K.K. Desai, C.J.
1. In this reference under section 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 amount 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 ?'
2. The facts which require to be noticed are as follows :
The assessees concerned in this reference are five individual assesses whose names appear in paragraph 2 of the statement of the case. In respect of the first two of the assesses, the question relates to the three assessment years, namely, 1955-56, 1956-57 and 1957-58. In respect of the other three assesses the question relates to the assessment year 1955-56. All the five assesses held certain different quantities of shares and in respect of these shares were shareholders of Messrs. 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 assesses in the assessment year 1955-56 and diverse different amounts between the first two assesses in the assessment years 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 Incomes-tax Officer held that the foreign company was an entity of association of persons as mentioned in section 3 of the act. He further held that the amount 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 section 4(1)(b)(iii) of the act. The foreign company having not paid taxes on the amounts, the assesses were not entitled to exemption under section 14(2)(b) of the Act. He, therefore, included these amounts as part of the income of the assesses during the above relevant assessment years. The Appellate Assistant Commissioner accepted the contention of the assesses that the amounts distributed were capital receipts and excluded these amounts from computation of the taxable income of the assesses. The five different appeals filed by the Commissioner of Income tax were consolidated and the Income-tax 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 Income-tax Act, it does not further necessary follow that the amount distributor by the liquidator among the shareholders changes its character. 'Following the principles in the case of Commissioners of Islands Revenue v. Burrell it held that the amounts distributed were not income in the hands of assesses and was not taxable. Having regard to the arguments advanced on behalf of the revenue the Tribunal considered the provisions in sections 14(2)(b), 16(1)(a) and 4(1)(b)(iii) of the Act and held that the Income tax officer had no case for sustaining the arguments that the assesses were not entitled to exemption under section 14(2)(b) and that the amounts distributed were income under section 4(1)(b)(iii) of the Act. In pursuance of the application made by the revenue for references to this court, the Tribunal referred the above question to this court.
3. Mr. Joshi for the revenue referred us to the provision of sections 2(5A), 2(6A)(c), 4(1)(b)(iii) and under section 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 section 3 of the act Income-tax was charged 'in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority and of every firm and other association of persons or the partners of the firm or the members of the association individually'. He emphasised that the foreign company would, under section 3, be an association of persons. He then pointed out that under section 14(2)(b) the assesses 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 assesses as members of the company. He then relied upon the admitted fact that in respect of the amount distributed to the assesses the foreign company had not paid any tax. He therefore, submitted that the amounts distributed by the liquidator of the foreign company to the assesses should be held income received by the assesses and that these amounts as income received into India (the taxable territories) were charged with liability to pay Income-tax under section 4(1)(b)(iii). In developing these submission he referred to the case of Commissioners of Island Revenue v. Burrell and submitted that the observations in that case could not be applied to the present facts, because those observation could only apply to companies and the foreign company in this case was liable to be considered as an association of persons. He also referred to the case of Commissioner of Income-tax v. P. R. A. L. Muthu Karuppan Chettiar where in connection with interest paid on capital to a retiring partner, the High Court of Madras distinguishing the facts in the case of Commissioners of Island Revenue v. Burrell held that interest paid could not be considered capital assets and was income.
4. 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.
5. In connection with the submission made by Mr. Joshi, it is first necessary to remember that the entities that were charged to tax under section 3 of the Act in this case were 'individual' assesses. 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 section 2(5A) as not to include a foreign company and that as regards charging the foreign company to tax under section 3, the company would be an association of persons, 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 assesses shareholders in the present case the only relevant section that was applicable was section 4(1)(b)(ii), 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 gain 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.'
