Dr. B.P Saraf, J.:— By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal (Tribunal) has referred the following two questions of law at the instance of the Revenue:
“1. Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the cash allowances given to the employees should not be treated as ‘perquisites’ for the purpose of working but the disallowance under section 40A(5) of the Income-tax Act, 1961?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the short-term capital loss suffered by the assessee was required to be worked out by considering the proceeds received on the redemption of preference shares at ‘nil’ as the same had already been considered as dividend under section 2(22) of the Income-tax Act?”
2. So far as the first question is concerned, it is an agreed position that it is covered by the decision of this court in the case of Commissioner Of Income-Tax, Bombay City-Ii v. Indokem Private Ltd., [1981] 132 ITR 125, and following the same, it has to be answered in the affirmative, i.e, in favour of the assessee and against the Revenue. We answer the same accordingly. The sole question that survives for consideration is question No. 2. Hence, we shall set out only those facts which are relevant for determining the issue involved in that question.
3. The assessee is a limited company and this reference relates to the assessment year 1973–74. The dispute is in regard to the computation of capital gain on redemption of preference shares. On September 13, 1971, the assessee had purchased 67,714 preference shares of Messrs. Mafatlal Gagalbhai and Co. Pvt. Ltd., at the rate of Rs. 100 per share. An expenditure of Rs. 16,929 was incurred as transfer fees, stamp charges, etc., in connection with the aforesaid purchase. The said shares were redeemed on July 1, 1972, for which the assessee received a sum of Rs. 67,71,400. The total amount of Rs. 67,71,400 received by the assessee on redemption of shares was treated by the Income-tax Officer as dividend under section 2(22) of the Act and included in the total income of the assessee. The assessee claimed a short-term capital loss of Rs. 67,88,329. This loss was computed on the basis that the actual cost of the shares to the assessee including expenditure incurred on transfer fee, etc., was Rs. 67,88,329 and the consideration received by the assessee was the amount received by it minus the whole or part thereof which is treated as dividend under section 2(22) of the Act and brought to tax as such. In the instant case, the admitted position is that the whole of the consideration received on redemption had been assessed as dividend under section 2(22) of the Act. That being so, the consideration for redemption became nil. There was, therefore, a capital loss of Rs. 67,88,329. In view of the period for which these assets were held by the assessee, the capital loss was claimed as a short-term capital loss. The Income-tax Officer did not accept the above contention of the assessee. He treated the entire consideration of Rs. 67,71,400 received by the assessee as dividend under section 2(22) and assessed the same to income-tax. When the question of computation of capital gain came, he again treated the very same amount as the consideration for the transfer of preference shares and determined the capital loss of the assessee at Rs. 16,929. It is evident from the following calculation given by the Income-tax Officer in the assessment order:
Rs.
Cost of 67,714 shares as discussed above at Rs. 100 per share
67,71,400
Add: Transfer fee, stamp charges, etc.
16,929
67,88,329
Less: Amount received on redemption of shares
67,71,400
Short-term capital loss
16,929
4. The Income-tax Officer observed that the fact that the very same amount has been treated as dividend by him under section 2(22) of the Act will make no difference in determining the consideration for transfer for the purposes of computation of the capital gain.
5. Aggrieved by the order of the Income-tax Officer, the assessee went in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the short-term capital loss suffered by the assessee was required to be worked out by considering the proceeds received on the redemption of preference shares at “nil” as the same had already been considered as dividend under section 2(22) of the Income-tax Act, 1961. While arriving at the above decision, the Appellate Assistant Commissioner followed an earlier decision in I.T.A No. 15303 of 1963–64. Against the order of the Appellate Assistant Commissioner, the Revenue went in appeal to the Tribunal. The Tribunal upheld the order of the Appellate Assistant Commissioner and rejected the appeal of the Revenue. Hence, this reference at the instance of the Revenue.
