Liquidation distributions to members are capital receipts where articles only regulate surplus distribution, not trading income

Sums distributed to a member on the winding up of a mutual insurance company were treated as capital receipts, not trading income. The assets in liquidation belonged to the company as a separate legal entity, and the member's entitlement to share in the surplus arose from proprietary membership rights rather than from a trading contract for repayment of premiums. The company's articles, though contractual in character, merely regulated the mode of distribution and did not alter the ordinary rule that liquidation distributions are capital in the recipient's hands. The appeal succeeded.

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Issues: Whether sums distributed to a member on the winding up of a mutual insurance company were capital receipts in the member's hands or trading receipts liable to income tax.

Analysis: The distributions were made by a liquidator on a winding up, and the assets in liquidation were the property of the company distinct from its members. Although the company's articles formed a contract between the company and its members, that contractual character did not displace the ordinary rule that assets distributed on liquidation are capital in the hands of the recipient. Section 302 of the Companies Act, 1948, treated the company's property on winding up as distributable among members according to their rights and interests, and article 130 merely regulated that distribution. The member's right to share in the surplus arose from its proprietary position as a member, not from a trading contract for repayment of premiums.

Conclusion: The sums were capital receipts and not trading receipts; the appeal succeeded.

Ratio Decidendi: A distribution to a member from the surplus assets of a company in liquidation is prima facie a capital receipt, and a contractual provision in the articles governing the mode of distribution does not by itself convert that capital distribution into trading income.

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