Supreme Court of India

COMMISSIONER OF INCOME TAXversusRAM KUMAR AGGARWAL AND BROS.

Citation: 1993 INSC 354
Decided: 2 November 1993
Bench: B P JEEVAN REDDYS P BHARUCHA

Holding

When shares are held as stock-in-trade, any surplus received on liquidation is a revenue receipt and is assessable in total income.

Summary

The assessee, a partnership firm dealing in shares, bought all equity shares of a company in 1945 and treated those shares as stock-in-trade for tax purposes. When the company was liquidated, the liquidator distributed a surplus to the shareholders, and the assessee received Rs. 32,25,550. The Income Tax Officer included this amount in the assessee's total income, but the Income Tax Appellate Tribunal deleted the addition. The Calcutta High Court, on reference, held that the surplus was not assessable, relying on the view that distribution on liquidation is capital in nature. The Commissioner of Income Tax appealed to the Supreme Court. The Court held that because the shares were held as stock-in-trade, the surplus received in lieu of those shares is a revenue receipt and must be taxed. Accordingly, the Supreme Court set aside the High Court judgment and allowed the appeal, confirming the inclusion of the surplus in the assessee's income.

Issues considered

Whether the shares held by the assessee constitute stock-in-trade or a capital asset.
Whether the surplus amount received on liquidation of the company is assessable as income.
Whether the character of the receipt follows the character of the shares held (revenue vs capital).
Whether Section 511 of the Companies Act, 1956 and the provisions of the Income Tax Act, 1922, render the surplus as capital or revenue.

Legislation cited

Subjects

Income TaxLiquidationSurplus distributionStock-in-tradeCapital receiptCompanies ActSection 511Partnership firmShare dealingAssessable income

Judgment

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 mpany were hel~ bdy
......, assessee as stoc • n-tra e an w et er t e surp1us 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
B
shares must be held to have realised the value of the said shares.

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, Distinguished. H
504 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.

A Dalmia Cement Paper Marketing Co. Ltd. v. Commissioner of Income
Tax, Bi/tar and Orissa, 17 I.T.R. 141, approved.

Hari Prasad Jayanti Lal aiid Co. v. Income Tax Officer, Altmedabad
and Anr.,59 I.T.j. 794, referred to.

B Brogan v. Stafford Coal and Iron Co. Ltd., 41 Tax Cases 305, Com-
missioner of Inland Revenue v. George Bu"ell & Anr., 9 Tax Cases 27,
referred to.

CIVIL APPELLATE JURISDICTION,: Civil Appeal No. 1453 of
c 1976.
From Judgment and order dated 19/20th May, 1975 Calcutta High
Court in Income Tax Reference No. 227 of 1968.

G.C. Sharma, W.C. Chopra, T.R. Talwar and Ms. A. Subhashini
D (N.P.) for the Appellant.

P.K. Mukherjee (N.P.) for the Respondents.

The Judgment of the Court was delivered by

E B.P. JEEVAN REDDY, J. This appeal arises from the judgment of a
Division Bench of the Calcutta High Court answering the question referred
to it in favour of the assessee and against the revenue.· The Assessment
Year concerned herein is 1956-57. The three questions referred at the
instance of revenue, for the opinion of the High Court are :

F "(1) Whether on the facts and in the circumstances of the case, the
Tribunal was justified in investigating the nature of the shares held
by the assessee in Chrestian Mica Co. Ltd. when both the assessee
and the Income-tax Authorities has treated them as the stock-in-
trade of the assessee as' a dealer in share for every assessment year
since 1949-50 and proceeded on the same basis for the instant
G
assessment year?

(2) Whether on the facts and in the circumstances of the case, the
Tribunal was justified in law in holding that the shares held by
assessee in Chrestian Mica Co. Ltd. were not its stock-in-trade for
H dealing in shares?
COMMR. OF LT. v. R.K.. AGGARWAL [JEEVAN REDDY, J.] 505

(3) If the answer to question (2) be in the negative then whether, A
on the facts and in the circumstances of the case, the Tribunal was
right in holding that the sum of Rupees Thirty Two lacs twenty
five thousand and five hundred and fifty was not assessable in the
hands of the Assessee?"

The assessee is a partnership firm. The accounting year relevant to B
assessment year 1956-57 was the year ending on December 31, 1955. The
Income Tax Officer made an assessment on a total income of Rs. 36,41,544
which included a sum of Rs. 32,25,550 representing the surplus which the
assessee received during the previous year from the liquidator of Chrestian
Mica Co. Ud. which went into voluntary liquidation in the year 1955. The C
assessee preferred an appeal to the Appellate Assistant Commissioner
objecting to the inclusion of the said surplus amount. The appeal was
dismissed, But on further appeal, the Income Tax Appellate Tribunal
agreed with its contention.

