Article 14 of the constitution not violated.

Ramachandra Iyer, J.-

This is a petition under Article 226 of the Constitution praying for the issue of a writ of certiorari to call for records in G.I. No. 7-L/55-56, dated 28th February, 1957, and to quash the order of the Additional Income-tax Officer, Special Circle, Madras, assessing the petitioner to tax under section 34 of the Indian Income-tax Act.

The petitioner, an assessee, was assessed to an income of Rs. 3,362 for the year 1955-56 (the corresponding year of account being 13th April, 1954 to 12th April, 1955 ) on the basis of his return, no tax was levied thereon, as it was below the taxable limit. Some time thereafter, the Additional Income-tax Officer, Special Circle, Madras, obtained information which revealed that the assessee had failed to disclose fully and truly his real income for the year. The Officer initiated proceedings under section 34 of the Act, and after enquiry, found that, during the year of account, the assessee should be held as deemed to have received by way of dividend a sum of Rs 1,01,695. On that finding, the petitioner was assessed to tax on his total income of Rs 1,05,057, the tax levied thereon being Rs. 31,830-8-0. The petitioner has filed before the Appellate Assistant Commissioner, an appeal against the order of assessment under section 30 of the Act. He has also applied under Article 226 of the Constitution for quashing the same on the ground that the provisions of the Indian Income-tax Act, namely, sections 2(6-A) (e) and 12 (1-B), under which he was deemed to have received the dividends, were ultra vires of the Union Legislature.

The facts necessary to appreciate the question raised are these. The assessee is a shareholder, owning one share of Rs. 1,000 in a private limited company, K.M.S. Lakshmana Iyer & Sons, Ltd. The company has its registered office at Madurai, and carries on buiness as dealers in yarn, it being one of the distributors of the yarn produced by Madura Mills, Ltd. The year of account adopted by the company is the year ending with 15th of September, each year. The paid up capital of the company is Rs. 5,00,000 divided into 500 shares of Rs. 1,000 each. During the relevant period, the other shareholders in the company were the four sons of the petitioner, the first three holding 125 shares each and the fourth 124 shares. On 31st August, 1955, the assessee transferred even the one share held by him in favour of his fourth son. There is no dispute that the company is a “controlled company” coming within section 23-A of the Income-tax Act, and that, during the relevant period, the petitioner was a shareholder therein.

The Company earned considerable profits, a sum of Rs. 25,000 out of the undistributed profits was set apart on 16th September, 1953, as a reserve. In the following year that is, on 16th September, 1954, there was a similar reserve of Rs. 75,000. Those amounts, which could have been distributed to the shareholders as dividends, were not so distributed. But the petitioner was drawing monies from the company as loans. During the year of account, a sum of Rs. 70,429-9-11 was granted to him as a loan. On 27th April, 1955, the liability of the petitioner to the company for amounts granted to him by way of loans was Rs. 87,596-0-8. On the latter date, the company by a resolution made in that behalf, wrote off the entire amount due by the petitioner as irrecoverable. To offset the loss resulting from the writing off of the petitioner’s liability, the company transferred the reserve fund of one lakh of rupees (representing the undistributed profits) to its profits and loss account. In effect, the undistributed profits wiped off the liability of the petitioner in respect of his drawings.

The Income-tax Officer held that the loans advanced by the company to the assessee would be dividends, as defined in section 2 (6-A) (e) of the Act, and would be assessable to tax under section 12 (1-B), being loans to shareholders prior to 1st April, 1955. The amount of loan was, ther

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