1969 (2) TMI 20 - HC - Income Tax

Capital gains - liquidation - profit or gain arising from the sale, exchange, relinquishment or transfer of the capital asset - assessability as capital gains - applicability of provisions of s. 12B(1)

Summary

Issues:
Assessment of sum received by assessee as capital gains under section 12B(1) of the Indian Income-tax Act, 1922.

Analysis:
The case involved the assessment of a sum received by an assessee as capital gains under section 12B(1) of the Indian Income-tax Act, 1922. The assessee held shares in a company that went into voluntary liquidation, and the liquidators paid dividends and a refund of capital to the assessee. The main question was whether the sum received by the assessee was assessable as capital gains. The Income-tax Officer contended that the sum attracted the provisions of section 12B(1) since the entire cost of acquiring the shares had been recovered. However, the Appellate Assistant Commissioner overturned this decision, stating that no amount was received in the relevant accounting period. The matter was then appealed to the Income-tax Appellate Tribunal. The Tribunal noted that the extinguishment of rights in a liquidation scenario did not constitute relinquishment, as in the case of a voluntary act. The Tribunal also highlighted the distinction between relinquishment and extinguishment in the Income-tax Act, 1961. Consequently, the Tribunal held that the sum received did not fall under the purview of section 12B(1) of the Indian Income-tax Act, 1922.

The Tribunal referred the case to the High Court, posing the question of whether the sum represented profits or gains arising from the relinquishment of capital assets under section 12B. The High Court analyzed the nature of shares in a company, emphasizing that a share represents a proprietary relationship and a bundle of rights. Upon liquidation, the shareholder's ownership over these rights is not extinguished, only altered. The Court concluded that in this case, there was neither a sale, exchange, relinquishment, nor transfer of the capital asset to make the sum assessable as capital gains under section 12B. Additionally, the Court considered the timing of the liquidation in relation to the provisions of section 12B(1) and found that even if there was a relinquishment, it occurred before the relevant date specified in the section. Therefore, the Court upheld the Tribunal's decision, ruling against the revenue and directing the Commissioner of Income-tax to bear the costs of the reference.

In conclusion, the High Court, concurring with the Tribunal, held that the sum received by the assessee was not assessable as capital gains under section 12B(1) of the Indian Income-tax Act, 1922. The judgment was based on the understanding that the liquidation did not involve the requisite elements of sale, exchange, relinquishment, or transfer of the capital asset, and any potential relinquishment occurred before the relevant date specified in the Act.