Voluntary liquidation distributions are not capital gains transfers: assets passed to contributories as a statutory adjustment of rights.

Distribution of assets by a voluntary liquidator to contributories on members' voluntary winding up was treated as a statutory adjustment of pre-existing rights, not a sale, exchange, relinquishment or transfer of a capital asset. Reading the charging and computation provisions of section 12B with the winding-up scheme, the analysis concluded that no new beneficial interest passed to the contributory and that the later sale position was separately dealt with to avoid double taxation. On that basis, the distribution did not attract capital gains tax under section 12B.

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

Analysis: Section 12B, as amended, charged tax on profits or gains arising from sale, exchange, relinquishment or transfer of a capital asset, while section 12B(3) provided a special basis of computation where the asset became the assessee's property on liquidation of a company. Reading the charging and computation provisions together with the scheme of winding up under the Companies Act, the distribution of surplus assets by the liquidator was held to be a statutory adjustment of pre-existing rights of contributories, not a transfer of beneficial interest, sale, exchange or relinquishment. The reasoning also rejected an interpretation that would produce double taxation, because the later sale by the contributory was already separately addressed by section 12B(3) on the footing of the company's original cost.

Conclusion: The distribution of assets on voluntary liquidation did not attract section 12B as a taxable transfer, and the sum of Rs. 95,944 was not liable to capital gains tax.

Ratio Decidendi: Distribution of assets by a company in voluntary liquidation to its contributories is not a sale, exchange, relinquishment or transfer within the capital gains charging provision, because it merely recognises pre-existing rights and does not vest a new beneficial title in the transferee.

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