Liquidation proceeds and dividend taxation: profits from the liquidation year fell outside the dividend proviso and were not capital gains.

Amounts received by a shareholder on liquidation were treated as outside capital gains because the receipt did not arise from the shareholder's sale of a capital asset; it stemmed from the sale of the company's assets. The liquidation payment was also outside dividend taxation to the extent the proviso to section 2(6A)(c) limited assessable distributions to accumulated profits from the company's previous six accounting years before liquidation. Profits arising in the company's year ending with liquidation were excluded, and the shareholder's own accounting year was irrelevant. The amount was therefore not taxable under section 12B and was excluded from assessment under the proviso.

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Issues: Whether the amount received by a shareholder on liquidation of a company was taxable as dividend under section 2(6A)(c) of the Income-tax Act, 1922, or as capital gains under section 12B of that Act.

Analysis: Section 12B did not apply because the receipt was not profits or gains arising from the sale of the shareholder's capital asset; it resulted from the sale of the company's assets. As to section 2(6A)(c), even assuming that the receipt was dividend arising on liquidation and accrued in the assessee's accounting year, the proviso limited inclusion to accumulated profits distributed out of the company's previous six accounting years preceding liquidation. Profits arising in the company's year ending with the date of liquidation were outside the proviso, and the timing of the assessee's own accounting year was irrelevant.

Conclusion: The amount was not taxable under section 12B, and the proviso to section 2(6A)(c) excluded the sum from assessment. The question was answered in the negative and in favour of the assessee.

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