The assessee was a regular dealer in shares. In the year 1945, it. D
purchased all the equity shares of Chrestian Mica Co. Ltd. which was then ·
a public limited company. The assessee took over its management. In 1947,
the company was converted into a private limited company. For the A. Y.
1949-50, the assessee claimed a trading loss of Rs. 29,88,735 stated to be
the loss suffered on account of depreciation of the value of the shares of E
the said company. This claim was made on the basis that all the shares of
the company were held by it as stock-in-trade. It's claim was allowed by
the Tribunal on appeal. In all the subsequent assessments, the said shares
were treated as its stock-in-trade and value of those shares as claimed by
the assessee was adopted.
F
In the assessment proceedings relating to the assessment year con-
cerned herein (1956-57), the assessee admitted that the shares of the said
company were held by it as stock-in-trade. On that basis, the said surplus
amount received by it form the liquidator was included in its total income
by the I.T.O. and the A.AC. On appeal, however, there was a difference G
of opinion between the Judicial Member and the Accountant Member
whereupon the matter was referred to the Vice-President. He upheld the
assessee's plea. Then followed the reference to the High Court.

Before the High Court, the counsel for the assessee contended that
the admission and concession made by the assessee to the effect that the H
506 SUPREfdE COURT REPORTS (1993) SUPP. 3 S.C.R.

·A , said shares were held by it as stock-in-trade was erroneous and was,
therefore, not binding upon it. Some decisions relating to adventure in the
nature of trade were relied upon in that behalf. The said contention was,
however, rejected by the High Court and rightly in our opinion. It was then
argued for the assessee that the said shares ceased to be stock-in-trade of
· B the assessee the moment the company was converted from a public limited
company to a private limited company. This contention was also rejected
by the High Court. The High Court then considered the question whether
the amount received by the. assessee from the liquidator was in lieu of the
shares held by it. Following the decision of the House ·of Lords in Com-
e missioner of Indian Revenue v. George Burrell & Anr., 9 Tax Cases 27, it
held that whatever is received by a share-holder on the liquidation of a
company iS not the income of the property but the property itself. The High
Court referred to certain other English and Indian decisions and observed · ..
that as a general rule, what is distributed in a liquidation is capital whatever
D may have been its source. It also observed that there was no sale or transfer
of the shares held by the assessee - "the liquidator sells the assets of the
company and not the shares of the shareholder", it observed. Refernce was
also made to the provisions of Section 211 of the Indian Companies Act,
1913 and Section 511 of the Companies Act, 1956. For all the said reasons, ·
the questions referred \\'.ere answered in favour of the assessee. Dipak
' E Kumar Sen, J. delivered a separate concurring opinion. The learned Judges
did not place much reliance upon the English decisions. He pointed out
that in none of the English decisions relied upon before them, did the
assessee hold the shares as stock-in-trade. The main ground upon which
he held in favour of the assessee runs thus·, "where a limited liability
: F company is liquidated and the liquidator distributes the surplus assets,
, there is no transaction in the trading sense between the liquidator and the
shareholders. Irrespective of the decision of the shareholders the liquidator
has to carry out his duties and obligation as laid down in the Companies
Act. No consideration passes from the liquidator to the shareholder as in
G the case of sale. Nor can it be said that the liquidator in distributing the
surplus assets is realising or redeeming the shares. In law, a shareholder
may teclmically continue to be a shareholder even after he gets his share
of the surplus. Till the company is struck of the register, he remains a
s~eholder in law. He retrains his share scrip$. By. virtue of his. l!olding
~/sharehold~ is entitled to surplus assets on the liquidation.of company and
COMMR.OFI.T.v. R.K.AGGARWAL[JEEVANREDDY,J.] 507

such surplus assets it appears to me to be in the nature of and accretion A
to his share."

Sri G.C. Sharma, learned counsel of the revenue characterised the
view taken the High Court as unsustainable in law besides being unrealistic ,
and hyper-technical. Learned counsel submitted that the assets which a B
shareholder receives on the liquidation of a company is in lieu of and on
account of the shares held by him. Once a company goes into liquidation
and the liquidator distributes the assets among the shareholders (after
discharging the liabilities, if any) the company ceases to exist, though
technically speaking it may continue as such until its name is struck off the
register of companies. It is not necessary, submitted the learned counsel, C
that there should be a sale or transfer of shares for the income to arise.
Once the shares get 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.
D
Though the respondent was duly served and was represented by Sri
P.K.Mukherjee, it was represented by the learned counsel on the last date
of hearing that inspite of repeated letters by him, the assessee was not
responding and, therefore, he was obliged to report 'no instructions'.
Thereafter, he did not participate in the hearing of the appeal.
E
Whether shares of a company held by a person constitute his capital
or his stock-in-trade, is not a pure question of law but essentially one of
fact. While one person may hold the shares of a company by way of
investment, the other may hold them as his stock-in-trade. In this case, it
is clear beyond any doubt that the assessee has been holding the shares of F
the aforesaid company as its stock-in-trade. In the earlier years, it claimed
a trading loss on the footing that they represented its stock-in-trade. Even
in the assessment proceedings for the A.Y. 1956-57 (concerned herein), it
took the very same stand though at the stage of Tribunal and his Court, it
sought to wriggle out of the said admission unsuccessfully. The High Court
has held rightly that it cannot do so and that it is bound by its admission G
and its course of conduct over the past several years. The High Court, it
may be recalled, has also rejected its further submission that the said shares
ceased to be its stock-in-trade on the conversion of the company from a
public limited company to a private limited company. If so, it follows that --
if the assessee receives any surplus amount in lieu of the said shares, it H
508 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.

