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TMI Blog1968 (1) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... o which we shall for the sake of convenience refer as the managing agency company, was the managing agent of Rohit Mills Limited and was a company in which the public are not substantially interested within the meaning of section 23A. By a resolution dated 3rd December, 1957, passed at an extraordinary general meeting of Rohit Mills Limited, it was resolved that the managing agency should be determined and accordingly it came to an end on 31 st December, 1957. Since the managing agency of Rohit Mills Limited was the only business of the managing agency company and it came to an end, the directors of the managing agency company resolved on 20th January, 1958, to wind up voluntarily the managing agency company and a notice calling the annual general meeting, inter alia, for the purpose of passing the necessary resolution was issued to the shareholders on the same day. The annual general meeting was convened to be held on 18th February, 1958, but before that, an extraordinary general metting was held on 10th February, 1958, and at that meeting a dividend of Rs. 399 per share was declared in compliance with a direction of the Income-tax Officer to make further distribution to avoid an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calling for particulars relating to the shares held by the assessee in the managing agency company and two other companies, namely, Chinubhai Naranbhai and Company Limited and Sakarlal Balabhai and Company Limited. Further correspondence thereafter took place between the assessee and the Income-tax Officer in the course of which the assessee disputed the applicability of section 44F but the Income-tax Officer rejected the contention of the assessee and applied the provisions of section 44F to the sale of 94 shares effected by the assessee in favour of Balabhai Damodardas Trust and Nita. The assessee preferred an appeal to the Appellate Assistant Commissioner but the appeal was unsuccessful and the matter was thereupon carried in further appeal to the Tribunal. The Tribunal took the view that section 44F was wrongly applied by the revenue authorities to the facts of the case and there were in the main three grounds on which this view was based. First, the Tribunal held that, on a true construction of section 44F, sub-section (2), the Income-tax Officer was bound to take into account all the circumstances in relation to the total holding of the assessee for the purpose of deciding wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the relevant year or years of assessment, furnish such a statement and such particulars in the form and within the time (not being less than twenty-eight days) required by the notice. (2) If it appears to the Income-tax Officer by reference to all the circumstances in relation to the securities of any such person (including circumstances with respect to sales, purchases, dealings, contracts, arrangements, transfers or any other transactions relating to such securities) that such person has thereby avoided or would avoid more than ten per cent of the amount of the income-tax or super-tax for any year which would have been payable in his case in respect of the income from those securities if the income had been deemed to accrue from day to day and had been apportioned accordingly, and the income so deemed to have been apportioned to him had been treated as part of his total income from all sources for the purposes of income-tax or super-tax, then those securities shall be deemed to be securities to which sub-section (3) applies. (3) For the purposes of assessment to income-tax or super-tax in the case of any such person, the income from any securities to which this sub-sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lculated with considerable accuracy in advance. A surtax-payer, who pays more than the standard rate of tax, can thus find it profitable to sell his securities just before they go 'ex-div.', as he will receive as capital the equivalent of the net dividend, instead of receiving a dividend subject to tax in his hands at a higher rate than that deducted from the dividend. " The learned author then goes on to say at page 1767, paragraph 1-1588 : " One obvious method for this type of taxpayer to avoid tax was to buy securities just after they had gone 'ex-div.' and sell them just before they went 'ex-div.' for the subsequent dividend. " or, we may add, to sell securities just before they went " ex-div." and buy them just after they had gone " ex div. ". It was " to deal with tax-payers who used this and similar devices on a substantial scale " that the English section was enacted. The same mischief also existed in India and, therefore, when the legislature made extensive amendments in the Income-tax Act in 1939, the legislature introduced section 44F to remedy such mischief. Originally the Bill did not include any clause corresponding to sections 44E and 44F but at the stage o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making the gift was to save tax on the income from the shares at the higher rate applicable to him. So also, to take another example, the assessee may impress his shares with the character of joint family property or if the shares are joint family property the assessee may effect a partition and the shares may on such partition go to the share of a coparcener as his separate property : neither would be a case of tax avoidance for, in either case, the capital asset itself would be transferred and income from the capital asset would no longer go to the assessee but would go to the Hindu undivided family or the coparcener, as the case may be. The same would be the position where the assessee sells the shares to a purchaser either by way of change of investment or as a dealer. Where the assessee divests himself of the source of income and in consequence his income is reduced leading to dimunition in tax liability, he cannot be charged with avoidance of tax liability. Tax avoidance, postulates that the assessee is in receipt of amount which is really and in truth his income liable