Full Judgment Text
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PETITIONER:
M.C.T.M. CHIDAMBARAM CHETTIAR
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, MADRAS
DATE OF JUDGMENT:
29/11/1965
BENCH:
SUBBARAO, K.
BENCH:
SUBBARAO, K.
SHAH, J.C.
SIKRI, S.M.
CITATION:
1966 AIR 1453 1966 SCR (2) 761
ACT:
Indian Income-tax Act, 1922 (Act 11 of 1922), s. 44D-
Firm transferred assets to Non-resident-Income from Non-
resident-If partners of firm assessable separately.
HEADNOTE:
A firm, constituted by the assessees who were closely
related, transferred assets to a Corporation carrying on
money-lending business in the Federated Malaya States. In
consideration of the assets so transferred the Corporation
allotted shares to the partners of the firm.. The Incometax
Officer assessed the partners of the firm separately under
s. 44D of the Act in respect of the income of the
Corporation, which on appeals were upheld by the Appellate
Assistant Commissioner. On further appeals by the
assessees, the Tribunal allowed the appeals on the ground
that the income from the assets transferred was not
assessable to tax at the time of transfer. At the instance
of the Revenue, the question was referred to the High Court
which was answered against the assessee. In appeal to this
Court :
HELD : The High Court was correct in answering the
question against the assessee.
(i) The language of s. 44D(1) of the Act is plain. It
does not say "when any person has transferred any assets"
but it says, "by means of a transfer of assets". The person
who transfers assets is not designated but emphasis is laid
on the consequence flowing from such a transfer.Whosoever
effects the transfer, if bY such a transfer the assessee
acquires a right to enjoy the income, he is liable to tax.
The words "means" and "acquired" in the context., are only
words of passive nature. The hand that transfers is
immaterial; what matters is the result envisaged by the said
section, namely a non-resident is the transferee of the
assets, but the assessee acquires the power to enjoy the
income from those assets. The words by means of a transfer
of assets" mean nothing more than .as a result or by virtue
or in consequence of the transfer". [765 E-G; 766 E]
Congreve and Congreve v. Commissioner of Inland
Revenue, (1943-49) 30 T.C. 163 and Bambrdige v. Commissioner
of Inland Revenue, (1953-56) 36 T.C. 313, applied.
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(ii) The construction that s. 44D(1) can be
invoked only if at the time of the transfer the income from
the said assets was liable to tax, is not only inconsistent
with the phraseology used but will defeat the object of the
section. The expressions "any income", "such income" and
"that income" found in the sub-section refer to the same
income. What is assessed in a particular year is that
income which is deemed to be the income in the hand-, of
assessee. "That income" is such income in regard whereof he
has "the power to enjoy". "Such income" is any income which
if it were the income of the assessee would be chargeable to
income-tax. The quality of chargeability is referable only
to the income from the assets transferred during the year in
which it is sought to be [766 F; 767 B]
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(iii) If the assessees were able directly or
indirectly to control the income of the Corporation, they
would be deemed to have the power to enjoy the income. Sub-
section (5) of s. 44D gives an enlarged meaning to the words
"power to enjoy" in sub-s. (1).
In the present case, the circumstances were
overwhelming to establish that the assessees had a
controlling voice in the affairs of The Corporation. They
were closely related, holding almost all the shares of the
Corporation, and were the partners of the firm which
transferred the assets. [767 H; 768 B-C]
(iv) The burden was upon the assesee to show to
the satisfaction of the Income-tax Officer that the transfer
was saved under sub-section (3) of s. 44D inasmuch as it was
not for a purpose to avoid tax liability but was only a bona
fide commercial transaction. The Tribunal found as a fact
on the material placed before it that the transfer was to
avoid the liability to taxation; and that being a finding of
fact, the High Court rightly accepted it. The correctness
of the said finding of fact cannot be permitted to be
canvassed in these appeals. [768 G-769 A]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos.
477 to 488 of 1964.
Appeals from the judgment and order dated October
16, 1959 of the Madras High Court in Case Referred No. 31 of
1954.
N. A. Palkhivala, C. Ramakrishna, 0. C. Mathur and
J. B. Dadachanji for the appellants.
A. V. Viswanatha Sastri, Gopal Singh, R. N.
Sachthey and B. R. G. K. Achar, for the respondent.
The Judgment of the Court was delivered by
Subba Rao, J. These appeals raise the question of the
liability of the appellants to pay income-tax under S. 44D
(1) of the Indian Income-tax Act, 1922, hereinafter called
the Act, in respect of the income of the M.C.T.M. Banking
Corporation Limited.
