# COMMISSIONER OF INCOME TAX, MADRAS v. M/S. MADURAI MILLS CO. LIMITED

- **Citation:** [1973] 3 S.C.R. 662
- **Court:** Supreme Court of India
- **Decided:** 1973-03-09
- **Case number:** Civil Appeal No. 1394 of 1970
- **Bench:** K. S. Hegde, P. Jaganmohan Reddy, Khanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-madras-v-m-s-madurai-mills-co-limited-5917
- **Pages:** 8

## Headnote

Income-tax Act, 1922, s. 12B-Capital Gains-Voluntary liquidation
of private limited company-Distribution of assets
to shareholder.--
Surplus received by shareholders whether attracts tax on capital gains--
Distribution of assets whether amounts to sale, exchange relinquishmenti
or transfer within meaning of s. 12B.
Interpretation of statutes-Proviso which existed
in
original
law
dropped in amended law-Inference to be drawn,
Three private limited companies in which the assessee held ahatel·
went into voluntary liquidation in December 1959
In the course ot
the ·liquidation proceedings the liquidators made dislribution in the year
of account relevant to the aaaeasment year 1961-62, and the assesaee
company got cash or assets in lieu of the amounts due in respect of
the three compariies. The Revenue took the view that by reason
of
the distribution of assets of the three private companies under liquidatiol> by the liquidators there had been a capital gain which was assessed
by the Income-tax Officer at Ra. 95,944/-. The Appellate Assisl$t
Commissioner up\leld the order of the Income-tax
Officer.
He
took
the view that the surplus arose out of the .exchange of aharea held by
the assessee company in the three companies and therefore the surplus
ought to be brought to tax. In further appeal the Tribunal held that
there was no exchange or transfer of shares and assets in question but
the transaction could be
viewed
as
a
relinquishment. The
Higb
Court held, in reference, that where a liquid.tor distributes the assets
of the company which ha8 gone into voluntary liquidatiop
he
ia
performing a legal function and there is no element of sale, transfer,
exchange or relinquishment involved in such distribution. The Revenue
appealed to this Court,
Dismissing the appeal,
HELD : (i) The distribution of the assets of the companies in
liquidation does not amount to a transaction of sale, exchange, reJiD ..
quishment or transfer So as to attract section 12B of the Act.
When
a shareholder reoeives money repr...,nting his share on distribution of
the net assets of the company in liquidation, he receives that money
in satisfaction of the right which belonged to him by virtue of
his
holdin.e the shares and not by operation of_ GDY
transaction
which
amounts to sale, exchange, relinquishment or transfer. In the ckcumstances it was difficult to hold that the assessee company was liable to
pay tax on capital gains as contemplated by section l 2B of tho Act
in respect of the amount of Rs. 95,944/- [6670)
(ii) If the language of sub-section (!) of section 12B of the Act
is clear and does not warrant the inference that distribution of assets
on liquidation of a company constitutes sale, transfer qr exchange
the
said" trllllSaction of distribution of assets would not chan_ge its character
and acquire the attributes of sale, transfer or exchange because of the
omission of a clarification in the first proviso to aub..ection ( l) of
section 12B of the Act, even though such a clariJlcation was there In
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C.I.T . . v. MADURAI MILLS (Khanna, ].)
663
the !hi.rd provis<> of the s~ction inserted by the earlier Act (Act 22 of
1947). It is· well settled that considerations 'stemming from legislative
history must pot be 'allowed to override the pMn words of a statute.
A proviso cannot be construed as enlarging the scopz of an enactment
\Vhen it can be fairly and p.r:operly construed with'out attributiniz to
it !hat effect. Further if the language of the enacting part of the statute
is
pla~ <ind unamb'iguous and does not contain the provisions which
are said to occur in it~ one cannot derive those provisions by implication from a proviso. [6690]
Commissioner. of Income-tax U.P. v. Bankey Lal Vaidya . [197_11
79 I. T. R. 594 and Commissioner of Income-Tax v. Dewas Cine Cor•
poration [1968] 68 I.T.R. 240, applied.
