1965 (11) TMI 24 - SC - Income Tax

Whether the income made by the Corporation can be assessed under the provisions of section 44D of the Income-tax Act in the hands of the present assessees and if so to what extent? Held that - The words by means of a transfer of assets mean nothing more than as a result or by virtue or in consequence of the transfer therefore reject the first contention of the learned counsel that the expression by means of a transfer in section 44D(1) of the Act means a transfer by an assessee and that as in the instant case the transfer was by the firm which was a juristic entity separate from the assessees the income of the Corporation was not assessable to tax in their hands. The second contention that the said sub-section can be invoked only if at the time of the transfer the income from the said assets was liable to tax and that as in the present case when the transfer of the assets was effected in 1933 the income therefrom was not chargeable to income-tax for it was foreign income not remitted to India---the said assets fell outside the ken of the said sub-section also rejected as the sub-section was designedly couched in the widest phraseology to prevent evasion of tax in the manner prescribed thereunder. If it was not so a person can transfer his assets to another in a year they have not yielded any income at all reserving indirectly the right to enjoy the income therefrom in future or he may transfer his assets when they are not yielding any income but which may under a scheme of future development yield enormous profits. On the other hand a bona fide transferor is amply protected by sub-section (3) of section 44D of the Act. As it is recorded in the statement of case that it was conceded before the Tribunal that the assessees had power to enjoy the income of the assets transferred within the meaning of section 44D(1) of the Act. In the circumstances the High Court rightly held that the assessees had the power to enjoy the income within the meaning of section 44D(1) 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. The correctness of the said finding of fact cannot be permitted to be canvassed in these appeals. Appeal dismissed.

Summary

Issues Involved:
1. Liability of appellants to pay income-tax under section 44D(1) of the Indian Income-tax Act, 1922.
2. Interpretation of "by means of a transfer of assets" in section 44D(1).
3. Applicability of section 44D(1) if the income from transferred assets was not initially chargeable to income-tax.
4. Determination of whether the assessees had the power to enjoy the income from the transferred assets.
5. Consideration of whether the transfer was a bona fide commercial transaction under section 44D(3).

Issue-wise Detailed Analysis:

1. Liability of appellants to pay income-tax under section 44D(1):
The appellants were assessed to income-tax under section 44D(1) in respect of the income of the M. Ct. M. Banking Corporation Limited. The Tribunal initially allowed the appeals of the assessees, but the High Court reversed this decision, holding that the income of the Corporation was attracted by section 44D. The Supreme Court upheld the High Court's decision, confirming that the appellants were liable to pay income-tax under section 44D(1).

2. Interpretation of "by means of a transfer of assets" in section 44D(1):
The appellants argued that the phrase "by means of a transfer" implied a transfer by the assessee themselves. However, the Court clarified that the sub-section's language does not specify who must transfer the assets but focuses on the consequences of such a transfer. The Court emphasized that "by means of a transfer of assets" means "as a result or by virtue or in consequence of the transfer," and the hand that transfers is immaterial. The Court supported this interpretation with decisions from English courts on similar provisions.

3. Applicability of section 44D(1) if the income from transferred assets was not initially chargeable to income-tax:
The appellants contended that section 44D(1) could only be invoked if the income from the transferred assets was liable to tax at the time of transfer. The Court rejected this argument, stating that the clause "any income which if it were the income of such person would be chargeable to income-tax" refers to the assessment year and not the year of transfer. The Court emphasized that the sub-section aims to prevent tax evasion by transferring assets to non-residents while enjoying the income indirectly.

4. Determination of whether the assessees had the power to enjoy the income from the transferred assets:
The Court examined whether the assessees had the power to enjoy the income from the transferred assets within the meaning of section 44D(1). Sub-section (5) of section 44D expands the meaning of "power to enjoy" to include direct or indirect control of the income. The Court found overwhelming evidence that the assessees had a controlling voice in the Corporation, as they were closely related and owned the majority of shares. The Court noted that the partners were acting in unison and had the power to enjoy the income from the assets.

5. Consideration of whether the transfer was a bona fide commercial transaction under section 44D(3):
The appellants argued that the transfer was a bona fide commercial transaction and not intended to avoid tax liability. The burden of proof was on the assessees to show that the transfer was saved under section 44D(3). The Tribunal found that the transfer was intended to avoid tax liability, and the High Court accepted this finding. The Supreme Court upheld the High Court's decision, stating that the finding of fact could not be challenged in the appeals.

Conclusion:
The Supreme Court concluded that the High Court had correctly answered the question of law, and the appeals were dismissed with costs. The Court affirmed that the appellants were liable to pay income-tax under section 44D(1) of the Indian Income-tax Act, 1922, and rejected all contentions raised by the appellants.