Sir M.Ct.M. Muthiah Chettiar, his wife Deivanai Achi, Ms
two sons Chidambaram Chettiar and Muthiah Chettiar, and his
two daughters Umayal Achi and Vallia Murai Achi constituted
an undivided Hindu family. The said family carried on
moneylending business on an extensive scale in British
India, Burma and elsewhere. Upto and inclusive of the year
1927-28, the undivided Hindu family was assessed to income-
tax as such. During the assessment year 1928-29 it was
claimed that a partition had taken place in the said family
and that Sir M.Ct.M. Muthiah Chettiar and his two Sons
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constituted a firm. The said firm was duly registered and
it was assessed to income-tax. After the death of the said
Sir M.Ct.M. Muthiah Chettiar in 1929, his two sons and his
wife continued the firm and it was assessed to income-tax as
a firm. In June 1929 the said firm started a new
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money-lending business at Kuala Lumpur in the Federated
Malaya States with a capital of Rs. 12 lakhs. The said
capital was transferred from its business in Burma. On
March 24, 1932, a company called the M.Ct.M. Banking
Corporation, hereinafter called the Corporation, was
incorporated in Pudukkotai. It commenced business on and
from March 31, 1932. One of the purposes of the said
Corporation was to acquire and carry on business which was
being carried on by the firm in Kuala Lumpur. A branch of
the Corporation was opened in Kuala Lumpur on September 22,
1933. Between November 1, 1933, and November 31, 1937. On
December 31, 1938, out of the total shares were transferred
to the Corporation and in consideration of the assets so
transferred, the Corporation allotted to the partners of
the, firm 1,200 shares of face value of Rs. 1,000 each.
Though the Corporation commenced business in 1932, no
dividends were declared by it. But in 1938 the Corporation
distributed bonus shares of value of Rs. 5 lakhs out of the
profits of Rs. 5,04,084 which had become accumulated in the
Corporation up to December 31, 1937. On December 31, 1938,
out of the total shares of 2,271 in the Corporation, the
said two sons and the widow of Sir M.Ct.M. Muthiah Chettiar
held 1,944 shares. From the assessment year 1933-34 to the
assessment year 1938-39 the firm was treated as the agent of
the Corporation and its income arising and accruing in
British India was assessed in the hands of the firm which
had its head office in Madras. For the assessment years
1939-40, 1940-41 and 1941-42, the Income-tax Officer, I
Circle, Madras, assessed the said partners of the firm
separately under s. 44D of the Act in respect of the income
of the Corporation. Against the orders of the Income-tax
Officer, the three partners preferred appeals to the
Appellate Assistant Commissioner, who rejected the same.
Against the Orders of the Appellate Assistant Commissioner
rejecting the appeals the assessees preferred appeals to the
Income-tax Appellate Tribunal, Madras, Bench ’A’. The
Tribunal allowed the appeals of the assessees on the ground
that the income from the assets transferred to the
Corporation was ’not assessable to income-tax at the time of
the transfer and that, ’therefore, the income therefrom was
not liable to tax during the assessment years under s. 44D
of the Act. At the instance of ’the Revenue, the following
question of law was referred to the High Court of Madras for
its opinion :
"Whether the income made by the Corporation
can be assessed under the provisions of
Section 44-D of the Income-tax Act in the
hands of the present assessees and if so, to
what extent."
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A Division Branch of the High Court, by its judgment, dated
August 4, 1958, held that the said income of the Corporation
was attracted by s. 44D of the Act, but before giving a
final answer to the question propounded, it directed the
Tribunal to furnish a further statement of case on the
question whether the assessees were entitled to relief under
sub-s. (3)(a) of S. 44D of ’the Act. On December 23, 1958,
the Tribunal submitted a ’finding that the assessees did not
satisfy the requirements of the said sub-section. The High
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Court accepted the said finding and answered the question
against the assessees in the affirmative. The present
appeals were filed against the order of the High ,Court
after obtaining a certificate from the said High Court.
We shall now proceed to consider the arguments advanced
’by Mr. Palkhivala, learned counsel for the assessees, in
support ,of his contention that the income of the
Corporation was not assessable to tax in the hands of the
assessees. As all his arguments turned upon the provisions
of s. 44D of the Act, it would be convenient to read the
same at the outset :
"Where any person has, by means of a transfer
of assets, by Virtue or in consequence
whereof, either alone or in conjunction with
associated operations, any income which if It
were the income of such person would be
chargeable to income-tax becomes payable to a
person not resident or to a person resident
but not ordinarily resident in the taxable
territories, acquired any rights by virtue or
in consequence of which he has within the
meaning of this section power to enjoy such
income, whether forthwith or in the future,
that income shall, whether it would or would
not have been chargeable to income-tax apart
from the provisions of this section, be deemed
to be income of such first mentioned person
for all purposes of this Act."
