1959 (10) TMI 44 - HC - Income Tax

Summary

Issues Involved:

1. Applicability of Section 44-D(1) of the Indian Income-tax Act.
2. Interpretation of "transfer of assets" under Section 44-D(1).
3. Chargeability of income under Section 44-D(1).
4. Assessee's power to enjoy income under Section 44-D(1).
5. Bona fide commercial transaction under Section 44-D(3)(b).
6. Avoidance of tax liability under Section 44-D(3)(a).

Detailed Analysis:

1. Applicability of Section 44-D(1) of the Indian Income-tax Act:
The court analyzed the conditions under Section 44-D(1), which include:
- Transfer of assets.
- Income traceable to transferred assets.
- Income payable to a non-resident or not ordinarily resident.
- Assessee's power to enjoy such income.

The court rejected the contention that the transfer must be made by the assessee himself, noting that the section does not specify who the transferor should be. The court cited English cases (Congreve v. Commissioners of Inland Revenue and Bambridge v. Commissioners of Inland Revenue) to support this interpretation.

2. Interpretation of "transfer of assets" under Section 44-D(1):
The court held that the section does not require the transferor to be the assessee. The focus is on the transfer of assets and the resulting income, regardless of who made the transfer. The court emphasized that the section aims to catch transactions that avoid tax liabilities, even if the transferor is not the assessee.

3. Chargeability of income under Section 44-D(1):
The court rejected the argument that the income must have been chargeable to tax at the time of transfer. It clarified that the chargeability is determined based on the state of law and facts during the assessment year, not the year of transfer. The court emphasized that the section's language refers to the income in the assessment year, not the year of transfer.

4. Assessee's power to enjoy income under Section 44-D(1):
The court found that the assessees had substantial shareholdings in the Corporation, giving them the power to enjoy the income. The court noted that the holding of shares in a close corporation, where the assessees could influence decisions, satisfied the requirement of having the power to enjoy the income.

5. Bona fide commercial transaction under Section 44-D(3)(b):
The court examined whether the transfer of assets was a bona fide commercial transaction. It noted that the Department and the Tribunal found no evidence to support the claim that the Corporation was started for the benefit of the Nattukottai Chettiars or to become the Pudukottai State's bank. The court concluded that the transaction was not bona fide.

6. Avoidance of tax liability under Section 44-D(3)(a):
The court directed the Tribunal to determine whether the transfer or associated operations had the purpose of avoiding tax liability. The Tribunal found that the promoters had the tax effect in mind when transferring the assets. The court agreed with the Tribunal's finding, noting that the timing of the transfer and the formation of the Corporation coincided with changes in tax laws, suggesting an intention to avoid tax.

Conclusion:
The court held that the assessees did not satisfy the requirements of Section 44-D(3)(a) and (b), and the income from the transferred assets was chargeable to tax under Section 44-D(1). The court answered the reference question in the affirmative, against the assessees, and ordered them to pay the costs of the reference.