Capital gains tax on voluntary liquidation distribution excluded where assets merely satisfy contributories' pre-existing rights.

Distribution of a company's assets by a voluntary liquidator to contributories on winding up was analysed as a statutory adjustment of pre-existing rights, not a conveyance by an owner. On that reasoning, the transaction did not amount to a sale, exchange, relinquishment or transfer within section 12B of the Indian Income-tax Act, 1922, because no new title was created and no beneficial ownership was divested in the relevant sense. Section 12B(3) was read as supporting tax only on a subsequent alienation by the recipient, and taxing the initial distribution would risk double taxation. The distribution was therefore treated as outside capital gains tax under section 12B.

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

Analysis: The charging provision under section 12B taxed profits or gains arising from sale, exchange, relinquishment or transfer of a capital asset. Read with the Companies Act, 1956, the process of voluntary winding up and distribution of assets was held to be a statutory mechanism for recognition and implementation of the contributories' pre-existing rights. The liquidator did not receive or convey beneficial ownership as an owner, but merely adjusted and distributed the company's assets in accordance with those rights. Since no new title was conferred and no divestiture by an owner occurred, the transaction did not answer the legal meaning of sale, exchange, relinquishment or transfer. Section 12B(3) also indicated that taxation was intended only on a later alienation by the recipient, and treating the initial distribution as taxable would create double taxation.

Conclusion: The distribution of assets on voluntary liquidation was not liable to capital gains tax under section 12B, and the question was answered in the negative in favour of the assessee.

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