Chapter VB was inserted in the Income-tax Act, 1922, by the
Indian Income-tax (Amendment) Act, 1939 (Act VII of 1939).
’Section 44D is one of the sections of that Chapter. The
provisions of this Chapter were modelled on S. 18 of the
English Finance Act of 1936, as amended by s. 28 of the
English Finance Act of 1938. The object of S. 44D of the
Act, as disclosed by the provisions thereof, was to prevent
residents. of ’India from evading the payment of income-tax
by transferring their assets to non-residents while enjoying
the income by adopting devious methods. The sub-section
suffers from want of clarity, but a deeper scrutiny brings
out the following ingredients of it
765
(i)there must be a transfer of assets; (ii) by reason of
that transfer, income traceable to the said assets becomes
payable to a person non-resident or to a person resident but
not ordinarily resident in the taxable territories; (iii)
the resident by means of the transfer alone or in
conjunction with associated operations, acquires right to
enjoy such income; (iv) the income from the said assets, if
it was the income of the resident, would be chargeable to
income-tax; and (v) in that event, the income of the non-
resident would be deemed to be the income of the resident
for,’ all the purposes of the Act. Shortly stated, under
this section, if a resident has power to enjoy the income
accruing or arising out of the assets transferred to a non-
resident, he would be deemed to have received that income
and. therefore, would be liable to be assessed under the
Act.
The first contention of Mr. Palkhivala is that the
expression "by means of a transfer" in s. 44D(1) of the Act
means a transfer by an assessee and that, as in the instant
case the transfer was by the firm which was a juristic
entity separate from the assessees: the income of the
Corporation was not assessable to tax in their hands.
The language of the sub-section is plain. It does not
say "when any person has transferred any assets", but it
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says, "by means of a transfer of assets". The person who
transfers assets is not designated but emphasis is laid on
the consequences flowing from such a transfer. Whosoever
effects the transfer, if by such a transfer the assessee
acquires a right to enjoy the income, he is liable to tax.
The words "means" and "acquired" in the context are only
words of passive nature. The hand that transfers is
immaterial : what matters is the result envisaged by the
said section, namely, a non-resident is the transferee of
the assets but the assessee acquires the power to enjoy the
income from those assets. This construction is supported by
the decisions of English Courts given on a section which is
in pari materia with the relevant part of s. 44D(i) of the
Act. The material part of s. 18 of the English Finance Act,
1936, as amended by s. 28 of the English Finance Act, 1938,
reads
(1) Where such an individual has by
means of any such transfer, either alone or in
conjunction with associated operations,
acquired any rights by virtue of which he has,
within the meaning of this section, power to
enjoy, whether forthwith or in the future,
any income of a person resident or domiciled
out of the United Kingdom which, if it were
income of that individual
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received by him in the United Kingdom, would
be chargeable to income-tax by deduction or
otherwise, that income shall, whether it would
or would not have been chargeable to income-
tax apart from the provisions of this section,
be deemed to be income of that individual for
all the purposes of the Income-tax Acts.
It would be noticed that in the said sub-section, as in S.
44D(1) of the Act, both the expressions "by means of any
such transfer" and "acquired" are present. In Congreve and
Congreve v. Commissioners of Inland Revenue(1), Lord
Simonds, repelling the argument similar to that presented to
us, observed :
"........ it is to my mind clear, first,
that in their ordinary grammatical sense the
words "by means or, do not connote any
personal activity on the part of the person
who is said to enjoy or suffer something by
those, means, and, secondly, that in their
present context it is not necessary or
legitimate in order to give a limiting sense
to the words to read them as if they were
followed by such word as "effected by him"."
This view was followed by Harmam, J., in Bombridge v. Com-
missioners of Inland Revenue(2). The words "by means of a
transfer of assets" mean nothing more than "as a result or
by virtue or in consequence of the transfer". We,
therefore, reject the first contention of the learned
counsel.
The second contention is that the said sub-section can
be invoked only if at the time of the transfer the income
from the said assets was liable to tax and that, as in the
present case when the transfer of the assets was effected in
1933 the income therefrom was not chargeable to income-tax
for it was foreign income not remitted to India-the said
assets fell outside the ken of the said sub-section. This
argument was sought to be sustained on the express terms of
s. 44D(1) of the Act. The clause " any income which if it
were the income of such person would be chargeable to
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income-tax", it is said, is descriptive of the assets
transferred and constitutes a limitation on the operation of
the section. This construction is not only inconsistent
with the phraseology used but will defeat the object of the
section. The expressions "any income", "such income" and
"that income" found in the sub-section refer to the same
income. What is assessed in a particular year is that
income which is deemed to be the income in the hands of the
assessee. "That income" is such income in regard whereof he
has "the power to enjoy".
