1967 (12) TMI 16 - HC - Income Tax

Winding Up - amount received as consideration for the assignment by the liquidator - this is capital receipt

Summary

Issues Involved
1. Whether the sum of Rs. 5 lakhs was a capital receipt or a revenue receipt in the hands of the assessee.

Analysis

Issue 1: Nature of the Receipt (Capital vs. Revenue)
The primary question for determination was whether the sum of Rs. 5 lakhs received by the assessee was a capital receipt or a revenue receipt. The facts of the case are as follows:

- The assessee, a lessee of mica mining rights and surface rights, had its mining rights requisitioned and partially acquired by the Government of India.
- Compensation proceedings involved three parties: the Bhoticas, the assessee, and Mr. E. C. Knuckey.
- The assessee agreed to grant a lease to Chrestian Mica Industries Ltd. for Rs. 3,85,000 and 50% of net profits as royalty.
- The assessee later went into voluntary liquidation and assigned its rights to receive royalties and other benefits to Messrs. Associated Industries Limited for Rs. 5 lakhs.

The Income-tax Officer initially classified the Rs. 5 lakhs as a revenue receipt, arguing that the assessee was receiving the consideration in bits and that it was a business transaction in the normal course of making profits. However, the Appellate Assistant Commissioner and the Tribunal reversed this decision, concluding that the amount was a capital receipt, not liable to income tax.

Legal Principles and Precedents
The judgment referenced several legal principles and precedents to determine the nature of the receipt:

1. Liquidator, Rhodesia Metals Limited (In Liquidation) v. Commissioner of Taxes:
- The Privy Council held that a sale by a liquidator of the whole undertaking of a company is generally a capital transaction unless special circumstances indicate otherwise.
- The key question was whether the liquidator was carrying on the company's business while entering into the agreement. If not, the receipt could not be considered gross income.

2. Narain Swadeshi Weaving Mills Ltd. v. Commissioner of Excess Profits Tax and Baker v. Cook (H. M. Inspector of Taxes):
- These cases illustrated that a liquidator might carry on the company's business to facilitate winding up, but this does not necessarily imply that the receipts are revenue in nature.

3. Wilson Box (Foreign Rights) Ltd. (in liquidation) v. Brice:
- The court held that mere liquidation of a company's assets does not attract tax as trading receipts unless the liquidation involves carrying on a trade.

4. Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income-tax:
- The Privy Council's doctrine of annuity was discussed, but it was deemed inapplicable to this case as the receipt was not in the nature of an annuity or periodical return.

Conclusion
The court concluded that the Rs. 5 lakhs received by the liquidator was a capital receipt. The liquidator did not carry on the business but rather sold the mining lease and rights outright, free from encumbrances, to realize the assets of the company in liquidation. This transaction did not produce income in the form of an annuity or periodical return, and thus, it was not a revenue receipt.

The judgment emphasized the complete and outright transfer of the mining lease and rights, supporting the classification of the receipt as capital. The court also referenced relevant sections of the Companies Act, reinforcing that the liquidator's actions were within the scope of realizing and getting in the assets of the company.

Final Decision: The sum of Rs. 5 lakhs was a capital receipt and not a revenue receipt in the hands of the assessee. There was no order as to costs due to the absence of representation for the liquidator.

A. C. SEN J. concurred with the judgment.