Liquidation distributions to shareholders are capital receipts, and an exemption provision cannot by itself create tax liability.

Amounts distributed to shareholder assessees by the liquidator of a foreign company on liquidation were treated as capital receipts and not income in the shareholders' hands. The analysis states that liquidation proceeds represented the company's assets, and the fact that part of the distribution could be traced to accumulated profits did not, by itself, make the receipt taxable as income. The deeming rule for liquidation distributions applied only to companies within the statutory definition, and section 14(2)(b) operated only as an exemption provision, not as a charging provision creating tax liability.

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Issues: Whether amounts received by shareholder assessees from the liquidator of a foreign company on liquidation were taxable as income under section 4(1)(b)(iii) of the Indian Income-tax Act, 1922, and whether section 14(2)(b) affected that liability.

Analysis: The distribution made by the liquidator represented the assets of the company in liquidation and not income earned by the shareholders. On liquidation, the distinction between capital and revenue in the hands of the company's assets could not convert the shareholders' receipts into income merely because a part of the distribution might be referable to accumulated profits. The deeming provision treating certain liquidation distributions as dividend applied only to a company within the statutory definition and did not govern a foreign company in the present setting. Section 14(2)(b) was an exemption provision and did not operate as a charging provision to impose tax merely because the association had not paid tax.

Conclusion: The amounts received by the assessees were not taxable income in their hands, and the reference was answered in the negative, in favour of the assessees.

Final Conclusion: Receipts by shareholders from the liquidation of the foreign company were held to be capital distributions and not chargeable as income.

Ratio Decidendi: A liquidation distribution to shareholders is not income in their hands unless the statute clearly brings it within a charging provision applicable to them; an exemption provision cannot by itself create tax liability.

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