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PETITIONER: COMMISSIONER OF INCOME TAX, MADRAS

       Vs.

RESPONDENT: M/S.  MADURAI MILLS CO.  LIMITED

DATE OF JUDGMENT09/03/1973

BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ HEGDE, K.S. REDDY, P. JAGANMOHAN

CITATION:  1973 AIR 1357            1973 SCR  (3) 662  1973 SCC  (4) 194  CITATOR INFO :  R          1977 SC 999  (8)  RF         1985 SC1416  (60)  C          1991 SC2104  (7)

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

HEADNOTE: Three  private limited companies in which the assessee  held shareswent  into voluntary liquidation in December 1959,  ID the  course of the liquidation proceedings  the  liquidators made  distribution  in the year of account relevant  to  the assessment  year 1961-62, and the assessee company got  cash or assets in lieu of the amounts due in respect of the three companies.  The Revenue took the view that by reason of  the distribution of assets of the three private companies  under liquidation by the liquidators there had been a capital gain which  was  assessed  by  the  Income-tax  Officer  at   Rs. 95,944/-.   The Appellate Assistant Commissioner upheld  the order of the Income-tax Officer.  He took the view that  the surplus  arose  out of the exchange of shares  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  a  relinquishment.   The  High  Court  held,  in reference, that where a liquidator distributes the assets of the company which has gone into voluntary liquidation he  is performing  a  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 a transaction  of  sale,

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exchange,  relinquishment  or  transfer  so  as  to  attract section  12B of the Act.  When a 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 it was difficult to  bold that  the assessee company was liable to pay tax on  capital gains as contemplated by section 12B of the Act in  respect of the amount of Rs. 95,944/- [667D] (ii) If the language of subsection (1) of section 12B of the Act  is  clear  and  does not  warrant  the  inference  that distribution   of  assets  on  liquidation  of   a   company constitutes sale, transfer or exchange the said  transaction of distribution of assets would not change its character and acquire the attributes of sale, transfer or exchange because of  the omission of a clarification in the first proviso  to sub-section (1) of section 12B of the Act, even though  such a clarification was there in 663 the third proviso of the section inserted by the earlier Act (Act  22  of 1947). it is well settled  that  considerations stemming  from legislative history must ,not be  allowed  to override the plain words of a statute.  A proviso cannot  be construed is enlarging the cope of an enactment when it  can be  fairly and property construed without attributing to  it that  effect.  Further if the language of the enacting  part of the statute is plain and unambiguous and does not contain the  provisions  which are said to occur in it,  one  cannot derive  those  provisions  by implication  from  a  proviso. [669D] Commissioner  of  Income-tax U. P. v, Bankey  Lal  Vaidya  , [1971] 79 I.T.R. 594 and Commissioner of Income-Tax v. Dewas Cine Corporation [1968] 68 I.T.R. 240, applied. Commissioner   of   Income-tax  v.   Associated   Industrial Development   Co.    P.  Ltd.  [1969]  73  I.T.R.   50   and Commissioner of Income Tax V. R.  M. Amin, [1971] 82  I.T.R. 194, approved. Anderson   v.   Commissioner  of  Income  Tax,   [1960]   39 I.T.R. 123, distinguished.

JUDGMENT: 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. S.  C. Manchanda, P. L. Juneja and R. N. Sachthey,  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 certificate 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 the Act) in the negative in favour of the assessee respondent :               "  Whether on 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

