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PETITIONER: JAMES ANDERSON, ADMINISTRATOR OFTHE ESTATE OF THELATE HENRY

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX,BOMBAY

DATE OF JUDGMENT: 04/03/1960

BENCH: DAS, S.K. BENCH: DAS, S.K. KAPUR, J.L. HIDAYATULLAH, M.

CITATION:  1960 AIR  751            1960 SCR  (3) 167  CITATOR INFO :  D          1971 SC2270  (4)  D          1973 SC1357  (8)  F          1976 SC 662  (3)

ACT: Income-tax-Distribution     of    capital     assets-Whether distribution  must  be in specie-Sale of capital  assets  by administrator  for distribution amongst  legatees-Profit  on such   sales,  if  amounts  to  capital  gains   liable   to tax-Income-tax  Act,  1922 (XI Of 1922),  S.  12B(1),  third proviso.

HEADNOTE: The  appellant  was the administrator of the estate  of  one Henry Gannon, a resident of British India, who left for  the United  Kingdom  in  1944 and died there in  1945.   In  the course  of administration the appellant sold certain  shares and securities belonging to the deceased for the purpose  of distributing  the  assets amongst the legatees  and  thereby realised  more  than their cost prime.  The excess  of  sale price  over  the cost price was treated  by  the  Income-tax Officer as capital gain under s. 12 B 168 of the Income-tax Act and the appellant was assessed to  tax on  such capital gain for the assessment years  1947-48  and 1948-49.   The  appellant contended that there  had  been  a distribution  of  capital assets by him under  the  will  of Henry  Gannon and therefore he came under the protection  of the third proviso to s. 12B(1) and was not liable to tax. Held,  that  the appellant was not protected  by  the  third proviso  to  s. 12B(1) as the expression "  distribution  of capital  assets  "  in that proviso  meant  distribution  in specie and not distribution of sale proceeds of the  capital assets.   So long as there was distribution of  the  capital assets  in  specie  and  there was no  sale,  there  was  no transfer  for the purposes of s. 12B, but as soon  as  there was a sale of the capital assets and profits or gains  arose therefrom, the liability to tax also arose, whether the sale was by the administrator or by the legate. Sri  Kannan Rice Mills Ltd. v. Commissioner  of  Income-tax, Madras,  (1954) 26 I.T.R. 351; Commissioner  of  Income-tax,

