COMMISSIONER OF INCOME TAX Vs. CHIMANLAL B PARIKH

JUDGEMENT

(1.) IN this reference under S. 66(1), Indian INCOME TAX ACT, 1922, the question referred to us reads as follows :

(2.) THE facts which require to be noticed are as follows : The assessees concerned in this reference are five individual assessees whose names appear in paragraph 2 of the statement of the case. In respect of the first two of the assessees, the question relates to the three assessment years, namely, 1955 -56, 1956 -57 and 1957 -58. In respect of the other three assessees the question relates to the asst. year 1955 -56. All the five assessees held certain different quantities of shares and in respect of these shares were shareholders of M/s Nakasero Trading Co. Ltd. (hereinafter referred to as "the foreign company") of Jinja (Uganda) in East Africa. The foreign company was taken into liquidation in the year 1953. The liquidator of the foreign company distributed diverse different amounts between the five assessees in the asst. yr. 1955 -56 and diverse different amount between the first two assessees in the asst. yrs. 1956 -57 and 1957 -58. In connection with the amounts distributed by the liquidator to these shareholders by separate assessment orders, copies of which are Annexure "A" to the statement of the case, the ITO held that the foreign company was an entity of AOP as mentioned in S. 3 of the Act. He further held that the amounts distributed were liable to be treated as income to the extent that the amounts were paid out of the accumulated profits. The amounts were income under S. 4(1)(b)(iii) of the Act. The foreign company having not paid taxes on the amounts, the assessees were not entitled to exemption under S. 14(2)(b) of the Act. He, therefore, included these amounts as part of the income of the assessees during the above relevant assessment years. The AAC accepted the contention of the assessees that the amounts distributed were capital receipts and excluded these amounts from computation of the taxable income of the assessees. The five different appeals filed by the CIT were consolidated and the Tribunal by its judgment and order dated 9th August, 1963, dismissed these appeals. The Tribunal held that "as soon as liquidation of a company starts, all distinction between revenue and capital disappears and there is only one capital fund which the liquidator is called upon to distribute among the shareholders on realisation of the assets of the company". It further proceeded to observe that "the foreign company if it had income assessable within the taxable territories would have been liable to pay income -tax in its character as a company". It also observed : "Merely because the foreign company is not a company for the purpose of the Indian IT Act, it does not further necessarily follow that the amount distributed by the liquidator among the shareholders changes its character." Following the principles in the case of IRC vs. Burrell (1924) 9 TC 27 (CA), it held that the amounts distributed were not income in the hands of the assessees and was not taxable. Having regard to the arguments advanced on behalf of the Revenue the Tribunal considered the provisions in ss. 14(2)(b), 16(1)(a) and 4(1)(b)(iii) of the Act and held that the ITO had no case for sustaining the argument that the assessees were not entitled to exemption under S. 14(2)(b) and that the amounts distributed were income under S. 4 (1)(b)(iii) of the Act. In pursuance of the application made by the Revenue for reference to this Court, the Tribunal referred the above question to this Court.

(3.) IN connection with the submissions made by Mr. Joshi, it is first necessary to remember that the entitles that were charged to tax under S. 3 of the Act in this case were "individual" assessees. No question of charging income -tax to the foreign company had arisen for consideration. In our view the arguments advanced by pointing out that "company" was defined in S. 2(5A) as not to include a foreign company and that as regards charging the foreign company to tax under S. 3, the company would be an AOP, had the result of creating confusion only. It is abundantly clear that for taxing the amounts distributed by the liquidator of the foreign company to the assessees shareholders in the present case the only relevant section that was applicable was S. 4(1)(b)(iii), which provides as follows :