Chagla, C.J:—

A very short question arises on this reference as to the proper interpretation of the third proviso to s. 12B(1) of the Indian Income-tax Act. The assessment years are 1947-1948 and 1948-1949, and the assessee is the administrator of the estate of one Henry Ganon. Henry Ganon died on May 13, 1945 having left a will dated November 18, 1942 and probate was issued of this will to the National Bank of India in England as the executors. The National Bank gave a power of attorney to the assessee and the assessee applied to the Court under s. 241 of the Indian Succession Act and obtained Letters of Administration with the will annexed. In the course of the administration of the estate the assessee sold shares and securities belonging to the deceased and it was found that for the assessment year 1947-1948 there was a profit of Rs. 20,13,738 and for the assessment year 1948-1949 the profit was Rs. 1,51,963. The Department contended that these sums represented the capital gains and they were liable to tax. The assessee's contention was that he was not liable to pay tax on these capital gains because his case fell within the ambit of the third proviso to s. 12B(1).

Now, the most important facts are admitted and are not in dispute. The assessee sold shares belonging to the testator, and shares constitute capital assets within the meaning of the Act. The sale of these shares resulted in capital gain and unless the assessee satisfies us that this capital gain is saved from taxation under some provision of the Act, the capital gain is clearly liable to tax. The charging section with regard to capital gains is s. 12B(1) which provides that tax shall be payable by an assessee under the head “capital gains” in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after March 31, 1946 and before April 1, 1948. There is a sale of capital assets within the period indicated in this section and therefore apart from any proviso to this section there is a clear liability upon the assessee to pay tax. The proviso relied upon is the third proviso and to the extent that it is material it provides:

“Provided that any distribution of capital assets under a will shall not for the purpose of this section be treated as a sale, exchange or transfer of the capital assets.”

The contention of the assessee is that we have a case here where there is a distribution of capital assets under a will and therefore such a distribution cannot be treated as a sale, exchange or transfer of capital assets.

Now, in the first place, before we proceed to construe the third proviso, it is difficult to understand how this is a case of distribution of capital assets under a will. The capital assets dealt with by the testator by his will were the shares and admittedly there has been no distribution by the administrator of these capital assets. What the administrator has done is, he has sold the capital assets and then distributed the sale proceeds realised. Therefore, we are not dealing with the distribution of capital assets contemplated by the third proviso; we are dealing with something quite different; we are dealing with something into which the capital asset has been converted. Therefore, in terms, the proviso has no application. This is a case of a sale of a capital asset antecedent to the distribution of the sale proceeds and the sale falls clearly within sub-s. (1) of s. 12B and does not come within the purview of the third proviso. Mr. Palkhivala's contention is that the third proviso deals with cases of what he chooses to call involuntary transfers and he wants us to carry forward the first part of the proviso so as to qualify the case of distribution under a will. The first part of the proviso is:

“Provided further that any transfer of capital assets by reason of the compulsory acquisition thereof under any law for the time being in force relating to the compulsory acquisition of property for public purposes……”

and Mr. Palkhivala urges that we must qualify distribution of assets under a will by the expression “by reason of.” In other words, according to him the legislature intended that when a distribution takes place by reason of a direction in the will and where the testator or the administrator is compelled in the course of administration to sell the capital assets and distribute the sale proceeds, then the third proviso applies. In our opinion, it is clear that the third proviso only applies to a case where there is distribution of capital assets in specie. In our opinion, the construction suggested by Mr. Palkhivala is opposed to the plain natural meaning which we must put upon the third proviso. The suggested construction is both unnatural and strained and there is no reason whatever why that construction should be put upon the third proviso. The third proviso deals with a simple case where an administrator or an executor transfers capital assets belonging to the testator in specie to the persons entitled to those assets. The Legislature provides that in such a case there would not be any sale, exchange or transfer as contemplated by s. 12B(1), and there is very good reason why this provision is made because when assets are transferred in specie to a legatee, sub-s. (3) of s. 12B provides that where he sells these assets he will have to pay tax on capital gain on the basis laid down in that sub-section. Therefore, the intention of the Legislature is to tax the profit made by the sale of capital assets. The incidence of taxation must fall at the time of the sale. The sale may take place by the administrator or the executor or he may choose to transfer these capital assets in specie to the legatee, in which case it is when the legatee sells the capital assets that it would attract tax. But the curious argument advanced by Mr. Palkhivala is that although a legatee would be liable to pay tax on capital gains under sub-s. (3) of s. 12B, if he got the capital assets in specie there would be no liability to pay tax at all by anybody at any time if the executor or the administrator chose to sell the capital assets and realised them into cash. In our opinion, there is neither reason nor principle underlying this argument or contention.

