost of acquisition would be the
fair market value of the asset on the date of distribution. In the
present case, at the end of paragraph 8 we have made a
presumption to the effect that the assessee has offered the
capital gains of Rs.50/- for taxation in assessment year 1991-
92. Therefore, the provisions of sec.55(2)(b)(iii) would come
into play. Accordingly, the presentation of transaction B in
such a situation would be as follows :
Computation (2)
Sales consideration
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
on sale of property Rs.170/-
Less : Cost of acquisition Rs. 150/- (being fair market
value of the property
on the date of
distribution)
Rs. 20/- capital gains
chargeable to tax in
assessment year
1992-93.
To repeat, while presenting the above two computations, we.
have presumed, (a) the two transactions have taken place in
different years, and (b) the assessee has offered for tax the
capital gains arising in the year of its accrual. Let us take
another situation. We retain presumption (a) as it is. So far as
presumption (b) is concerned, let us presume that the assessee
has not offered the capital gains for taxation in the year of its
accrual. In that case. in our view. the cost of acquisition will
be as per sec.49(1)(II)(C), I.e. it will be the cost to the
previous owner. In that case, the arithmetical presentation
will be as follows :
Computation (3)
Sales consideration
of the property Rs.170/-
Less: Cost of acquisition
to the company Rs. 80/-
Rs. 90/- capital gains
chargeable to tax in
assessment year 1992-93
From the above three computations it can be seen that if the
assessee offers capital gains for taxation as they arise, he will
be paying tax on total capital gains of Rs.70/-. However, if he
has chosen to offer capital gains for tax only in the year of
sale of property received on distribution, he will end up
paying more tax, i.e. on capital gains of Rs.90/-. This can. be
taken to be the additional tax burden invited by the assessee
himself for not offering for tax the capital gain arising in
transaction A in the year in which the gain accrued.
10. While presenting the computations in paragraphs 8
& 9 above, we have presumed that both the transactions have
taken place in different years. However, as mentioned earlier,
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
this is not the actual position in the case before us. In the case
before us, both the transactions have taken place in the same
year and this fact in particular has given rise to the dispute.
As mentioned earlier, sec. 55(2)(b)(iii) comes into play only if
capital gains arising from the first transaction has been
assessed to tax. In the present case, the question both the
transactions have taken place in the same year. In transaction
A has not been charged to tax in the earlier The argument of
the department is that capital gains arising year and hence,
sec.49(1)(iIi)(c) will apply. In our considered view, if this
interpretation is to be accepted, it would amount to saddling
the assessee with higher tax liability for no fault of his. This is
one aspect of the matter. Another angle from which the matter
can be viewed is this. In point of time, transaction A occurs
first and it is only as a result of transaction A, transaction B
occurs. Therefore, while preparing the total computation of
income, the assessee will first compute capital gains in
transaction A and offer it for tax. Thereafter, the assessee will
compute capital gains in transaction B and offer it for tax.
Under these circumstances, it can be said that the assessee
has been assessed to capital gains tax under sec.46 and
therefore, provisions of sec.55(2)(b)(iii) will be applied, i.e.
the fair market value of the asset on the date of distribution
can be taken as the cost of acquisition. The assessee has
practically done this only with a slight difference. Instead of
making two computations as in computation (1) and
computation (2) above, he has integrated both the
computations into one as follows :
Computation (4)
Sales consideration of the property Rs. 170/-
Less: Cost of acquisition of shares Rs.100/-
Rs. 70/- capital gains
chargeable to
tax in assessment
year 1991-92
Thus, If capital gains arising in transaction A are treated as
assess to tax earlier, then, whether the computations are
separately done as per computation (1) and (2) or they are
integrated into one as in computation (4), it makes no
difference. However, the departmental view is as follows :
Computation (5)
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
Sales consideration of the property Rs. 170/-
Less: Cost of acquisition
of the company Rs. 80
Rs. 90/- capital gains
chargeable to
tax in assessment
year 1991-92
The department is canvassing for the above computation
despite the fact that capital gains arising in transaction A are
being taxed as per computation (4). Again, in our view,
computation (5) should be adopted only where the assessee
has postponed the taxability of capital gains arising in
transaction A. In the present case, the assessee has not
postponed the taxability of capital gains but is offering it for
tax in the same year in which the gains have accrued.
Therefore, it would be just and proper to accept the
computation made by the assessee. However, we may hasten to
add that so far as this appeal is concerned, we are not
accepting the same for the reasons that follow.
20. Having thus accepted the argument of the appellant, the Tribunal
proceeds to conclude adverse to the Appellant stating that it was bound by the
conclusions of the earlier Benches of the Tribunal that had been decided
adverse to the other two Appellants. In fact, the Tribunal could well have
referred the matter for the constitution of a Larger Bench as is normally done in
such matters instead of which, the Departmental appeal has come to be allowed.
We are of the view that the procedure followed by the Tribunal in this case is
incorrect particularly in view of the categorical discussion and conclusion in
favour of the Assessee in the paragraphs extracted supra, with which we concur.
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
21. At any rate, we are now concerned with the substantial question of
law on this issue and for this purpose, find that the manner of computation as
adumbrated in Computation 4 above, would be the proper methodology for
computation of cost of acquisition. This is a case where one has necessarily to
take note of the computations of capital gain both in regard to transactions 1
and 2, and the same have rightly been taken note of, and stand encapsulated, in
computation 4 above.
22. In light of our conclusion as above, we see no necessity to advert to
any of the cases cited as the discussion in the order of the Tribunal would more
than suffice. The substantial questions of law are answered in favour of the
appellant and against the revenue. These appeals are allowed. No costs.
[A.S.M., J] [G.A.M., J]
30.04.2025
Index:Yes
Neutral Citation:Yes
ssm
To
The Assistant Commissioner
Of Income Tax City Circle VII (2), Chennai.
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T.C.A.Nos. 438 of 2008, 34 of 2009 & 5 of 2010
DR. ANITA SUMANTH.,J.
and
G.ARUL MURUGAN.,J.
ssm
T.C.(A) Nos. 438 of 2008, 34 of 2009 & 5 of 2010
30.04.2025
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