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TMI Blog1959 (10) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ed of his sons and his widow. In June, 1930, this firm started a new money-lending business at Kuala Lumpur in the Federated Malay States with a capital of twelve lakhs of rupees, which it was stated had come out of the realisations from the business in Burma. On March 24, 1932, a company called the M. CT. M. Banking Corporation Ltd., was incorporated in Pudukottai, and it commenced business on March 31, 1932. One of the purposes for which the Corporation was constituted was to acquire and carry on the business which the S. RM. M. CT. M. Firm had been carrying on in Kuala Lumpur. On September 22, 1933, the Corporation opened a branch in Kuala Lumpur. Commencing from that date various assets of the firm were transferred to the Corporation. The amounts transferred up to November 1, 1933, aggregated to about four and a half lakhs of rupees. On November 9, 1933, the firm transferred $4.65 lakhs or seven lakhs of rupees to the Corporation. A further sum of $9,400 was adjusted in the books with the result, that assets of the firm of the nett value of twelve lakhs of rupees were transferred to the Corporation. In consideration of the assets so transferred the Corporation allotted to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transfers fell within the ambit of section 44-D. Ultimately, however, the Tribunal allowed the appeals of the assessees on the ground, that in order to attract the operation of section 44-D the income from assets which were transferred should have been initially chargeable to tax. The assets which were transferred in the instant case lay in Kuala Lumpur, that is, outside British India, and therefore the unremitted income therefrom was not chargeable to income-tax in 1933 when the transfers were effected. For that reason the Tribunal concluded that section 44-D (1) did not apply. Thereupon the Commissioner asked for a reference to the court and the question he posed was : Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that, though otherwise section 44-D was applicable, it is not warranted because the transfer in question happened before 1939 and at a time when foreign income was assessable on remittance basis alone? The Tribunal, however, considered that the proper question that arose was: Whether the income made by the Corporation can be assessed under the provisions of section 44-D of the Income-tax Act in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax v. C.W. Figgies and Company [1953] 24 ITR 405 . As the transfer in this case was not made by the assessees section 44-D(1) was not attracted. We are unable to accept this contention of Mr. Jagadisa Ayyar. The section does not say when any person has transferred any assets. On the other hand, it reads, where any person has, by means of a transfer of assets etc. The section does not specify who should have made the transfer and in terms it does not require that the assessee should be the transferor. Though in the large majority of cases it may be found that the transferor is the assessee himself and the transferee is some person over whom he has a measure of control the section is actually silent as to who the transferor should be. It proceeds on the basis that it is of no consequence who the transferor is. If there has been a transfer of assets and if by reason thereof (whether alone or in conjunction with associated operations) certain consequences follow, the section would apply and the liability to pay the tax will arise. The matter is covered by authority. Vide Congreve and Congreve v. Commissioners of Inland Revenue [1946] 30 Tax Cas. 163 and Bambridge v. Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ech which Lord Simonds delivered, he dealt with this argument* : My Lords, on this question I agree at all points with the unanimous judgment of the Court of Appeal, which was delivered by Cohen L.J. The preamble or introductory words of the section which state its purpose do not, in my view, assist the contention, which was developed upon its operative words, that the avoidance by an individual of liability to tax must be achieved by means of a transfer of assets effected by that individual. They are, on the contrary, in the widest possible terms, and I do not know what better words could be used if the Legislature intended to define its purposes as covering a transfer of assets by A, by means of which B avoided liability to tax. When I turn to the operative words, I cannot reach any other conclusion. It was urged that in their context the words ' by means of any such transfer' can mean only a transfer effected by the individual who avoids tax liability. It was said that they do not mean the same as 'as a result of' or 'by virtue or in consequence of, and the immediate proximity of the latter phrase was referred to as pointing the contrast. My Lords, this i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... open to the appellant to argue that she may not be liable by reason of the transfers made by her parents. The second contention of Mr. Jagadisa Ayyar was to this effect. Sub-section 44D(1) refers to any income which if it were the income of such person would be chargeable to income-tax . The charge-ability referred to here must have arisen in the year in which the income accrued or arose. Before 1939 even a resident was not taxed on his foreign income unless it was brought into the taxable territories. At the time the S. RM. M. CT. M. Firm transferred its assets to the Corporation those assets were still in Kuala Lumpur, and so neither the assets nor the income therefrom was chargeable to tax, and income not chargeable to tax at the time it arose is outside the scope of section 44D. The sub-section speaks of a transfer of assets by virtue or in consequence whereof, either alone or in conjunction with associated operations . These words imply that the income must have been chargeable to tax also in the year in which the transfer or associated operations were carried out. In the present