Characterisation of foreign company distributions: distributions must be assessed as dividend income if they constitute revenue receipts for the shareholder.

Whether amounts received as distributions from a foreign-incorporated company constitute taxable income under the Income-tax Act: the Act's inclusive definition of "dividend" applies to distributions irrespective of the character of the income in the company, and the characterisation must be determined in the hands of the shareholder; recognition of a foreign company's corporate character by comity does not prevent treating distributions as assessable receipts. The operative effect stated is that such sums, though arising from capital profits in the company, are assessable as income (dividend/profits) for the recipient.

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Issues: Whether amounts received by the assessees as dividends from a foreign company are assessable as income under the Indian Income-tax Act.

Analysis: The definition of "dividend" in the Act is inclusive and extends to distributions made by a company irrespective of the character of the income in the company's hands. The court examined whether the sums, though derived from capital profits of the foreign company, when distributed to shareholders constitute revenue receipts in the hands of the recipients. The court held that the nature of the receipt must be determined in the hands of the shareholder and not by reference to the character of the income in the company. The fact that the distributing body is a foreign company does not prevent recognition of the distribution as income; the corporate character of a foreign-incorporated company is recognised by comity and distributions to shareholders may be treated as assessable receipts under the Act. Relevant provisions applied included the inclusive definition of dividend and the provisions concerning income from other sources.

Conclusion: The sums received by the assessees from the foreign company are assessable as income (dividend/profits) under the Indian Income-tax Act; decision is against the assessee and in favour of the Revenue.

Ratio Decidendi: A distribution by a foreign-incorporated company to its shareholders, though derived from capital profits in the company's hands, is to be characterised by the taxing law according to its effect in the hands of the recipient and is assessable as income under the Income-tax Act if it constitutes a revenue receipt for the shareholder.

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