·
Commissioner of Income-tax ·v. Associated Industrial
Developnient
Co. P. Ltd. [1969] 73 I.T.R. 50 and Commissioner of Income
Tax
v. R. M.

## Text

662
COMMISSIONER OF INCOME TAX, MADRAS
v.
M/S. MADURAI MILLS CO. LIMITED
March 9, 1973
[K. S. HEGDE, P. JAGANMOHAN REDDY AND H. R, KHANNA, JJ.]
Income-tax Act, 1922, s. 12B-Capital Gains-Voluntary liquidation
of private limited company-Distribution of assets
to shareholder.--
Surplus received by shareholders whether attracts tax on capital gains--
Distribution of assets whether amounts to sale, exchange relinquishmenti
or transfer within meaning of s. 12B.
Interpretation of statutes-Proviso which existed
in
original
law
dropped in amended law-Inference to be drawn,
Three private limited companies in which the assessee held ahatel·
went into voluntary liquidation in December 1959
In the course ot
the ·liquidation proceedings the liquidators made dislribution in the year
of account relevant to the aaaeasment year 1961-62, and the assesaee
company got cash or assets in lieu of the amounts due in respect of
the three compariies. The Revenue took the view that by reason
of
the distribution of assets of the three private companies under liquidatiol> by the liquidators there had been a capital gain which was assessed
by the Income-tax Officer at Ra. 95,944/-. The Appellate Assisl$t
Commissioner up\leld the order of the Income-tax
Officer.
He
took
the view that the surplus arose out of the .exchange of aharea held by
the assessee company in the three companies and therefore the surplus
ought to be brought to tax. In further appeal the Tribunal held that
there was no exchange or transfer of shares and assets in question but
the transaction could be
viewed
as
a
relinquishment. The
Higb
Court held, in reference, that where a liquid.tor distributes the assets
of the company which ha8 gone into voluntary liquidatiop
he
ia
performing a legal function and there is no element of sale, transfer,
exchange or relinquishment involved in such distribution. The Revenue
appealed to this Court,
Dismissing the appeal,
HELD : (i) The distribution of the assets of the companies in
liquidation does not amount to a transaction of sale, exchange, reJiD ..
quishment or transfer So as to attract section 12B of the Act.
When
a shareholder reoeives money repr...,nting his share on distribution of
the net assets of the company in liquidation, he receives that money
in satisfaction of the right which belonged to him by virtue of
his
holdin.e the shares and not by operation of_ GDY
transaction
which
amounts to sale, exchange, relinquishment or transfer. In the ckcumstances it was difficult to hold that the assessee company was liable to
pay tax on capital gains as contemplated by section l 2B of tho Act
in respect of the amount of Rs. 95,944/- [6670)
(ii) If the language of sub-section (!) of section 12B of the Act
is clear and does not warrant the inference that distribution of assets
on liquidation of a company constitutes sale, transfer qr exchange
the
said" trllllSaction of distribution of assets would not chan_ge its character
and acquire the attributes of sale, transfer or exchange because of the
omission of a clarification in the first proviso to aub..ection ( l) of
section 12B of the Act, even though such a clariJlcation was there In
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C.I.T . . v. MADURAI MILLS (Khanna, ].)
663
the !hi.rd provis<> of the s~ction inserted by the earlier Act (Act 22 of
1947). It is· well settled that considerations 'stemming from legislative
history must pot be 'allowed to override the pMn words of a statute.
A proviso cannot be construed as enlarging the scopz of an enactment
\Vhen it can be fairly and p.r:operly construed with'out attributiniz to
it !hat effect. Further if the language of the enacting part of the statute
is
pla~ <ind unamb'iguous and does not contain the provisions which
are said to occur in it~ one cannot derive those provisions by implication from a proviso. [6690]
Commissioner. of Income-tax U.P. v. Bankey Lal Vaidya . [197_11
79 I. T. R. 594 and Commissioner of Income-Tax v. Dewas Cine Cor•
poration [1968] 68 I.T.R. 240, applied.