A must be held to be a revenue receipt in his hands. It can not be denied
that the amount received by the assessee from the liquidator in this case
was in lieu of its share-holding. In effect· and in truth, the amount received
by it represented the recompense for its shares, even though it is true there
was no transfer of shares from the assessee to the liquidator or to any one
B else. It was a case of return for the money paid by the assessee for acquiring
the said shares. In one case, the return may be more than what the holder
paid for them while in another it may be less, the charactr.r of the receipt
remains the same. The High Court has however held in favour of the
assessee opining that (i) whatever is received by the shareholder on a
liqu~dation of a company is "no income of the property but the property
C itself' , (ii) that whatever is distributed in a liquidation is capital, whatever
may have been its source, as h.eld in Brogan v. Stafford Coal and Iron Co.
Ltd., 41 Tax Cases 305, (iii) in the course of liquidation of the company
the liquidator sells the assets of the company and not the shares of the
shareholders; and (iv) where a limited company is liquidated and the
D liquidator distributes the surplus assets, there is no transaction in the
trading sense between the liquidator and the shareholders. By virtue of his
holding, a shareholder is entitled to surplus assets on the liquidation of the
company and such surplus assets are in the nature of an accretion to the
shares held by him.

E The question is whether the opinion of the High Court is correct in
_ law? We find it difficult to say so. Section 511 of the Companies Act applies
to every voluntary winding-up. It says that "subject to the provisions of this
Act as to preferential payments, the assets of a company shall, on its
winding-up, be applied in satisfaction of its liabilities pari passu and, subject
to such application, shall, unless the articles otherwise provide, be dis-
F
tributed among the members according to their rights and interests in the
company." The concluding words of this Section indicate that the assets of
a company, on its liquidation, shall be distributed among the sbal'eholders
according to their rights and interests in the company which necessarily
means according to their share-holding. What each shareholder gets is
G proportionate to his share-holding in the company. Once the distribution
takes place the shares and the share-holding come to an end. The fact that
the shares may technically continue until the name of the company is struck
off the register of the company is of little significance. After the distribution
of the assets nothing remains of the shares. To say that the assets a '
H
COMMR.OFI.T.v. R.K.AGGARWAL[JEEVANREDDY,J.) 509

shareholder receives on the liquidation of the company are unrelated to A
his share-holding is to be blind to the reality. Such an argument ignores
the basic reality recognised by Section 511 of the Companies Act. The same
comment holds good about the argument that the amount received is an
accretion to the shares. It is true that a liquidator does not sell the shares.
It is equally true that there is no transfer of shares by the shareholder to B
the liquidator or to any other person. That is not really necessary. So long
as money received in lieu of shares, there is a receipt and where an assessee
is a dealer in shares, any surplus amount received by him constitutes his
income. As stated above, where a company goes into liquidation and the
liquidator distributes the assets of the company among the shareholders, C
what each shareholder gets is in lieu of his share-holding. That is the worth,
the value and the price of his share-holding. A shareholder participates in
the distribution of the assets of a company on its liquidation by virtue of
and because of his share-holding. We, therefore, find it difficult to agree
with the High Court that a shareholder participates in the distribution of
assets on the liquidation of the company de hors his share-holding. Once D
this is so, it follows that the money received by the assessee in lieu of its
share-holding partakes the same character in which he held the share. If
he held the shares as stock-in-trade, the money received by it represents
his income, i.e., a revenue receipt in its hands. If it held that by way of
investment, the money it receives represents a capital receipt by. it. E

