Full Judgment Text
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PETITIONER:
NAVNITLAL C. JAVERI
Vs.
RESPONDENT:
K. K. SEN, APPELLATE ASSISTANT COMMISSIONER OFINCOME-TAX,’
DATE OF JUDGMENT:
28/10/1964
BENCH:
GAJENDRAGADKAR, P.B. (CJ)
BENCH:
GAJENDRAGADKAR, P.B. (CJ)
WANCHOO, K.N.
HIDAYATULLAH, M.
DAYAL, RAGHUBAR
MUDHOLKAR, J.R.
CITATION:
1965 AIR 1375 1965 SCR (1) 909
CITATOR INFO :
R 1965 SC1387 (18)
RF 1965 SC1862 (10)
F 1972 SC 524 (18)
RF 1973 SC1461 (218)
RF 1977 SC1802 (29)
RF 1981 SC1922 (9)
R 1984 SC 420 (45)
D 1985 SC1698 (31)
C 1990 SC 781 (72)
R 1990 SC1637 (38)
D 1990 SC1664 (6)
RF 1992 SC 803 (41,44)
RF 1992 SC1360 (9)
ACT:
Constitution of India, 1950, List 1, VII Schedule, Entry 82-
Income--Income-tax Act (11 of 1922), ss. 2(6A) (e) and 12
(1B)-Legislative competence and constitutional validity.
HEADNOTE:
The assessee was a share holder in a private limited company
whose ordinary business was not money-lending business. He
took a loan amounting to over Rs. 4 lakhs from a company.
The Income-tax Officer computed the assessee’s income at Rs.
3 lakhs and odd, under s. 12(1B) read with s. 2 (6A) (e) of
the Income-tax Act, 1922. That amount included a sum of
over Rs. 2 lakhs representing the accumulated profits of the
company. The assessee’s share in the accumulated profits,
if distributed as dividend, would be an amount proportionate
to the number of shares held by him. He therefore
contended, that the balance of the accumulated profits was
not his income and that the Legislature was not competent to
enact the two sections according to which that amount was
also treated as his income. His writ petition in the High
Court challenging. the constitutional validity of the two
sections was dismissed. He appealed to the Supreme Court.
HELD (Per Gajendragadkar, C. J., Wanchoo, Hidayatullah and
Mudholkar JJ.) : (i) The sections are not beyond the
legislative competence of Parliament.
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The companies to which s. 12(1B) applies are- companies in
which at least 75% of the voting power lies in the hands of
persons other than the public. They are controlled by a
group of persons allied together and having the same
interest. The controlling group can determine whether the
profits made by the company should be distributed as
dividends or not. When they deliberately refused to
distribute the accumulated profits as dividends but adopted
the device of advancing the profits by way of loan to one of
the shareholders, it was with the object of evading the
payment of tax by the company on the accumulated profits.
Section 12(1B) provides that if a controlled company adopts
the device of making a loan to one of its shareholders, he
will be deemed to have received the amount out of the
accumulated profits as dividend and would be liable to pay
tax on his income. The word "income" in Entry 82 in List I
of the 7th Schedule to the Constitution must receive a wide
interpretation depending on the facts of each case. Having
regard to the fact that the Legislature was aware of the
devices to evade tax, it would be within its competence to
devise a fiction for treating an ostensible loan as the
receipt of the dividend. [919 A-H. 920 H; 921 C-D]
(ii) The absence of a provision enabling the income-tax
officer to consider in each case whether the loan was
genuine or the result of a device does not make the section
go beyond the competence of the Legislature. [921 D-E]
If the Legislature thought that in almost every case the
advances or loans were the result of a device to evade tax,
it would be competent to
910
it to prescribe a fiction and hold that in cases of such
advances or loans, tax should be recovered from the
shareholder on the basis that he had received a dividend.
[921 G-H]
(iii) Section 12(lB) does,not impose an unreasonable
restriction on the appellant’s fundamental rights under Art.
19(1) (f) and (g) of the Constitution. [922 A]
The section does not affect the appellant’s right to borrow
money. There is no element of unfairness, because the other
shareholders have deliberately agreed to make the loan or
the advance and the shareholder to whom the loan is advanced
deliberately takes it with a view to assist the company to
evade the payment of tax and to have the benefit of the use
of the amount subject to the payment of interest. The
company receives interest, the shareholder enjoys the use of
the money and in the process the payment of tax is evaded.
Further, past transactions were excluded from the operation
of the sections by the issue of a circular by the Central
Board of Revenue. [922 B-F]
Per Raghubar Dayal J. (dissenting) : (i) Sections 2(6A) (e)
and 12(lB) of the Income-tax Act, 1922 as they stood in 1955
are void. [923 B]
It is not open ’to the Legislature to describe any payment
of money by a company to a shareholder by the word
"dividend" and then provide that such payment will come
within the expression "income" in item 82, List I of
Schedule 7. The definition of dividend must have a rational
connection with concept of dividend in the context of the
profits of the company and its distribution amongst the
shareholders. The essence of an amount paid as dividend is
that it has to represent the proportionate amount a
particular shareholder is to get on the basis of the shares
held by him out of the profits of the company set apart for
payment of dividend to shareholders. Any ad hoc payment of
money to a shareholder as advance or loan unrelated to-his
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share in the accumulated profits cannot rationally come
within the expression dividend. [926 E-H]
(ii) The provisions of the impugned sections impose
unreasonable restrictions on the fundamental right to hold
property under Art. 19(1)(f) of the Constitution. [928 E]
If any enactment provides that certain profits of the
company, though not distributed as dividend, be treated as
used for the payment of dividends it should necessarily
follow that a particular shareholder be deemed to have
received a proportionate amount of such profits. It would
be unreasonable to provide that a particular shareholder
should be deemed to have received an amount in excess of his
proportionate share as dividend. It is unreasonable that a
particular shareholder who receives a loan or advance from a
company be deemed to have received that entire amount as
dividend when his proportionate share would be much less.
[928 B-E]
Navinchandra Mafatlal v. Commissioner of Income-tax, Bombay
City, [1955] 1 S.C.R. 829, Sardar Baldev Singh v.
Commissioner of Income-tar, Delhi and Agra [1961] 1 S.C.R.
482 and Balaji v. Income-tax Officer, Special Investigation
Circle, [1962] 2 S.C.R. 983, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 45 of1964.
Appeal from the judgment and order dated July 30, 1962, of
the Bombay High Court in Special Civil Application No. 69 of
1962.
