Madurai Mills Company Ltd. vs Commissioner of Income Tax

Ramaprasada Rao, J.—This tax case comes upon a requisition made by the assessee u/s 66(1) of the Indian Income Tax Act, 1922. The

assessment year is 1961-62. The assessee, a public limited company, held shares in three private companies: Indian Mills Supply Company

(Private) Ltd., Harveys (Private) Ltd. and Pandyan Weaving Mills (Private) Ltd. The assessee held variegated shares in the above companies. It is

common ground that the three private companies as above went into members'' voluntary liquidation. In the year of account and in the course of

liquidation proceedings the voluntary liquidators distributed the assets of the three companies which went into liquidation, and as a result thereof the

assessee obtained cash or assets in the shape of shares in other companies and immovable properties in lieu of its holdings in the respective private

companies. The statement of the case discloses the number of shares held by the assessee-company in the private companies and also sets out the

descriptive particulars about the shares received by the assessee-company and/or cash or other assets after duly evaluating them. The revenue

considered that by reason of the distribution of assets of the three private companies under liquidation by the liquidators in the members'' voluntary

winding up to the assessee, there has resulted capital gains within the meaning of Section 12B of the Indian Income Tax Act, 1922, as

subsequently amended, and brought to tax a sum of Rs. 95,944 under the caption of ""capital gains"". It transpires that the assessee, for the previous

year ending December 31, 1960, originally filed a return showing a sum of Rs. 95,944 as capital gains, but subsequently it retracted and showed a

loss of Rs. 59,104. The working details furnished by the assessee in relation to the second statement filed by it disclosing the loss is on the basis

that the cost of shares distributed by the liquidators should be taken at the figure at which they were acquired by the companies which distributed

them. Aggrieved by the order of the Income Tax Officer who assessed the assessee to capital gains at the sum of Rs. 95,944, the assessee

approached the Appellate Assistant Commissioner and later the Appellate Tribunal, but unsuccessfully. The main contention of the assessee is that

the transaction in question involved no sale, exchange, relinquishment or transfer and that on a fair interpretation of the entirety of Section 12B in

juxtaposition to the express provisions of the Companies Act, 1956, the resultant surplus, if any, received by the assessee as a result of such

distribution of the assets by the liquidators would not be capital gains and therefore the amount in question is not exigible to tax. The Appellate

Assistant Commissioner was of the view that the surplus arose out of the exchange of shares held by the assessee-company in three companies

and therefore such surplus ought to be brought to tax. The Tribunal was of the view that there was an exchange or transfer of shares or assets in

question and held that the transaction could also be viewed as a relinquishment. At the request of the assessee, the following question of law has

been referred:

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 u/s 12B?

In order to appreciate the contentions raised before us, it is necessary to refer to the legislative history of Section 12B. The charging section with

regard to capital gains is Section 12B(1). In fact, for the first time by the Income Tax and Excess Profits Tax Amendment Act of 1947, capital

gains were charged to tax and so made liable u/s 12B, introduced therein for the first time. The tax under the head of "" Capital gains "" was payable

in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset. For purposes of this discussion it is

not necessary to state the period, the transactions during which were brought into the net of taxation. The levy was abolished by the Indian Finance

Act, 1949; but it was revived with effect from April 1, 1957, by the Finance (No. 3) Act, 1956.

Old Section 12B can now be noticed before the present provision, as amended in 1957, be considered and dealt with. Section 12B(1) of the

old Act is the charging section and it contained four provisos. The charging section dealt with a transaction which was in the nature of a sale,

exchange or transfer of a capital asset. Provisos 1, 2 and 4 are not relevant and need not be referred to. The third proviso, however, read:

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 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.

Sub-section (2) of Section 12B of the old Act laid a statutory formula for purposes of computation of capital gains. Sub-section (3) therein

provided :

Where any capital asset 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-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.

