1969 (2) TMI 34 - HC - Income Tax

Capital assets transferred by reason of the liquidation of a company - such a transaction was not to be treated u/s 12B as a sale, exchange or transfer of capital assets - therefore the Tribunal was not right in holding that the assessee was liable to tax u/s 12B

Issues Involved
1. Whether the distribution of assets by the liquidator in a members' voluntary liquidation constitutes a sale, exchange, relinquishment, or transfer under Section 12B of the Indian Income-tax Act, 1922.
2. The applicability of capital gains tax on the surplus received by the assessee from the liquidation process.
3. Interpretation of legislative amendments and their impact on the taxability of such transactions.
4. Analysis of the statutory mechanics under the Companies Act, 1956, regarding the distribution of assets during liquidation.

Detailed Analysis

1. Nature of Distribution in Members' Voluntary Liquidation
The primary issue was whether the distribution of assets by the liquidator in a members' voluntary liquidation constitutes a sale, exchange, relinquishment, or transfer under Section 12B of the Indian Income-tax Act, 1922. The court held that the distribution of assets by the liquidator does not involve a sale, exchange, relinquishment, or transfer. The liquidator acts as a fiduciary, and the distribution is merely a recognition of pre-existing rights of the contributories, not a creation of new rights. The court emphasized that the process of distribution is a statutory mechanism to implement pre-existing rights, and no beneficial interest passes in the property conveyed or transferred.

2. Applicability of Capital Gains Tax
The revenue had assessed a sum of Rs. 95,944 as capital gains, arguing that the surplus received by the assessee from the liquidation process should be taxed. However, the court found that the transaction does not fall within the ambit of Section 12B(1) as it does not involve a sale, exchange, relinquishment, or transfer. The court noted that the legislative history and amendments to Section 12B indicate that the distribution of assets in liquidation was not intended to be treated as a taxable event for capital gains.

3. Interpretation of Legislative Amendments
The court examined the legislative amendments to Section 12B, particularly the changes introduced by the Finance (No. 3) Act, 1956. The court noted that while the first proviso to Section 12B(1) of the later Act made certain exclusions, it did not explicitly exclude the distribution of assets on the liquidation of a company. However, the court interpreted that the omission does not imply that such distributions should be taxed. The court emphasized that the statutory mechanics and the fiduciary role of the liquidator indicate that the distribution is not a taxable transfer.

4. Statutory Mechanics under the Companies Act, 1956
The court analyzed the relevant provisions of the Companies Act, 1956, including Sections 428, 484, 487, 490, 491, 511, and 555. The court highlighted that the liquidator's role is to distribute the surplus assets among the contributories according to their pre-existing rights. The liquidator does not hold the property as an owner but as a fiduciary, and the distribution process does not create new rights but recognizes existing ones. The court also referred to judicial precedents and authoritative texts to support its interpretation that the distribution of assets in liquidation does not constitute a transfer for tax purposes.

Conclusion
The court concluded that the distribution of assets by the liquidator in a members' voluntary liquidation does not constitute a sale, exchange, relinquishment, or transfer under Section 12B of the Indian Income-tax Act, 1922. Consequently, the sum of Rs. 95,944 received by the assessee is not liable to tax as capital gains. The question referred to the court was answered in the negative and in favor of the assessee, with costs awarded to the assessee.

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