G.S. Pathak, M. M. Gharekhan and 1. N. Shroff, for the
appellant.
911
C.K. Daphtary, Attorney-General, R. Ganapathy Iyer, Gopal
Singh and R. N. Sachthey, for the respondent.
The Judgments of P. B. GAJENDRAGADKAR C.J., K. N. WANCHOO,
M. HIDAYATULLAH and J. R. MUDHOLKAR JJ. was delivered by
GAJENDRAGADKAR C.J. RAGHUBAR DAYAL J. delivered a dissenting
Opinion.
Gajendragadkar C.J. This appeal arises from a writ petition
filed by the appellant Navnit Lal C. Javeri in the Bombay
High Court in which he challenged the validity of section
12(1B) read with s. 2 (6A) (e) of the Indian Income-tax Act,
1922 (No. 11 of 1922) (hereinafter called the Act) as it
stood in 1955. The High Court has rejected the appellant’s
contention that the said section is invalid, and the
appellant has come to this Court with a certificate granted
by the High Court.
The appellant holds 11 out of 845 shares in a private
limited company named the Malegaon Electricity Co.,
(Private) Ltd. (hereinafter referred to as the company).
The value of each share is Rs. 100. The business of the
company is to supply electricity to the residents of
Malegaon. Some time during 1955, the appellant took a loan
amounting to over Rs. 4 lakhs from the company. A notice
was issued to the appellant by the 8th, Income-Tax Officer
under s. 22(2) of the Act calling, upon him to make his
return for the assessment year 1956-57. The Income-tax
Officer computed his income at Rs. 3,58,460. This amount
included a sum of Rs. 2,83,126 representing the accumulated
profits of the company. The Income-tax Officer took the
view that under s. 2 (6A) (e) the said amount must be deemed
to be dividend received by the appellant, and as such, must
be included in the total income of the appellant as income
from other sources within the meaning of s. 12(1B) of the
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Act. This order was challenged by the appellant by
preferring an appeal before the Appellate Assistant
Commissioner. The appeal, however, failed and was
dismissed. The appellant then preferred a second appeal
before the Income Tax Appellate Tribunal. Whilst this
appeal was pending, before the said Tribunal, the appellant
moved the High Court under Articles 226 and 227 of the
Constitution, and contended that the relevant section under
which the department had purported to levy assessment
against him on the sum of Rs. 2,83,126, was ultra vires.
That is how the only question which the High Court had to
decide in the present writ proceedings was whether s. 12
(1B) read with s. 2 (6A) (e) was constitutionally valid.
912
in order to deal with this point, it is necessary to read
the two relevant provisions of the Act. Section 2(6C)
defines "income" as including dividend. Section 2 (6A)
defines "dividend" in an inclusive manner. Section 2 (6A)
(e) provides
"Dividend" includes-
(e) any payment by a company, not being a
company in which the public are substantially
interested within the meaning of s. 23A, of
any sum (whether as representing a part of the
assets of the company or otherwise) by way of
advance or loan to a shareholder or any
payment by any such company on behalf or for
the individual benefit of a shareholder, to
the extent to which the company in either
case, possesses accumulated profits; but
dividend does not include-
(i)
(ii) any advance or loan made to a
shareholder by a company in the ordinary
course of its business where the lending of
money is a substantial part of the business
,of the company;
(iii) any dividend paid by a company
which is set off by the company against the
whole or any part of any sum previously paid
by it and treated as a dividend within the
meaning of sub-clause (e), to the extent to
which it is so set off."
Thus, the inclusive definition of "dividend" takes in the
payments to which clause (e) of s. 2(6A) refers and makes
them dividend for the purpose of the Act.
Section 12(1) provides that the tax shall be payable by
an assessee under the head "Income from other sources" in
respect of income, profits and gains of every kind which may
be included in his total income (if not included under any
of the preceding heads). Section 12(lB) provides :-
"any payment by a company to a shareholder by
way of advance or loan which would have been
treated as a dividend within the meaning of
clause (e) of subsection (6A) of s. 2 in any
previous year relevant to any assessment year
prior to the assessment year ending on the
31st day of March, 1956, had that clause been
in force in that year, shall be treated as a
dividend received by him in the previous year
relevant to the
913
assessment year ending on the 31st day of
March, 1956, if such loan or advance remained
outstanding on the first day of such previous
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year".
Both these provisions viz., s. 2(6A)(e) and s. 12(lB) were
introduced in the Act by the Finance Act 15 of 1955 which
came into operation on the 1st of April, 1955.
It is thus clear that the combined effect of these two
provisions is that three kinds of payments made to the
shareholder of a company to which the said provisions apply,
are treated as taxable dividend to the extent of the
accumulated profits held by the company. These three kinds
of payments are: (1) payments made to the shareholder by way
of advance or loan; (2) payments made on his behalf; and (3)
payments made for his individual benefit. There are five
conditions which must be satisfied before s. 12(lB) can be
invoked against a shareholder. The first condition is that
the company in question must be one in which the public are
not substantially interested within the meaning of s. 23A as
it stood in the year in which the loan was advanced. The
second condition is that the borrower must be a shareholder
at the date when the loan was advanced; it is immaterial
what the extent of his shareholding is. The third condition
is that the loan advanced to a shareholder by such a company
can be deemed to be dividend only to the extent to which it
is shown that the company possessed accumulated profit at
the date of the loan. This is an important limit prescribed
by the relevant section. The fourth condition is that the
loan must not have been advanced by the company in the
ordinary course of its business. In other words, this
provision would not apply to cases where the company which
advances a loan to its shareholder carries on the business
of money-lending itself ; and the last condition is that the
loan must have remained outstanding at the commencement of
the shareholder’s previous year in relation to the
assessment year 1955-56. In dealing with the question about
the constitutionality of the impugned provisions, it is
necessary to bear in mind these respective conditions which
govern the application of the said provisions.
There is another material circumstance which cannot be
ignored. It appears that when these amendments were
introduced in Parliament, the Hon’ble Minister for Revenue &
Civil Expenditure save an assurance that outstanding loans
and advances which are otherwise liable to be taxed as
dividends in the assessment year 1955-56 will not be
subjected to tax if it is shown that they had been genuinely
refunded to the respective companies before the 30th June,
1955. It was realized by the Government
914
that unless such a step was taken, the operation of s.