It would thus appear that in case capital assets are transferred by reason of the liquidation of a company, then such a transaction was not to be

treated u/s 12B as a sale, exchange or transfer of capital assets. Sub-section (3) of Section 12B, by a rule of thumb, laid down an independent

formula of computation notwithstanding the general process of reckoning formulated in Sub-section (2) of Section 12B. Sub-section (3) of Section

12B postulates that in case there is a transaction by way of sale, exchange or transfer of assets secured on the liquidation of a company, then the

person involved in the transaction has to suffer capital gains on the basis of the unearned increment notable in the same by taking the difference in

value of the asset on the date of such sale, exchange or transfer, and the actual cost of the said asset to the previous owner therof. Thus it is clear

that in case a person deals with it once over voluntarily by himself after securing the same on the liquidation of a company, then the cost of the

previous owner thereof, namely, the cost of the company which went into liquidation, shall be the basis to reckon the difference and eventually

capital gains. This peculiar formula introduced by the statute in relation to such assets dealt with by a person on his own volition abundantly makes

it clear that it was intended at all material times by the legislature that the distribution of assets by the liquidator of a company did not involve a

transfer, sale or exchange. No doubt, this is the result achieved by the independent operation of the third proviso to Section 12B(1). But yet the

principle behind the grant of such exemption as contained in the third proviso is elucidated by an express and special formula of computation in

relation to such assets and as contained in Sub-section (3) of Section 12B.

As already stated, capital gains tax was virtually abolished by the Indian Finance Act, 1949, only to be revived by the Finance Act (No. 3) Act

of 1956. The present Section with which we are concerned runs thus :

Section 12B (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,

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 in 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 followed the earlier pattern and concerned itself with the computation of the amount of capital gains in

transactions like sale, exchange, relinquishment or transfer of the capital asset. Sub-section (3) of Section 12B provides as follows :

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......

The proviso to this sub-section and Sub-section (4) need not be noticed as they are not relevant for purposes of this case.

It is seen that when the charging section was recast by the Finance (No. 3) Act, 1956, which came into effect from April 1, 1957, certain

changes were effected in the text of the section. The first proviso to Section 12B(I) is new and has to be noticed. Though the first proviso shadows

the third proviso to the old Section 12B (1), yet it has made certain marked and designed changes. Whilst the first proviso to Section 12B(1) of

the later Act excludes from the exigibility to tax only transactions involving distribution of assets on the total or partial partition of a Hindu undivided

family or under a deed of gift, bequest or will, the earlier third proviso to Section 12B of the old Act excluded not only the above transactions but

also such transfer of capital assets by reason of compulsory acquisition or on the dissolution of a firm or other association of persons, or on the

liquidation of a company or transfer on irrevocable trust. It is significant, however, that in the later Act, Sub-section (3), which is new, provides that

in cases where any capital asset became the property of the assessee on the liquidation of a company (amongst others), its actual cost allowable to

the assessee for purposes of computation of capital gains shall be its actual cost to the previous owner thereof. In fact, Sub-section (3) practically

reflects the earlier situation. The essential distinction in so far as this reference is concerned is whilst under the old Act and as a proviso to the

charging section, transfer of capital assets on the liquidation of a company was not to be treated as sale, exchange or transfer, under the new Act

no such exclusion is provided for; but when such assets are secured on the liquidation of a company, then in case they are dealt with by the person

so obtaining the capital assets, capital gains would be computed by taking the difference between the sale price involved in the subsequent

transaction and deducting therefrom the actual cost to the company which went into liquidation and whose assets the liquidators distributed.