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is  a  public limited company carrying on  the  business  of manufacture  and sale of yarn.  The assessee held shares  in the following 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. 100/- 664               (3)  Pendyan Weaving Mills (Private)  Limited,               1,800 shares of the face value of Rs. 100/-. The above three companies went into voluntary liquidation in December,   1959.    In  the  course  of   the   liquidation proceedings,  the  liquidiators  made  distribution  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 respectively.  The  revenue took  the view that by reason of the distribution of  assets of  the  three private companies under  liquidation  by  the liquidators, there had ’been a capital gain of Rs. 96,735.85 in respect of Indian Mills Supply Company (Private)  Limited and  Rs. 41,168-88 in respect of Harveys  (Private)  Limited making  a  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 a balance  of Rs. 95,944.00. The assessee company at first showed the  sum of Rs. 95,944.00 as capital gains but subsequently it  filed a  statement showing a 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  Appellate Assistant  Commissioner  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 no  sale, exchange, relinquishment or transfer and as  such, the  amount in question was not capital gain  under  section 12B of the Act.  The Appellate Assistant Commissioner was of the  view  that  the surplus arose out of  the  exchange  of shares  held by the assessee company in the three  companies and  therefore the surplus ought to be brought to tax.   The Tribunal  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 consequently held liable to pay tax on  the sum  of  Rs.  95,944  under section 12B  of  the  Act.   The question reproduced above was thereafter, on the application of the assessee, referred to the High Court. The High Court while answering the question in the  negative held  that  when a liquidator distributes the  assets  of  a company  which  has gone into voluntary liquidation,  he  is performing a legal function and there is no element of sale, transfer,  exchange  or  relinquishment  involved  in   such distribution.  The judgment of the High Court is reported in (1969) 74 T.T.R. 623. 665 Before  dealing further, 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

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arising 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(1) of section  12B 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  arising  from  the   sale,               exchange,  relinquishment  or transfer,  of  a               capital  asset effected after the 31st 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 or partial partition of  a               Hindu  undivided  family or under  a  deed  of               gift,  bequest  or  will, shall  not  for  the               purposes of this section be treated as a sale,               exchange,  relinquishment or transfer  of  the               capital assets Sub-section  (2)  of  section  12B  prescribed  a  statutory formula for purposes of computation of capital gains.   Sub- section (3) of section 12B was as under :               "Where  any capital asset became the  property               of the assessee by succession, inheritance  or               devolution  or on any distribution of  capital               assets on the total or partial partition of  a               Hindu  undivided family or on the  dissolution               of  a firm or other association of Persons  or               on  the  liquidation of a company or  under  a               deed  of  gift,  or  transfer  on  irrevocable               trust,  its actual cost allowable to  him  for               the  purposes  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 reproduced  above shows  that the liability to pay tax on account  of  capital gains can arise only if the assessee makes profits or gains arising from the sale, exchange. relinquishment or  transfer of  a  capital  asset effected after March  31,  1956.   The question  with  which  we  are  concerned  is  whether   the distribution of assets of the companies which 666 had  gone into voluntary liquidation by the  liquidators  to the  assessee  company  resulted  in  a  transaction   which amounted to sale, exchange, relinquishment or transfer. Mr. Manchanda on behalf of the appellant has argued in  this Court  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  distribution.   Ac- cording   to   observations  on  page   512   of   Buckley’s Commentaries  on  the Companies Act, thirteenth  edition,  a

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liquidator is only a trustee in the sense that the  property of  the  company  ceases  upon  the  winding  up  to  belong beneficially to the company and passes into his custody,  to be applied by him as directed by the statute.  It is further observed on page 513 :               "The  question  whether  a  liquidator  in   a               voluntary  winding up is a 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 discussed, but not decided,  in               Re  Windsor  Steam  Coal  Co.  (1)  Semble,  a               liquidator is in the position of a trustee for               the  members when distributing surplus  assets               in  specie  in  a  winding  up,  so  that   no               beneficial  interest  passes in  the  property               conveyed  or transferred, within  the  Finance               (1909-1910)  Act,  1910,  s.  74(6),  and   ad               valorem  stamp duty under that section is  not               payable  on  conveyances or transfers  of  the               property to the members." When a 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 contemplated  by  section 12B of the Act in respect  of  the amount of Rs. 95,944. In the case of Commissioner of Income-tax U.P. v. Bankey Lal Vaidya(2)  (to which one of us was a party)  the  respondent who was a karta of a Hindu undivided family, entered into  a partnership with D to carry on the business of manufacturing and selling pharmaceutical products and literature  relating thereto.  On the dissolution of the partnership, its assets, which  included goodwill, machinery,  furniture,  medicines, library and copyright (1) [1929] 1 Ch. 151.        (2) [1971] 79 I.T.R, 594. 667 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 that the assets  be  taken over by D and the respondent be paid his share of the  value of  the assets in money and accordingly the  respondent  was paid  Rs. 1,25,000.  Question arose 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  arrangement  between the  partners  of  the  firm amounted  to  a distribution of the assets of  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  a 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 ease  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 revenue.  In that case the assessee who held a  power of  attorney  from the executor of a deceased  person,  sold certain shares and securities belonging to the deceased  for

