Is a receipt by a shareholder on the winding up of a company a "transfer" that can be charged under section 45 on its own, or does the charge depend entirely on section 46(2)?
It depends entirely on s.46(2), and this decision — which is about liquidation and not about buy-backs, so the 1 October 2024 changeover does not touch it — is why. The Supreme Court held that when a shareholder receives money or assets on the liquidation of a company he receives them in satisfaction of a right that already belonged to him by virtue of holding the shares, not by any transaction amounting to sale, exchange, relinquishment or transfer, and that this reasoning covers extinguishment of rights in a capital asset as well. It then held that s.46(2) "was enacted both with a view to make shareholders liable for payment of tax on capital gains as well as to prescribe the mode of calculating the capital gains", and that but for that sub-section it would not have been possible to charge capital gains on a liquidation distribution at all. Because s.46(2) then applied only to companies within the s.2(17) definition, and the company in liquidation was a Uganda company outside it, no charge could be sustained and the Revenue's appeal was dismissed with costs.
Decided by the Supreme Court (H.R. Khanna J, delivering the judgment of the Court (the report's coram line adds Jaswant Singh J; the judgment text carries no signature block)) on 1976-11-26, reported as 1977 AIR 999; 1977 SCR (2) 220; 1977 SCC (1) 691; also cited in a later Supreme Court judgment as (1977) 1 SCC 691 : 1977 SCC (Tax) 234 : (1977) 106 ITR 368; Civil Appeal No. 51 of 1972, from the judgment and order dated 16 October 1970 of the Gujarat High Court in I.T. Reference No. 4 of 1967. It bears on section 45, section 2(47), section 46(2), section 2(17), section 256(1) of the Income Tax Act 1961, in Capital Gains and How Tax Law Is Read matters.
The reasoning outlives the result, and the two must be kept apart. The RESULT — no charge on a distribution by a foreign company in liquidation — depends on a gap that no longer exists: s.2(17) as it stands today defines "company" to include at clause (ii) "any body corporate incorporated by or under the laws of a country outside India", so a Uganda company would now be a company and s.46(2) would apply to it on its own terms. Do not offer this case for the proposition that a foreign liquidation is outside the charge. The REASONING is what is still worth citing. First, it explains why s.46(2) is drafted as it is and why the Supreme Court in Vijay Kumar Budhia could hold that a shareholder who transferred nothing is nonetheless chargeable: the charge is statutory and self-contained, not an application of s.45. Second, it is the Court's own rejection of the Revenue's argument that s.46(2) is mere computation machinery hanging off s.45 — an argument that still surfaces when the department wants to charge something that s.46(2) does not cover. Third, it locates the boundary of the head: a receipt in satisfaction of a pre-existing right that the shareholder already had, rather than a receipt for parting with something, is not the product of a transfer. That boundary has been much worked over since — a reduction of share capital has been held to be a transfer by extinguishment, and this library holds both Kartikeya V. Sarabhai and PCIT v Jupiter Capital on that — and a reader should treat this decision as authority on the LIQUIDATION situation the Court was deciding, not as a general rule that extinguishment is never a transfer.
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The assessee, an individual, held 192 shares of Kawelengoji Ginneries Ltd., Kampala, a private limited company incorporated in Uganda, acquired before 1 January 1954 at Sh. 1,000 each — Sh. 1,92,000 in all, equivalent to Rs.28,000. The company went into voluntary liquidation by special resolution dated 10 July 1961. The liquidators sold the company's assets and drew up the liquidator's account on 31 July 1961, under which the assessee became entitled to Sh. 4,68,489 at Sh. 2,440.0493 per share as return of capital, equivalent to Rs.3,12,326, producing an excess of Rs.1,84,326, which he received during the accounting year — calendar year 1961, the previous year for assessment year 1962-63. The Income-tax Officer treated the excess as capital gains under s.45, pointing out that the Uganda company was not a company within s.2(17) so that the shareholders could not have the benefit of s.46(2). Before the Appellate Assistant Commissioner the assessee relied on the definition of "transfer" in s.2(47); it was not disputed that there was no sale, exchange or compulsory acquisition, so the only question was whether there had been a relinquishment of the asset or the extinguishment of any rights in it. The Gujarat High Court, on a reference under s.256(1), answered in favour of the assessee the question whether there was a transfer of a capital asset within s.45 read with s.2(47), and the Revenue appealed on certificate.