case, transfer of the assets of the S. RM. M. CT. M. Firm was completed in 1933, and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were right, the profits the assessee may derive through or via. the non-resident company would not be liable to tax, because in the year the business was transferred (or the associated operations took place) there was no profit and consequently no liability to pay any tax. One would have thought that section 44D was deliberately intended to catch transactions of this kind in the net of taxation. A construction that would defeat the manifest purpose of a statute is not to be readily adopted unless of course that is the only reasonably possible construction. As explained on page 28 of Volume 20 of Halsbury's Laws of England, third edition : Taxing Acts are to be construed strictly, in the sense that one has to look merely at what is clearly said, there being no room for any intendment; but a fair and reasonable construction must be given to the language without leaning to one side or the other. Whether in applying the terms of the charge or the terms of an exemption no considerations of equity or hardship affect the construction of the Act. We must read the words as they appear in the statute, and when we do so it will become manifest that the construction which Mr. Jaga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... am Chettiar holds a little less than one-third of the shares, his brother Muthiah Chettiar a little less than one-fourth and Lady Deivanai Achi more than one-fourth. The holdings of all the others put together are less than half of the number of shares which Chidambaram Chettiar alone holds. The Corporation is an extremely close Corporation, and, as a matter of actual fact, the assessees should have no difficulty in getting the Corporation to do what they want it to do. It is no doubt true that the assessees do not form an association which could be assessed on that basis and that again, they do not constitute one assessable unit. But that is only technically so. As a matter of actual fact their close relationship and identity of interests would induce them to act together and in substance enable them to do what they liked with the Corporation. It should be remembered that it was the firm which consists of the three assessees that was constituted the agent of the Corporation. It must also be borne in mind that the sub-section does not require that there should be a right to present enjoyment of the income. It is sufficient if the assessee has acquired rights which give him the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficial owners together with the benefit of a debt owing to him by one of the companies. The consideration for that transfer was (1) the issue to the appellant of a series of promissory notes payable on demand, (2) the issue of shares to the appellant and to his wife, and (3) the issue of further shares at the appellant's direction to his sons. Under the bylaws of the Canadian company, the appellant, by virtue of the rights attaching to his shareholding, had full control as he was able to elect and remove the directors, to amend the by-laws and to decide the allotment and transfer of shares. There was no doubt in that case that the appellant had made a transfer of his assets in consequence whereof the income, viz., the dividends paid on the shares of the companies which had been transferred to the Canadian company, had become payable to the person resident and domiciled out of the United Kingdom, viz., the Canadian company, and, that by reason of that transfer the appellant had acquired certain rights. The dispute was as to whether these rights gave him power to enjoy the income or any part of the income of the Canadian company. The Court held (page 214): It was contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lden v. Beck [1940] 23 Tax Cas. 384, that the notes included an element of interest in respect of which the appellant was liable to income-tax. Against the assessments made on him Lord Howard de Walden appealed and contended that he had power to enjoy only small portions of the income of the companies since by means of the transfers and the associated operations the only benefit he received from their income was the interest element in the promissory notes and any dividends on his holding of shares in two of the companies and that he had not therefore power to enjoy the income of the companies within the meaning of sub-section (3) of section 18. This contention was negatived. On page 131 Macnaghten, J., observed: But I think the words of the section are too strong to admit of the construction for which Mr. Tucker contended. In the sub-paragraph (e) the word 'benefit' does not appear: power to 'control' the income according to the definition is 'power to enjoy' it; and under sub-paragraphs (b) and (c) the individual who obtains the 'benefit' mentioned in those sub-paragraphs is a person who ex hypothesi has not received any part of the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transaction within the meaning of clause (b ) of this sub-section. It was contended that the object of forming the Corporation and registering it in Pudukottai was to serve the interests of the large number of Nattukottai Chettiars in Pudukottai State who were doing money-lending and transacting other business in Malaya and Burma and who had no banking and exchange facilities in the State of Pudukottai. It was also stated that the hope was entertained that the Corporation would grow in stature into the State Bank of Pudukottai. It was explained before the departmental officers that the idea of forming the Corporation originated in the mind of late Sir M. CT. M. Muthiah Chettiar as early as 1929, but that he died before he could put his ideas into effect. His son took up the matter in 1930 and got a firm of solicitors in Bombay to prepare the memorandum and the articles of association and to comply with the other requirements of law. Mr. Jagadisa Ayyar contended that neither the Department nor the Tribunal has expressly found that the transaction