to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may appar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is intended to protect the revenue against any attempted evasions of the liability to income tax imposed by the Act--that liability is imposed on the taxpayer in respect only of his income (section 10(1)) ; and the bona fide gift or sale by a taxpayer of assets producing income is therefore in no sense an attempt to evade his liability to income tax.... " This view taken by Knox C.J. was affirmed in appeal by Gavan Duffy and Starke JJ. who said : " The section, as the Chief Justice says, does not prohibit the disposition of property. Its office is to avoid contracts........which place the incidence of the tax or the burden of tax upon some person or body other than the person or body contemplated by the Act. If a person actually disposed of income-producing property to another so as to reduce the burden of taxation, the Act contemplates that the new owner should pay the tax. The incidence of the tax and the burden of the tax fall precisely as the Act intends, namely, upon the new owner. But any agreement which directly or indirectly throws the burden of the tax upon a person who is not liable to pay it, is within the ambit of section 53. " These observations of the Austra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to predicate", as observed by Lord Denning in Newton v. Federal Commissioner of Taxation by looking at the very act by which " the transaction " was implemented--that it was implemented in that particular way so as to avoid tax. " This construction is clearly borne out by the language of section 44F. Reading the marginal note of the section which can certainly be looked at for the purpose of understanding the drift of the section, we find that the words used are " avoidance of tax by sales-cum-dividends. " These words " avoidance of taxation " are not colourless words. They are strong and compelling words connoting a positive volition--a deliberate intention--on the part of the assessee to avoid tax. Moreover, the opening part of sub-section (2) refers to various transactions relating to the securities entered into by the assessee and then proceeds to say that the assessee has " thereby avoided " a certain amount of tax, clearly suggesting that the assessee has by adopting those transactions avoided tax or, in other words, the transactions are entered into by the assessee for the purpose of avoiding tax. These words in the opening part of sub-section (2) leave no doubt tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s where there is the end effect of escapement of tax liability irrespective of whether such end effect is merely incidental or is the result of a transaction entered into by the assessee for the purpose of achieving such end effect. The section is punitive in character and must be construed strictly and if two constructions are possible, one which favours the taxpayer must be preferred as against the other which throws a greater burden upon him. If the wider construction were adopted, the result would be that even a bona fide investor who changes his investment at an opportune time by selling his shares just before the date of declaration of dividend with a view to gather the maximum profit for his investment would be hit by the section. We do not think the legislature could have intended to bring about such a startling interference with the activities of bona fide investors. The context in which section 44F occurs also lends support to this construction which we are inclined to place on the language of section 44F. Section 44F is the last of a fasciculus of three sections in Chapter V-B. Section 44D, which is the first in this group of sections, strikes at avoidance of income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealings, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section. Thus, no one, by looking at a transaction of shares cum dividend, can predicate that the transfer was made to avoid tax. Nor can anyone by seeing a private company turned into a non-private company, predicate that it was done to avoid Div. 7 tax, see W. P. Keighery Ply. Ltd. v. Commissioner of Taxation. Nor could anyone, on seeing a declaration of trust made by a father in favour of his wife and daughter, predicate that it was done to avoid tax, see Deputy Federal Commissioner of Taxation v. Purcell. But when one looks at the way the transfers were effected in Jaques v. Federal Commissioner of Taxation, Clarke v. Federal Commissioner of Taxation and Bell. v. Federal Commissioner of Taxation, the way the cheques were exchanged for like amounts and so forth--there can be no doubt at all that the purpose and effect of that way of doing things was to avoid tax. " These words though uttered with reference to section 26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any being taken in liquidation, a large amount of accumulated profits of the earlier years would be distributed by the liquidator and it would be liable to be taxed as dividend in the hands of the shareholders by reason of section 2(6A)(c). The assessee, therefore, sold the said 94 shares at the fair market price which would necessarily reflect the value of the distribution to be made by the liquidator on liquidation and thus obtained as capital receipt an amount substantially equivalent to the amount of distribution to be made by the liquidator. The assessee, in reality and substance, obtained the amount of distribution to be made by the liquidator without the liability to taxation which would have certainly fallen upon him if he had not sold the said 94 shares and received the amount of distribution directly from the liquidator, and this was achieved by, the assessee by the artifice or device of sale of the said 94 shares at the fair market price. It is in these circumstances impossible to resist the conclusion that the assessee sold the said 94 shares for the purpose of avoiding liability to taxation. It is no doubt true that the assessee had no longer any use for the said 94 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion must not be confined only to the circumstances in relation to the securities in respect of