COMMISSIONER OF INCOME TAX, MADRAS versus M/S. MADURAI MILLS CO. LIMITED

COMMISSIONER OF INCOME TAX, MADRAS

M/S. MADURAI MILLS CO. LIMITED March 9, 1973

[K. S. HEGDE, P. JAGANMOHAN REDDY AND H. R, KHANNA, JJ.]

Income-tax Act, 1922, s. 12B-Capital Gains-Voluntary liquidation of private limited company-Distribution of assets to shareholder.--Surplus received by shareholders whether attracts tax on capital gains--Distribution of assets whether amounts to sale, exchange relinquishmenti or transfer within meaning of s. 12B. Interpretation of statutes-Proviso which existed in original law dropped in amended law-Inference to be drawn,

Three private limited companies in which the assessee held ahatel· went into voluntary liquidation in December 1959 In the course ot the ·liquidation proceedings the liquidators made dislribution in the year of account relevant to the aaaeasment year 1961-62, and the assesaee company got cash or assets in lieu of the amounts due in respect of the three compariies. The Revenue took the view that by reason of the distribution of assets of the three private companies under liquida-tiol> by the liquidators there had been capital gain which was assessed by the Income-tax Officer at Ra. 95,944/-. The Appellate Assisl$t Commissioner up\leld the order of the Income-tax Officer. He took the view that the surplus arose out of the .exchange of aharea held by the assessee company in the three companies and therefore the surplus ought to be brought to tax. In further appeal the Tribunal held that there was no exchange or transfer of shares and assets in question but the transaction could be viewed as relinquishment. The Higb Court held, in reference, that where liquid.tor distributes the assets of the company which ha8 gone into voluntary liquidatiop he ia performing legal function and there is no element of sale, transfer, exchange or relinquishment involved in such distribution. The Revenue appealed to this Court,

Dismissing the appeal,

HELD : (i) The distribution of the assets of the companies in liquidation does not amount to transaction of sale, exchange, reJiD .. quishment or transfer So as to attract section 12B of the Act. When shareholder reoeives money repr...,nting his share on distribution of the net assets of the company in liquidation, he receives that money in satisfaction of the right which belonged to him by virtue of his holdin.e the shares and not by operation of_ GDY transaction which amounts to sale, exchange, relinquishment or transfer. In the ckcums-tances it was difficult to hold that the assessee company was liable to pay tax on capital gains as contemplated by section l 2B of tho Act in respect of the amount of Rs. 95,944/- [6670)

(ii) If the language of sub-section (!) of section 12B of the Act is clear and does not warrant the inference that distribution of assets on liquidation of company constitutes sale, transfer qr exchange the said" trllllSaction of distribution of assets would not chan_ge its character and acquire the attributes of sale, transfer or exchange because of the omission of clarification in the first proviso to aub..ection ( l) of section 12B of the Act, even though such clariJlcation was there In

the !hi.rd provis<> of the s~ction inserted by the earlier Act (Act 22 of 1947). It is· well settled that considerations 'stemming from legislative history must pot be 'allowed to override the pMn words of statute. proviso cannot be construed as enlarging the scopz of an enactment \Vhen it can be fairly and p.r:operly construed with'out attributiniz to it !hat effect. Further if the language of the enacting part of the statute is pla~ <ind unamb'iguous and does not contain the provisions which are said to occur in it~ one cannot derive those provisions by implica-tion from proviso. [6690]

Commissioner. of Income-tax U.P. v. Bankey Lal Vaidya . [197_11 79 I. T. R. 594 and Commissioner of Income-Tax v. Dewas Cine Cor• poration [1968] 68 I.T.R. 240, applied. ·

Commissioner of Income-tax ·v. Associated Industrial Developnient Co. P. Ltd. [1969] 73 I.T.R. 50 and Commissioner of Income Tax v. R. M. Amin, [1971] 82 1.T.R. 194, approved. · Anderson v. Commissioner of Income Tex. [1960] 39 I.T.R. 123, distinguished. ' CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1394 of 1970. '\ Appeal by certificate from the judgment and order dated February 28, 1969 of the High Court at Madras in Tax Case No .. .. 124 of 1965. · ·.',

,. Appeal by certificate from the judgment and order dated February 28, 1969 of the High Court at Madras in Tax Case No .. .. 124 of 1965. · ·.',

s. C. Manchanda, P. L. Juneia and R. N. Sacluhey, for the appellant.

S, T. Desai and T. A. Ramachandran, for the respondent'.