The argument of the learned counsel for the assessee is that though the first proviso to Section 12B(1) of the later Act makes an apparent

departure from the literature and text of the third proviso to Section 12B(1) of the old Act, yet having regard to the express provisions relating to

the computation of such a capital asset in the hands of a person securing the same from the liquidator, the principle of exemption of tax liability of

the initial transaction whereby the liquidators transferred the assets is still available and has not in any way been departed from. He would also urge

that there is no sale, exchange, relinquishment or transfer when the liquidators in a ""members'' voluntary liquidation"" distributed the assets of the

company amongst its contributories including the shareholders. He has taken us through the provisions of the Companies Act, 1956, and in the

main, would contend that on a proper scrutiny and understanding of the purport of the deal at or about the time when distribution of assets of a

company in liquidation takes place, it cannot be said that any transfer as is legally or popularly understood is involved. According to him, there is

obviously no sale and indeed no question of exchange or relinquishment can ever arise. Mr. Balasubrahmanyan for the revenue, however, would

strenuously contend that the transaction involved, in any event, a relinquishment, and referred to us the genesis of the amendment in 1957, and

would urge that the transaction did involve a disposal resulting in a capital gain. His sheet-anchor is that, as the corporate entity of the company is

maintained during liquidation, any transaction between the liquidator on the one hand and the contributory on the other did involve, therefore, an

element of transfer or relinquishment and would therefore come within the teeth of the charging Section 12B(1) of the Act.

It is no doubt true that the legislature obviously introduced the word ""relinquishment"" in Section 12B(1) after it noticed certain judicial

precedents which exempted transactions involving relinquishment from the mischief of the taxing Section on the only ground that relinquishment

involved a concept totally different from a sale, exchange or transfer, and that therefore it is not covered by the statute. For the first time this was

noticed by Chagla C.J. in Provident Investment Co. Ltd. v. Commissioner of Income Tax, [1953] 24 ITR 33. The learned judge was of the view

that Section 12B of the Indian Income Tax Act, 1922, does not subject to tax capital gains arising to an assessee by reason of relinquishment of

some property belonging to him or some rights vested in him. In order to avoid escapement of such transactions involving ""relinquishment"", the

legislature, when it re-introduced Section 12B by the Finance Act, 1956, thought it wise to add the word ""relinquishment"" as well in Section 12B

of the present Act. The question still however is whether the transaction in question involves a sale, transfer, exchange or relinquishment. To

understand the scope and purpose of the transaction, the provisions of the Companies Act have to be noted, analysed and understood.

Section 428 gives statutory recognition to the well established judicial concept that a fully paid shareholder is a contributory. It explains the

term ""contributory"" as including the holder of any shares which are fully paid-up. It is not in dispute that the assessee is a fully paid-up shareholder

in all the three private companies which went into voluntary liquidation. Section 484 provides for the circumstances in which a company may be

voluntarily wound up and u/s 486 a voluntary winding up shall be deemed to commence at the time when the resolution for voluntary winding-up is

passed. The immediate consequence of voluntary winding-up of a company is, as provided in Section 487, the company shall cease to carry on its

business, except so far as may be required for the beneficial winding-up of such business, provided that the corporate state and corporate powers

of the company shall continue until it is dissolved. Section 490 postulates the power of a company to appoint a voluntary liquidator and once a

liquidator is appointed, Section 491 says that all the powers of the board of directors shall cease, excepting for a limited purpose which is not very

necessary for purposes of discussion. It is statutorily obligatory on the part of the company to give notice of the appointment of a liquidator to the

Registrar of Joint Stock Companies, and every liquidator so appointed in turn is obliged u/s 178 of the Income Tax Act, 1961, to notify the

Income Tax Officer concerned of his appointment. It is by now well established that the position of a voluntary liquidator is not strictly that of a

trustee, but he could succinctly and indeed properly be characterised as a gentleman employed by the company for the purpose of winding up of

the company and enjoined to do certain duties and vested with certain powers. It is also clear that the property of the company does not vest in

him as the corporate character of the company continues until dissolution. He therefore acts as a catalyst to bring about the ultimate dissolution of

the company and during the process pay all the creditors, wipe out liabilities and distribute the surplus assets to the contributories pari passu and in

accordance with their shares. It is such distribution of the property of the company that is envisaged in Section 511 which runs as follows :

Subject to the provisions of this Act as to preferential payments, the assets of a company shall, on its winding up, be applied in satisfaction of its

liabilities pari passu and, subject to such application, shall, unless the articles otherwise provide, be distributed among the members according to

their rights and interests in the company.