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Bombay North v. Walji Damji, (1955) 28 I.T.R. 914 and  Gowri Tile Works v. Commissioner of Income-tax, Madras, (1957)  31 I.T.R. 250, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 335 of 1956. Appeal  by special leave from the judgment and  order  dated August  25,  1954, of the Bombay High  Court  in  Income-tax Reference No. 1 of 1954. N.A. Palkhivala, S. N. Andley, and J. B. Dadachanji,  for the appellant. K.N. Rajagopal Sastri and D. Gupta, for the respondent. 1960.  March, 4. The Judgment of the Court was delivered by S.K.  DAS,  J.-This appeal by special leave is  from  the decision of the Bombay High Court dated August 25, 1954,  in Income-tax Reference No. 1 of 1954.  The only question which falls  for  decision  in the appeal is the  true  scope  and effect  of the third proviso to old S. 12B(1) of the  Indian Income Tax Act, hereinafter referred to as the Act. The facts relevant to the appeal are these: one Henry Gannon was a resident of British India, who used to be assessed  to income-tax  under  the Income-tax law of this  country.   He left  India in 1944 for the United Kingdom where he died  on May  13,  1945.  He left a will dated November 18,  1942  by which  the  National  Bank  of India  Ltd.,  in  London  was appointed  Executor  of  his estate.  On  October  1,  1945, probate 169 of  the  will  was granted to the said Bank by  a  Court  of competent  jurisdiction in the United Kingdom.   On  October 25, 1945, a power of attorney was given by the Bank to James Anderson,  who is now the appellant before us.  He  made  an application to the High Court of Bombay under s. 241 of the, Indian  Succession  Act  and on  that  application  obtained Letters  of Administration with a copy of the will  annexed. In  the  course  of administration of the  estate  of  Henry Gannon,  the  appellant sold certain shares  and  securities belonging  to the deceased for the purpose  of  distributing the  assets amongst the legatees.  The sale of these  shares and  securities  realised more than their cost  price.   The excess of the sale price over the cost price was treated  by the  Income Tax Officer as capital gain under s. 12B of  the Income Tax Act.  For the assessment year 1947-48 the capital gain was computed by the Income Tax Officer at Rs. 20,13,738 and for the assessment year 1948-49 at Rs. 1,51,963.   These amounts  of  capital  gain  were  brought  to  tax  for  the assessment  year  1947-48  and 1948-49  along  with  certain dividend  and interest income which had accrued or had  been received  in the relevant years of account.   Not  satisfied with these assessments, the appellant preferred two  appeals to  the Appellate Tribunal, Bombay.  These two appeals  were consolidated.   The appellant urged three points in  support of  his  contention  that  the  assessments  were   invalid: firstly,  that  s. 12B imposing a tax on capital  gains  was ultra  vires the Government of India Act, 1935  ;  secondly, that. under s. 24B of the Act, the appellant was only liable to pay tax which the testator would have been liable to  pay and  as these capital assets were not sold by the  testator, there was no liability upon the appellant: and thirdly, that the sale of the shares and securities by the appellant under the  will  of Henry Gannon came within the  purview  of  the third  proviso to s. 12B(1) and, therefore, was riot  to  be treated  as a sale of capital assets under s.  12B(1).   The

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Appellate  Tribunal repelled the first two contentions,  but accepted  the third as correct and in that view allowed  the two appeals in part.  It directed the Income Tax Officer  to delete from the assessed income 22 170 the capital gains made by the sale of shares and securities. The Commissioner of Income-tax, Bombay City, then moved  the Appellate Tribunal to refer to the High Court of Bombay  the question  which arose out of the third  contention,  namely, the  true  scope and effect of the third proviso to  old  s. 12B(1)  of  the  Act.   The  Appellate  Tribunal   thereupon referred  the following question of law to the  Bombay  High Court: "  Whether  the  sale of the shares and  securities  by  the administrator of the estate of late Mr. Gannon is not a sale for  the  purpose  of Section 12B(1) in view  of  the  third proviso to section 12B(1) of the Indian Income Tax Act." At  the  instance of the assessee the  other  two  questions which  were  decided against him were also referred  to  the High  Court.   The High Court of Bombay considered  all  the three questions in Income-tax Reference No. 1 of 1954 and by its decision appealed from answered all the three  questions against  the assessee.  The appellant then moved this  Court for special leave which was granted on October 7, 1955. The question whether the levy of capital gains under section 12B  is  ultra  vires no longer survives by  reason  of  the decision   of  this  Court  in  Navinchandra  Mafatlal   v.’ Commissioner  of  Income-tax(1).   This  question  was   not therefore pressed before us.  The question under s. 24B  was also  not  seriously pressed.  The view of the  Bombay  High Court  that  s.  24B does not limit  the  liability  of  the Administrator  or  Executor to the cases referred  to  under that section is correct; because the appellant is as much an assessee  under  the Act as any other individual and  if  he makes capital gains, he is as much liable to pay tax as  any other  individual.   This position has  not  been  seriously contested before us. We  are, therefore, left only with the question which  turns on the true scope and effect of the third proviso to old  s. 12B(1) of the Act.  Capital gains were charged for the first time  by the Income-tax and Excess Profits  Tax  (Amendment) Act,  1947,  which  inserted s. 12B in the  Act.   It  taxed capital  gains arising after March 31, 1946.  The  levy  was virtually abolished by the Indian (1)  [1954] 26 I.T.R. 758; [1955] I. S.C.R. 829. 171 Finance  Act,  1949,  which confined the  operation  of  the section  to capital gains arising before April 1, 1948;  but it  was  revived  with effect from April  1,  1957,  by  the Finance  (No.  3) Act, 1956, which substituted  the  present section.   We  are  concerned in this appeal  with  the  old section.   That section, leaving out those parts  which  are not relevant for our purposes, ran as follows : "  S. 12B Capital gains-(1) 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 or transfer of  a  capital asset effected after the 31st day  of  March, 1946,  and  before  the 1st day of  April,  1948;  and  such profits  and  gains  shall be deemed to  be  income  of  the previous  year in which the sale, exchange or transfer  took place: Provided  further  that any transfer of  capital  assets  by reason  of the compulsory acquisition thereof under any  law for  the  time  being in force relating  to  the  compulsory