The Judgment of the Court was delivered by

KHANNA, J.-This appeal on ce~tificate has been filed by the Commissioner of Income Tax against the judgment of Madras . High Court whereby that court answered the following question· referred to it under section 66 (1) of the Indian Income Tax Act, 1922 (hereinafter referred to as ilie Act) in the n~gative in favour of the assessee respondent :

"Whether orl the facts and circumstances of the case, the Tribunal was right in holding that the sum of Rs. 95,944/- is liable to tax under Section 12B(2) ?" . ·

The matter relates to assessment year 1961-62. The assessee is public limited company carrying on the business of manu-facture and sale of yam. The assessee held shares in the follow-ing companies as under : .

(1) Indian Mills Supply Company (Private) Limited, 2,760 shares of the face value of Rs. 100/-

(2) Harveys (Private) Limited, 1,000 shares of the face value of Rs. 1001-.

[1973] 3 S.C.R.

( 3) Pendyan Weaving Mills (Private) 1,800 shares of tile face value of Rs. 100/-.

Limited,

The above three companies went into voluntary liquidation in December, 1959. In the course of the liquidation proceedings, the liquidiators made diS'tribution in the relevant year of account and the assessee company got cash or assets in lieu of cash of the amount of Rs. 4,57,858, Rs. 1,41,739 and Rs. 1,83,175 in respect of Indian Mills Company (Private) Limited, Harveys (Private) Limited and Pandyan Weaving Mills (Private) Limited respective-ly. The revenue took the view that by reason of the distributton of assets of the three private companies under liquidation by the liquidators, there had been capital gain of Rs. 96,735.85 in respeot of Indian Mills Supply Company (Private) Limited and Rs. 41,168.88 in respect of Harveys (Private) Limited making total of Rs. 1,37,904.73. Out of that, loss amounting to Rs. 41,960.56 in respect of Pandyan Weaving Mills (Private) Limited was deducted, leaving balance of Rs. 95,944.00. The assessee company at fir!ll showed the sum of Rs. 95,944.00 as capital gains but subsequently it filed statement showing loss of Rs. 59, 104 on the basis that the cost of shares distributed by the liquidators should be taken at the figure at which they had been acquired by the companies which distributed the shares. The Income-tax Officer assessed the assessee company to capital gain at the sum of Rs~ 95,944. Aggrieved by the order of the Income-tax Officer the assessee filed appeal before the Anpella Assistant Commis-sioner and on being unsuccessful there, filed further appeal before the Income Tax Appellate Tribunal. The main contention which was raised on behalf of the assessee was that the transaction in question involved. lio sale, exchange, relinquishment or transfer and as such, the amoulit in que!llion was not capital 2ain under section 12B of the Act. The Appellate AssiS'tant Commissioner was of the view that the surplus arose out of the exchange of shares held by the assessee company in the three comnanies and therefore the surplus ought to be brought to tax. The T'ibunal held that there was an exchange or transfer of shares and assets in question. The transaction, according to the Tribunal, could also be viewed as ·a relinquishment. The assessee was conseauently held liable to pay tax on the sum of Rs. 95,944 u'1der section 12B of the Act. The question reproduced above was thereafter, on the application of the assessee, referred to the High (',ourt.

The High Court while answering the question in the ne11ative held that when liquidator distn'butes the a•sets of comn~ny which has gbne into voluntary liquidation, he is performing legal function and there is no element of sale, transfer, exchan~e or relinquiShment involved in such distribution. The judgment of the Hil!h Court is reported in (1969) 74 T.T.R. 623.

performing legal exchan~e or The judgment of

Before dealing farther, we may mention that capital gains were charged for the first time by the Income Tax and Excess Profit Tax (Amendment) Act, 1947 (Act 22 of 1947) which inserted section 12B in the Act. It taxed capital gains a·ising after March 31, 1946. The tax on capital gains was virtually abolished by the Indian Finance Act, 1949 which confined the operation of that section to capital gains arising before April 1, 1948. Capital gains tax was, however, revived with effect from APril 1, 1957 by the Finance (No. 3) Act of 1956. Sub-section(l) of section J2B along _with its first proviso was as under :"The tax shall be payable by an assessee under the head 'capital gains' in respect of any profits or gains aris-c ing f·om the sale, exchange, relinquishment or trans.fer, of capital asset effected after the 31 't day of March, 1956. and such profits and gains shall be deemed to be income of the previous year to which the sale, exchange, relinquishment or transfer took place : Provided that any distribution of capital assets on the total o• partial partition of Hindu undivided family or under deed of gift. bequest or will, shall not for the purnoses of this section be treated as sale. exchange, relinquishment or transfer of the capital assets "

Sub-section (2} of section 12B prescribed statutory r~rmula for purpose' nf computation of capital gains. Sub-sec•ion ( 3) of section 12B was as under :

"Where aqy capital asset became the prr>uerty of the assessee by succession, inheritance or devolution or on anv distribution of capital a<sets on the total or partial nartition of Hindu undivided fnmily or on the dissolu-F tion "f firm or other association of persons_ or on the liquidation of company or under deed of gift, or transfer on irrevocable trust, its actual cost allowable to him for the pumoses of this section shall be its actual cost to the previous owner thereof. and the provisions of sub~section (2) shall apply accordingly; and where the actual cost to the previous owner cannot be ascertained, the fair market value at the date on which the capital asset became the Property of the previous owner shall be deemed to be the actual cost thereof ...... "

