Liquidation surplus and capital gains taxability turn on the substantive law for the relevant previous year.

Liquidation surplus received by a shareholder was not treated as capital gains under section 12B of the Indian Income-tax Act, 1922, because the receipt did not arise from a sale, transfer, exchange, or relinquishment of shares. The article also explains that section 46(2) of the Income-tax Act, 1961, read with section 297(2)(b), could not retrospectively create a capital gains charge for assessment year 1961-62, since taxability depends on the substantive law applicable to the relevant previous year and a procedural saving provision cannot impose a new charging liability. The assessee's position was accepted on both points.

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Issues: (i) Whether the sums received by a shareholder from a company in liquidation were assessable as capital gains under section 12B of the Indian Income-tax Act, 1922; (ii) Whether section 46(2) of the Income-tax Act, 1961, applied to the receipt of liquidation surplus in the assessment year 1961-62 by reason of section 297(2)(b) of that Act.

Issue (i): Whether the sums received by a shareholder from a company in liquidation were assessable as capital gains under section 12B of the Indian Income-tax Act, 1922.

Analysis: The receipt arose not from any sale, transfer, exchange, or relinquishment of the assessee's shares, but from the shareholder's entitlement to receive surplus available for distribution on liquidation. A liquidation dividend of this nature did not answer the description of capital gains under section 12B.

Conclusion: The sums were not assessable as capital gains under section 12B of the Indian Income-tax Act, 1922, and the finding was in favour of the assessee.

Issue (ii): Whether section 46(2) of the Income-tax Act, 1961, applied to the receipt of liquidation surplus in the assessment year 1961-62 by reason of section 297(2)(b) of that Act.

Analysis: The charge to tax is governed by the substantive law applicable to the relevant previous year. Section 297(2)(b) is confined to the procedural framework for assessment after the commencement of the new Act and does not operate as a charging provision. It could not retrospectively impose a fresh capital gains liability where none existed under the repealed Act.

Conclusion: Section 46(2) of the Income-tax Act, 1961, did not apply to create a taxable capital gain in the assessment year 1961-62, and the finding was in favour of the assessee.

Final Conclusion: The reference was answered against the revenue on both questions, and the assessee succeeded on the substantive tax liability issues.

Ratio Decidendi: Taxability must be determined by the substantive law applicable to the relevant previous year, and a procedural saving provision cannot retrospectively create a new charging liability.

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