Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1965 Supreme(SC) 326

SUPREME COURT OF INDIA
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
M. Ct. M. Chidambaram Chettiar (dead), by his Legal Representatives, etc., Appellants
Versus
The Commissioner of Income-tax, Madras, Respondent.
Civil Appeals Nos. 477 to 488 of 1964.
Advocates appeared
Mr. N. A. Palkhivala, Senior Advocate, (Mr. C. Ramakrishna, Advocate, and Mr. O. C. Mathur, Advocate of M/s. J. B. Dadachanji and Co., with him), for Appellants; Mr. A. V. Viswanatha Sastri, Senior Advocate, (M/s. Gopal Singh, R. N. Sachthey and B. R. G. K. Achar, Advocates, with him), for Respondent.

Advocates:
A.V.VISHWANATHA SASTRI, B.R.G.K.Achar, C.RADHA KRISHAN, Gopal Singh, J.B.DADACHAN, N.A.PALKHIWALA, O.C.MATHUR, R.N.SACH

The transfer of assets to a non-resident company with the intention to avoid tax liability and the assessee having the power to enjoy the income of the company would attract the provisions of Section 44-D of the Indian Income-tax Act, 1922.

Headnote:
INCOME TAX - Section 44-D - Transfer of assets to a non-resident company - Power to enjoy income - Control over the application of income - Bona fide commercial transaction - Burden of proof.
Fact of the Case:

The assessee, a Hindu undivided family, transferred assets to a newly incorporated company, the M. Ct. M. Banking Corporation (Corporation), in exchange for shares. The Corporation commenced business in 1932 and distributed bonus shares in 1938. The Income-tax Officer assessed the assessee under Section 44-D of the Indian Income-tax Act, 1922, on the ground that the income of the Corporation was deemed to be the income of the assessee. The assessee contended that the income was not assessable to tax in their hands as the transfer of assets was a bona fide commercial transaction and they did not have the power to enjoy the income of the Corporation.
Finding of the Court:

The Supreme Court held that the income of the Corporation was assessable to tax in the hands of the assessee under Section 44-D of the Act. The Court held that the expression "by means of a transfer of assets" in Section 44-D(1) of the Act means "as a result or by virtue or in consequence of the transfer" and that it does not connote any personal activity on the part of the person who is said to enjoy or suffer something by those means. The Court also held that 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 and that the assessee had the power to enjoy the income of the Corporation within the meaning of Section 44-D(1) of the Act.
Issues: 1. Whether the transfer of assets to the Corporation was a bona fide commercial transaction or a transaction to avoid tax liability? 2. Whether the assessee had the power to enjoy the income of the Corporation within the meaning of Section 44-D(1) of the Act?
Ratio Decidendi: 1. The burden of proof was upon the assessee to show to the satisfaction of the Income-tax Officer that the transfer was saved under sub-section (3) of Section 44-D of the Act. 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. 2. The assessee, though closely related, were acting in unison and were controlling the affairs of the Corporation. Sub-section (5) of S. 44-D gives an enlarged meaning to the words "power to enjoy" in sub-s. (1). The relevant clause of that subsection 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 not resident. or resident but not ordinarily resident, in the taxable territories, if- (e) such first-mentioned person is able, in any manner whatsoever and whether directly or indirectly, to control the application of the income.
Final Decision: The appeals were dismissed with costs.

Judgement

SUBBA RAO, J.: These appeals raise the question of the liability of the appellants to pay income-tax under S. 44-D (1) of the Indian income-tax Act, 1922, hereinafter called the Act, in respect of the Income of the M. Ct. M. Banking Corporation Limited.

2. Sir. M. Ct. M. Muthiah Chettiar, his wife Deivanai Achi, his two sons Chidambaram Chettiar and Muthiah Chettiar, and his two daughters Umayal Achi and Villia 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 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 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 Kula Lumpur on September 22, 1933. Between November 1, 1933, and November 9, 1933, assets of the firm of net value of Rs. 12 lakhs 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 upto 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 order 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 S. 44-D of the Income-tax Act in the hands of the present assessees and if so, to what extent.

A Division Bench of the High Court, by its judgment, dated August 4, 1958, held that the said income of the Corporation was attracted by S. 44-D of the Act, but before giving a final answer to the question pr

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