Case: James Anderson Vs. The Commissioner Of Income-Tax,Bombay

2. The facts relevant to the appeal are these: one Henry Gannon was a resident of British India, who used to be assessed to income-tax under the Income-tax law of this country. He left India in 1944 for the United Kingdom where he died on May 13, 1945. He left a will dated November 18, 1942 by which the National Bank of India Ltd. in London was appointed Executor of his estate. On October, 1, 1945, probate of the will was granted to the said Bank by a Court of competent jurisdiction in the United Kingdom. On October 25, 1945, a power of attorney was given by the Bank to James Anderson, who is now the appellant before us. He made an application to the High Court of Bombay under S. 241 of the Indian Succession Act and on that application obtained Letters of Administration with a copy of the will annexed. In the course of administration of the estate of Henry Gannon, the appellant sold certain shares and securities belonging to the deceased for the purpose of distributing the assets amongst the legatees. The sale of these shares and securities realised more than their cost price. The excess of the sale price over the cost price was treated by the Income-tax Officer as capital gain under S. 12B of the Income-tax Act. For the assessment year 1947-48 the capital gain was computed by the Income-tax Officer at Rs. 20,13,738 and for the assessment year 1948-1949 at Rs. 1,51,963. These amounts of capital gain were brought to tax for the assessment years 1947-48 and 1948-49 along with certain dividend and interest income which had accrued or had been received in the relevant years of account. Not satisfied with these assessments, the appellants preferred two appeals to the Appellate Tribunal, Bombay. These two appeals were consolidated. The appellant urged three points in support of his contention that the assessments were invalid: firstly, that S. 12B imposing a tax on capital gains was ultra vires the Government of India Act, 1935; secondly, that under S. 24B of the Act, the appellant was only liable to pay tax which the testator would have been liable to pay and as these capital assets were not sold by the testator, there was no liability upon the appellant; and thirdly, that the sale of the shares and securities by the appellant under the will of Henry Gannon came within the purview of the third proviso to S. 12B (1) and, therefore, was not to be treated as a sale of capital assets under S. 12B (1). The Appellate Tribunal repelled the first two contentions, but accepted the third as correct and in that view allowed the two appeals in part. It directed the Income-tax Officer to delete from the assessed income the capital gains made by the sale of shares and securities. The Commissioner of Income-tax, Bombay City, then moved the Appellate Tribunal to refer to the High Court of Bombay the question which arose out of the third contention, namely, the true scope and effect of the third proviso to old S. 12B (1) of the Act. The Appellate Tribunal thereupon referred the following question of law to the Bombay High Court:"Whether the sale of the shares and securities by the administrator of the estate of late Mr. Gannon is not a sale for the purpose of S. 12B (1) in view of the third proviso to S. 12B (1) of the Indian Income-tax Act."3. At the instance of the assessee the other two questions which were decided against him were also referred to the High Court. The High Court of Bombay considered all the three questions in Income-tax Reference No. 1 of 1954 and by its decision appealed from answered all the three questions against the assessee. The appellant then moved this Court for special leave which was granted on October 7, 1955.

Reasoning: 4. The question whether the levy of capital gains under S. 12B is ultra vires no longer survives by reason of the decision of this Court in Navinchandra Mafatlal v. Commissioner of Income-tax 1954-26 ITR 758  : 1955 SCR 829: ( (S) AIR 1955 SC 58  ). This question was not therefore pressed before us. The question under S. 24B was also not seriously pressed.The view of the Bombay High Court that S. 24B does not limit the liability of the Administrator or Executor of the cases referred to under the section is correct; because the appellant is as much an assessee under the Act as any other individual and if he makes capital gains, he is as much liable to pay that as any other individual. This position has not been seriously contested before usIf the appellant comes within that ambit, then the sales which he made of the shares and securities will not be treated as transfer within the meaning of sub-s. (1)7. We are unable to accept the argument as correct. Firstly, having regard to the definition of the expression "capital assets", it would be wrong to read" distribution of capital assets" as meaning "distribution of sale proceeds of capital assets". Obviously, there is a clear and vital distinction between "capital assets" and their "sale preceeds". If capital assets are sold first and a distribution of the sale proceeds is made afterwards, then the sale proceeds distribution and what is distributed is not capital assets but the sale proceeds thereof. Secondly, we do not agree that the third proviso serves no purpose if the expression "distribution of capital assets" is given its natural and plain meaning, viz. distribution in specie. The High Court expressed the view that by the proviso the legislature might have intended to protect an assessee from a possible argument by the Revenue that when (to take an example appropriate to the case) an executor or administrator transferred the estate or part of the estate to the person entitled to it, there was a transfer within the meaning of sub-s. (1) of S. 12B. To us it seems that the purpose of the proviso is abundantly clear if the scheme of sub-ss. (1), (2) and (3) is kept in mind. Assume that there is a distribution of capital assets in specie amongst the legatees, and one of the legatees sells the capital assets which he got in one of the ways mentioned in the third proviso; he at once becomes liable to tax on the profits made on the sale. Sub-section (3) makes that position clear and if the proviso is read in the context of the substantive provisions of S. 12B its purpose is quite clear. The purpose is this: as long as there is distribution of the capital assets in specie and no sale, there is no transfer for the purposes of the section; but as soon as there is a sale of the capital assets and profits or gains arise therefrom, the liability to tax arises, whether the sale be by the administrator or the legatee. It is significant that the proviso uses the words "for the purposes of this section" and not merely sub-s. (1). Indeed, Mr. Palkhivala was forced to concede that in view of the provisions of sub-s. (3) of S. 12B, the expression "distribution of capital assets" must also mean distribution in specie because under sub-s. (3) it is the capital asset which becomes the property of the assessee under any of the circumstances mentioned in the third proviso. He then contended that the expression meant both distribution in specie and distribution of sale proceeds. We do not see why an unnatural or forced meaning should be given to the expression, when by giving the expression its plain and natural meaning the third proviso fits in with the scheme of sub- ss. (1), (2) and (3) of S. 12B of the Act. It is necessary to point out here that on the interpretation sought to be placed on the third proviso on behalf of the appellant, the administrator will escape paying tax if he sells the capital assets; but the legatee will not escape if he sells the capital assets after having received them in specie from the administrator. This is an anomaly which is against the scheme of S. 12B of the Act.We are accordingly of the view that the High Court rightly held that the expression "distribution of capital assets" in the third proviso to sub-s. (1) of S. 12B of the Act means distribution in specie and not distribution of sale proceeds9. The position seems to us to be so clear that it is unnecessary to labour it or to refer to decided cases. Such decisions of the High Courts as have been brought to our notice are all one way and they take the same view as was taken by the High Court in the decision under appeal