6. We have heard learned counsel for the Revenue, Dr. Balasubramaniam at length. Counsel does not dispute any of the facts set out above. Learned counsel was fair enough to state that redemption of preference shares amounts to “transfer” within the meaning of section 2(47) of the Act. It is a case of relinquishment of an asset. The only dispute is whether in a case where a part or the whole of the consideration had been assessed as dividend by virtue of the definition of dividend contained in section 2(22) of the Act, the sale consideration will get reduced to that extent or not. The submission of counsel for the Revenue is that it is by virtue of the deeming provision contained in section 2(22) of the Act that the whole or part of the amount received by the assessee is treated as dividend for the purpose of assessment and levy of income-tax. That does not entitle the assessee to claim that the consideration for transfer of shares got reduced to that extent. The Income-tax Officer is not required to take the reduced figure of consideration into account for computation of capital gains. For computation of capital gain, the Income-tax Officer is entitled to take into account the actual amount received by the assessee as consideration for redemption of preference shares irrespective of the fact that the whole of such consideration or part of it has already been deemed to be dividend under section 2(22) of the Act and subjected to tax. The deeming provision contained in section 2(22), according to learned counsel for the Revenue, is confined to determination of income from dividend for the purpose of levy of tax. It cannot affect the computation of capital gain under section 45 of the Act. The alternate submission of learned counsel was that in any event the amount left with the assessee after payment of income-tax on deemed dividend has to be treated as the consideration for computation of capital gain. The consideration cannot be reduced to nil.
7. We have carefully considered the above submissions. We, however, find it difficult to accept the same. To our mind, the position is clear beyond all doubts. There is no dispute that redemption of preference shares amounts to transfer within the meaning of section 2(47) of the Act and that section 45 will apply to such transfers and the capital gain or loss will have to be computed. The mode of computation of capital gains has been laid down in section 48 of the Act. According to this section, capital gain is to be computed by deducting from the full consideration received as a result of transfer the cost of acquisition and improvements. In the instant case, there is no dispute about the consideration received by the assessee. The amount of consideration, both according to the assessee and the Revenue, is Rs. 67,71,400. The only controversy is whether this amount will get reduced by the whole or part of this consideration which has been deemed to be dividend under section 2(22) of the Act for the purpose of levy of tax. In other words, whether the same receipt can be treated by the Income-tax Officer both as dividend and as consideration received as a result of a transfer of a capital asset. In our opinion, the answer, in clear terms, is “No”. The Revenue cannot approbate and reprobate. It cannot be permitted to treat a part or the whole of the consideration as dividend and to assess the same as such and also to say that this will not have the effect of reducing the amount of consideration for the purpose of computation of capital gain. It cannot be ignored that in the instant case, the whole of the amount received by the assessee in respect of the transfer of preference shares has already been treated by it as dividend and what is left with the assessee by way of consideration is only the amount received minus the amount deemed to be dividend. It may be observed that it is not the assessee who wants to say that the entire amount is not “consideration in respect of transfer”. It is only because the whole of the amount received by it has been deemed to be dividend that it is contended by the assessee that the consideration for the purpose of computation of capital gain is nil and capital gain/loss has to be computed on that basis.
8. From a bare reading of section 2(22) and sections 45 and 48 of the Act, it is clear that for the purpose of finding out the profits or gains arising from the transfer of a capital asset, it is necessary to know the cost of acquisition of the asset and the full value of the consideration for which the transfer is made. It is the difference between the two which is termed as profits and gains arising from the transfer subject, however, to specific provisions, if any, contained in any other section of the Act. Section 48 of the Act deals with the mode of computation of capital gains. It says that capital gain has to 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 cost of acquisition and the cost of improvement thereof and other expenses mentioned therein. The full value of consideration has not been defined in the Act. That is so because there is not much scope for controversy in that regard. In the instant case also, there is no dispute that the assessee received a sum of Rs. 67,71,400 as consideration for the transfer. It is by virtue of the definition of “dividend” contained in section 2(22) of the Act that whole of this amount was treated as dividend. That being so, the balance amount, if any, can only be held to be consideration for the transfer of preference shares for the purpose of computation of capital gains, which in the instant case is nil. The capital gain, therefore, has to be computed under section 48 of the Act by treating the consideration as nil and not Rs. 67,71,400 because doing so will amount to taking into account the same receipt twice — one for assessment as dividend income and again as consideration for computation of capital gain, which will amount to double taxation of the same receipt in the hands of the same person under two different heads which is not permissible. It seems that the entire confusion in this case has arisen because the cost of acquisition of the shares excluding the expenses incurred in acquisition thereof is identical with the amount received on transfer but that cannot be determinative of the controversy. Section 2(22) deals with various types of cases and creates a fiction by which certain receipts or part