·
Commissioner of Income-tax ·v. Associated Industrial
Developnient
Co. P. Ltd. [1969] 73 I.T.R. 50 and Commissioner of Income
Tax
v. R. M. Amin, [1971] 82 1.T.R. 194, approved. ·
Anderson v. Commissioner of Income Tex. [1960] 39 I.T.R. 123,
distinguished.
'
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1394 of
1970.
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Appeal by certificate from the judgment and order dated
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February 28, 1969 of the High Court at Madras in Tax Case No ..
124 of 1965.
· ·.',
s. C. Manchanda, P. L. Juneia and R. N. Sacluhey, for the
appellant.
S, T. Desai and T. A. Ramachandran, for the respondent'.
The Judgment of the Court was delivered by
KHANNA, J.-This appeal on ce~tificate has been filed by the
Commissioner of Income Tax against the judgment of Madras
. High Court whereby that court answered the following question·
referred to it under section 66 (1) of the Indian Income Tax Act,
1922 (hereinafter referred to as ilie Act) in the n~gative in favour
of the assessee respondent :
"Whether orl the facts and circumstances of the
case, the Tribunal was right in holding that the sum of
Rs. 95,944/- is liable to tax under Section 12B(2) ?" . ·
The matter relates to assessment year 1961-62. The assessee
is a public limited company carrying on the business of manufacture and sale of yam. The assessee held shares in the following companies as under :
.
(1) Indian Mills Supply Company (Private) Limited,
2,760 shares of the face value of Rs. 100/-
(2) Harveys (Private) Limited, 1,000 shares of the
face value of Rs. 1001-.
664
SUPREME COUil.T REPORTS
[1973] 3 S.C.R.
( 3) Pendyan Weaving Mills (Private)
Limited,
A
1,800 shares of tile face value of Rs. 100/-.
The above three companies went into voluntary liquidation in
December, 1959.
In the course of the liquidation proceedings,
the liquidiators made diS'tribution in the relevant year of account
and the assessee company got cash or assets in lieu of cash of the
amount of Rs. 4,57,858, Rs. 1,41,739 and Rs. 1,83,175 in respect
of Indian Mills Company (Private) Limited, Harveys
(Private)
Limited and Pandyan Weaving Mills (Private) Limited respectively.
The revenue took the view that by reason of the distributton
of assets of the three private companies under liquidation by the
liquidators, there had been a capital gain of Rs. 96,735.85 in
respeot of Indian Mills Supply Company (Private) Limited and
Rs. 41,168.88 in respect of Harveys (Private) Limited making a
total of Rs. 1,37,904.73. Out of that, loss amounting to Rs.
41,960.56 in respect of Pandyan Weaving Mills (Private) Limited
was deducted, leaving a balance of Rs. 95,944.00. The assessee
company at fir!ll showed the sum of Rs. 95,944.00 as capital gains
but subsequently it filed a statement showing a loss of Rs. 59, 104
on the basis that the cost of shares distributed by the liquidators
should be taken at the figure at which they had been acquired by
the companies which distributed the shares.
The Income-tax
Officer assessed the assessee company to capital gain at the sum
of Rs~ 95,944. Aggrieved by the order of the Income-tax Officer
the assessee filed appeal before the Anpella e Assistant Commissioner and on being unsuccessful there, filed further appeal before
the Income Tax Appellate Tribunal. The main contention which
was raised on behalf of the assessee was that the transaction in
question involved. lio sale, exchange, relinquishment or transfer
and as such, the amoulit in que!llion was not capital 2ain under
section 12B of the Act. The Appellate AssiS'tant Commissioner
was of the view that the surplus arose out of the exchange of
shares held by the assessee company in the three comnanies and
therefore the surplus ought to be brought to tax. The T'ibunal
held that there was an exchange or transfer of shares and assets in
question. The transaction, according to the Tribunal, could also
be viewed as ·a relinquishment.
The assessee was conseauently
held liable to pay tax on the sum of Rs. 95,944 u'1der section 12B
of the Act.
The question reproduced above was thereafter, on
the application of the assessee, referred to the High (',ourt.
The High Court while answering the question in the ne11ative
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held that when a liquidator distn'butes the a•sets of a comn~ny
which has gbne into voluntary liquidation, he is performing a legal
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function and there is no element of sale, transfer, exchan~e or
relinquiShment involved in such distribution.
