1973 (3) TMI 1 - SC - Income Tax

Voluntary liquidation of a company- capital gains - Whether Tribunal was right in holding that the sum of Rs. 95,944 is liable to tax under section 12B(2) - the difference between the language of the first proviso to section 12B(1), as inserted by Finance (No. 3) Act of 1956, and the third proviso to section 12B(1), as inserted by Act 22 of 1947, cannot be of much material help to the revenue

Summary

Issues Involved:
1. Taxability of capital gains under section 12B(2) of the Indian Income-tax Act, 1922.
2. Interpretation of "sale, exchange, relinquishment or transfer" in the context of liquidation.
3. Applicability of legislative history and statutory interpretation principles.

Issue-wise Detailed Analysis:

1. Taxability of capital gains under section 12B(2) of the Indian Income-tax Act, 1922:
The main question was whether the sum of Rs. 95,944 received by the assessee-company during the liquidation of three companies was liable to tax under section 12B(2) of the Act. The revenue argued that this amount constituted capital gains. The assessee contended that the transaction did not involve any sale, exchange, relinquishment, or transfer, and thus should not be taxed as capital gains. The Tribunal initially held that the transaction amounted to an exchange or transfer of shares and assets, making it liable to tax. However, the High Court ruled in favor of the assessee, stating that the distribution of assets by a liquidator does not constitute a sale, transfer, exchange, or relinquishment, and thus, is not taxable under section 12B.

2. Interpretation of "sale, exchange, relinquishment or transfer" in the context of liquidation:
The Supreme Court examined whether the distribution of assets by the liquidators amounted to a "sale, exchange, relinquishment, or transfer" under section 12B. The Court held that the act of distributing assets by the liquidators did not create new rights but merely recognized existing legal rights. The Court referenced the observations in Buckley Commentaries on the Companies Acts, which stated that a liquidator acts as a trustee, and the distribution of assets does not involve a transfer of beneficial interest. Therefore, the distribution of assets during liquidation does not amount to a sale, exchange, relinquishment, or transfer, and cannot be taxed as capital gains.

3. Applicability of legislative history and statutory interpretation principles:
The Court discussed the legislative history of capital gains tax, noting that it was first introduced by the Income-tax and Excess Profits Tax (Amendment) Act, 1947, and later revived by the Finance (No. 3) Act of 1956. The Court emphasized that the language of sub-section (1) of section 12B is clear and does not warrant the inference that distribution of assets on liquidation constitutes a sale, transfer, or exchange. The Court also noted that the omission of specific provisions regarding liquidation in the first proviso to section 12B(1) does not imply that such transactions should be treated as taxable events. The Court cited principles from Craies on Statute Law and Maxwell on the Interpretation of Statutes, emphasizing that legislative history should not override the plain words of a statute and that a proviso cannot enlarge the scope of an enactment.

Conclusion:
The Supreme Court concluded that the distribution of assets by liquidators during the voluntary liquidation of a company does not amount to a sale, exchange, relinquishment, or transfer, and thus, is not subject to capital gains tax under section 12B of the Indian Income-tax Act, 1922. The appeal was dismissed with costs, upholding the High Court's decision in favor of the assessee.