which it is alleged that there is avoidance of tax liability. The Tribunal held that since the Income-tax Officer had not examined the circumstances in relation to the total holding of the assessee for the purpose of deciding whether the sale of 94 shares effected by the assessee was with a view to avoiding tax liability and had failed to consider what were the other shares and securities held by the assessee apart from the said 94 shares and whether any transactions or transfers were entered into by the assessee relating to those shares and securities and if so what was their effect, the condition set out in the opening part of sub-section (2) of section 44F was not satisfied and section 44F could not, therefore, be properly applied. This conclusion of the Tribunal, we do not think, is supported by the language of sub-section (2) of section 44F. The question really is what is the true import of the expression " the securities " in the opening part of sub-section (2) of section 44F. Does it refer to all the securities of the assessee or is it confined only to the securities in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section. The Income-tax Officer was, therefore, not required to take into account all the circumstances in relation to the total holding of the assessee but was quite justified in focussing his attention only on the circumstances with respect to the sale of 94 shares in respect of income from which there was, according to the Income-tax Officer, avoidance of tax liability and which, therefore, formed the subject-matter of action under section 44F. That takes us to the second question arising in the reference, namely, as to what is the true connotation of the word " income " in section 44F. Does the word " income " include the artificial categories of income referred to in the several clauses of section 2(6A) ? Section 2(6A) includes within the category of dividend certain distributions and payments which are not dividend according to the accepted connotation of that word and by reason of section 2(6C)(i) which defines " income " as including dividend, such distributions and payments are included within the category of " income ". The distribution of Rs. 1,750 per share made in the present case was a distribution falling within section 2(6A)(c) and the learned Advocate-General, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uce a different concept of dividend for the purpose of income-tax and that it was not as if what was not dividend was fictionally converted into dividend. But this argument does not appeal to us. Fiction of law is not necessarily created by any particular expression. It is no doubt true that the common legislative device employed to create a legal fiction is to use the expression " deemed " but that is not the only device available to the legislature for creating a fiction of law. It is interesting to note that even the expression " deemed " does not always create a legal fiction. As observed by Lord Radcliffe, the expression " deemed " is apt to include not only the impossible but also the obvious and the uncertain. Where a particular receipt is not income but the law says that it shall be regarded as income, the law departs from reality and this departure constitutes a fiction of law. A distribution falling within section 2(6A)(c) is, therefore, not really income but is fictionally regarded by law as income and the question is whether it is included within the word " income " in section 44F. Now the first point which arises for consideration is whether there is anything repugna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome mere pieces of paper incapable of producing any income. Therefore, as a matter of plain grammatical English, it would not be correct to speak of a distribution of the property of the company on liquidation as income from shares. The words " income from securities " are referable only to income by way of yield from securities and as such they signify only periodic income, that is, income referable to a period of time. It is no doubt true that at one place in sub-section (1), the legislature while referring to income has used the words " in respect of which " and not " from " but the repeated use of words referring to the income as income from securities along with the general drift of the section and the way in which the section is couched clearly indicate that what the legislature had in view was not fictional income of the kind specified in section 2(6A)(c) but periodic income, that is, income referable to a period of time. The second indication of the legislative intent is to be found in sub-section (1) of section 44F. The words " ...the income received by him was less than the sum to which the income would have amounted if the income from such securities had accrued from d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by him from the shares or securities is less than the sum to which the income would have amounted if, instead of accruing at stated points of time, the income had accrued from day to day and been apportioned accordingly for the period in question proceed to take action against the assessee under the section in respect of the shares or securities. Sub-section (1) thus clearly postulates that the income from the shares or securities is capable of accruing from day to day and is apportionable by time but in law it does not accrue from day to day and accrues only at stated points of time. Where in respect of such income the conditions specified in sub-section (1) are satisfied, the Income-tax Officer would issue notice to the assessee as contemplated by that sub-section and if the conditions specified in sub-section (2) are satisfied in respect of such income for any year, sub-section (3) says that though the income from the shares or securities did not in law accrue from day to day, it shall be deemed to have accrued from day to day. Sub-section (1)--and for the matter of that even sub-section (2)--merely contemplates fictional accrual from day to day : it does not supply a fictional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o which the income would have amounted if the income from the shares or securities