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acquisition   of  property  for  public  purposes   or   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,  bequest, will  or  transfer on irrevocable trust shall not,  for  the purposes  of this section, be treated as, sale, exchange  or transfer of the capital assets: (2)  The  amount of a capital gain shall be  computed  after making the following deductions from the full values of  the consideration  for which the sale, exchange or  transfer  of the capital asset is made, namely :- (i)expenditure  incurred  solely in connection  with  such sale, exchange or transfer; (ii)the  actual cost to the assessee of the capital  asset, including  any expenditure of a capital nature incurred  and borne by him in making any additions or alterations  thereto but excluding any expenditure 172 in  respect of which any allowance is admissible  under  any provisions of sections 8, 9, 10 and 12. (3)  Where  any  capital asset became the  property  of  the assessee  by succession, inheritance or revolution or  under any of the circumstances referred to in the third proviso to sub-section  (1), 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 " Capital  asset " is defined in s. 2(4A) of the Act,  and  it was  not disputed before us that the shares  and  securities which  the appellant sold constituted capital  asset  within the  meaning of that definition.  We may shortly state  here the scheme of sub-ss. (1), (2) and (3) of s. 12B of the Act. Sub-section (1) is the substantive provision which levies  a tax  in respect of profits or gains arising from  the  sale, exchange  or transfer of a capital asset effected  during  a specified  period.   The admitted position in this  case  is that  the  appellant sold the shares and  securities,  which constituted  capital  asset,  within that  period  and  thus clearly came within sub-s. (1) of s. 12B.  Sub-s. (2) states how  the amount of capital gain shall be computed,,  and  it allows  certain  deductions  from  the  full  value  of  the consideration  for which the sale, exchange or  transfer  of capital   assets  is  made.   As  nothing  turns  upon   the deductions  allowed under sub-s. (2), we need not  refer  to them.   Sub-section  (3)  refers to a  capital  asset  which became   the  property  of  the  assessee   by   succession, inheritance or devolution or under any of the  circumstances referred  to in the third proviso to sub-s. (1), and  states what  deductions the assessee is then entitled to.   In  one case, the assessee may be the administrator or executor  who has himself sold the capital 173 assets ; in another case the assessee may be the person  who has  got the capital assets by succession etc. or under  any of  the  circumstances referred to in the third  proviso  to sub-s. (1), and if in the latter case the assessee sells the capital  assets, he brings himself within sub-s. (1) but  is entitled  to a deduction of the actual cost to the  previous owner  in  accordance  with the provisions  of  sub-s.  (2); where, however, the actual cost to the previous owner cannot