The judgment of
the Hil!h Court is reported in (1969) 74 T.T.R. 623.
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C.I.T. v. MADURAI MILLS (Khanna, /.)
665
Before dealing farther, we may mention that capital gains were
charged for the first time by the Income Tax and Excess Profit
Tax (Amendment) Act, 1947 (Act 22 of 1947) which inserted
section 12B in the Act. It taxed capital gains a·ising after March
31, 1946. The tax on capital gains was virtually abolished by
the Indian Finance Act, 1949 which confined the operation of
that section to capital gains arising before April 1, 1948. Capital
gains tax was, however, revived with effect from APril 1, 1957
by the Finance (No. 3) Act of 1956. Sub-section(l) of section
J2B along _with its first proviso was as under :
"The tax shall be payable by an assessee under the
head 'capital gains' in respect of any profits or gains arising f·om the sale, exchange, relinquishment or trans.fer,
of a capital asset effected after the 31 't day of March,
1956. and such profits and gains shall be deemed to be
income of the previous year to which the sale, exchange,
relinquishment or transfer took place :
Provided that any distribution of capital assets on the
total o• partial partition of a Hindu undivided family or
under a deed of gift. bequest or will, shall not for the
purnoses of this section be treated as a sale. exchange,
relinquishment
or transfer of the
capital
assets
"
Sub-section (2} of section 12B prescribed a statutory r~rmula for
purpose' nf computation of capital gains.
Sub-sec•ion ( 3) of
section 12B was as under :
"Where aqy capital asset became the prr>uerty of the
assessee by succession, inheritance or devolution or on
anv distribution of capital a<sets on the total or partial
nartition of a Hindu undivided fnmily or on the dissolution "f a firm or other association of persons_ or on the
liquidation of a company or under a deed of gift, or
transfer on irrevocable trust, its actual cost allowable to
him for the pumoses of this section shall be its actual
cost to the previous owner thereof. and the provisions of
sub~section (2) shall apply accordingly; and where the
actual cost to the previous owner cannot be ascertained,
the fair market value at the date on which the capital
asset became the Property of the previous owner shall
be deemed to be the actual cost thereof ...... "
Perusal of sub-section ( 1) of section 12B renroduced above
shows that the liability to pav tax on account of capital gains can
arise onlv if the assessee makes profit' or gains ari<ing frnm the
sale, exchange. relinquishment or tramfer of a capital asset effected after March 31. 1956. The question with which we are cnncerned is whether the distribution of assets of the companies which
666
SUPREME COURT REPORTS
[1973] 3 s.c.R.
had gone into voluntary liquidation by ihe liquidators to the
A
assessee company resulted in a transaction which amounted to
sale, exchange, relinquishment or transfer.
Mr. Manchanda on behalf of the appellant has argued in this
Coun that the transaction in question amounted to sale or transfer.
We, however, find ourselves unable to accede to this contention.
The act of each of the liquidators in distributing the assets of. the
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company which had gone into voluntary liquidation did not result
in the creation of new rights. It merely entailed recognition of
legal rights which were in existence prior to the distribU;tion. Ac·
cording to observations on page 512 of Buckley's Commentaries
on the Companies Act, thirteenth edition, a liquidator is only a
trustee in. the sense that the property of the company ceases upon c
the winding up to belon11; beneficially to the company and passes
into his custody, to be applied by him as directed by the 9tatute.
It is further observed on page 513 :
"The question whether a liquidator in a voluntary
winding up is a trustee within the meaning of the Trustee
Act, 1925, and as such entitled to the benefit of ss. 30
and 61 of that Act, was dis£_ussed, but not decided, in Re
Windsor Steam Coal Co.(") Semble, a liquidator is in
the position of a trustee for the members when distributing surplus assets in specie in a winding up, so that no
beneficial interest passes in the property conveyed or
transferred, within the Finance (1909-1910) Act, 1910,
s. 7 4 ( 6), and ad va/orem stamp duty under that section
is not payable on conveyances or transfers of the property to the members."
