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Issues Involved:
1. Constitutional validity of sections 2(6A)(e) and 12(1B) of the Indian Income-tax Act. 2. Competence of the Parliament to enact legislation under Entry 82 of List I of the Seventh Schedule. 3. Alleged discrimination under Article 14 of the Constitution. Issue-wise Detailed Analysis: 1. Constitutional Validity of Sections 2(6A)(e) and 12(1B): The petitioner challenged the provisions of sections 2(6A)(e) and 12(1B) of the Indian Income-tax Act, arguing that they were ultra vires of the Union Legislature. The court explained that these sections were introduced by the Finance Act of 1955 to prevent tax evasion by treating certain loans or advances made by controlled companies to their shareholders as dividends, thus making them taxable. The court noted that the provisions aimed to counter the common practice where shareholders would receive company profits as loans to avoid tax on dividends. The court held that the impugned sections created a legal fiction to treat such loans as dividends, which was within the legislative competence of the Parliament. 2. Competence of the Parliament under Entry 82 of List I: The petitioner contended that the Parliament's power under Entry 82 of List I, which pertains to "Taxes on income other than agricultural income," did not extend to taxing loans as income. The court referred to previous judgments, including Navinchandra Mafatlal v. Commissioner of Income-tax and Amina Umma v. Income-tax Officer, to emphasize that the legislative power to tax income includes the power to enact measures to prevent tax evasion. The court concluded that the impugned provisions, which aimed to tax loans as income to prevent evasion, fell within the scope of Entry 82. Additionally, the court noted that even if the provisions did not fall under Entry 82, the Parliament had the authority under Entry 97 of List I, which provides residuary powers to legislate on matters not enumerated in List II or III. 3. Alleged Discrimination under Article 14: The petitioner argued that the provisions were discriminatory and violated Article 14 of the Constitution, as they imposed tax liability only on the first shareholder who obtained a loan, while others who might take loans later would escape taxation. The court rejected this argument, stating that the classification between controlled companies and other companies was rational and recognized in previous judgments. The court explained that the provisions treated all shareholders of a controlled company alike when they borrowed money while there were accumulated profits. The court held that the legislation was based on a rational distinction and did not violate the principle of equality before the law. Conclusion: The court dismissed the petition, upholding the constitutional validity of sections 2(6A)(e) and 12(1B) of the Indian Income-tax Act. The court found that the provisions were within the legislative competence of the Parliament under Entry 82 of List I and did not contravene Article 14 of the Constitution. The petitioner was ordered to pay the costs of the respondent, with counsel's fee set at Rs. 250.
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