6. The only substantial and significant question which arose in connection with charging these assesses to Income-tax under this section was whether the amounts distributed were income in true sense in which that word is used in the Income-tax Act. The argument on behalf of the assesses was that the distribution made to the assesses by the liquidator of the foreign company could never have the charter of 'income'. The submission was that the distributions represented the proceeds of the properties and assets of the foreign company. These properties and assets were never income earned by the assesses in any manner. These properties could be capital assets or accumulated profits of the business carried on by the foreign company. The assesses had no connection with these assets and/or accumulated profits. The only connection which the assesses had with the foreign company was that of being its shareholders. Prima facie, these submissions were liable to be accepted as correct. It is quite clear that, in law, the business of a limited company can never be of the ownership of its shareholders. In the liquidation of insolvent companies the shareholder would hardly get anything towards return of the capital investments made by him in purchasing the shares of the company. Under the relevant provision of law relating to solvent companies, in liquidation thereof the shareholders may by chance get certain amounts by the payments and distribution made by the liquidator. Apparently, the amounts distributed would represent the proceeds of the assets of the ownership of the company. Apparently, the shareholders would have no relation whatsoever with the business carried on by the company except as shareholders. The business would not be carried on by the shareholders. It anything, if the amounts distributed by reason of the law of liquidation by the liquidator amongst the shareholder are in value in excess of the investment made by the shareholders for purchasing their holdings, they would be capital gains made by reason of the investments. This is made apparent when under section 2(6A)(c) 'dividend' is defined to include 'any distribution made to the distribution is attribution is attributable to the accumulated profits of the company immediately before its clause (c) of the above sub-section (6A) has been by the deeming definition described 'dividend'. But for this deeming provision the distribution even of accumulated profits of the company in liquidation, would be distribution of properties of the company. The artificial provision attributable to the accumulated profits as deemed divided had to be included in the above sub-section (6A) of section 2 because of the above correct situation in law. It is quite clear that having regard to the definition of 'company' in sub section (5A) of section 2, the distribution made by the liquidator of a foreign company could never be held to be dividend under sub section (6A) of section 2. The findings made in the above discussion can be supported by the observations made by the Court of Appeal in the case of Commissioners of Islands Revenue v. Burrell. The judgment starts at page 37 and Pollock, Master of the Rolls at page 39 observed :
'These sums have not been distributed to the shareholders as dividends. The voluntary liquidation has deprived the directors of the power of declaring a dividend. These facts must be faced and due weight given to the consideration which arise from them....Further, it is a misapprehension, after the liquidator has assumed his duties, to continue the distinction between surplus profits and capital.'
7. At page 41, he further observed :
'The quota returned to shareholder is returned to him as that part of the property of the company to which he is entitled, by the officer whose duty it is to distribute the 'property of the company' in accordance with section 186 of the companies act, 1908. That officer does not carry on the company as the directors did; and he has no longer the power that they had, to divide the profits as dividend upon the shares-profits to which, in that character, the shareholder had no right to lay a demand.'
8. Lord Justice Atkin also delivered a confirming judgment.
9. Section 14 on which reliance is placed on behalf of the revenue has no bearing whatsoever on the above relevant question. The section relates to exemptions of a general nature and clause (b) of sub-section (2) provides :
'(b) if a member of a an association of person other than a Hindu undivided family, a company, or a firm , in respect of any portion of the amount which he is entitled to receive from the association on which the tax has already been paid by the association.'
10. It is quite clear that the provisions in this section are not charging provisions. They have not the effect of providing that when as association of persons is not charged to tax and is not liable to pay tax a member of the association becomes automatically liable to pay income tax in respect of the amount distributed by the foreign company, under charging section 3, as 'an association of persons' the revenue was not justified in arguing that as regards the distributions made by the foreign company to the assessees the the provisions in section 14(2)(b) were applicable. The only basis upon which these assesses could be charged to income tax in respect of the amounts distributed by the liquidator of the foreign company would be upon a finding that the amounts distributed were income within the meaning of that phrase in section 4. As already discussed above, what was distributed between these assesses could never be held to be income of these assesses. The distribution was of the assets of the foreign company. These assesses could never be held to be liable to pay income tax in respect of the assets of the foreign company distributed between them as stated above.
11. In the result, our answer to the above question is in the negative. The revenue will pay the costs of the assesses.
12. Question answered in the negative.