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be  determined,  he is entitled to a deduction of  the  fair market value at the date on which the capital assets  became the  property of the previous owner.  This in effect is  the scheme of the three sub-sections.  Manifestly, the intention of  the legislature is to tax the profits made by the  sale, exchange or transfer of capital assets and the incidence  of the taxation falls at the time of the transfer.  If the sale is  made  by the administrator or  executor,  the  liability under sub-s. (1) falls on him; if, however, the sale is made by a person who got the capital assets inter alia in any  of the  ways mentioned in sub-s. (3), he becomes liable to  tax as  and when he sells the capital assets and  makes  profits therefrom.   Now,  the question is what  bearing  the  third proviso  to  sub-s. (1) has on the aforesaid  scheme.   This proviso  states in effect that under  certain  circumstances mentioned therein a transfer of capital assets shall not  be treated as a transfer for the purposes of the section.   The circumstances enumerated are: (a) compulsory acquisition  of property  for public purposes, (b) distribution  of  capital assets  on  the  total  or  partial  partition  of  a  Hindu undivided family, (c) distribution of capital assets on  the dissolution of a firm or other association of persons, or on the  liquidation  of  a company,  and  (d)  distribution  of capital  assets  under  a deed of  gift,  bequest,  will  or transfer  on irrevocable trust.  In the present case we  are concerned  with  the  question  whether  there  has  been  a distribution of capital assets by the appellant under a will so  as to bring him within the ambit of the  third  proviso. If  the  appellant comes within that ambit, then  the  sales which  he  made  of the shares and securities  will  not  be treated  as  transfer within the meaning of  sub-s.(1).  The contention of the appellant 174 is  that there has been a distribution of capital assets  by him  under the Will of Henry Gannon and therefore  he  comes under  the protection of the third proviso.  The High  Court took the view that the expression " distribution of  capital assets   "  in  the  third  proviso  can  only   mean   such distribution  in  specie;  it  cannot  and  does  not   mean distribution  of  the sale proceeds of the  capital  assets. The  High Court, therefore, held that the appellant did  not come  within the protection of the third proviso, as he  did not distribute the capital assets in specie. On  behalf of the appellant it has been contended before  us that  the  High Court came to an erroneous  conclusion  with regard to the scope and effect of the third proviso.  Mr. N. A.  Palkhivala  who  has argued the case on  behalf  of  the appellant has put his argument in the following way.  He has submitted that normally the purpose of a proviso is to carve out  an  exception  from the  substantive  provision.   Sub- section  (1) of s. 12B, which is the substantive  provision, imposes  the liability to tax on an assessee in  respect  of profits or gains arising from the sale, exchange or transfer of  a  capital asset.  Leaving out the  case  of  compulsory acquisition of property Tor public purposes which may result in  capital  gains, Mr. Palkhivala has  submitted  that  the other  cases earlier enumerated as (b), (c) and (d)  in  the proviso  cannot  result  in  any capital  gains  by  a  mere distribution in specie; because on a distribution in  specie upon  a partition or upon a testamentary gift or gift  inter vivos,  no capital gain can possibly be made by  the  person who  owned the assets before the distribution and who  alone can be liable to tax under the section.  If, therefore,  the correct interpretation of the third proviso is  distribution of capital assets in specie, the proviso does not serve  any