Perusal of sub-section ( 1) of section 12B renroduced above shows that the liability to pav tax on account of capital gains can arise onlv if the assessee makes profit' or gains ari<ing frnm the sale, exchange. relinquishment or tramfer of capital asset effect-ed after March 31. 1956. The question with which we are cnn-cerned is whether the distribution of assets of the companies which

had gone into voluntary liquidation by ihe liquidators to the assessee company resulted in transaction which amounted to sale, exchange, relinquishment or transfer.

Mr. Manchanda on behalf of the appellant has argued in this Coun that the transaction in question amounted to sale or transfer. We, however, find ourselves unable to accede to this contention. The act of each of the liquidators in distributing the assets of. the company which had gone into voluntary liquidation did not result in the creation of new rights. It merely entailed recognition of legal rights which were in existence prior to the distribU;tion. Ac· cording to observations on page 512 of Buckley's Commentaries on the Companies Act, thirteenth edition, liquidator is only trustee in. the sense that the property of the company ceases upon the winding up to belon11; beneficially to the company and passes into his custody, to be applied by him as directed by the 9tatute. It is further observed on page 513 :

"The question whether liquidator in voluntary winding up is trustee within the meaning of the Trustee Act, 1925, and as such entitled to the benefit of ss. 30 and 61 of that Act, was dis£_ussed, but not decided, in Re Windsor Steam Coal Co.(") Semble, liquidator is in the position of trustee for the members when distribut-ing surplus assets in specie in winding up, so that no beneficial interest passes in the property conveyed or transferred, within the Finance (1909-1910) Act, 1910, s. 7 4 ( 6), and ad va/orem stamp duty under that section is not payable on conveyances or transfers of the pro-perty to the members."

When shareholder receives money representing his share on distribution of the net assets of the company in liquidation, he receives that money in satisfaction of the right which belonged to him by virtue of his holding the shares and not by operation of any transaction which amounts to sale, exchange, relinquishment or transfer. In the circumstances, we find it difficult to hold that the assessee company is liable to pay tax on capital gains as con-templated by section 12B of the Act in respect of the amount of Rs. 95,944.

representing his share on

In the case of Commissioner of Income-tax U.P. v. Bankey Lal Vaidya(') (to which one of. us was patty) the reapondent who was karta of Hindu uadivi.ded family, entered into part-nership with to carry on the 1*Jsiness of manufacturing and selling pharmaceutical products and literature relating thereto. On the dissolution of the partnership, ks assets, which included goodwill, machinery, furniture, medicines, library and copyright

(2) [197l] 7' 1.T.R. !94.

in respect of certain publications, were valued at Rs. 2,50,000. Since most of the assets were incapable of physical division, it was agreed tha1t the 11$Sets be taken over by and 1he respondent be paid his share. of the value of the assets in money and accord-ingly the respondent was paid Rs. 1,25,000. Question arose B, whether the sum of Rs. 65,000 being part of the amount received by the respondent could be brought to tax as capital gains under section 12B of the Act. It was held by Shah J., speaking for the Court, that the 31Tangement between the partners of the firm amounted to distribution of the assets ol the firm on dissolution and that there was no sale, exchange or transfer of the respondent's share in ·the capital assets to D. The sum of Rs. 65,000, it was accordingly held, could not be taxed as capital gains. The receipt of money by the respondent was, in the opinion of the Court, nothing but receipt of his share in the distributed assets of the company.

Reliance in that case was placed, as has been done also in the present case, on behalf of the revenue upon the case of James Anderson v. Commissioner of Income Tax.([1]) The said case was distinguished and was found to be of not much avail to the re-venue. In that case the assessee who held power of attorney from the executor of deceased person, sold certain shares and securities belonging to the deceased for the purpose of distributing the assets amongst the legatees. The excess realised by sale was treated by the department as capital gains. The contention of the assessee was that since the sale of the shares and securities fell within the purview of the third proviso to section 12(B)(l), it could not be treated as sale ol capital assets but this contention was rejected by this Court. James Anderson's case, in our opinion, is not of such assistance to the revenue as in that case there was no distriblUtion of capital assets between the legatees. On the contrary, the assessee had in pursuance of the authority given to him by the executor of the deceased sold the shares and securities and the said sale had resulted in capital gain. In the present case there has been no sale of receipt of price but only distribution of the assets of the companies which had gone into voluntary liqui-G dation. Such transaction does not amount to sale, exchange, relinquishment or transfer of the assets. The revenue, in the cir-cumstances, cannot derive much assilltari.ce from that case.