12(1B) would lead to extreme hardship, because it would have
covered the aggregate of all outstanding loans of past years
and that may have imposed an unreasonably high liability on
the respective shareholders to whom the loans might have
been advanced. In order that the assurance given by the
Minister in Parliament should be carried out, a circular
[No. 20(XXI-6)/55] was issued by the Central Board of
Revenue on the 10th May, 1955. It is clear that a circular
of the kind which was issued by the Board would be binding
on all officers and persons employed in the execution of the
Act under s. 5(8) of the Act. This circular pointed out to
all the officers that it was likely that some of the
companies might have advanced loans to their shareholders as
a result of genuine transactions of loans, and the idea was
not to affect such transactions and not to bring them within
the mischief of the new provision. The officers were,
therefore, asked to intimate to all the companies that if
the loans were repaid before the 30th June, 1955 in a
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genuine manner, they would not be taken into account in
determining the tax liability of the shareholders to whom
they may have been advanced. In other words, past
transactions which would normally have attracted the
stringent provisions of s. 12(lB) as it was introduced in
1955, were substantially granted exemption from the
operation of the said provisions by making it clear to all
the companies and their shareholders that if the past loans
were genuinely refunded to the companies, they would not be
taken into account under s. 12(lB). Section 12(1B) would,
therefore, normally Apply to loans granted by the companies
to their respective shareholders with full notice of the
provisions prescribed by it.
Mr. Pathak for the appellant contends that the impugned
provision is constitutionally invalid, because it is beyond
the legislative competence of Parliament. He argues that
Entry 82 in List I of the Seventh Schedule which deals with
"taxes on income other than agricultural income" cannot
justify the impugned provision, because a loan advanced to a
shareholder by the company cannot, in any legitimate sense,
be treated as his income; and so, the artificial manner in
which such dividend is ordered to be treated as income by
the impugned provision is not justified by the said Entry.
He also contends that the said provision offends Art. 19(1)
(f) & (g) and cannot be said to be justified by clause (5)
or (6) of the said article. There is no doubt that if the
impugned provision is beyond the legislative powers of
Parliament, it would be bad. Similarly, it is now well-
settled that even tax
915
legislation must stand the scrutiny of the fundamental
rights guaranteed by the Constitution, and so, there can be
no doubt that if the impugned provision invades the
fundamental rights of the appellant and the invasion is not
constitutionally justified, it would be invalid.
In dealing with this point, it is necessary to consider
what exactly is the denotation of the word "income" used in
the relevant Entry. It is hardly necessary to emphasis that
the entries in the Lists cannot be read in a narrow or
restricted sense, and as observed by Gwyer C.J. in the
United Provinces v. Atiqa Begum(1). " each general word
should be held to extend to all ancillary or subsidiary
matters which can fairly and reasonably be said to be
comprehended in it." What the entries in the List purport to
do is to confer legislative powers on the respective
Legislatures in respect of areas or fields covered by the
said entries-. and it is an elementary rule of construction
that the widest possible construction must be put upon their
words. This doctrine does not, however, mean that
Parliament can choose to tax as income an item which in no
rational sense can be regarded as a citizen’s income. The
item taxed should rationally be capable of being considered
as the income of a citizen. But in considering the question
as to whether a particular item in the hands of a citizen
can be regarded as his income or not, it would be
inappropriate to apply the tests traditionally prescribed by
the Income-tax Act as such.
In Navinchandra Mafatlal v. The Commissioner of Income-tax,
Bombay City(1), this Court had occasion to consider the
question as to whether capital gains could be treated as
income within the meaning of item 54 of List I of the
Seventh Schedule to the Government of India Act, 1935.
Section 12-B of the Indian Income-tax Act, 1922 which had
been inserted in the said Act by Act XXII of 1947, had
imposed tax on ’capital gains’. The validity of this
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provision was challenged on the ground that capital gains
cannot be treated as income within the meaning of entry 54.
This plea was rejected by this Court on the ground that the
words used in a constitutional enactment conferring legis-
lative powers ought to be construed most liberally and in
their widest amplitude. Adopting this approach Das J. as he
then was, speaking for the Court, observed that the word
"income" used in the said entry must be given its ordinary,
natural and grammatical meaning and that was, income is a
thing that comes in. On this view, the Court found no
difficulty in coming to the conclusion that income would
include capital gains. If the traditional
(1) [1941] F.C.R. 110. (2) [1955]1 S.C.R. 829.
Sup./65-
916
sense of income had been accepted, then, of course, capital
gains could not be treated as income. That, in fact, was
the argument which was pressed by Mr. Kolah who appeared for
the appellant. "If we hold", observed the learned Judge,
"as we are asked to do, that the meaning of the word
’income’ has become rigidly crystallised by reason of the
judicial interpretation of that word appearing in the
Income-tax Act, then logically no enlargement of the scope
of the Income-tax Act, by amendment or otherwise, will be
permissible in future." And he has significantly added that
a conclusion so extravagant and astounding can scarcely be
contemplated or countenanced. This decision, therefore
shows that the word "income" used in entry 54 which
corresponds to the present entry 82 in List I of the 7th
Schedule to our Constitution, was liberally construed, and
capital gains were deemed to be included within its scope.
This aspect of the matter has also been clearly enunciated
by Gwyer C.J. in In re: The Central Provinces and Berar
Sales of Motor Spirit and Lubricants Taxation Act, 1938 (No.
14 of 1938) (1). "I conceive", said the learned Chief
Justice, "that a broad and liberal spirit should inspire
those whose duty it is to interpret it (the Constitution);
but I do not imply by this that they are free to stretch or
pervert the language of the enactment in the interests of
any legal or constitutional theory, or even for the purpose
of supplying omissions or of correcting supposed errors".
The next decision to which we ought to refer deals with s.
23A of the Act. In Sardar Baldev Singh v. Commissioner of
Income-tax, Delhi & Ajmer(1) the validity of the said
section was challenged. Section 23A(1) provides, inter
alia, that subject to the provisions of sub-sections (3) and
(4), where the Income-tax Officer is satisfied that in
respect of any previous year the profits and gains
distributed as dividends by any company within the twelve
months immediately following the expiry of that previous
year are less than sixty per cent of the total income of the
company of that previous year as reduced by the amounts
specified in clauses (a), (b) & (c) of the said sub-section,
the Income-tax Officer shall, unless he is satisfied that
having regard to losses incurred by the company in earlier
years or to the smallness of the profits made in the
previous year, the payment of a dividend or a larger
dividend than that declared would be unreasonable, make an
order in writing that the company shall, apart from the sum
(1) [1939] F.C.R. 18 at p. 37.