The appeal was dismissed with costs. The Court held that the distribution of the assets of a company in voluntary liquidation to its shareholders is not a sale, exchange, relinquishment or transfer, and that the same reasoning covers the extinguishment of any rights in a capital asset; that s.46(2) was enacted both to make shareholders liable to tax on capital gains and to prescribe the mode of calculating them, so that but for that sub-section it would not have been possible to charge capital gains on money or assets received by a shareholder on liquidation; and that since s.46(2) applied only to companies within the s.2(17) definition and the legislature had made no similar provision for other companies, the levy could not be sustained on a distribution by a company outside that definition.
The Court followed its earlier decision in CIT, Madras v. Madurai Mills Co. Ltd., where it had held in the context of s.12B of the 1922 Act that the liquidators' act of distributing the assets did not create new rights but merely entailed recognition of legal rights already in existence, and had observed that when a shareholder receives money representing his share on distribution of the net assets of a company in liquidation "he receives that money in satisfaction of the right which belonged to him by virtue of his holding the shares and not by operation of any transaction which amounts to sale, exchange, relinquishment or transfer". Those observations, though made on a provision that spoke only of sale, exchange, relinquishment or transfer, were held to cover extinguishment of rights in capital assets as well. The Court then looked at the matter from another angle: the legislature had made express provision in s.46(2) for companies within s.2(17), and but for that provision it would not have been possible to charge capital gains on a liquidation receipt; having made no similar provision for other companies, the levy on a distribution by such a company could not be sustained. It rejected the Revenue's argument that s.46(2) merely prescribes the mode of calculation while the liability arises under s.45, holding that the sub-section was enacted both to create the liability and to prescribe the calculation. On the Revenue's appeal to legislative history the Court applied Madurai Mills, that considerations stemming from legislative history cannot override the plain words of a statute.
The aforesaid section, in our view, was enacted both with a view to make shareholders liable for payment of tax on capital gains as well as to prescribe the mode of calculating the capital gains to the shareholders on the distribution assets by a company in liquidation.
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Handle my notice → Ask a CA on WhatsAppIt depends entirely on s.46(2), and this decision — which is about liquidation and not about buy-backs, so the 1 October 2024 changeover does not touch it — is why. The Supreme Court held that when a shareholder receives money or assets on the liquidation of a company he receives them in satisfaction of a right that already belonged to him by virtue of holding the shares, not by any transaction amounting to sale, exchange, relinquishment or transfer, and that this reasoning covers extinguishment of rights in a capital asset as well. It then held that s.46(2) "was enacted both with a view to make shareholders liable for payment of tax on capital gains as well as to prescribe the mode of calculating the capital gains", and that but for that sub-section it would not have been possible to charge capital gains on a liquidation distribution at all. Because s.46(2) then applied only to companies within the s.2(17) definition, and the company in liquidation was a Uganda company outside it, no charge could be sustained and the Revenue's appeal was dismissed with costs. This was decided by the Supreme Court (H.R. Khanna J, delivering the judgment of the Court (the report's coram line adds Jaswant Singh J; the judgment text carries no signature block)) and bears on section 45, section 2(47), section 46(2), section 2(17), section 256(1) of the Income Tax Act 1961. It is reported as 1977 AIR 999; 1977 SCR (2) 220; 1977 SCC (1) 691; also cited in a later Supreme Court judgment as (1977) 1 SCC 691 : 1977 SCC (Tax) 234 : (1977) 106 ITR 368; Civil Appeal No. 51 of 1972, from the judgment and order dated 16 October 1970 of the