When a shareholder receives money
representing his share on
distribution of the net assets of the company in liquidation, he
receives that money in satisfaction of the right which belonged to
him by virtue of his holding the shares and not by operation of
any transaction which amounts to sale, exchange, relinquishment
or transfer. In the circumstances, we find it difficult to hold that
the assessee company is liable to pay tax on capital gains as contemplated by section 12B of the Act in respect of the amount of
Rs. 95,944.
In the case of Commissioner of Income-tax U.P. v. Bankey
Lal Vaidya(') (to which one of. us was a patty) the reapondent
who was a karta of a Hindu uadivi.ded family, entered into a partnership with D to carry on the 1*Jsiness of manufacturing and
selling pharmaceutical products and literature relating thereto.
On the dissolution of the partnership, ks assets, which included
goodwill, machinery, furniture, medicines, library and copyright
11) [1929) I Ch. UI.
(2) [197l] 7' 1.T.R. !94.
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C.I.T. v. MADURAI MILLS (Khanna, J.)
667
in respect of certain publications, were valued at Rs. 2,50,000.
Since most of the assets were incapable of physical division, it
was agreed tha1t the 11$Sets be taken over by D and 1he respondent
be paid his share. of the value of the assets in money and accordingly the respondent was paid Rs. 1,25,000. Question arose
B, whether the sum of Rs. 65,000 being part of the amount received
by the respondent could be brought to tax as capital gains under
section 12B of the Act. It was held by Shah J., speaking for the
Court, that the 31Tangement between the partners of the firm
amounted to a distribution of the assets ol the firm on dissolution
and that there was no sale, exchange or transfer of the respondent's
c share in ·the capital assets to D. The sum of Rs. 65,000, it was
accordingly held, could not be taxed as capital gains. The receipt
of money by the respondent was, in the opinion of the Court,
nothing but a receipt of his share in the distributed assets of the
company.
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Reliance in that case was placed, as has been done also in
the present case, on behalf of the revenue upon the case of James
Anderson v. Commissioner of Income Tax.( 1) The said case was
distinguished and was found to be of not much avail to the revenue. In that case the assessee who held a power of attorney
from the executor of a deceased person, sold certain shares and
securities belonging to the deceased for the purpose of distributing
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the assets amongst the legatees. The excess realised by sale was
treated by the department as capital gains. The contention of the
assessee was that since the sale of the shares and securities fell
within the purview of the third proviso to section 12(B)(l), it
could not be treated as a sale ol capital assets but this contention
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was rejected by this Court. James Anderson's case, in our opinion,
is not of such assistance to the revenue as in that case there was
no distriblUtion of capital assets between the legatees. On the
contrary, the assessee had in pursuance of the authority given to
him by the executor of the deceased sold the shares and securities
and the said sale had resulted in capital gain. In the present case
there has been no sale of receipt of price but only a distribution
of the assets of the companies which had gone into voluntary liquidation. Such a transaction does not amount to sale, exchange,
relinquishment or transfer of the assets. The revenue, in the circumstances, cannot derive much assilltari.ce from that case.
In the case of Commissioner of lllCOIM Tax v. Dewas Cine
Corporation(' this Court while dealing with section 10(2) (vii)
of the Act observed that the exwession "sale" in its ordinary mean·
in11; is a transfer of property for a 1>rice, and adjustment of the
rights of the partnen In 'a dissolved firm by allotment of its assets
(ll [1960] 39 I.T.R. 123 .
(2) (1968] 68 I.T .R. 2'40.
....
668
SUPREME COURT REPORTS
[1973] 3 S.C.R.
is not a transfer nor it is for a price. In that case the assets were
distributed among the partners and it was contended that the
assets must·in law be deemed to be sold to the individual partners
in consideration of their respective shares, and the difference bet·
ween the written-down value and the price realised should be in·
eluded in the total income of the partnership under the second
proviso to section J.0(2)(vii). This Court in this context observed that a partner ruay in an action for dissolution insist that the
assets of the partnernhip be realised by. sale of its assets, but property allotted to a partner in satisfaction of his claim to his share,
could not be deemed in law to be sold to him.