(2) [1961] 1 S.C.R. 482.
917
determined as payable by it on the basis of the assessment
under s. 23, be liable to pay super-tax at the rate
specified by the said sub-section. The object of this
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section is to prevent avoidance of super-tax by shareholders
of a company in which the public are not substantially
interested. As is well-known, the rates,of super-tax
applicable to companies are much lower than the rates
applicable to individual assessees. The legislature thought
that individuals tried to avoid the payment of super-tax at
a higher rate by transferring to a private limited company
it). return for shares the sources of their income, and then
the profits made by the company were allowed to accumulate
in the hands of the company, dividends not being declared,
and the said profits would ultimately be distributed in a
capital form by one device or another. The object of s. 23A
was to defeat such attempts. The main effect of the
provisions of s. 23A appears to be that a company should not
accumulate more than 40 per cent of its net profits to build
up reserves or to provide for capital expenditure.It will
be recalled that s. 2(6A) has taken within the definition of
’dividend" the accumulated profits of such companies, and so
s. 23A attempts to reach such accumulated profits for the
purpose of taxation.
The argument which was urged before this Court in the
cast of Sardar Baldev Singh(1) was that a company and its
share, holders are different persons, and so, s. 23A was
ultra vires inasmuch as it purported to tax the shareholders
on the income of the company in which they hold shares. If
the accumulated profits are distributed amongst the
shareholders by way of dividends, the shareholders could
legitimately be taxed in respect of the dividends received
by them; but when s. 23A attempts to tax the shareholders
for accumulated profits even though they are not distributed
as dividends, what, the section purports to do is to tax the
share-holders for the profits made by the company; and that,
according to the appellant, made s. 23A invalid. This
argument was repelled by this Court on the ground that the
obvious intention of s. 23A was to prevent evasion of tax,
and it was held that entry 54 should be read not only as
authorising the imposition of a tax, but also as authorising
an enactment which prevents the tax imposed being evaded;
otherwise the power to tax a person on his income might
often be made in fructuous by ingenious contrivances. It
would be noticed that s. 23A wanted to deal with a situation
where shareholders did not deliberately distribute the
accumulated profits as dividends amongst themselves.
Section
(1) [1961] 1 S.C.R. 482.
918
23A, therefore, provides that these accumulated profits
will be deemed to have been distributed to the shareholders
and tax levied against them on that basis. It is likely
that in such a case, hardship may be caused in some honest
cases; but this Court made it perfectly clear that
considerations of hardship are irrelevant for determining
questions of legislative competence. It is thus clear that
the result of the decision of this Court in Sardar Baldev
Singh(1) is that the income which technically belonged to
the ’company, was treated, as income belonging to the share-
holders in proportion to the shares they held in the
company, and on that footing tax was levied on them; and yet
the said tax was held to be constitutionally valid.
There is yet another case in which a similar question was
considered. In Balaji v. Income-tax Officer, Special
Investigation Circle, (2) a person and his wife started
business in partnership and admitted their three minor sons
to it. In computing the total income of the said person for
the purpose of assessment, the Income-tax Officer included
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the share of the income of his wife and three minor sons
under S. 16 (3) (a) (i) & (ii) of the Act. The validity of
this provision was challenged on the ground that the
impugned section purported to tax a person for the income of
other persons, namely, his wife and minor sons. In
rejecting the contention raised against the validity of the
impugned section, this Court held that the Entries in the
Legislative Lists are not powers but fields of legislation
and the widest import and significance should be attached to
them. On this view, the conclusion reached by this Court
was that Entry 54 of the Federal Legislative List covered
legislation like s. 16 (3) (a) (i) & (ii), because it was
intended to prevent evasion of tax. It appears from the
judgment that the validity of the said section was also
challenged on the ground that it contravened Articles 14 and
19(1) (f) & (g) of the Constitution. This plea was also
rejected. One of the considerations which weighed with the
Court in repelling the said plea was that the additional
payment of tax made on the income of the wife or the minor
children would ultimately be home by them in the final
accounting between them. Having regard to this con-
sideration and bearing in mind the fact that the mode of
taxation authorised by the impugned section, though harsh,
was thought to be necessary to prevent evasion of payment of
tax, this Court held that the said section was valid. It is
in the light of these decisions that we must proceed to
consider Mr. Pathak’s argument that s. 12(1B) of the Act is
ultra wires.
(1) [1961] 1 S.C.R. 482. (2) [1962] 2 S.C.R. 983.
In dealing with Mr. Pathak’s argument in the present case,
let us recall the relevant facts. The companies to which
the impugned section applies are companies in which at least
75 per cent of the voting power lies in the hands of persons
other than the public, and that means that the companies are
controlled by a group of persons allied together and having
the same interest. In the case of such companies, the
controlling group can do what it likes with the management
of the company, its affairs and its profit within the limits
of the Companies Act. It is for this group to determine
whether the profits made by the company should be
distributed as dividends or not. The declaration of
dividend is entirely within the discretion of this group.
When the legislature realized that though money was
reasonably available with the company in the form of
profits, those in charge of the company deliberately refused
to distribute it as dividends to the shareholders, but
adopted the device of advancing the said accumulated profits
by way of loan or advance to one of its shareholders, it was
plain that the object of such a loan or advance was to evade
the payment of tax on accumulated profits under s. 23A. It
will be remembered that an advance or loan which falls
within the mischief of the ’impugned section is advance or
loan made company which does not normally deal in money-
lending is made with full knowledge of the provisions
contained impugned section. The object of keeping
accumulated without distributing them obviously is to take
the benefit lower rate of super-tax prescribed for
companies. This was defeated by s. 23A which provides that
in the case distributed profits, tax would be levied on the
shareholders on the basis that the accumulated profits will
be deemed to have been distributed amongst them. Similarly,
s. 12(1B) provides that if a controlled company adopts the
device of making a loan or advance to one of its
shareholders, such shareholder will be deemed to have
received the said amount out of the accumulated profits and
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would be liable to pay tax on the basis that he hag received
the said loan by way of dividend. It is clear that when
such a device is adopted by a controlled company, the
controlling group consisting of shareholders have
deliberately decided to adopt the device of making a loan or
advance. Such an arrangement is intended to evade the
application of a. 23A. The loan may carry interest and the
said interest may be received by the company; but the main
object underlying the loan is to avoid payment of tax. It
may ultimately be repaid to the company and when it is so
repaid, it may or may not be treated as part of
920
accumulated profits. It is this kind of a well-planned
device which
s. 12(1B) intends to reach for the purpose of taxation.