Even Section 512, which enumerates the powers and duties of liquidator in voluntary winding up, provides for payment of the debts of the

company by the liquidator who shall adjust the rights of the contributories amongst themselves. Section 555 is indeed instructive. It says :

Where any company is being wound up, if the liquidator has in his hands or under his control any money representing......assets refundable to any

contributory which have remained undistributed for six months after the date on which they became refundable, the liquidator shall forthwith pay

the said money into the public account of India in the Reserve Bank of India in a separate account to be known as the company''s liquidation

account.

The provisions of the Companies Act provide indeed sufficient data to answer the question referred for our decision. In a ""members'' voluntary

winding-up"", the liquidator is put in as a buffer between the company, which for certain technical purpose has the right to continue its corporate

entity, and the contributories in order to avoid the race amongst the creditors and an unequal distribution of the available surplus assets after

payment of the liabilities. Though for certain special purposes the corporate character is allowed to be continued, yet in the course of such winding-

up the company is in the course of disintegration and its veil is tottering, and it, therefore, follows that courts can look through the crevices of such a

tottering veil and assess the situation. When the liquidator distributes the assets, he is performing a legal but a statutory function. In such a

distribution or refunding of the assets or adjustment of rights of the contributories, no element of sale, transfer, exchange or relinquishment is

involved. But it is only a statutory mechanics compulsorily introduced for the recognition and implementation of pre-existing rights of contributories.

As the transaction involves the recognition of pre-existing legal rights and not the creation of new rights, it is not necessary, nor is it expedient, to go

fathoms deep into such transactions to find and discover as to what in substance the nature of the transaction is. It is apposite to quote the

instructive dicta of Lord Tomlin in Duke of Westminster v. Commissioners of Inland Revenue, [1935] 19 T.C. 400, 520:

Apart, however, from the question of contract with which I have dealt it is said that in revenue cases there is a doctrine that the court may ignore

the legal position and regard what is called '' the substance of the matter......''. This supposed doctrine......seems to rest for its support upon a

misunderstanding of language used in some earlier cases. The sooner this misunderstanding is dispelled and the supposed doctrine given its quietus

the better it will be for all concerned, for the doctrine seems to involve substituting ''the uncertain and crooked cord of discretion'' for ''the golden

and straight mete wand of the law ''.

Thus viewed, the legal import of the transaction in question, namely, distribution of the available assets to its contributories in a voluntary

liquidation of a company, does not present any difficulty. It involved the transfer of certain rights which undoubtedly is to recognise a pre-existing

right and not to create a new right by itself. Buckley on the Companies Acts, thirteenth edition, makes the position rather simple. At page 512 the

learned author says:

But the 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.........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......... .

The contributories participate in the distribution of such assets ex legi. Barry Pinson in his book on Revenue Law, dealing with exemptions from

stamp duties in cases of conveyances, says that a distribution by a company in liquidation would be exempt from duty as a conveyance in which no

beneficial interest passes. In Halsbury''s Laws of England, Simonds edition, volume 33, paragraph 612, note (h), the learned author would say that

a transfer by a liquidator to the contributories would not attract duty payable as on conveyances or transfers of property. The intrinsic character of

the transaction which involves distribution of assets by the liquidator to the contributories is well brought analytically in In re Strathblaine Estates

Ltd., [1948] 1 Ch. 228. There the company agreed with its shareholders to distribute among them in specie certain properties which it owned. The

company ultimately was dissolved without having executed the necessary conveyances. On an application by the shareholders for a vesting order,

