1972 (9) TMI 32 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the assessee-shareholders were liable to be assessed in respect of the amounts received from the liquidator of the foreign company under section 4(1)(b)(iii) read with section 14(2)(b) of the Indian Income-tax Act, 1922 ?

Summary

Issues:
Assessment of assessees-shareholders regarding amounts received from liquidator of foreign company under Indian Income-tax Act, 1922.

Analysis:
The High Court of BOMBAY addressed a reference under section 66(1) of the Indian Income-tax Act, 1922, concerning the liability of assessees-shareholders for amounts received from the liquidator of a foreign company. The Income-tax Officer treated the distributed amounts as income under section 4(1)(b)(iii) and denied exemption under section 14(2)(b) due to non-payment of taxes by the foreign company. However, the Appellate Assistant Commissioner considered the amounts as capital receipts and excluded them from taxable income. The Income-tax Tribunal dismissed the appeals, stating that in liquidation, the distinction between revenue and capital vanishes, and the amounts distributed were not taxable income. The Tribunal emphasized that the foreign company, if assessable, would have paid taxes as a company. The Court analyzed the provisions of sections 14(2)(b), 16(1)(a), and 4(1)(b)(iii) and concluded that the assessees were entitled to exemption under section 14(2)(b) as the distributed amounts were not taxable income.

The revenue argued that the distributed amounts should be considered income under section 4(1)(b)(iii) as the foreign company had not paid taxes on them. The Court rejected this argument, emphasizing that the shareholders had no ownership of the company's assets and the distributions were proceeds of the company's properties. The Court cited the definition of "dividend" and distinguished between capital assets and income. Referring to the case of Commissioners of Inland Revenue v. Burrell, the Court highlighted that distributions in liquidation do not constitute dividends and shareholders do not have rights to company profits. Section 14, relied upon by the revenue, was deemed irrelevant as it pertained to exemptions and not charging provisions. The Court concluded that the distributed amounts were not income for the assessees and ruled in their favor, holding the revenue liable for costs.

In conclusion, the Court determined that the amounts distributed by the liquidator of the foreign company to the assessees were not taxable income under the Indian Income-tax Act, 1922. The Court emphasized that the distributions were not income but proceeds of the company's assets, and the shareholders were not liable to pay income tax on these amounts. The Court's decision favored the assessees, and the revenue was directed to bear the costs.