It appears that such a device is adopted by private
companies in many countries. Simon has referred to this
device in these words :-
"Generally speaking, surtax is charged only on
individuals, not on companies or other bodies
corporate. Various devices have been adopted
from time to time to enable the individual to
avoid surtax on his real total income or on a
portion of it, and one method involved the
formation of what is popularly called a ’one-
man company’. He individual transferred his
assets, in exchange for shares, to a limited
company, specially registered for the purpose,
which thereafter received the income from the
assets concerned. The individual’s total
income for tax purposes was then limited to
the amount of the dividends distributed to him
as practically the only shareholder, which
distribution was in his own control. The
balance of the income, which was not so
distributed, remained with the company to
form, in effect, a fund of savings accumulated
from income which had not immediately
attracted surtax. Should the individual wish
to avail himself of the use of any part of
these savings he could effect this by
borrowing from the company, any interest
payable by him going to swell the savings
fund; and at any time the individual could
acquire the whole balance of the fund in the
character of capital by putting the company
into liquidation."(1)
What Simon says about one-man company can be equally true
about the controlled company whose affairs are controlled by
a group of persons closely knit and having the same
interest.
The question which now arises is, if the impugned section
treats the loan received by a shareholder as a dividend paid
to him by the company, has the legislature in enacting the
section exceeded the limits of the legislative field
prescribed by the present Entry 82 in List I. As we have
already noticed, the word "income" in the context must
receive a wide interpretation; how wide it should be it is
unnecessary to consider, because such an enquiry would be
hypothetical. The question must be decided
(1) Simon’s Income-tax, 2nd Ed. Vol. 3, para 592, p. 341.
921
on the facts of each case. There must no doubt be some
rational connection between the item taxed and the concept
of income liberally construed. If the legislature realises
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 19
that the private controlled companies generally adopt the
device of making advances or giving loans to their
shareholders with the object of evading the payment of tax,
it can step in to meet this mischief, and in that
connection, it has created a fiction by which the amount
Ostensibly and nominally advanced to a shareholder as a loan
is treated in reality for tax purposes as the payment of
dividend to him. We have already explained how a small
number of shareholders controlling a private company adopt
this device. Having regard to the fact that the legislature
was aware of such devices, would it not, be competent to the
legislature to device a fiction for treating the ostensible
loan as the receipt of dividend? In our opinion, it would
be difficult to hold that in making the fiction, the
legislature has traveled beyond the legislative field
assigned to it by entry 82 in List 1.
It is, however, urged by Mr. Pathak that while providing
for such a fiction, the legislature should have required the
Income-tax Officer to consider in each case whether the loan
was genuine, or was the result of a device; and he argues
that since no such provision has been made and a uniform
presumption by fiction is, sought to be raised, the
legislature has gone beyond its legislative competence. In
support of this argument, Mr. Pathak has referred to the
fact that under s.- 108(1) of the Commonwealth Income-tax
Act it is provided that the amount paid to the shareholder
by way of advance or loan can be taxed if in the opinion of
the Commissioner it represents distributions of income,
Such a provision would have made the impugned section valid,
Mr. Pathak argues that omission of Parliament to exclude
from the operation of s. 12(lB) genuine loans or advances,
and its failure to distinguish between such loans and
advances and loans and advances made as a device shows, that
it has acted blindly and must, therefore, be held to have
exceeded its legislative power. We are not inclined to
accept this argument. If the legislature thinks that the
advances or loans are in almost every case the result of a
device, it would be competent to it to prescribe a fiction
and hold that in cases of such advances or loans, tax should
be recovered from the shareholder an the basis that he has
received the dividend. Therefore, we are satisfied that the
High Court was right in coming to the conclusion that the
impugned section is not beyond the legislative competence of
the legislature.
922
Then it is argued by Mr. Pathak that the impugned provision
contravenes the appellant’s fundamental rights under Art.
19(1) (f) & (g) and is not saved by clauses (5) & (6) of the
said article. It is not easy to appreciate this argument.
Art. 19(1) (f) recognises the right of a citizen to acquire,
hold and dispose of property and Art. 19(1)(g) recognises
the right to practice any profession, or to carry on any
occupation, trade or business. The impugned provision does
not contravene either of these rights. The shareholder’s
right to borrow money from his own company cannot be said to
be a fundamental right; besides all that the impugned
section does is to provide that if a loan is borrowed by a
shareholder from a company to which the said provision
applies, it will be deemed to be a receipt by him of the
dividend. This provision does not affect the appellant’s
right to borrow money from any other source; and his company
from which he borrows does not ordinarily do money-lending
business. That is why the restriction imposed by the
section cannot be said to be unreasonable at all. In
dealing with the question about the reasonableness of this
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provision, we cannot also overlook the fact that past
transactions were excluded from its operation by the issue
of a circular to which we have already referred. There is
no element of unfairness in the fiction, because the other
shareholders have deliberately agreed to make the loan or
the advance and the shareholder to whom the loan is advanced
deliberately takes it with a view to assist the company to
evade the payment of tax and to have the benefit of the use
of, the amount subject to the payment of interest. The
company receives interest, the shareholder enjoys the use of
the money, and in the process the payment of due tax is
evaded. That is the assumption made by the legislature in
making this provision. How can it be urged that either the
shareholder who is taxed, or the other shareholders who
deliberately make the advance to a colleague of theirs, are
unfairly dealt with by the impugned provision. In our
opinion, there is no scope for arguing that the fundamental
rights of the shareholder under Art. 19 (1) (f ) & (g) have
been contravened by the impugned provision. Therefore, we
must reject Mr. Pathak’s argument that the impugned
provision is invalid on the ground that it contravenes Art.
19(1)(f) & (g). There is obviously no scope for suggesting
that the impugned provision contravenes Art. 14; and in fact
Mr. Pathak has not raised this point before us. In that
connection, he himself fairly invited our attention to the
decision of the Madras High Court in K. M. S. Lakshmana
Aiyar v. Additional Income-tax Officer, Special
923
Circle, Madras, (1) where the challenge to the validity of
the impugned section on the ground that it contravened Art.
14 has been repelled.
The result is, the appeal fails and is dismissed with costs.
Raghubar Dayal J. I am of opinion that the appeal should
be allowed as ss. 12 (1B) and 2 (6A) (e), of the Indian
Income-tax Act, 1922, hereinafter called the Act, as they
stood in 1955, are void.