Jenkins J. held that as the company had been a trustee of the properties for the shareholders, a vesting order should be made under the provisions

of the Trustee Act. In effect the learned judge recognised in principle that the liquidator exercises certain duties in a fiduciary capacity when he

effectuates the distribution of the surplus assets in the course of the winding-up. In Commissioners of Inland Revenue v. Pollock & Peel Ltd. (In

Liquidation), [1957] 37 T.C. 241, 247 ; [1958] 34 ITR 379 a reference was made by the Court of Appeal to the speech of Lord Macnaghten in

Birch v. Cropper, [1889] 14 App. Cas. 525, 545, 546. The learned Law Lord went on to say :

In the case of winding-up everything is changed. The assets have to be distributed. The rights arising from unequal contributions on shares of

equal amounts must be adjusted, and the property of the company......... must be applied for that purpose......... I think it rather leads to confusion

to speak of the assets which are the subject of this application as '' surplus assets'' as if they were an accretion or addition to the capital of the

company capable of being distinguished from it and open to different considerations. They are part and parcel of the property of the company--

part and parcel of the joint stock or common fund--which at the date of the winding-up represented the capital of the company.

By the process of distribution made through the media of liquidator, the capital of the company which is nothing else than the capital of the

shareholders is being given over to them pari passu and it would be a strange phenomenon if such a refunding of the capital or adjustment of rights

be termed as exchange, transfer or relinquishment. Undoubtedly it is not a sale. As pointed out by Balakrishna Ayyar J. in Case Referred No. 73

of 1954:

Relinquishment implies the existence of an anterior interest in the subject-matter relinquished, in the person in whose favour the relinquishment is

made.

In a case of liquidation, the property of the company does not vest in the liquidator and therefore no relinquishment will arise. Relinquishment

means ceases to hold. This cessation only implies that the transferor in the instant case had an interest in it. The interest which the official liquidator

has is ephemeral in nature and it is so because he holds such assets only in a fiduciary capacity and not in the capacity of an owner to transfer the

same, as is legally understood.

By analysing the legal import of the statutory machinery provided in the Companies Act, 1956, for the distribution and refund of the assets of

the company in liquidation by the voluntary liquidator, to the contributories, it would be defeating the very purpose of the scheme, if it is said that

the actual colour of the transaction involves a transfer in substance. The process of distribution is only a means by which the antecedent pre-

existing title of the contributory is given due recognition and thus there is involved in it no conferment of new title. This is so when a partition takes

place in a Hindu undivided family : see Commissioner of Income Tax, Gujarat Vs. Keshavlal Lallubhai Patel, Sikri J., speaking for the Bench,

observed that a partition of the joint Hindu family property is not transfer in the strict sense. It is not every passing of property from one to the

other which necessarily involves a transfer in the legal sense. The word ""transfer"" ordinarily implies a divestiture of title and a conferment thereof for

the first time by either act of parties or by operation of law. This aspect is conspicuously absent in the case of distribution or refund of assets by the

voluntary liquidator of the company to its shareholders. He has no title to the property distributed or refunded and in consequence no divestiture

thereof can be thought of when it is so distributed or refunded to the contributories, The legal position and the legal concept inhered in the

distribution of assets by a liquidator in a voluntary winding up is not, in our view, altered by the mere omission of the same by the legislature in the

first proviso to Section 12B(1). In fact the first proviso has also designedly omitted any reference to the transfer of capital assets on the dissolution

of a firm. Does it mean, therefore, that when the assets were so distributed to the partners of a firm, any transfer or sale is involved ? The answer is

found in the decision of the Supreme Court in Commissioner of Income Tax, Madhya Pradesh Vs. Dewas Cine Corporation, . Said the Supreme

Court:

A partner may, it is true, in an action for dissolution insist that the assets of the partnership be realised by sale of its assets, but where in

satisfaction of the claim of the partner to his share in the value of the residue determined on the footing of an actual or notional sale property is

allotted, the property so allotted to him cannot be deemed in law to be sold to him. . . ''Sale'', according to its ordinary meaning, is a transfer of

property for a price, and adjustment of the rights of the partners in a dissolved firm is not a transfer, nor is it for a price"". (The underlining is ours.)