Gujarat High Court in I.T. Reference No. 4 of 1967. The reasoning outlives the result, and the two must be kept apart. The RESULT — no charge on a distribution by a foreign company in liquidation — depends on a gap that no longer exists: s.2(17) as it stands today defines "company" to include at clause (ii) "any body corporate incorporated by or under the laws of a country outside India", so a Uganda company would now be a company and s.46(2) would apply to it on its own terms. Do not offer this case for the proposition that a foreign liquidation is outside the charge. The REASONING is what is still worth citing. First, it explains why s.46(2) is drafted as it is and why the Supreme Court in Vijay Kumar Budhia could hold that a shareholder who transferred nothing is nonetheless chargeable: the charge is statutory and self-contained, not an application of s.45. Second, it is the Court's own rejection of the Revenue's argument that s.46(2) is mere computation machinery hanging off s.45 — an argument that still surfaces when the department wants to charge something that s.46(2) does not cover. Third, it locates the boundary of the head: a receipt in satisfaction of a pre-existing right that the shareholder already had, rather than a receipt for parting with something, is not the product of a transfer. That boundary has been much worked over since — a reduction of share capital has been held to be a transfer by extinguishment, and this library holds both Kartikeya V. Sarabhai and PCIT v Jupiter Capital on that — and a reader should treat this decision as authority on the LIQUIDATION situation the Court was deciding, not as a general rule that extinguishment is never a transfer. If it applies to you, the first step is this: Use this case for what s.46(2) IS — a charging provision in its own right — and not for the result, which turned on a definition of "company" that has since been widened.
The assessee, an individual, held 192 shares of Kawelengoji Ginneries Ltd., Kampala, a private limited company incorporated in Uganda, acquired before 1 January 1954 at Sh. 1,000 each — Sh. 1,92,000 in all, equivalent to Rs.28,000. The company went into voluntary liquidation by special resolution dated 10 July 1961. The liquidators sold the company's assets and drew up the liquidator's account on 31 July 1961, under which the assessee became entitled to Sh. 4,68,489 at Sh. 2,440.0493 per share as return of capital, equivalent to Rs.3,12,326, producing an excess of Rs.1,84,326, which he received during the accounting year — calendar year 1961, the previous year for assessment year 1962-63. The Income-tax Officer treated the excess as capital gains under s.45, pointing out that the Uganda company was not a company within s.2(17) so that the shareholders could not have the benefit of s.46(2). Before the Appellate Assistant Commissioner the assessee relied on the definition of "transfer" in s.2(47); it was not disputed that there was no sale, exchange or compulsory acquisition, so the only question was whether there had been a relinquishment of the asset or the extinguishment of any rights in it. The Gujarat High Court, on a reference under s.256(1), answered in favour of the assessee the question whether there was a transfer of a capital asset within s.45 read with s.2(47), and the Revenue appealed on certificate. The matter was decided on 1976-11-26 by the Supreme Court (H.R. Khanna J, delivering the judgment of the Court (the report's coram line adds Jaswant Singh J; the judgment text carries no signature block)). On those facts the Supreme Court held as follows. The appeal was dismissed with costs. The Court held that the distribution of the assets of a company in voluntary liquidation to its shareholders is not a sale, exchange, relinquishment or transfer, and that the same reasoning covers the extinguishment of any rights in a capital asset; that s.46(2) was enacted both to make shareholders liable to tax on capital gains and to prescribe the mode of calculating them, so that but for that sub-section it would not have been possible to charge capital gains on money or assets received by a shareholder on liquidation; and that since s.46(2) applied only to companies within the s.2(17) definition and the legislature had made no similar provision for other companies, the levy could not be sustained on a distribution by a company outside that definition.