The two provisions were enacted by Parliament in view of
Entry 82, List 1, Seventh Schedule of the Constitution which
reads : "Taxes on income other than agricultural income".
It is not disputed that whatever wide connotation the word
’income’ in this Entry may have, the item taxed should
really be capable of being considered as income, that there
be some rational connection between the item taxed and the
concept of "income" and that it is not open to Parliament to
choose to tax, as income, an item which in no rational sense
can be regarded as income. It is also not disputed that
Parliament can enact a law dealing with the evasion of
payment of income-tax.
In Navinchandra Mafatlal v. The Commissioner of Income-tax,
Bombay City(1) this Court had to consider the content of the word
"income" as used in Entry 54, List 1, Seventh Schedule to
the Government of India Act, 1935 (which is identical with
Entry 82. List 1, Seventh Schedule to the Constitution), in
determining whether the imposition of a tax under the head
"capital gains" by the Central Legislature, was ultra vires.
Section 12-B inserted in the Income-tax Act by the Indian
Income-tax and Excess Profits Tax (Amendment) Act, 1947 (Act
XXII of 1947) provided for the imposition of a tax on
capital gains arising from certain transactions mentioned in
the section. This Court said that "income", according to
the dictionary, means "a thing that comes in" and that in
the United States of America and Australia, the word
"income" was used in a wide sense so as to include "capital
gains". It referred to certain cases of those countries in
which a very wide meaning was ascribed to the word "income"
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 19
as its natural meaning and held that "its natural meaning
embraces any profit or gain which is actually received".
In the United States, the word "income" was first defined
in Stratton’s Independence v. Howhert(3) decided on December
1, 1913, as "gain derived from capital, from labour, or from
both
(1) (1960) 40 I.T.R. 469.
(2) [1955] 1 S.C.R. 829.
(3) 231 U.S. 399-59 L. Ed. 285.
924
combined". The court had to construe the word "income" as
used in S. 38 of the Corporation Excise Tax Act of August 5,
1909, which imposed an excise tax "equivalent to one per
centum upon the entire net income .... received by it from
all sources during the year".
In Eisner v. Macomber(1) referred to by this Court in
Mafatlal’s case(1), the court had to construe the word
"income" as used in the XVI Amendment of the Constitution of
the United States, which is :
"The Congress shall have power to lay and
collect taxes on incomes, from whatever source
derived, without apportionment among the
several States, and without regard to any
census or enumeration." and observed, at p.
206:
" Congress cannot by any definition it may
adopt conclude the matter, since it cannot by
legislation alter the Constitution, from which
alone it derives its power to legislate, and
within whose limitations alone that power can
be lawfully exercised.
.... For the present purpose we require only a
clear definition of the term ’income,’ as used
in common speech, in order to determine its
meaning in the Amendment; and, having formed
also a correct judgment as to the nature of a
stock dividend, we shall find it easy to
decide the matter at issue.
After examining dictionaries in common use we
find little to add to the succinct definition
adopted in two cases arising under the
Corporation Tax Act of August 5, 1909. ’Income
may be defined as the gain derived from
capital, from labour, or from both combined,’
provided it be understood to include profit
gained through a sale or conversion of capital
assets. to which it was applied in the Doyle
case
Brief as it is, it indicates the
characteristic and distinguishing attribute of
income, essential for a correct solution of
the present controversy."
The definition of "income" given in this case has been
followed in the other two cases referred to in Mafatlal’s
case(2) ViZ., Merchants’ Loan & Trust Co. v. Smietanka(3)
and United States
(1)252 U.S. 189=64 L. Ed. 521.
(2) [19551 1 S.C.R. 829.
(3) 255 U.S. 509=65 L. Ed. 751.
925
v. Stewart(1), cases which dealt with the taxation of
gains from the sale of capital assets.
The question in the Australian case viz., Resch v. The
Federal Commissioner of Taxation(1) was about the validity
of the provinces in the income-tax legislation to the effect
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that distribution of profits in the course of winding-up of
a company would be treated on the same footing as the
distribution by the company as a going concern. The
provision was held valid as Parliament possessed power to
bring to charge in an income-tax Act all profits and gains
accruing to a tax-payer, without distinguishing whether the
profit or gain should be regarded as a receipt on capital or
on income or revenue account.
The word "income" has been interpreted in a natural sense
in these cases and the definition given in Eisner’s case($)
is much narrower and limited in content than the widest
meaning which is now sought to be given to it by the
respondent. In Mafatlal’s case (4) too, this Court has not
given such a wide meaning to the word "income" as to include
"anything which comes in" and therefore to include the
amount of a loan which may be said to come in the hands of
the borrower. Loans borrowed by a shareholder from the
company do not, as such, come within the above general
definition of "income". They do not represent gains from
his labour or capital or profits gained through sale of
capital assets. The borrower has to repay them. If a
shareholder is really paid his share of the profits
ostensibly as a loan, such a nominal loan but really a share
of profits-can be taxed as "income" under an appropriate
enactment.
We may now consider the nature of what had been taxed in
this case and to which objection has been taken on the
ground that ss. 2 (6A) (e) and 12 ( 1 B) are invalid.
The appellant holds 11 out of 845 shares in a private
limited company. The value of each share is Rs. 100. In
1955 he took a loan of over Rs. 4,00,000 from the company.
Rs. 2,83,126, the amount of accumulated profits the company
had then, have been added to the appellant’s total income
for the relevant assessment year, in view of ss. 2(6A)(e)
and 12(1B) of the Act. He appellant’s share in the
accumulated profits, if distributed as dividend would be
11/845the of Rs. 2,83,126 i.e., Rs. 3,686. Rs. 2,79,440,
the balance, would then be the dividend payable to the other
co-sharers. The appellant contends that Rs. 2,79,440
(1) 311 U S 60 = 85 Ed 40
(3) 252 U.S. 189=64 L. Ed. 521.
(2) 66 C.L.R. 198.
(4) [1955] 1 S.C.R. 829.
926
is not his income and that Parliament was not competent to
enact ss. 2 (6A) (e) and 12 ( 1B) which treat it as his
"income" from dividend.