In the case of Commissioner of lllCOIM Tax v. Dewas Cine Corporation(' this Court while dealing with section 10(2) (vii) of the Act observed that the exwession "sale" in its ordinary mean· in11; is transfer of property for 1>rice, and adjustment of the rights of the partnen In 'a dissolved firm by allotment of its assets

(2) (1968] 68 I.T .R. 2'40.

(ll [1960] 39 I.T.R. 123 .

is not transfer nor it is for price. In that case the assets were distributed among the partners and it was contended that the assets must·in law be deemed to be sold to the individual partners in consideration of their respective shares, and the difference bet· ween the written-down value and the price realised should be in· eluded in the total income of the partnership under the second proviso to section J.0(2)(vii). This Court in this context observ-ed that partner ruay in an action for dissolution insist that the assets of the partnernhip be realised by. sale of its assets, but pro-perty allotted to partner in satisfaction of his claim to his share, could not be deemed in law to be sold to him.

In Commissioner of Income Tax v. Associaled Industrial Deve-lopment Co. P. Lt4.([1]) Division Bench of the Calcutta High Court held that the amount received by shareholder on the liqui-dation of company was not assessable to capital gains as there was no sale, c;Jtchange, relinquishment or transfer of the capital assets. Similar view has also been taken by the Gujarat High Court in Commissioner of Income Tax v. R. M. Amin.(').

We are, therefore, ol the view that distribution of the asset& of the companies in liquidation does not amount to transaction of sale, exchange, relinquishment or transfer so as to attract section ' 12B of the Act.

Mr. Manchanda on behalf of the appellant has invited our attention to the third proviso to sub-section (1) of section 12B as originally enacted by the Income Tax and Excess Profit Tax (Amendment) Act wherein it was stated, inter alia, that any dis• tribution of capital assets on the dissolution of firm or other association of persons or on the liquidation ol company shall not for the purpose of section 12B be treated as sale, exchange or transfer of capital assets. It is urged that the omission of such distribution of capital assets in the first proviso to sub-section ( 1 ) of section 12B, as revised by the Finance (No. 3) Act of 1956, would show that the legislature wanted the distribution of capital assets on dissolution of firm or other association of persons or the liquidation of company to be treated as sale, exchange or transfer. This contention, in our opinion. is not well-foiinded. It appears to us that the cases of the distn"bution of capital assets on dissolution of firm or other association Of persons or liquida· tion of company were mentioned in the third proviso under the earlier Act, as matter of clarification to allav fears even thoudi the language ol sub-section (I ) of section 12B was not intended to aOPlV to such cases. Provis'ls, as mentioned on nage 221 of Craies on Statute Laws, Sixth Edition, are often inserted to allay fears. proviso is inserted to guard against the particular case

12) (1971] 82 l.T.R. 19<4.

of which particular person is apprehensive, although the enact-ment was never intended to apply to his case or to any other similar case at all. .

We have already stated earlier that the distribution of assets by liquidator on the voluntary winding up of company cannot ll constitute sale, transfer or exchange for the purpose of sub-section (1) of section 12B of the Act. If the language of sub-section ( 1) of section 12B of the Act is clear. and does not warrant the infer-cn.ce that distribution of assets on liquidation of company cons-titutes sale, transfer or exchange the said transaction of distribution of assets would not, in our oPinion, change its character and acquire the attributes of sale, transfer or exchange because of the omission of clarification in the first proviso to sub-section ( 1) of section 12B of the Act. even though such clarification was there in the third proviso of the section inserted by the earlier Act (Act 22 of 1947). It is well-settled that considerations stemmir1g from legislative history must not be allowed to override the plain words of statute (see Maxwell on the Interpretation of Statutes, Twelfth Edition, page 65). proviso cannot be construed as enlarging the scope of an enactment when it can be fairly and properly construed without attributing to it that effect. Further, if the language of the enacting part of the statute is plain and un-ambiguous and does not contain the provisions which are said to occur in it, one cannot derive those provisions by implication · from proviso (see page 217 of Craies on Statute Law, Sixth . Edition).

In the light of what has been discussed above, the difference between the language of the first proviso to section 12(B)(l ), as inserted bv Finance (No. 3) Aot of 1956 and the third p•oviso to section 12(b)(l). ·as inserted by Act 22 of 1947, cannot be of such material help to the revenue.

Reference has also been made by Mr. Manchanda. to s~ti<Jn 46 of the Income Tax Act, 1961 which contains provision for chargin1t with capital irains the money or assets . received by sha•eholder on •he l;quidation of t:omPony. The liability under that section arises from it< express Provisions. ·It· cannot, however, be sai<l that such liahilitv would also a<ise even in the absence of such provisions un<ler the Aot of 1922.

The appeal consequen•ly fails and is dismis5ed i With . cos.ts.