A) ABSTRACT / HEADNOTE
This landmark case James Anderson, Administrator of the Estate of the Late Henry Gannon v. Commissioner of Income-tax, Bombay centered on the interpretation of Section 12B(1) of the Income-tax Act, 1922, particularly concerning capital gains tax liability arising from the sale of capital assets by an administrator during the course of estate distribution. The appellant sold shares and securities for distributing assets to legatees, resulting in a profit, which the Income Tax Department assessed as capital gains. The crux of the dispute involved the third proviso to Section 12B(1), which provides exemptions to specific kinds of transfers, including under a will. The Supreme Court ruled that only a distribution of capital assets in specie—not sale and subsequent distribution of sale proceeds—would qualify for exemption under this proviso. Therefore, the administrator’s act of selling the assets and distributing the sale proceeds did not exempt him from capital gains liability. The decision significantly clarifies the scope of taxation on capital gains in succession and testamentary contexts and establishes the taxability of transfers made by administrators in such scenarios.
Keywords: Capital Gains Tax, Distribution in Specie, Testamentary Transfer, Income-tax Act 1922, Section 12B(1), Estate Administration, Administrator Liability, Sale of Capital Assets
B) CASE DETAILS
i) Judgement Cause Title:
James Anderson, Administrator of the Estate of Late Henry Gannon v. Commissioner of Income-tax, Bombay
ii) Case Number:
Civil Appeal No. 335 of 1956
iii) Judgement Date:
March 4, 1960
iv) Court:
Supreme Court of India
v) Quorum:
S.K. Das, J.L. Kapur, and M. Hidayatullah, JJ.
vi) Author:
Justice S.K. Das
vii) Citation:
1960 AIR 610, 1960 SCR (3) 167
viii) Legal Provisions Involved:
Section 12B(1) and its third proviso, Section 24B, Section 2(4A) of the Income-tax Act, 1922
ix) Judgments Overruled by the Case:
None
x) Case is Related to:
Taxation Law, Interpretation of Statutes, Succession Law
C) INTRODUCTION AND BACKGROUND OF JUDGEMENT
The controversy emerged during the administration of the estate of Henry Gannon, a British Indian resident who died in the UK in 1945. His appointed administrator, James Anderson, sold shares and securities for the purpose of asset distribution among legatees. The sale realized gains exceeding the original cost, leading the Income Tax Officer to levy capital gains tax under Section 12B(1) of the Income-tax Act, 1922. The appellant claimed immunity under the third proviso to the said section, arguing that the sale was part of a will-based distribution and thus not a taxable transfer. However, the High Court of Bombay rejected this interpretation. On appeal, the Supreme Court was tasked with interpreting the meaning and scope of the expression “distribution of capital assets under a will”, especially whether such distribution must occur in specie or whether it includes proceeds from sale.
D) FACTS OF THE CASE
Henry Gannon, originally an Indian resident, left India in 1944 and died in the UK in 1945. He had executed a will in 1942, appointing the National Bank of India, London as executor. The Bank obtained probate and authorized James Anderson as attorney for administration in India. Under this authority, Anderson sold certain capital assets—specifically shares and securities—which generated capital gains exceeding Rs. 20 lakh across two assessment years: 1947-48 and 1948-49. The administrator used the proceeds to distribute the estate to legatees. The Income Tax Department assessed the capital gains under Section 12B, treating the sale as a transfer liable to tax. The administrator challenged this on three grounds: the constitutionality of Section 12B, liability under Section 24B, and applicability of the third proviso to Section 12B(1). The Appellate Tribunal ruled partially in his favor, exempting the capital gains based on the third proviso. However, the High Court reversed this decision, holding that only distribution in specie qualifies under the exemption, and not sale and distribution of proceeds.
E) LEGAL ISSUES RAISED
i) Whether the sale of capital assets by an administrator for distribution to legatees is a “transfer” under Section 12B(1) of the Income-tax Act, 1922.
ii) Whether the third proviso to Section 12B(1) exempts such sale from tax liability.
iii) Whether the distribution of sale proceeds, as opposed to distribution in specie, falls within the expression “distribution of capital assets under a will.”
iv) Whether Section 24B limits the administrator’s tax liability to that of the deceased.
F) PETITIONER / APPELLANT’S ARGUMENTS
i) The counsels for Petitioner / Appellant submitted that:
They argued that the term “distribution of capital assets under a will” in the third proviso to Section 12B(1) should be interpreted to include not only transfer of physical assets (in specie) but also distribution of the proceeds of sale. They claimed the sale was a necessary step in administering the estate as per the will. They contended that taxing such sale would amount to double taxation, as neither the administrator nor the legatees intended to profit, but were merely fulfilling testamentary instructions.