Before dealing with the contention, reference may be made
to what the impugned sections provide. Section 2 (6A) (e)
defines "dividend", in the circumstances mentioned in that
clause, to include any payment by a company of any sum by
way of advance or loan to a shareholder, or any payment by
any Such company on behalf of or for the individual benefit
of a shareholder to the extent to which the company in
either case possesses accumulated profits. Section 12(1B)
provides that any such payment to a shareholder made by way
of advance or loan in certain circumstances would be treated
as dividend received by him in the previous year relevant to
the assessment year ending March 31, 1956, if such loan or
advance remained outstanding on the first day of such
previous year. Now, the contention for the appellant is
that though Parliament can enact a law dealing with evasion
of payment of income-tax, it cannot tax what is not
"income", that the amount in excess of his proportionate
share in Rs. 2,83,126, if it had been actually distributed
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as profits by the company, could not have been his income
from dividend, that he could not have evaded payment of
income-tax on this amount from its being not distributed as
dividend and that therefore Parliament could not enact that
such excess amount be treated as dividend paid to him and,
consequently, as his "income".
The contention has force. The essence of an amount paid as
dividend is that it has to represent the proportionate
amount a particular shareholder is to get on the basis of
the shares held by him out of the profits of the company set
apart for payment of dividend to shareholders. Any ad hoc
payment of money to a shareholder as advance or loan
unrelated to his share in the accumulated profits cannot
rationally come within the expression "dividend". I am
therefore of opinion that it is not open to the legislature
to describe any payment of money by a company to a
shareholder by the word "dividend" and then provide that
such payment (called dividend) will come within the
expression "income" for the purposes of any law enacted by
virtue of Entry 82, List 1, Seventh Schedule to the
Constitution. The definition of "dividend" must have
rational connection with the concept of "dividend" in the
context of the profits of a company and its distribution
amongst shareholders at any time after the profits have been
earned. Clauses (a) to (d) of S. 2 (6A) may be said to have
such a connection.
927
It is conceivable, and not disputed for the appellant, I
that attempts are made by persons to evade payment of
income-tax and that one mode of such attempts is that
companies accumulate profits, do not use them for payment of
dividends and later pay the amount to shareholders by way of
profits but in the form of advance of moneys or loans to
some shareholders who pass on the ratable share of the
remaining shareholders and the shareholders thus escape
payment of super-tax at a higher rate as their receiving
such amounts could not be treated as "dividends" and so
could not be added to their "income’. At the same time, it
is not disputed for the respondent that there can be genuine
cases of loans taken by shareholders from a company when the
company was in a position to lend money out of its funds.
In fact, after the enactment of s. 2(6A)(e), the Central
Board of Revenue issued a Circular directing its officers to
intimate to all companies that if loans advanced by them
were repaid before June 30, 1955, in a genuine manner, they
would not be taken into account in determining the tax
liability of the shareholders to whom they had been advanced
as it was likely that some companies might have advanced
loans to their shareholders as a result of genuine
transactions of loans and the idea was not to affect such
transactions and not to bring them within the mischief of
the new provision. The provisions of s. 2 (6A) (e) take
into account all cases of advances or loans made by
companies to their shareholders, be they bona fide or be
they for the purpose of evading payment of super tax, and
make the borrower liable for the tax on even such amount of
the loan as be in excess of his proportionate share in the
accumulated profits up to the amount of the loan.
Reference may be made to the fact that in other countries
too, notice has been taken of attempts to evade payment of
income-tax by similar devices, and that enactments to defeat
the devices have been made by the legislatures of those
countries. We have been referred to s. 108 of the Income
Tax and Social Services Contribution Assessment Act 1936-53
(of the Commonwealth of Australia) which deals with loans to
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shareholders. Its provisions materially differ in one
respect from those of the impugned sections. Only so much
of the advances or loans are deemed to be dividends paid by
the company as in the opinion of the Commissioner represents
distributions of income. The entire amount of advance of
loan is not treated as dividend received by the borrower-
shareholder.
Imposition of a tax is a restriction on the, right of an
assessee
928
to hold property and a particular tax can be justified only
as a reasonable restriction on the exercise of that right in
the interests of the general public. The shareholder who
takes a loan or advance from a company which possesses
accumulated profits is, under the impugned provisions,
treated to have received the amount of the loan or advance
to the extent of the accumulated profits, as dividend. As
already stated, the amount of profits set apart for
dividends is to be proportionately distributed among the
various shareholders. If any enactment provides that
certain profits of the company, though not distributed as
dividend, be treated as used for the payment of dividends,
it should necessarily follow that a particular shareholder
be deemed to have received a proportionate amout of such
profits as dividend. It would be unreasonable to provide
that a particular shareholder should be deemed to have
received an amount in excess of his proportionate share as
dividend. The other shareholders should, in the circum-
stances, be deemed to have received their proportionate
shares of the profits deemed to have been distributed as
dividends. A reasonable law may provide for their
assessment as wan on the amount of dividends deemed to have
been distributed to them. It appears to me unreasonable that
a particular shareholder who receives a loan or advance from
a company be deemed to have received that entire amount as
dividend when his proportionate share be much less. I
would, for this reason also, consider the provisions of the
impugned sections to amount to imposing unreasonable
restrictions on the fundamental right to hold property under
Art. 19(1)(f).
I would now refer to certain cases on which reliance is
placed for the proposition that this Court has held valid
laws made to cover attempts for evasion of income-tax and
that therefore the impugned provisions enacted with the same
object to cover attempts to evade payment of super-tax
should be held valid. These case are : Mafatlal’s case(1),
already referred to; Sardar Baldev Singh v. Commissioner of
Income-tax, Delhi & Ajmer (2) ; and Balaji v. Income-tax
Officer, Special Investigation Circle(a).
Mafatlal’s case(1) dealt with the validity of the tax on
capital gains under S. 12B of the Act. In that case what
was taxed was what had been gained by the assessee as a
result of some dealing in capital assets. The capital gain
was to be computed after making certain deductions including
the actual cost to the assessee of
(1)[1955] 1 S.C.R. 829. (3) [1962] 2 S.C.R. 983.
(2) [1961] 1 S.C.R. 482.
929
The capital assets, and did not represent the entire amount
that came in as a result of the transaction. This case is
therefore an authority for the simple proposition that the
word "income" in Entry 82, List 1, Seventh Schedule ’to the
Constitution, has wide connotation and is not to be
restricted to have the same content as judicial decisions
had given to that word as used in the Act. "Income", in the
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Act, has been construed in the context of the scheme of the
Act and has been considered to mean generally what one earns
mostly in a recurring form from some existing sources. The
profits that one earns from the transfer of a capital asset
could be rationally considered, as held by this Court, to be
income, as it represented the amount in excess of what the
transferor-assessee had spent in acquiring that asset.