The Court followed its earlier decision in CIT, Madras v. Madurai Mills Co. Ltd., where it had held in the context of s.12B of the 1922 Act that the liquidators' act of distributing the assets did not create new rights but merely entailed recognition of legal rights already in existence, and had observed that when a shareholder receives money representing his share on distribution of the net assets of a company in liquidation "he receives that money in satisfaction of the right which belonged to him by virtue of his holding the shares and not by operation of any transaction which amounts to sale, exchange, relinquishment or transfer". Those observations, though made on a provision that spoke only of sale, exchange, relinquishment or transfer, were held to cover extinguishment of rights in capital assets as well. The Court then looked at the matter from another angle: the legislature had made express provision in s.46(2) for companies within s.2(17), and but for that provision it would not have been possible to charge capital gains on a liquidation receipt; having made no similar provision for other companies, the levy on a distribution by such a company could not be sustained. It rejected the Revenue's argument that s.46(2) merely prescribes the mode of calculation while the liability arises under s.45, holding that the sub-section was enacted both to create the liability and to prescribe the calculation. On the Revenue's appeal to legislative history the Court applied Madurai Mills, that considerations stemming from legislative history cannot override the plain words of a statute. In the words reproduced by the source cited on this page: "The aforesaid section, in our view, was enacted both with a view to make shareholders liable for payment of tax on capital gains as well as to prescribe the mode of calculating the capital gains to the shareholders on the distribution assets by a company in liquidation." The decision followed or applied Commissioner of Income-tax, Madras v. Madurai Mills Co. Ltd. — followed on both the transfer point and on legislative history not overriding plain words.
It was decided by the Supreme Court on 1976-11-26 and is reported as 1977 AIR 999; 1977 SCR (2) 220; 1977 SCC (1) 691; also cited in a later Supreme Court judgment as (1977) 1 SCC 691 : 1977 SCC (Tax) 234 : (1977) 106 ITR 368; Civil Appeal No. 51 of 1972, from the judgment and order dated 16 October 1970 of the Gujarat High Court in I.T. Reference No. 4 of 1967. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 45, section 2(47), section 46(2), section 2(17), section 256(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed with costs. The Court held that the distribution of the assets of a company in voluntary liquidation to its shareholders is not a sale, exchange, relinquishment or transfer, and that the same reasoning covers the extinguishment of any rights in a capital asset; that s.46(2) was enacted both to make shareholders liable to tax on capital gains and to prescribe the mode of calculating them, so that but for that sub-section it would not have been possible to charge capital gains on money or assets received by a shareholder on liquidation; and that since s.46(2) applied only to companies within the s.2(17) definition and the legislature had made no similar provision for other companies, the levy could not be sustained on a distribution by a company outside that definition. It arises in Capital Gains and How Tax Law Is Read matters, on section 45, section 2(47), section 46(2), section 2(17), section 256(1) of the Income Tax Act 1961, and was decided by H.R. Khanna J, delivering the judgment of the Court (the report's coram line adds Jaswant Singh J; the judgment text carries no signature block). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check s.2(17) before running any argument that a particular liquidating entity is outside s.46(2): clause (ii) now brings in a body corporate incorporated under the laws of a country outside India. If the department argues that s.46(2) merely computes a gain that s.45 charges, cite the Court's express rejection of exactly that argument. Where a receipt is said to be for a transfer, test it against the Court's distinction: a receipt in satisfaction of a right the shareholder already had by virtue of holding the shares is not the product of a sale, exchange, relinquishment or transfer. Do not extend the reasoning to a reduction of share capital without checking the later line of authority on extinguishment of rights, which this library holds separately.