(1) (1943-’49) 30 T.C. 163.
(2) (1963-’56) 36 T.C. 313.
767
"Such income" is any income which if it were the income of
the assessee would be chargeable to income-tax. The quality
of chargeability is referable only to the income from the
assets transferred during the year in which it is sought to
be assessed. As Balakrishna Ayyar, J., pointed out in the
judgment under appeal, to accede to the argument of the
assessee, the words in s. 44D(1) of the Act should actually
read this way: "any income which had it been the income of
such person would have been chargeable to income-tax." But
the words read otherwise thus : " any income which if it
were the income of such person would be chargeable to
income-tax". The tense refers to the assessment year and
not to the year when the transfer was affected. Learned
counsel for the assessees contended that this construction
would affect adversely a bona fide transferor of assets who
could not possibly have anticipated that the income from
such assets would be chargeable to tax in future and that
that could not have been the intention of the Legislature.
As indicated earlier, the sub-section is not concerned with
the transferor but only with the result brought about by
means of the transfer of the assets in conjunction with
associated operations. The sub-section was designedly
couched in the widest phraseology to prevent evasion of tax
in the manner prescribed thereunder. If it was not so, a
person can transfer his assets to another in a year they
have not yielded any income at all, reserving indirectly the
right to enjoy the income therefrom in future or he may
transfer his assets when they are not yielding any income,
but which may, under a scheme of future development, yield
enormous profits. On the other hand, a bona fide transferor
is amply protected by sub-s. (3) of s. 44D of the Act. We,
therefore, find no merits in this contention either.
The next submission of the learned counsel for the
assessees is that the assessees had not acquired, by means
of the said transfer of assets to the Corporation or in
consequence thereof, any power to enjoy the income therefrom
within the meaning of s. 44D(1) of the Act. While conceding
that, if the assessees had the controlling share in the
corporation, they would have the power to enjoy its income,
it was said that there was no evidence on which it could be
held that the assessees, though closely related, were acting
in unison and were controlling the affairs of the
Corporation. Sub-section (5) of s. 44D gives an enlarged
meaning to the words "power to enjoy" in sub-s. (1). The
relevant clause of that sub-section is cl. (e), which reads
(5) A person shall" for the purposes of
this section, be deemed to have power to enjoy
income of a person
768
not resident, or resident but not ordinarily
resident, in the taxable territories, if-
(e) such first-mentioned person is able, in
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any manner whatsoever and whether directly or
indirectly, to control the application of the
income.
If the assessees were able directly or indirectly to control
the income, of the Corporation, they would be deemed to have
the power to enjoy its income. In the present case, the
circumstances are overwhelming to establish that the
assessees had a controlling voice in the affairs of the
Corporation. They are closely related : two of them are
brothers and the third is their mother. They were the
partners of the firm which transferred the assets. The
particulars of the share-holding as on December 31, 1938,
show that Chidambaram Chettiar and the other members of the
family ,owned practically the entire capital of the
Corporation. The three partners owned 1944 shares out of
2,271 shares of the Corporation and the balance was held by
their close relatives. Apart from the three partners, the
other shareholders were the son, sisters and the wife of
Chidambaram Chettiar. It is obvious that the Corporation
was a close one and the partners of the firm had the
controlling voice in the management of the affairs ,of the
Corporation. The argument that there is no evidence that
there was unity of interest among the partners ignores the
realities of the situation, for the history of the firm, the
constitution of the Corporation, the manner the assets were
transferred and the other circumstances brought out in the
record lead to the only inference that the partners were
acting in unison throughout, Indeed it is recorded in the
statement of case that it was conceded before the Tribunal
that the assessees had power to enjoy the income of the
assets transferred within the meaning .of S. 44D(1) of the
Act. In the circumstances, the High Court rightly held that
the assessees had the power to enjoy the income within the
meaning of s. 44D(1) of the Act.
Lastly it was contended that the income in question was
saved from the operation of sub-s. (1) of s. 44D of the Act
by sub-s. (3) thereof. To state, it differently, the
transfer of the assets to the Corporation was not for a
purpose to avoid the tax liability but was only a bona fide
commercial transaction. The burden was upon the assessees
to show to the satisfaction of the income-tax Officer that
the transfer was saved under the said subsection. The
Tribunal found as a fact on the material placed before it
that the transfer was to avoid the liability to taxation;
and that being a finding of fact, the High Court rightly
accepted
769
it. The correctness of the said finding of fact cannot be
permitted to be canvassed in these appeals.
In the result, we hold that the High Court has answered
the question correctly. The appeals fail and are dismissed
with costs. One hearing fee.
Appeal dismissed.
770