Baldev Singh’s case(1) was concerned about the validity of
the provisions of s. 23A of the Act which authorised the
Income-tax Officer to order in writing that the
undistributed portion of the ostensible income of a company
calculated as profit therein shall be deemed to have been
distributed as dividends amongst the shareholders as at the
date of the general meeting aforesaid and that thereupon the
proportionate share thereof of each shareholder shall be
included in the total income of such shareholder for the
purpose of assessing his total income. The Income-tax
Officer was to make such an order only when he was satisfied
that the profits and gains distributed as dividends by any
company up to the end of the sixth month after its accounts
for the previous year are laid before the company in general
meeting, were less than 60% of the assessable income of the
company and that payment of a larger dividend would not be
unreasonable keeping in view the losses incurred by the
company in the earlier years and of the smallness of the
profits made.
It will be noticed that the order of the Income-tax Officer
could not be to the effect that the undistributed profits
would be deemed to be the dividend paid to any particular
shareholder or shareholders but could be to the effect that
they were distributed as dividends amongst all the
shareholders. The validity of this provision was not
questioned in the case. What was questioned in the case was
that the proportionate share of Baldev Singh, assessee, in
such undistributed profits, could not be added to his total
income of the particular year to which it was added. It was
held that in view of the deeming provision with respect to
the distribution of profits as dividends amongst
shareholders, the proportionate share of the dividends would
be deemed to be
(1) [1961]1 S.C.R. 482.
930
income of the assessee and that therefore, when it was not
taxed, would be deemed to have escaped assessment for the
purposes of s. 34 of the Act. The case is distinguishable
on several grounds. One is that the Income-tax Officer is
to make the order when he is satisfied that a larger
dividend could have been justifiably distributed, a view
necessarily leading to the inference that a lower dividend
was distributed in order to escape payment of super tax by
shareholders liable to pay such tax. The other is that the
Income-tax Officer was given power to make the order only
when profits less than 60% of the assessable income were
distributed as dividend. This indicates that the company
could accumulate profits up to 40% of the assessable income
for reasons which would be deemed to be genuine. This
should lead to the inference that the accumulation of
profits with respect to which no action has been taken under
s. 23A was justified and that therefore if in case a company
could spare the money to advance to a shareholder for his
needs, that alone should not lead to the inference that the
advance was made to evade the payment of super-tax by the
shareholder. The third point of distinction, and of signi-
ficance, is that no individual shareholder is made liable
for tax on an amount of the undistributed profits in excess
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of his proportionate share in those profits. The
shareholder is not thereby prejudiced. His income is
increased by an amount which he could have legitimately got
from the company if the persons in control had acted
reasonably and had retained such profits undistributed as
were necessary for the purposes of the company.
Another objection taken in Baldev Singh’s case(1) was about
the constitutionality of s. 23A on the ground that it
purports to tax the shareholders on the income of the
company in which they held shares, especially when it does
not give a right to the shareholders to realise from the
company the dividend which by the order is deemed to have
been paid to them. The section was held to be
constitutionally valid as it was enacted for preventing
evasion of tax in view of the conditions of its
applicability. In the circumstances of the cases covered by
S. 23A, there was a reasonable connection between the amount
deemed to be distributed as dividend and the possible
attempt for evading payment of super tax. The assessee
could not have been prejudiced if the persons in control of
the management of the company had acted reasonably or
actually distributed that amount as profits subsequent to
the order of the Income-tax-Officer.
(1) [1961] 1 S.C.R. 482.
931
In Balaji’s case(1), the validity of s. 16(3) (a), clauses
(i) and (ii), came up for consideration. These clauses
provide that in computing the total income of any individual
for the purpose of assessment there shall be included so
much of the income of his wife or minor child as arises
directly or indirectly from the membership of the wife in a
firm of which her husband is a partner or from the admission
of the minor to the benefits of partnership in a firm of
which such individual is partner. These provisions were
held valid. The Court left open the question whether A
could be taxed on the income of B and formulated the
question for decision as whether s. 16(3) (a), clauses (i)
and (ii), is a provision made by the Legislature to prevent
evasion of tax and answered it in the affirmative, as the
husband or the father could nominally take his wife or minor
child, in partnership with him, so that the tax burden may
be lightened and as this device enabled the assessee to
secure the entire income of the business and yet evade
income-tax which he would otherwise have been liable to pay.
It was said at p. 999:
"The scope of the provisions is limited only
to a few of the intimate members of a family
who ordinarily are under the protection of the
assessee and are defendants of him. The
persona selected by the provisions, namely,
wife and minor children, cannot also be ordi-
narily expected to carry on their business
independently with their own funds when the
husband or the father is alive and when they
are under his protection."
It is therefore clear that the basis for holding s. 16(3)
(a), clauses (i) and (ii), valid was that in effect the
husband or the father was the real person who ran the firm
and that the others were made partners nominally and
therefore the partnership was not genuine. In this view,
there could be no question of the provisions affecting the
husband or the father prejudicially or including in his
income amounts which were not his income. This, however,
cannot be said in the present case or in cases which come
within the purview of the impugned sections.
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In dealing with the contention that the provisions of s. 16
(3) (a), clauses (i) and (ii), contravened Art. 14 of the
Constitution, it was said at p. 991 :
"We have held that the object of the
legislation was to prevent evasion of tax. A
similar device would not ordinarily be
resorted to by individuals by entering
(1) [1962) 2 S.C.R. 983.
Supp. 1/65-
932
into partnership with persons other than
those mentioned in the sub-section, as it
would involve a risk of the third-party
turning round and asserting his own rights. The
Legislature, therefore, selected for the
purpose of classification only that group
of persons who in fact are used as a cloak to
perpetrate fraud on taxation."
Such a risk is always involved in a company making payments
as advances or loans to a shareholder when it possesses-
accumulated profits as the other shareholders run the risk
of not getting their proportionate share of profits which
they would have got if they had been really distributed as
dividends. This consideration, again, points to the
conclusion that the probability of such an advance or loan
being genuine would be dependent not so much on the
existence of accumulated profits but on the number of
shareholders in the company and the proportion of the number
of shares the borrower has to the total number of shares
held by the shareholders of the company. The lesser the
proportion, the greater is the chance of the advance or loan
being genuine, as there would in that case be greater risk
of the other shareholders losing their share in the profits
deemed to be distributed as dividends.
I am therefore of opinion that the impugned sections
viz., ss. 2(6A) (e) and 12(1B) of the Act are void and that
this appeal should be allowed.
Appeal allowed.
933