thereof are treated as dividend for the purpose of levy of income-tax. In this case, the entire consideration has been treated as dividend. There may, however/be cases where only a part of the consideration is treated as dividend. The balance amount of consideration in such cases will still be available for computation of capital gain. If the amount so left is higher than the cost of acquisition of the asset, the balance shall be profit and gain arising from transfer of a capital asset which will be assessable under the head “Capital gain”. Learned counsel for the Revenue submitted that the amount received by the assessee for transfer of the assets should not be reduced by the amount which is treated as dividend within the meaning of section 2(22) of the Act for the purposes of calculation of capital gain under section 48 of the Act. Reliance is placed in this connection on the language of section 46(1) of the Act. We have perused section 46. Sub-section (1) of this section provides that a company cannot be regarded as having made a capital gain if it merely distributes its assets among its shareholders on liquidation. Sub-section (2), however, provides that the shareholder may be chargeable to tax under the head “Capital gains” in respect of the money received or the market value of other assets distributed in specie on liquidation, as reduced by the amount assessed as dividend under section 2(22)(c) of the Act. In our opinion, this section instead of supporting the stand of the Revenue goes counter to it and supports the case of the assessee. In this case, in view of the provisions of section 46(1), the Legislature was required to make a specific provision in sub-section (2) to make the shareholder who receives any asset on liquidation of a company liable to capital gains. As in such a case, under section 2(22)(c) of the Act, a part of the receipt may be held to be dividend, with a view to avoid any ambiguity, the Legislature thought it fit to make it clear that the consideration for the purpose of computation of capital gain shall be the amount received by the assessee as reduced by the amount assessed as dividend under section 2(22)(c). This provision, in our opinion, makes the position abundantly clear that in a case where a part of the consideration has been assessed as dividend it is only the balance amount left with the assessee which can be said to be the consideration for the transfer and capital gain has to be computed under section 48 of the Act taking such balance amount only as the consideration for transfer. Before we conclude, we would like to observe that learned counsel for the Revenue very strongly contended that the extended definition of “dividend” in section 2(22) of the Act is only intended for the purpose of bringing certain receipts to tax under the Act as dividend and this deeming provision cannot be carried further to reduce the amount of consideration for computation of capital gains. We are not satisfied with this submission. The law in this regard is well-settled. A deeming provision is intended to enlarge the meaning of a particular word which includes matters which otherwise may or may not fall within the provision. It should, therefore, be extended to the consequences and incidents which shall inevitably follow. In other words, the consequences and incidents flowing from a legal fiction should also be deemed to be real. In that view of the matter, in our opinion, the Revenue itself having deemed the whole of the amount received by an assessee for relinquishment of its interest in a capital asset as dividend under section 2(22) of the Act for the purpose of assessment and levy of tax, it cannot be allowed to contend that this fact should not be taken into account in reducing the true amount of consideration for the transfer. The effect of deeming a part or whole of the consideration as dividend for the purpose of levy of income-tax is to reduce the consideration to that extent. There is no escape from this conclusion.
9. We are also not impressed by the submission of learned counsel for the Revenue that there is no bar in the Income-tax Act on double taxation of the very same receipt under two different heads, viz., “Dividend” and “Capital gain”. This argument does not require any elaborate discussion whatsoever because it is well-settled that the very same income or the very same receipt cannot be assessed twice under two different heads of income. It should not be forgotten that what is chargeable to tax under the Income-tax Act is the total income of the assessee. “Dividend” which is income from other sources and “capital gains” are only two different heads under which the income falls to be charged. That being so, once a particular receipt has been treated as dividend, it cannot be treated as income under any other head. The duty of the Income-tax Officer is only to find out the appropriate head under which the receipt in question can be assessed. Once he assesses a particular receipt under a particular head of income, that amount is no more available to him for assessment under another head. In view of this legal position, we do not find any merit also in the last submission of learned counsel for the Revenue. We, however, like to make it clear that in this case the admitted position is that the amount received by the assessee has been treated as dividend under section 2(22) of the Act. Learned counsel for the Revenue submits that it was a mistake to do so. Such a contention cannot be raised by the Revenue for the first time in reference proceedings before this court. The Revenue itself has treated the amount as dividend and assessed it to income-tax. The entire controversy in this case has arisen on that account. We are not called upon to decide whether the amount should have been assessed as deemed dividend or not. The fact remains that this amount has been treated as dividend and this has been accepted by all the authorities right from the Income-tax Officer to the Tribunal. The only question before us is whether having assessed the amount as dividend, the Revenue can refuse to take that fact into account while computing capital gain and decline to reduce the consideration received on transfer to that extent.
10. In view of the foregoing discussion, we answer question No. 2 referred to us in the affirmative, i.e, in favour of the assessee and against the Revenue. No order as to costs.