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purpose.   Therefore,  Mr. Palkhivala has  argued  that  the expression " distribution of capital assets " must be  given a  meaning  which will fulfil a purpose  and  correlate  the proviso  to the substantive provision in sub-s.  (1).   That meaning, according to him, is distribution of sale  proceeds of capital assets. We  are unable to accept the argument as correct.   Firstly, having regard to the definition of the expres- 175 sion   "capital   assets"  it  would  be   wrong   to   read "distribution  of capital assets " as meaning  "distribution of sale proceeds of capital assets".  Obviously, there is  a clear  and vital distinction between " capital assets "  and their  " sale proceeds ". If capital assets are  sold  first and a distribution of the sale proceeds is made  afterwards, then the sale precedes distribution and what is  distributed is  not  capital  assets  but  the  sale  proceeds  thereof. Secondly,  we do not agree that the third proviso serves  no purpose if the expression " distribution of capital assets " is given its natural and plain meaning, viz. distribution in specie.   The  High  Court expressed the view  that  by  the proviso  the legislature might have intended to  protect  an assessee  from a possible argument by the Revenue that  when (to take an example appropriate to the case) an executor  or administrator  transferred the estate or part of the  estate to  the person entitled to it, there was a  transfer  within the  meaning of sub-s. (1) of s. 12B.  To us it  seems  that the purpose of the proviso is abundantly clear if the scheme of  sub-ss. (1), (2) and (3) is kept in mind.   Assume  that there  is distribution of capital assets in  specie  amongst legatees,  and one of the legatees sells the capital  assets which he got in one of the ways mentioned in third  proviso; he  at  once becomes liable to tax on profits  made  on  the sale.  Sub-section (3) makes that position clear and if  the proviso is read in the context of the substantive provisions of s. 12B its purpose is quite clear.  The purpose is  this: as  long as there is distribution of the capital  assets  in specie and no sale, there is no transfer for the purposes of the section ; but as soon as there is a sale of the  capital assets  and profits or gains arise therefrom, the  liability to  tax arises, whether the sale be by the administrator  or the  legate.   It is significant that the proviso  uses  the words  " for the purposes of this section " and  not  merely sub-s.  (1).  Indeed, Mr. Palkhivala was forced  to  concede that in view of the provisions of sub-s. (3) of s. 12B,  the expression " distribution of capital assets " must also mean distribution  in specie because under sub-s. (3) it  is  the capital  asset  which becomes the property of  the  assessee under any of the circum- 176 contended  that  the expression meant both  distribution  in specie and distribution of sale proceeds.  We do    not  see why an unnatural or forced meaning should   be given to  the expression,  when  by giving the expression  its  plain  and natural meaning the third proviso fits in with the scheme of sub-ss.  (1),  (2)  and (3) of s. 12B of  the  Act.   It  is necessary  to  point  out here that  on  the  interpretation sought  to be placed on the third proviso on behalf  of  the appellant,  the administrator will escape paying tax  if  he sells the capital assets; but the legate will not escape  if he  sells the capital assets after having received  them  in specie from the administrator.  This is an anomaly which  is against the scheme of s. 12B of the Act.  We are accordingly of  the  view  that the High Court  rightly  held  that  the expression  " distribution of capital assets " in the  third

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proviso   to  sub-s.  (1)  of  s.  12B  of  the  Act   means distribution   in  specie  and  not  distribution  of   sale proceeds. In the High Court an alternative argument was also presented on  behalf  of  the assessee to the effect  that  the  third proviso  contemplated involuntary transfers.  This  argument was based on the use of the expression by reason of’ in  the proviso,  and the proviso was sought to be read  as  follows (omitting words not relevant to the case): "  Provided further that any transfer of capital  assets  by reason   of  any  distribution  of  capital   assets   under a......................  will................ shall not  for the purposes of this section be treated as sale, exchange or transfer of the capital assets." The argument was that inasmuch as the administrator sold the shares  and securities for the purpose of  distributing  the sale proceeds to the legatees, the sale was involuntary  and was  necessitated   by  reason of’ the terms  of  the  will; therefore,  he was protected under the third  proviso.   The High  Court  repelled this argument and  for  good  reasons. Firstly,  the  question whether the sale  was  voluntary  or involuntary.  is not, germane to the scheme of section  12B. Secondly, on a. proper reading of the proviso, the 177 expression  ’by reason of’ goes with the clause relating  to compulsory   acquisition  of  property  and  not  with   the distribution of capital assets. The  position  seems  to us to be so clear that  it  is  un- necessary  to labour it or to refer to decided cases.   Such decisions  of  the High Courts as have been brought  to  our notice  are all one way and they take the same view  as  was taken  by the High Court in the decision under  appeal  (see Sri  Kannan Rice Mills Ltd. v. Commissioner  of  Income-tax, Madras(1); Commissioner of Income-tax, Bombay North v. Walji Damji  (2); and Gowri Tile Works v. Commissioner of  Income- tax, Madras (3). For  the reasons given above, we see no merit in the  appeal and we dismiss it with costs. Appeal dismissed.