In Commissioner of Income Tax v. Associaled Industrial Development Co. P. Lt4.(1) a Division Bench of the Calcutta High
Court held that the amount received by a shareholder on the liquidation of a company was not assessable to capital gains as there
was no sale, c;Jtchange, relinquishment or transfer of the capital
assets.
Similar view has also been taken by the Gujarat High
Court in Commissioner of Income Tax v. R. M. Amin.(').
We are, therefore, ol the view that distribution of the asset&
of the companies in liquidation does not amount to a transaction
of sale, exchange, relinquishment or transfer so as to attract section '
12B of the Act.
Mr. Manchanda on behalf of the appellant has invited our
attention to the third proviso to sub-section (1) of section 12B
as originally enacted by the Income Tax and Excess Profit Tax
(Amendment) Act wherein it was stated, inter alia, that any dis•
tribution of capital assets on the dissolution of a firm or other
association of persons or on the liquidation ol a company shall not
for the purpose of section 12B be treated as sale, exchange or
transfer of capital assets. It is urged that the omission of such
distribution of capital assets in the first proviso to sub-section ( 1 )
of section 12B, as revised by the Finance (No. 3) Act of 1956,
would show that the legislature wanted the distribution of capital
assets on dissolution of a firm or other association of persons or
the liquidation of a company to be treated as sale, exchange or
transfer. This contention, in our opinion. is not well-foiinded. It
appears to us that the cases of the distn"bution of capital assets
on dissolution of a firm or other association Of persons or liquida·
tion of a company were mentioned in the third proviso under the
earlier Act, as a matter of clarification to allav fears even thoudi
the language ol sub-section (I ) of section 12B was not intended
to aOPlV to such cases. Provis'ls, as mentioned on nage 221 of
Craies on Statute Laws, Sixth Edition, are often inserted to allay
fears.
A proviso is inserted to guard against the particular case
(I) (1969] 73 l.T.R. 50.
12) (1971] 82 l.T.R. 19<4.
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C.I.T. v. MADURAI MILLS (Khatfna, J.)
669
of which a particular person is apprehensive, although the enactment was never intended to apply to his case or to any other
similar case at all.
.
We have already stated earlier that the distribution of assets
by a liquidator on the voluntary winding up of a company cannot
constitute sale, transfer or exchange for the purpose of sub-section
(1) of section 12B of the Act. If the language of sub-section ( 1)
of section 12B of the Act is clear. and does not warrant the infercn.ce that distribution of assets on liquidation of a company constitutes sale, transfer or exchange the said transaction of distribution
of assets would not, in our oPinion, change its character and
acquire the attributes of sale, transfer or exchange because of the
omission of a clarification in the first proviso to sub-section ( 1)
of section 12B of the Act. even though such a clarification was
there in the third proviso of the section inserted by the earlier Act
(Act 22 of 1947). It is well-settled that considerations stemmir1g
from legislative history must not be allowed to override the plain
words of a statute (see Maxwell on the Interpretation of Statutes,
Twelfth Edition, page 65). A proviso cannot be construed as
enlarging the scope of an enactment when it can be fairly and
properly construed without attributing to it that effect. Further,
if the language of the enacting part of the statute is plain and unambiguous and does not contain the provisions which are said
to occur in it, one cannot derive those provisions by implication
E · from a proviso (see page 217 of Craies on Statute Law, Sixth .
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Edition).
In the light of what has been discussed above, the difference
between the language of the first proviso to section 12(B)(l ),
as inserted bv Finance (No. 3) Aot of 1956 and the third p•oviso
to section 12(b)(l). ·as inserted by Act 22 of 1947, cannot be
of such material help to the revenue.
Reference has also been made by Mr. Manchanda. to s~ti<Jn
46 of the Income Tax Act, 1961 which contains a provision for
chargin1t with capital irains the money or assets . received by a
sha•eholder on •he l;quidation of a t:omPony. The liability under
that section arises from it< express Provisions. ·It· cannot, however,
be sai<l that such a liahilitv would also a<ise even in the absence
of such provisions un<ler the Aot of 1922.
The appeal consequen•ly fails and is dismis5ed With cos.ts.
i
.
.
G.C.
Appeal dismissed.