It would be appropriate at this stage to consider the decisions cited
by Sri G.C. Sharma and those referred to in the Judgment of the High
Court. In Commissioner of Income Tax. U.P. v. Madan Gopal Radhey La~
73 I.T.R. 652, it was held that though the assessee held certain shares of a p
company as stock-in- trade, the bonus shares issued by the company and
• received by him as capital. On the facts of that case, ho,wever, it was held
that since the assessee had converted the same into his stock-in-trade, the
sale proceeds of the said bonus shares represented his business receipts.
We are unable to see any relevance of the said proposition to the question
at issue herein. At the relevant time, under the Income Tax Act, 1922, issue G
of bonus share by capitalisation of the accumulated profits was not treated
as distribution of dividend. It is the said circumstance which seems to have
influenced the decision of this Court. The learned counsel for the revenue
brought to our notice a passage form the opinion of Lord Evershed in
Brogan. At page 333, the following statement occurs :. H
510 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.
I '

'I
A. "It cannot now be.in doubt that surplus assets in the hand of the
liquidator of a limited liability company-whether limited by. share
capital or by guarantee are in his hands capital. Such a conclusion
was laid down by the Court of Appeal in Commissioner of Inland
Revenue v. Burrell, [1924] 9 T.C.27 and it has never since been
questioned. The terms of Section 302 of the Companies Act, 1948,
B are entirely consistent with this view, for they speak of the "proper-
ty of the company" being distributed as therein stated. I agree that
the fact that the surplus assets of a company upon its winding-up
are capital in the hands of the liquidator is not conclusive upon
the question whether the respe.ctive shares of them handed out to
c the members are likewise in their respective hands capital also,
But prima f acie beyond doubt they are. Some business may consist
of dealing with capital assets : for example a company whose i
business is that of buying and selling real property or stocks and
shares. In case of such a company, no doubt the capital share of
the surplus assets in a liquidation would be no less a trading receipt
D than the proceeds of sale of any other of the assets it had acquired
for the purposes of its business."

The learned counsel says that the said statement of law runs counter
to the decision of this Court in Madan Gopal Radhey Lal. He also invited
E our attention to Hari Prasad Jayantilal & Co. v. V.S. Gupta, Income Tax
Officer, Ahemadabad & Anr., 59 I.T.R. 794, to contend that the principle
of this decision also runs counter to the decision in Madan Gopal Radhey
Lal. It is unnecessary for us to go into the said aspect as in our opinion
the principle of Madan Gopal Radhey Lal has no application to the facts
.F herein.

The High Court has placed strong reliance upon the decision of the
Court of Appeal in Commissioner of Inland Revenue v. Burrell, 9 Tax Cases
27 In that case, the respondents-assessees were partners in a firm which
held shares in a number of single-ship companies. On the sale or loss of
G each ship, each of the companies went into voluntary liquidation, and its
surplus assets, including reserves set aside out of profits, and other un-
divided profits, ar..cumulated and current, were distributed by the liquidator
among the shareholders. On those facts, it was held that on the liquidation
of a company undistributed profits can no longer be distinguished from the
H capital and that such porti<;>n of the assets distributed by the liquidator as
COMMR. OFl.T. v. R.K. AGGARWAL (JEEVAN REDDY,J.) 511

represents undistributed . profits is not income in the hands of the A
shareholders which they are required to include in their returns of total
income for Super-tax purposes. Firstly, it is not a case where the assessees
or the firms of which they were partners held the shares as stock-in-trade.
Secondly, the said decision cannot mechanically be applied to the cases
arising in this country in view of the definition of the expression "dividend" B
in Section 2(6A) of 1922 Act had in Section 2(22) of the 1961 Act. The
same comment holds good with respect to the decision of the House of
Lords in Brogan. This was also not a case where the shares were held by
the assessee as his stock-in-trade.

Reference may now be made to the decision of the Patna High Court C
in Dalmia Cement Paper Marketing Co. Ltd. v. Commissioner of Income
Tat, Bihar and Orissa, 17 l.T.R. 141. In this case, the assessee-company
was a dealer in shares and securities. It held the shares of another company
of the face value of Rupees four lacs which formed part of the stock-in-
trade of the assessee's share-dealing business. The other company went
into voluntary liquidation as a result of which the liquidator sold its assets D
and distributed a certain amount pro rata among the shareholders. The
assessee received Rs. 4,75,000 in one year and Rs.8021 in the next year.
The Income Tax authorities treated Rs. 75,000 and Rs. 8021 (being the
surplus amount over the purchase price of the shares) as revenue receipts
and included them in the assessable income of the respective years. It was E
held by the Patna High Court that the Income Tax authorities acted in
accordance with law in doing so inasmuch as the said amount represented
revenue receipts in the hands of the asscssee. In the judgment under
appeal, the Calcutta High Court has disagreed with this view but, for the
reasons given hereinabove, we arc of the opinion that the view taken by F
the Patna High Court is the correct one.

For the above reasons, we allow this appeal, set aside the judgment
of the High Court and answer all the tl:iree questions referred in the
negative, i.e., in favour of the revenue and against the assessce. No costs.
G
V.M. Appeal allo~ed.

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