had accrued from day to day and been apportioned accordingly. There being no reference to an accounting year in the scheme of the sub-section and the inquiry being in reference to a specified period of time, it is difficult to see how the fictional accrual of income from day to day could be related to the commencement of an accounting year. Sub-section (1) does not say so and to so read the sub-section would be to add words which are not there. Moreover, even as a fiction, it would be most artificial to treat the income as having accrued from day to day over the period from the commencement of the accounting year in which it has accrued up to the date of actual accrual. There is no logic or principle for relating fictional accrual of income from day to day to the commencement of the accounting year which may vary from assessee to assessee. As a matter of fact, if we consider the historical background against which the corresponding English section was enacted, it becomes clear that the fictional accrual from day to day which the legislature had in mind was accrual from day to day over the period of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were applicable to such income and by reason of the fiction enacted in the section such income was deemed to accrue from day to day from the commencement of the accounting year in which it actually accrued, the result would be that in many cases the very essence of the fiction in section 2(6A)(c) would be destroyed, for the fiction in section 44F would deem a part of the income in respect of the period from the commencement of the accounting year upto the date of liquidation to accrue prior to the date of the liquidation, whereas the very essence of the fiction enacted in section 2(6A)(c) is that the distribution representing the income is made subsequent to the date of liquidation. Moreover, like a distribution under section 2(6A)(c) even an advance or loan taken by a shareholder from the company falling within section 2(6A)(c) would be within the ambit and operation of section 44F and, therefore, if the purchaser of the shares from the assessee takes such an advance of loan, it would be income from the shares within the meaning of section 44F and if the other conditions of the section are satisfied it would be deemed to accrue from day to day from the commencement of the accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as a regular reprehensible practice. " These words according to their plain natural meaning connote that the avoidance of tax must be by way of an exception to the regular practice of the assessee and must not be part of a regular practice followed by the assessee. The revenue, however, pleaded that the word " systematic " did not involve the idea of number and that it only meant that the avoidance must be according to plan or organized method, that is, must be designed or deliberate. But this construction cannot be accepted and there are several reasons why it does not appeal to us. One reason is that the requirement that the avoidance must be intentional or designed is already brought in by sub-section (2) and if the avoidance is not designed or deliberate it would not be avoidance within the meaning of that sub-section and section 44F would not apply and there would be no necessity to provide for exemption under the proviso. Secondly, if the legislature wanted to prescribe in the proviso that the avoidance must not be designed or deliberate, the legislature could have used the words " designed " or " purposeful " or " deliberate " or " intentional " but instead the legislatu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od is used systematically ; in this, as in some other are as of the law, the dog is allowed but one bite. " It may also be noted that section 44F was introduced in our Act by an amendment made in 1939 after the decision in Bilsland's case. The legislature when it enacted section 44F must be taken to have been aware of the decision in Bissland's case interpreting the words " exceptional and not systematic " and yet the legislature retained the same phraseology as in section 33, sub-section (4). It may, therefore, be reasonably assumed that the words " exceptional and not systematic " were used by the legislature in the proviso in the same sense in which they had been judicially interpreted in Bilsland's case. If this is the true meaning it is clear that the avoidance of tax in the present case was exceptional and not systematic, for there was only one instance of such avoidance in the accounting year and it is not possible to say, that it was part of a regular practice followed by the assessee. The revenue is, however, on firmer ground when we turn to the second condition which requires that there should not be " in any of the three preceding years any such avoidance of income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. Basing himself on this construction he contended that, since the avoidance of tax referred to above was a solitary instance of avoidance of tax in the year 1956-57 and was, therefore, exceptional and not systematic, the second condition was satisfied in regard to all the three preceding years and the assessee was entitled to the benefit of the exemption given by the proviso. But this contention is based, on a misconstruction of the words " such avoidance of income-tax or super-tax. " We agree that these words refer to the avoidance of income-tax or super-tax mentioned in the first condition but the avoidance of income-tax or super-tax mentioned in the first condition is the avoidance referred to in sub-section (2) and that is the avoidance of income-tax or super-tax which is connoted by these words. These words do not import the quality of " exceptional and not systematic " which the avoidance of income-tax or super-tax is required to possess by virtue of the first condition. The first and the second conditions are cumulative and in construing the second condition, it would not be correct to read the words " such avoidance of income-tax or super-tax " as referable to the quality ..... X X X X Extracts X X X X X X X X Extracts X X X X
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