Liquidation distributions and capital gains tax: shareholder receipts were held not to be consideration for a taxable transfer.

Distribution of a company's assets by a liquidator on voluntary liquidation does not amount to a sale, exchange, relinquishment or transfer of a capital asset under section 12B of the Indian Income-tax Act, 1922. The liquidator merely recognises shareholders' pre-existing rights to receive their share in the net assets; the money received is therefore in satisfaction of those rights, not consideration for a taxable transfer. The earlier proviso was treated as clarificatory and incapable of enlarging the charging provision, while the later express charge in section 46 of the 1961 Act was regarded as a distinct enactment and not a basis for liability under the 1922 Act.

---

---

Issues: Whether the distribution of assets by a liquidator on the voluntary liquidation of a company amounts to a sale, exchange, relinquishment or transfer of a capital asset so as to attract capital gains tax under section 12B of the Indian Income-tax Act, 1922.

Analysis: The distribution by the liquidator did not create new rights but merely recognised existing rights of the shareholders to receive their share in the net assets of the company in liquidation. Money received by a shareholder on such distribution is received in satisfaction of the shareholder's pre-existing rights and not as consideration arising from any sale, exchange, relinquishment or transfer. The earlier legislative proviso was treated as clarificatory and could not enlarge the substantive charging provision, and the express charging provision in section 46 of the Income-tax Act, 1961 was regarded as a distinct later enactment rather than a basis for implying liability under the 1922 Act.

Conclusion: Distribution of assets on voluntary liquidation does not amount to sale, exchange, relinquishment or transfer for the purposes of section 12B of the Indian Income-tax Act, 1922, and the receipt is not taxable as capital gains.

---