Judgment

KHANNA, J.:- This appeal on certificate 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 the Act) in the negative in favour of the assessee respondent:

"Whether on 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)?"

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 yarn. 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. 100/-

3) Pandyan Weaving Mills (Private) Limited, 1,800 shares of the face value of Rupees 100/-.

The above three companies went into voluntary liquidation in December, 1959. In the course of the liquidation proceedings, the liquidators made distribution 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 distribution of assets of the three private companies under liquidation by the liquidators, there had been a capital gain of Rupees 96,735.85 in respect of Indian Mills Supply Company (Private) Limited and Rupees 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 assesses company at first 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 Offices 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 Appellate 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 no sale, exchange, relinquishment or transfer and as such, the amount in question was not capital gain under Section 12B of the Act. The Appellate Assistant Commissioner was of the view that the surplus arose out of the exchange of shares held by the assessee company in the three companies and therefore the surplus ought to be brought to tax. The Tribunal 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 consequently held liable to pay tax on the sum of Rs. 95,944 under Section 12B of the Act. The question reproduced above was thereafter, on the application of the assessee, referred to the High Court.

3. The High Court while answering the question in the negative held that when a liquidator distributes the assets of a company which has gone into voluntary liquidation, he is performing a legal function and there is no element of sale, transfer, exchange or relinquishment involved in such distribution. The judgment of the High Court is reported in (1969) 74 I.T.R. 623 (Mad).

4. Before dealing further, 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 126 in the Act. It taxed cap