The third proviso to S. 12B (1) of the Income-tax Act protects an assessee from taxation when there is distribution of capital assets in specie.

Judgment

S. K. DAS, J. : This appeal by special leave is from the decision of the Bombay High Court dated August 25, 1954, in Income-tax Reference No. 1 of 1954. The only question which falls for decision in the appeal is the true scope and effect of the third proviso to old S. 12B (1) of the Indian Income-tax Act, hereinafter referred to as the Act.

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