TMI Blog1969 (2) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 122B(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 tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under section 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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-ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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) a reference was made by the Court of Appeal to the speech of Lord Macnaghten in Birch v. Cropper. 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 arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell. 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 parities 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 fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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