Full Judgment Text
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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
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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
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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
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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.
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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
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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
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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
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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-
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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-
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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
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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.