SATYANARAYANA RAO, J. - The questions referred to this Court under Section 66(1) of the Income-tax Act for decision are as follows :-
(i) Whether on the facts and in the circumstances of the case the sum of Rs. 1,70,363 profit realised by the sale of plant, machinery and buildings by the assessee is exempt from capital gains tax by reason of the third proviso to Section 12B(1) of the Act :
(ii) Whether the profit realised by the sale of that portion of the buildings which was used for the assessees business was exempt from capital gains tax under the second proviso to Section 12-B(1) of the Act.
The statement of the case by the Income-tax Appellate Tribunal sets out fully the facts relevant for the decision of the two questions. On 25th March, 1947, the directors resolved to liquidate the company and a General Body Meeting was held on 31st March, 1947. By a special resolution of the company, the company went into voluntary liquidation and a liquidator was appointed. The capital assets of the company were then sold by the liquidator to a firm of 17 partners. The total sum realised by the sales was Rs. 2,10,000 made up of Rs. 50,000, the value of the buildings, Rs. 1,60,000 the value of the stores, machinery, plant etc. The total amount of the sale proceeds realised was distributed between the shareholders. The Income-tax Officer held that out of the sum of Rs. 1,60,000, realised by the sale of stores; plant, machinery etc. the sum of Rs. 1,47,192 was assessable to tax as capital gains. He apportioned the sale proceeds of the building between the portion occupied by outsiders, unconnected with the business and the portion occupied by the assessee for the purposes of his business. In respect, of the latter portion, he estimated the capital gains to be Rs. 23,171. Thus on a total sum of Rs. 1,70,363 which was treated as capital gains, the tax was imposed under Section 12-B(1) of the Act.
The assessee claimed in the first place that the whole of it was exempt from income-tax under the third proviso to Section 12-B(1) of the Act and in the alternative, that even if he failed in that contention, that the portion allocated for the building occupied by the assessee, that is the sum of Rs. 23,171, which entered into the computation, should be excluded under the second proviso to Section 12-B(1) of the Act. Those two contentions were rejected by the Department and also by the Appellate Tribunal.
The questions raised have to be solved by a reference to the two provisos, that is provisos 2 and 3 to Section 12-B(1) of the Act. The matter is one of first impression as there is no decided case on the points raised. In our opinion, however, the language of the two provisos is clear and does not admit of any doubt. We are inclined to agree with the view taken by the Department and the Appellate Tribunal regarding the interpretation of the two provisos. The first question referred to us relates to the construction of the third proviso. The exemptions contained in this proviso may be classed under two heads :- (i) Transfer of capital assets by reason of compulsory acquisition of property under the law relating to the acquisition and transfer by way of an irrevocable trust : (ii) Distribution of capital assets at a partition of a Hindu undivided family, or on the dissolution of a firm or other association of persons, or at the liquidation of a company, or under a deed of gift, bequest or will. The exemption with reference to realisation under a compulsory acquisition is undoubtedly based on the circumstance, that the acquisition was not voluntary but compulsory acquisition is undoubtedly based on the circumstance, that the acquisition was not voluntary but compulsory under the statute in force for the acquisition of property. The other cases relate to distribution of assets either at the time of partition or on the dissolution of partnership, or on a liquidation of a company and for that purpose, the assets are valued for distribution. Though the value of the capital assets may be much more than the actual amount spent for acquisition, there being no realisation by sale or otherwise of the assets but only a distribution, in specie, of the assets, it was though just that there should be no tax treating the difference between the two amounts as capital gains. This being the main intention of the proviso, and, as in the present case there is no distribution of the capital assets as such but only of the sale proceeds of the assets after sale was effected by the liquidator, it is difficult to accept the contention urged on behalf of the assessee that any transfer of a capital asset on the occasion of either dissolution of a firm or liquidation of the company would also be covered by the language of the section. In our opinion, the expression, 'any distribution of capital assets' governs not only partition of a Hindu undivided family but also the dissolution of a firm and the other association of persons or the liquidation of a company. To accept the contention urged on behalf of the assessee one has to rewrite the section so as to mean any transfer on the occasion of the liquidation of a company, for which, we think, there is no justification as, in our opinion, the language of the section is unambiguous. It is no doubt true that it may not be wholly appropriate to describe the property given under a deed of gift as distribution under it, but there may be cases where even under a gift there may be such distribution. The fact that, in the case of an irrevocable trust, the word 'transfer' is used is, in our opinion, a clear indication that the expression 'any distribution of capital assets' would govern not only partition but also dissolution and liquidation. What the assessee really claims is not distribution of capital assets but the sale proceeds of a capital asset realised in liquidation proceedings by the liquidator. The language of the proviso does not cover such a case. Whatever may be the functions of a liquidator in liquidation proceedings, and even if he is to sell the assets for discharging the liabilities and distributing the surplus, that does not mean that the operation by sale for that end would be a distribution of capital assets within the meaning of the proviso. We think, therefore, that the first of the questions referred to us must be answered in the negative and against the assessee.
The second question too does not present much difficulty. It applies only to property, the income of which is chargeable under Section 9. When one turns to the language of Section 9, one finds that for purposes of computation of income of the property the property taken into consideration is only such portion of the property, which is not in the occupation of the assessee for the purposes of any business or vocation carried on by him. The charging section, Section 3, states that the income-tax can be charged on the income, and Section 6 deals with the heads of income, and the computation of income in respect of the heads specified under Section 6 is provided in the following sections, and Section 9 relates to the computation of income in respect of the property. It is, therefore, difficult to hold that the property which does not enter into the computation is property which is 'chargeable', but which is excluded for the purposes of tax to be levied. It is never made chargeable under Section 9 and, therefore, it is impossible to hold that the second proviso to Section 12-B (1) applies to this case. In our opinion, therefore, the second question also must be answered in the negative and against the assessee.
As the assessee has failed, he must pay the costs of the respondent which we fix at Rs. 250.
Reference answered accordingly.