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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)(1), it  could not  be  treated  as  a sale  of  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 distribution 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  a distribution  of the assets of the companies which had  gone into  voluntary  liquidation.  Such a transaction  does  not amount to sale, exchange, relinquishment or transfer of  the assets.   The revenue, in the circumstances,  cannot  derive much assistance from that case. In  the  case of Commissioner of Income Tax  v.  Dewas  Cine Corporation (2) this Court while dealing with section 10 (2) (vii) of the Act observed that the expression "sale" in  its ordinary meaning is a transfer of property for a price,  and adjustment of the rights of the partners in a dissolved firm by allotment of its assets (1) [1960] 39 I.T.R. 123.   (2) [1968] 68 I.T.R. 240. 668 is  not a transfer nor it is for a 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 between the  written- down value and the price realised should be included in  the total income of the partnership under the second proviso  to section  10(2) (vii).  This Court in this  context  observed that a partner may in an action for dissolution insist  that the  assets  of the partnership be realised by sale  of  its assets,  but property allotted to a 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. Associated Industrial Deve- lopment  Co.  P. Ltd. (1) a Division Bench of  the  Calcutta High Court held that the amount received by a shareholder on the  liquidation of a company was not assessable to  capital gains  as  there was no sale,  exchange,  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 . (2). We  are,  therefore, of the view that  distribution  of  the assets of the companies in liquidation does not amount to  a 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  distribution  of  capital  assets  on  the dissolution of a firm or other association of persons or  on the  liquidation of a 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 a firm  or

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other association of persons or the liquidation of a company to   be  treated  as  sale,  exchange  or  transfer.    This contention, in our opinion. is not well-founded.  It appears to  us that the cases of the distribution of capital  assets on dissolution of a firm or other association of Persons  or liquidation of a company were mentioned in the third proviso under the earlier Act, as a matter of clarification to allay fears even though the language of sub-section (1) of section 12B  was not intended to apply to such cases.  Provisos,  as mentioned  on  page  221 of Craies on  Statute  Laws,  Sixth Edition,  are often inserted to allay fears.  A  proviso  is inserted to guard against the particular case (1) [1969] 73 I.T.R. 50.      (2) [1971] 82 I.T.R. 194. 669 of  which a particular person is apprehensive, although  the enActment 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  a liquidator on the voluntary winding  up  of  a company cannot 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 inference that  distribution of  assets  on liquidation of a  company  constitutes  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 a clarification in the first proviso  to sub-section (1) of section 12B of the Act, even though  such a  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 stemming from  legislative history must not be allowed to override the plain words of a statute  (see  Maxwell on the  Interpretation  of  Statutes, Twelfth Edition, page 65).  A 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 unambiguous and does  not  contain the  provisions which are said to occur in it. one  cannot derive  those provisions by implication from a 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)(1), as inserted by Finance (No. 3) Act of 1956 and  the third proviso to section 12(b) (1), 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 section  46 of  the Income Tax Act, 1961 which contains a Provision  for charging with capital gains the money or assets received  by a  shareholder  on  the  liquidation  of  a  company.    The liability  under  that  section  arises  from  it,   express Provisions.   It  cannot,  however,    be  said  that such a liability  would  also  arise even in the  absence  of  such provisions under the Act of 1922. The appeal consequently fails and is dismissed with costs. G.C.                                   Appeal dismissed. 670