But the argument of the revenue is that the corporate entity is sustained and preserved by the statute, notwithstanding liquidation, and hence

there is a transfer by the company to the shareholders. If the veil of incorporation can be pierced through when it is alive and strong and when the

company is functioning, though, of course, for certain purposes, is it impossible to crack the shell of such a corporate entity when the company is in

the course of disintegration and the veil itself is tottering? We think not. The economic realities behind the legal facade have to be noticed and

implemented. The legal import of the words ""refund of assets"" gains more significance rather than its substance which is being pressed into service

by the revenue. It would be a travesty of facts if the legal concept around the distribution of assets is buttressed and the substance of the same

brought to bear to interpret the meaning of ""distribution or refund of assets"". As pointed out by the Supreme Court in A.V. Fernandez Vs. The

State of Kerala, .:

If the revenue satisfies the court that the case falls strictly with''in the provisions of the law, the subject can be taxed. If, on the other hand, the

case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to

probe into the intentions of the legislature and by considering what was the substance of the matter. We must of necessity, therefore, have regard

to the actual provisions of the Act and the rules made thereunder before we can come to the conclusion......

Under the Companies Act, if the liquidator does not distribute the available surplus of assets then such assets are treated as bona vacantia and

they escheat to the State. This again is reflective of the legal position that in liquidation there is no transfer as is popularly or legally understood

when the assets are refunded to the shareholders. It is only in case where the shareholders could not be found, it is impossible for the liquidator at

or about the time of dissolution of the company to refund the assets, he hands over such assets to the State on the ground that it is nobody''s

property. In fact, the company law enables the contributory to come up to the court at any reasonable time thereafter to prove his claim and obtain

his assets, though for administrative purposes such assets are deposited in the public account of India under the caption ""Company''s liquidation

account"". This again gives a clue that the operational methods adopted by the liquidator in voluntary liquidation in giving over the assets in specie to

the members does not involve a transfer as such.

We also gain support for the above view that there is no transfer in the instant case if the ratio of the various decisions of this court and the

Supreme Court are looked into. In Sri Kannan Rice Mills Ltd, v. Commissioner of Income Tax, [1954] 26 ITR 351 this court came to the

conclusion that where there is a distribution of capital assets as such, the third proviso to Section 12B(1) of the old Act would apply. In James

Anderson, Administrator of The Estate of The Late Henry Gannon, Bombay Vs. The Commissioner of Income Tax, Bombay, the Supreme Court

was of the view that there was no transfer as long as there was distribution of capital assets in specie. In T. Appavu Chettiar v. Commissioner of

Income Tax, [1956] 29 ITR 768 the short facts were as follows. The company went into liquidation on March 31, 1947, and the assets of the

company were sold by the liquidator on the same day and the sale proceeds were realised and distributed on April 1, 1947. The assessee who

held shares of the face value of Rs. 8,750 in the company received for his share Rs. 40,000. The assessee was assessed to Income Tax on Rs.

31,250 being the difference between the amount he received and the capital he had subscribed.

Negativing the view of the Tribunal that the amount was ""dividend"" u/s 2(6A)(c) of the Income Tax Act or, in the alternative, it amounted to

capital gains u/s 12B, the learned judges held that the amount was not profits or gains arising from the sale of any capital asset of the assessee and

that therefore Section 12B did not apply to the amount received by the assessee. Avoiding multiplying the authorities on the above lines, we are

satisfied that there is no transfer involved in the distribution of the assets and hence no question of assessment of any unearned income under the

head of ""Capital gains"" u/s 12B of the Indian Income Tax Act, 1922, even as amended, would arise.