Superseded by amendment. The RESULT is superseded, though the reasoning is not. The decision turned on the Uganda company falling outside the definition of "company" in s.2(17), so that s.46(2) could not reach it. Section 2(17) as it now stands includes at clause (ii) "any body corporate incorporated by or under the laws of a country outside India", so a foreign company in liquidation is within s.46(2) and the gap the case exploited is closed. That limb can be dated: clause (17) was substituted by the Finance (No. 2) Act, 1971 with effect from 1 April 1971, so the gap closed from assessment year 1971-72 — nine years after the assessment year in issue here and five years before this judgment was delivered, which is why the Court decided the case on the definition as it stood for assessment year 1962-63. Do not offer the case for the proposition that a foreign liquidation is outside the charge. The Court's construction of s.46(2) as itself a charging provision, and not mere computation machinery hanging off s.45, was expressly endorsed by the Supreme Court in Vijay Kumar Budhia v CIT on 14 September 1993, which recorded that this was "also the view taken by this Court in CIT v. R.M. Amin". That limb is untouched and is what the case is now cited for. One caution before it is used more widely. The boundary the Court drew — that a receipt in satisfaction of a pre-existing right is not the product of a transfer — has been worked over since by the extinguishment line, and the interaction between this decision and CIT v. Grace Collis (Supreme Court, 23 February 2001), which deals with extinguishment of rights on an amalgamation, is not established in this entry. Grace Collis does not appear to refer to this decision, but that is not proof that the two can be read side by side, and anyone arguing that extinguishment is never a transfer should work out the relationship for himself before relying on either. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This judgment carries NO paragraph numbers. It opens with counsel's appearances and then "Judgment of the Court was delivered by KHANNA, J." and runs into unnumbered prose. Any paragraph locator offered for it in a digest or a law report is that report's numbering and not the Court's, and none is used in this entry; cite the passage by its words. The `bench` field names only Khanna J, whom the judgment's own text records as delivering the judgment of the Court. The second name, Jaswant Singh J, appears only in a coram line in the electronic report; coram lines in that source are not reliable, and the name could not be corroborated from a signature block in the text, so it is recorded as the report's coram line and not asserted as established from the judgment. The assessment year is 1962-63 and the previous year is calendar year 1961. The company in liquidation was Kawelengoji Ginneries Ltd., Kampala, a private limited company incorporated in Uganda. The statutory point that now limits the case — that s.2(17) includes a body corporate incorporated outside India, clause (17)(ii) reading "any body corporate incorporated by or under the laws of a country outside India" — is dated by the substitution of clause (17) by the Finance (No. 2) Act, 1971 with effect from 1 April 1971. The Court's reliance on CIT, Madras v. Madurai Mills Co. Ltd. is recorded as this judgment states it; that decision has not been examined here, and anyone building an argument on the Madurai Mills reasoning should read it rather than take it at second hand. A warning about the text. The electronic version of this judgment in wide circulation carries stray full stops introduced in transcription — "was enacted. both with a view", "the legislature, has made. express provision", "he shall be chargeable. to income-tax", "it would have been difficult to. levy tax". The quotation reproduced in this entry removes the stray full stop after "enacted" and makes no other change to the Court's words; anyone quoting a longer passage should expect the same defects and should check against a law report before the words go into a written submission. Finally, on scope: the decision is about a distribution on liquidation, not about a buy-back, so the buy-back changeover of 1 October 2024 does not touch it, and it says nothing about s.46(1), which deals with the company's own position. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with costs. The Court held that the distribution of the assets of a company in voluntary liquidation to its shareholders is not a sale, exchange, relinquishment or transfer, and that the same reasoning covers the extinguishment of any rights in a capital asset; that s.46(2) was enacted both to make shareholders liable to tax on capital gains and to prescribe the mode of calculating them, so that but for that sub-section it would not have been possible to charge capital gains on money or assets received by a shareholder on liquidation; and that since s.46(2) applied only to companies within the s.2(17) definition and the legislature had made no similar provision for other companies, the levy could not be sustained on a distribution by a company outside that definition.
TaxSphere, “CIT, Gujarat-II v R.M. Amin (Supreme Court) — a distribution on liquidation is not a transfer within s.2(47), and s.46(2) is itself the charging provision without which no capital gain could be charged at all”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-rm-amin-46-2-is-itself-the-charging-provision-and-a-liquidation-distribution-is-not-a-transfer/ (validity last checked 2026-09-09)
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