Shareholder distribution of capital receipts remains capital in recipients' hands, even if labelled as dividend.

Shareholder distributions must be characterised by their nature in the hands of the recipient, not by the source or label attached to them in the company's accounts. Amounts received by a company as salamis and land acquisition compensation were capital in the company's hands, and when later distributed to shareholders they represented a share of capital beneficially belonging to them. The Supreme Court stated that describing the payment as a dividend did not change its true character. The distribution was therefore a capital receipt in the shareholders' hands and was not taxable as dividend or as income from other sources under section 2(6A) of the Indian Income-tax Act, 1922.

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Issues: Whether the distribution to shareholders of amounts received by the company as salamis and land acquisition compensation, and subsequently declared as dividends, was taxable in the shareholders' hands as dividend or as income from other sources under section 2(6A) of the Indian Income-tax Act, 1922.

Analysis: The receipt had to be characterised in the hands of the shareholders, not by its nature in the hands of the company. Although the sums were capital receipts in the company's hands, the shareholders were beneficially entitled to the capital itself. When the amounts were distributed, the shareholders received their share of a capital asset and not a revenue accretion. The fact that the distribution was made under the label of dividend did not alter the true character of the receipt.

Conclusion: The amount distributed to the shareholders was a capital receipt in their hands and was not taxable as dividend or as income from other sources under section 2(6A) of the Indian Income-tax Act, 1922.

Ratio Decidendi: The nature of a receipt for tax purposes is determined by its character in the hands of the recipient; where shareholders receive a distribution representing capital belonging to them beneficially, the amount remains capital notwithstanding its description as dividend.

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