1961 (2) TMI 69 - HC - Income Tax

Summary

Issues:
1. Constitutional validity of section 2(6A)(e) of the Income-tax Act.
2. Whether the loans obtained by the petitioner retained the character of agricultural income.

Analysis:

Issue 1: Constitutional validity of section 2(6A)(e) of the Income-tax Act
The petitioner challenged the constitutional validity of section 2(6A)(e) of the Income-tax Act, arguing that the Parliament lacked legislative competence to enact a provision deeming loans as income. The court cited the decision in Lakshmana Aiyar v. Additional Income-tax Officer, which upheld the legislative competence of Parliament under entry 82 of List I of Schedule VII of the Constitution. The court emphasized that the power to legislate on taxes on income included measures to prevent tax evasion, such as deeming loans as income for taxation purposes. Consequently, the court rejected the petitioner's contention on the ultra vires nature of section 2(6A)(e).

Issue 2: Character of loans obtained by the petitioner
The petitioner claimed that since the loans were derived from a company with agricultural income, they should retain the character of agricultural income and be exempt from taxation under section 4(3)(vii) of the Income-tax Act. However, the court analyzed the provisions of section 2(6A)(e) and clarified that any payment deemed as dividend, including loans, did not retain the original character of the income in the hands of the company. The court distinguished between the taxation of company profits and shareholder receipts, highlighting that the amended provisions of section 23A and section 2(6A)(e) imposed tax liability differently. Therefore, the court concluded that the loans obtained by the petitioner did not continue to hold the status of agricultural income and were subject to taxation.

In summary, the court upheld the constitutional validity of section 2(6A)(e) and ruled that the loans obtained by the petitioner, even if originating from agricultural income, were not exempt from taxation. The court dismissed the petitioner's arguments on both issues, leading to the rejection of the writ petitions.