Mr. Balasubrahmanyan, however relied upon the first proviso to Section 12B as it stands after the Finance Act, 1956, and would urge that by

reason of the omission of the expression ""any transfer of capital asset on the liquidation of a company"", it should be meant that the legislature made

a deliberate departure and intended to bring to tax such distribution of assets by the voluntary liquidator to the contributories in the course of

liquidation. We have already made it plain in our judgment that if a transaction in law cannot mean one thing, it would not by inference and by

reference to the intentions of the legislature be made a different thing. The refund of assets by the liquidator effected in the capacity of a trustee, or

done in the exercise of a fiduciary duty, cannot be veiled and the intentions of the legislature or the inaptitude of a draftsman brought to play to

interpret whether a given transaction is a sale, exchange, relinquishment or transfer. The first proviso to Section 12B of the Act is only illustrative,

but not exhaustive. One such transaction, in our view, which does not fall within the operative charging provision, namely, Section 12B(1), is the

distribution or refund of assets by the voluntary liquidator to the contributories. It is a well-established canon of interpretation of law that a proviso

cannot govern the main section and, if under the main charging section, the transaction cannot be brought to tax, then it is not exigible to tax at all.

Mr. Ramamani for the assessee rightly referred to us Section 12B(3) which highlights the subject under discussion and particularly for the

contention that the distribution of assets in liquidation by a voluntary liquidator cannot be brought to tax as capital gains. Section 12B(3) postulates

a special method of reckoning, notwithstanding the statutory formula of computation generally prescribed in Sub-section (2) of Section 12B. In a

case where any capital asset became the property of the assessee by reason of any distribution of such assets on the liquidation of a company, its

actual cost allowable to such an assessee for purposes of Section 12B shall be its actual cost to the previous owner thereof. This means that when

assets are secured by a contributory at or about the time of distribution of such capital assets by the liquidator in a voluntary liquidation and if he

attempts to dispose them of, then he would be called upon to suffer capital gains tax on the difference between the sale price obtained by him by

reason of such a sale and the original cost of such an asset to the company which went into liquidation. This naturally implies that he would have to

suffer a higher quantum of tax because of the special statutory indicia in Sub-section (3) of Section 12B. If the argument of the revenue is

accepted, then it would result in double taxation. If the distribution of assets is a transfer by the liquidator to the shareholder within the meaning of

Section 12B(1), then the difference would be exigible to tax even at that stage. According to subsection (3) of Section 12B the position would be

that if the contributory re-sells the capital asset, he has to pay on the difference between his sale price and the cost to the company which would

mean that the difference which was brought into the net of taxation already would again be made exigible to tax, thus resulting in double taxation,

relief against which is always provided for in all fiscal enactments. In order to avoid such an anomaly and to effect a plausible reconciliation of the

position and particularly to harmonise the intention of the legislature, after reading Section 12B as a whole, it is but necessary that in order to

secure synchrony, symmetry and harmony, it is but essential that the first transaction between the voluntary liquidator and the contributory should

be excluded from the sphere of taxation, so that Sub-section (3) of Section 12B can work itself out without prejudicing and without affecting the

fundamental canons of taxation. While considering a similar provision in the United States, Mr. Mertens in his book on Law of Federal Income

Taxation, volume 3, at page 458, states that the general theory is that where no gain or loss is recognized as resulting from the exchanges therein

referred to since the exchange is treated by statute as merely a change of form, the new property received shall, for the purpose of determining gain

or loss from a subsequent sale, be considered as taking the place of the old property given up in connection with the exchange. Such an aid to

interpretation of the letter and spirit of Section 12B of the Act has to be brought to light in the instant case and if the principle is so understood and

applied, it follows that the first transaction, which only reflected a distribution and refund of assets on liquidation to a contributory, cannot and

would not be characterised as a transfer or sale.

For the reasons above stated, we are of the view that the Tribunal was not right in holding that the sum of Rs. 95,944 is liable to tax u/s 12B of

the Indian Income Tax Act.

The question is therefore answered in the negative and in favour of the assessee with costs. Counsel''s fee Rs. 250.