Relinquishment for capital-loss claims: diminution on liquidation or book write-off does not effect disposal under section 12B.

Reduction of cumulative preference shares to nil on company liquidation does not constitute a relinquishment, disposal or transfer of a capital asset for purposes of section 12B because shareholder rights and contributory status persist until legal dissolution, so the claimed loss is not allowable. Similarly, unilateral writing off of a decreed debt in the assessee's books does not extinguish the legally enforceable right under the decree and therefore does not amount to relinquishment or disposal under section 12B; that claim is likewise not allowable.

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Issues: (i) Whether the sum of Rs. 5,000 paid for cumulative preference shares which became of nil value on the company going into liquidation amounted to a capital loss within the meaning of section 12B of the Income-tax Act, 1922; (ii) Whether the outstanding decree amount of Rs. 53,761 which was written off by the assessee amounted to a capital loss within the meaning of section 12B of the Income-tax Act, 1922.

Issue (i): Whether the reduction to nil of the value of shares on liquidation constituted a relinquishment or disposal of the capital asset within section 12B of the Income-tax Act, 1922.

Analysis: Shares are capital assets. A loss under section 12B requires a sale, exchange, transfer or relinquishment of the capital asset. Relinquishment entails cessation of ownership or parting with rights in the asset. On liquidation the shareholder remains a contributory with pre-existing rights to any surplus and other rights attendant on share ownership until winding-up and dissolution are legally completed. An official liquidator's statement that assets are insufficient to pay secured creditors, or a diminution of share value to nil, does not itself extinguish the shareholder's ownership or rights and does not constitute a disposal or relinquishment in the statutory senses. The stage of dissolution under section 481 of the Companies Act was not reached during the assessment year and therefore does not arise for treating the shares as relinquished.

Conclusion: The sum of Rs. 5,000 did not constitute a capital loss under section 12B of the Income-tax Act, 1922; the claim is dismissed (against the assessee).

Issue (ii): Whether unilateral writing off in books of a decree debt (Rs. 53,761) amounts to relinquishment or disposal of a capital asset under section 12B of the Income-tax Act, 1922.

Analysis: A court decree remains a legally enforceable right until satisfied or extinguished by a mode recognised by law or until barred by limitation. A unilateral accounting entry writing off a debt does not extinguish the creditor's legal rights under the decree nor prevent future execution if the debtor's position improves. Relinquishment requires an effective surrender or cessation of legal rights; mere internal book treatment does not effect such relinquishment.

Conclusion: The sum of Rs. 53,761 written off did not constitute a capital loss under section 12B of the Income-tax Act, 1922; the claim is dismissed (against the assessee).

Final Conclusion: Both referred questions are answered against the assessee; the transactions did not result in capital losses allowable under section 12B and the assessee is not entitled to set off the claimed amounts as capital losses.

Ratio Decidendi: A capital loss under section 12B arises only on sale, exchange, transfer or relinquishment which effects cessation of ownership or legal rights; mere diminution of value on liquidation or unilateral writing off in accounts does not constitute relinquishment or disposal for the purposes of section 12B.

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