Mr. Palkhivala says that the Legislature in the third proviso was contemplating cases of involuntary transfers and according to him the distinction is that when an administrator is compelled to sell capital assets in order to administer the estate, no question of capital gain can arise. It is only when he voluntarily sells capital assets and distributes the sale proceeds that the third proviso would have no application. In our opinion, the Legislature was not concerned with the voluntary or involuntary nature of the transaction. The sole concern of the Legislature was that if a capital asset was sold and a capital gain arose, such capital gain should be subjected to taxation. It was not the intention of the Legislature that in certain cases capital assets should escape taxation although they were sold and profit was made, and therefore the Legislature by enacting s. 12B(1) and also enacting sub-s. (3) provided for all cases of a capital asset left by a testator being sold and realised and profit being made. If the capital asset was sold before distribution, then clearly the tax would be attracted at the date of the sale, but if the administrator or the executor chose not to sell the capital asset but to transfer it or distribute it in specie, then the Legislature subjected that capital asset to tax only when the legatee or the person interested in the estate sold that capital asset. But if Mr. Palkhivala's contention were to be accepted, it would be open to the administrator or the executor by realising capital assets before distribution to permit these capital assets to escape the capital gains tax.

Mr. Palkhivalla's further contention is that the Legislature could never have contemplated when it enacted the third proviso that the cases covered by that third proviso were cases where there was distribution of capital assets in specie. Mr. Palkhivala says it is impossible to contend that when an executor or administrator distributes an estate in specie there could be a case of sale, exchange or transfer. Now, there is no limit to legal ingenuity and when legal ingenuity is applied to the provisions of the Indian Income-Tax Act sometimes it reaches proportions which leaves one really surprised, and it is not difficult to understand that the Legislature should have protected the assessee from a possible argument by the Department that when an executor or an administrator transfers the estate or part of the estate to the person entitled to that estate there was a transfer within the meaning of s. 12B(1). It seems to us that such an argument is not so absurd or so impossible that the Legislature could not possibly have intended to counter it by enacting the third proviso. But really in this case we are not concerned to interpret the third proviso. What we are concerned with is to decide whether there is a sale of a capital asset which has resulted in a capital gain, and as we said before it is not disputed by Mr. Palkhivala that the administrator has sold capital assets in the nature of shares and securities and has realised capital gains. There is nothing in the third proviso which saves the sale from being subjected to tax. It is not a case of distribution; distribution came subsequent to the sale; and therefore whatever be the nature of the distribution contemplated by the third proviso, as we are dealing with a case of a simple sale by an administrator of capital assets belonging to the estate, the interesting question as to whether the distribution contemplated by the third proviso is in specie or otherwise strictly does not arise.

It is then urged that the administrator is not liable to pay tax by reason of s. 24-B. It is said that an administrator or an executor is 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 it is suggested that there is no liability upon the executor or the administrator. Now, that contention is obviously untenable. Section 24B casts a liability upon the executor or the administrator to pay tax which the testator would have been liable to pay if he had not done so. But s. 24B does not limit the liability of the administrator or the executor only to the cases referred to in s. 24B. An administrator or an executor is as much an assessee under the Act as any other individual and if he carries on business or makes profit or receives dividends or makes capital gains, he is as much liable to pay tax as any other individual. Therefore, there is no force whatever in the contention that the administrator is not liable to pay tax on capital gains because the capital assets were not realised by the testator but by the administrator himself.

The third question raised is as to whether the capital gains tax is ultra vires of the Legislature. We have already decided this question against the assessee and it is unnecessary to repeat the arguments which we have set out in that decision. We will merely confirm the view that we took there.

Therefore we will answer the questions as follows:

(1) The sale of shares and securities by the assessee is a sale for the purpose of s. 12B(1).

(2) (a) In the negative.

(b) In the affirmative.

The assessee to pay the costs.

Attorneys for the Applicant: N.K Petigara.

Attorneys for the Respondent: Little & Co.

Answer accordingly.

P.M.P