1960 (3) TMI 3 - SC - Income Tax

Whether the sale of the shares and securities by the administrator of the estate of late Mr. Gannon is not a sale for the purposes of section 12B(1) in view of the third proviso to section 12B(1) of the Indian Income-tax Act? Held that - It is necessary to point out here that on the interpretation sought to be placed on the third proviso on behalf of the appellant, the administrator will escape paying tax if he sells the capital assets ; but the legatee will not escape if he sells the capital assets after having received them in specie from the administrator. This is an anomaly which is against the scheme of section 12B of the Act. We are accordingly of the view that the High Court rightly hold that the expression distribution of capital assets in the third proviso to sub-section (1) of section 12B of the Act means distribution in specie and not distribution of sale proceeds. Appeal dismissed.

Issues Involved:

1. Whether the levy of tax on capital gains under section 12B is ultra vires.
2. The applicability of section 24B regarding the liability of an administrator or executor.
3. The true scope and effect of the third proviso to old section 12B(1) of the Indian Income-tax Act.

Detailed Analysis:

1. Ultra Vires of Section 12B:

The appellant initially contended that section 12B, which imposes a tax on capital gains, was ultra vires the Government of India Act, 1935. However, this issue was no longer pursued due to the Supreme Court's decision in Navinchandra Mafatlal v. Commissioner of Income-tax, which upheld the validity of section 12B. Consequently, this argument was not pressed before the Supreme Court.

2. Applicability of Section 24B:

The appellant argued that under section 24B of the Act, he was only liable to pay tax which the testator would have been liable to pay, and since the capital assets were not sold by the testator, there was no liability upon the appellant. The Bombay High Court held that section 24B does not limit the liability of the administrator or executor to the cases referred to under that section. The appellant, being an assessee under the Act, is liable to pay tax on capital gains like any other individual. This position was not seriously contested before the Supreme Court.

3. Scope and Effect of the Third Proviso to Section 12B(1):

The core issue revolved around the interpretation of the third proviso to section 12B(1). The appellant sold shares and securities belonging to the deceased for distributing the assets among the legatees. The Income-tax Officer treated the excess of the sale price over the cost price as capital gains and taxed it. The appellant contended that the sale of these shares and securities under the will came within the purview of the third proviso to section 12B(1), and thus, should not be treated as a sale of capital assets under section 12B(1).

The third proviso to section 12B(1) states that any transfer of capital assets by reason of compulsory acquisition, or any distribution of capital assets on partition, dissolution, liquidation, or under a deed of gift, bequest, will, or transfer on irrevocable trust, shall not be treated as a sale, exchange, or transfer of the capital assets.

The High Court interpreted that the expression "distribution of capital assets" in the third proviso means distribution in specie (in its original form) and not the distribution of sale proceeds. Therefore, since the appellant did not distribute the capital assets in specie but sold them and then distributed the proceeds, he did not come within the protection of the third proviso.

The Supreme Court upheld the High Court's interpretation, stating that there is a clear and vital distinction between "capital assets" and their "sale proceeds." The purpose of the proviso is to protect an assessee from being taxed on the transfer of capital assets in specie. If the assets are sold and then distributed, it constitutes a transfer subject to tax under section 12B(1). The intention of the legislature is to tax profits made from the sale, exchange, or transfer of capital assets, and the liability arises at the time of the transfer.

The Supreme Court also rejected the alternative argument that the third proviso contemplated involuntary transfers. The expression "by reason of" in the proviso relates to compulsory acquisition and not to the distribution of capital assets.

Conclusion:

The Supreme Court dismissed the appeal, affirming the Bombay High Court's decision that the sale of shares and securities by the administrator did not fall within the third proviso to section 12B(1) and was thus subject to capital gains tax. The interpretation of "distribution of capital assets" as distribution in specie was upheld, and the appeal was dismissed with costs.

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