Decided on September 29,1972



K.K.DESAI,C.J. - (1.) IN this reference under S. 66(1), Indian INCOME TAX ACT, 1922, the question referred to us reads as follows : "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 s. 4(1)(b)(iii) r/w S. 14(2)(b) of the Indian INCOME TAX ACT, 1922 ?"
(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. Mr. Joshi for the Revenue referred us to the provisions of ss. 2(5A), 2(6A)(c), 4(1)(b)(iii) and under S. 2(5A) "company" was defined to mean and refers to an Indian company or "any association, whether incorporated or not and whether Indian or non -Indian . . . . which is declared . . . to be a company." That the declaration made was applicable was not suggested. Mr. Joshi, therefore, rightly pointed out that the above foreign company could not be held to be a "company" under the Act. He pointed out that under S. 3 of the Act income - tax was charged "in respect of the total income of the previous year of every individual, HUF, company and local authority and of every firm and other AOP or the partners of the firm or the members of the association individually". He emphasised that the foreign company would, under S. 3, be an AOP. He then pointed out that under S. 14(2)(b) the assessees in the present case were exempted from payment of tax in respect of the amount received by them from the above foreign company if the company had already paid tax on the amount distributed to and/or received by the assessees as members of the company. He then relied upon the admitted fact that in respect of the amount distributed to the assessees the foreign company had not paid any tax. He, therefore, submitted that the amounts distributed by the liquidator of the foreign company to the assessees should be held to be income received by the assessees and that these amounts as income received into India (the taxable territories) were charged with liability to pay income -tax under S. 4(1)(b)(iii). In developing these submissions he referred to the case of IRC vs. Burrell (supra), and submitted that the observations in that case could not be applied to the present facts, because those observations could only apply to companies and the foreign company in this case was liable to be considered as an AOP. He also referred to the case of CIT vs. P. R. A. L. Muthu Karuppan Chettiar (1935) 3 ITR 208 (PC), where in connection with interest paid on capital to a retiring partner, the High Court of Madras distinguishing the facts in the case of IRC vs. Burrell (supra), held that interest paid could not be considered capital assets and was income. As we were not accepting the submissions made by Mr. Joshi, we did not call upon Mr. Kolah for the assessee to give any reply to the arguments advanced.
(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 : "4. (1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which - . . . . . (b) if such person is resident in the taxable territories during such year, -. . . . (iii) having accrued or arisen to him without the taxable territories . . . . are brought into or received in the taxable territories by him during such year." ;

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