Capital gains exemption on liquidation assets denied where sale proceeds were distributed instead of assets in specie.

The third proviso to Section 12B(1) of the Income-tax Act, 1922 was construed as covering distributions of capital assets in specie on events such as liquidation, not a liquidator's sale followed by distribution of sale proceeds; the exemption therefore did not extend to profits from sale of plant, machinery and buildings in voluntary liquidation. The second proviso was held to apply only to property whose income is chargeable under Section 9, and property used by the assessee for business was outside that charging provision; the exemption therefore could not be claimed for profit attributable to business-use buildings. Both claims failed and the capital gains assessment stood.

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Issues: (i) Whether profit realised on sale of plant, machinery and buildings in voluntary liquidation was exempt from capital gains tax under the third proviso to Section 12B(1) of the Income-tax Act, 1922; (ii) Whether profit attributable to the portion of the buildings used for the assessee's business was exempt under the second proviso to Section 12B(1) of the Income-tax Act, 1922.

Issue (i): Whether profit realised on sale of plant, machinery and buildings in voluntary liquidation was exempt from capital gains tax under the third proviso to Section 12B(1) of the Income-tax Act, 1922.

Analysis: The third proviso was read as covering compulsory acquisition, irrevocable trusts, partition of a Hindu undivided family, dissolution of a firm or association of persons, liquidation of a company, and transfer under a deed of gift, bequest or will. The controlling idea was distribution of capital assets in specie, not realisation of assets by sale. A sale by a liquidator followed by distribution of sale proceeds was held not to amount to distribution of capital assets within the proviso.

Conclusion: The exemption under the third proviso did not apply, and the question was answered against the assessee.

Issue (ii): Whether profit attributable to the portion of the buildings used for the assessee's business was exempt under the second proviso to Section 12B(1) of the Income-tax Act, 1922.

Analysis: The second proviso was held to apply only to property the income of which is chargeable under Section 9. Under Section 9, only property not occupied by the assessee for the purposes of business or vocation enters the computation of property income. Property used by the assessee for business was therefore not property chargeable under Section 9, and the proviso could not be invoked.

Conclusion: The exemption under the second proviso did not apply, and the question was answered against the assessee.

Final Conclusion: Both referred questions were decided against the assessee, leaving the capital gains assessment undisturbed.

Ratio Decidendi: An exemption for distribution of capital assets on liquidation applies only to distribution of assets in specie and not to the sale proceeds realised by a liquidator, and a proviso linked to property chargeable under a specific head cannot extend to property excluded from that charging computation.

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