They also relied on a purposive interpretation of “transfer”, arguing that the third proviso’s objective was to exempt estate distributions from capital gains tax, regardless of the manner—direct or through sale. They argued that limiting it to distribution in specie rendered the proviso otiose in many practical situations where selling assets may be necessary due to liquidity or indivisibility.
Additionally, they invoked Section 24B to argue that the administrator could only be taxed for obligations the deceased incurred during their lifetime. Since the deceased did not execute the sale, they argued the gain was not taxable in the hands of the administrator.
G) RESPONDENT’S ARGUMENTS
i) The counsels for Respondent submitted that:
They asserted that capital gains liability under Section 12B(1) arises upon the sale of capital assets, irrespective of the purpose behind the sale. The Income Tax Department contended that when the administrator sells the assets and distributes proceeds, it amounts to a taxable transfer as per the express wording of the section.
They emphasized that the third proviso to Section 12B(1) clearly intended to exclude from taxation only cases where the capital assets themselves—not proceeds—were distributed directly to the beneficiaries. The logic was that no actual transfer occurred in such cases, just a change in title. But where a sale occurs, a transfer is complete, and any gain realized is subject to tax.
They also dismissed the Section 24B argument, asserting that an administrator under Indian law is a full-fledged assessee and liable for tax on any income or gains that accrue during the administration period.
H) RELATED LEGAL PROVISIONS
i) Income-tax Act, 1922
-
Section 12B(1): Deals with capital gains on sale/transfer of capital assets.
Link to provision -
Third Proviso to Section 12B(1): Excludes certain transfers from being treated as capital gains—e.g., under will, gift, HUF partition, etc.
-
Section 24B: Pertains to liability of legal representatives for tax of deceased individuals.
Link to provision -
Section 2(4A): Defines capital asset.
I) JUDGEMENT
a. RATIO DECIDENDI
i) The Supreme Court held that the third proviso to Section 12B(1) refers exclusively to distribution in specie, not to distribution of sale proceeds. If an administrator sells the capital asset and then distributes the proceeds, the gain made from the sale is taxable.
The Court clarified that there is a distinction between distribution of capital assets and distribution of money realised from the sale of such assets. Hence, the administrator cannot escape liability by claiming the sale was made for the benefit of legatees.
The Court rejected the argument under Section 24B, ruling that administrators act as independent assessees under the law. The sale was conducted by the administrator posthumously, and thus the gain was rightly assessable.
b. OBITER DICTA
i) The Court observed that adopting a broad interpretation of “distribution” would lead to absurd consequences, allowing administrators to avoid tax liability while legatees would remain liable for later sales. This disparity would undermine the coherent scheme of Section 12B.
c. GUIDELINES
-
A transfer under a will must result in direct distribution of assets in original form (in specie) for the third proviso of Section 12B(1) to apply.
-
Any sale of capital assets by an administrator, even if done to fulfill testamentary duties, is a taxable event.
-
Capital gains liability arises on the act of sale, irrespective of the administrator’s intention or necessity under a will.
-
Section 24B does not limit an administrator’s liability to only those gains which would have accrued to the deceased; the administrator is an independent assessee.
J) CONCLUSION & COMMENTS
This ruling firmly entrenches the principle that tax liability on capital gains under Section 12B arises at the point of sale or transfer of a capital asset, regardless of the circumstances or motives. It clarifies that the third proviso’s exemption is limited strictly to in specie distributions and not to asset liquidations, even if done under a testamentary obligation.
The case affirms the tax authorities’ approach of prioritizing the substance of the transaction—a realised gain on the sale—over the form of asset distribution. It also brings estate administrators within the net of capital gains tax, marking a significant precedent in succession law and taxation in India.
J) REFERENCES
a. Important Cases Referred
i) Sri Kannan Rice Mills Ltd. v. Commissioner of Income-tax, Madras, [1954] 26 I.T.R. 351
ii) Commissioner of Income-tax, Bombay North v. Walji Damji, [1955] 28 I.T.R. 914
iii) Gowri Tile Works v. Commissioner of Income-tax, Madras, [1957] 31 I.T.R. 250
iv) Navinchandra Mafatlal v. Commissioner of Income-tax, [1954] 26 I.T.R. 758; [1955] 1 S.C.R. 829
b. Important Statutes Referred
i) Income-tax Act, 1922, especially Sections 2(4A), 12B(1), 12B(3), and 24B
ii) Indian Succession Act, 1925, Section 241
iii) Government of India Act, 1935 (for constitutional challenge)