was not a bona fide commercial transaction. In paragraph 14 of the order in I.T.A. 619 of 1947-48 dated May 5, 1952, which the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h finding the claim of the assessees is found to fall outside clause (b), the assessees can still invoke clause (a), and, in order to obtain the benefit of clause (a) it is sufficient to show that neither the transfer nor the associated operation had for its purpose or for any of its purposes the avoidance of liability to taxation. That these clauses are in the alternative appear to have been overlooked both by the Appellate Assistant Commissioner and by the Tribunal. The requirements of the two sub-clauses have been mixed up. In paragraph 14 of his order dated May 5, 1952, the Assistant Commissioner says: The two points on which satisfaction has got to be given under sub-section (3) are: (a)that it was not the purpose of the creation of the non-resident Corporation to avoid taxation in British India; and (b)that the transfer of the assets constituted bona fide commercial transactions. It has been noticed that the Assistant Commissioner used the word and for or as appears in the statute. The Tribunal has also fallen into the same error because in paragraph 15 it says : It was next argued that under sub-section (3) of section 44D the assessees were entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se only because of the change made in the Act in 1939, and nobody could have thought of that in 1933. The test must be, not has tax been avoided, but was there any intention to avoid tax, and, in order to decide that, said Mr. Jagadisa Ayyar, we must place ourselves in the position of the promoters of the Corporation when they promoted the company. Mr. Jagadisa Ayyar asked, how can it be said that the intention was to avoid tax, because the moment the Corporation declared dividends and the dividends came into the hands of the assessees they will be liable to pay tax. Mr. Rama Rao Sahib explained that there are other ways of bringing money into the taxable territories than in the shape of dividends. For instance, bonus shares issued by the company could be sold and the sale proceeds thereof would not attract tax. Again, the Corporation may reduce its capital and return the amount by which the capital was reduced to its shareholders. In that case again, there will be no liability to tax. The Corporation may go into voluntary liquidation and the assets may be returned that way. It may make loans to the shareholders with no intention of collecting the money. But then, as was explain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration before giving our finding. The statement is submitted after consideration of such further evidence as the parties chose to produce before us. 2. One handicap in this case is the absence of direct evidence which could have been produced by the assessee on account of the death of Sri Chidambaram Chettiar who was in charge of the affairs of the firm, as well as the Corporation during his lifetime. In the absence of such direct evidence the conduct of the assessee, the firm and the Corporation in the period 1932 to 1937 have to be taken into account and inferences have to be drawn therefrom. It was vaguely mentioned that both the late Sir M. CT. Muthiah Chettiar and his son, the late Chidambaram Chettiar, during their lifetime had an idea of starting a bank in Pudukottai State for the convenience of the Chettiar community residing in the Pudukottai State and carrying on business outside India. It was mentioned that they had correspondence with Messrs. Little Co., a well-known firm of solicitors in Bombay, on that subject. In spite of several opportunities being given such correspondence had not been produced. Therefore, no direct evidence had been produced by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit, but represented the credit balances of the branch of the firm in the head office books at Madras occasioned by non-encashment of hundies by the constituents of the Corporation at Madras. He argued that these were not remittances of profits and strictly not assessable to tax. But this argument ignores that in the then prevailing circumstances, the Department was treating such credit balances of foreign branches as remittances of foreign profits and no protest was raised. In other words, the remittances were measured by the balances in favour of the foreign branches in the head office books. The assessee also did not dispute the correctness of such a treatment. It is too late in the day now to argue that they did not represent remittances of profit. Whatever that may be, we are immediately concerned only with the fact that the firm was subject to tax on the sums mentioned in column 2 above. As mentioned above, the Corporation was formed on March 24, 1932, and the assets of Kuala Lumpur branch of the firm were transferred by November, 1933. The Corporation did not file returns of income in response to the notice under section 22(1) of the Act for the assessment years 1933-34 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,084 the sum taxed was ₹ 51,223 (column 4 above). On the other hand, the Corporation issued bonus shares of the face value of ₹ 5 lakhs in 1938. It is also significant that the credits in the head office of the firm at Madras were in favour of the Corporation but never vice versa. On these facts, it cannot be said that the promoters of the Corporation did not have the tax effect in their minds when the firm transferred its assets to the Corporation in late 1933. If the promoters of the Corporation did not have the tax aspect in view there is no reason why dividends should not have been declared by the Corporation to the shareholders who were in British India. 5. The departmental representative brought to our notice a letter by the late Chidambaram Chettiar dated March 28, 1936, in which he stated that he had received remuneration of ₹ 12,000 as Governing Director in the form of 120 shares of the paid up value of ₹ 100. He also referred to the letter dated July 17,1936, on behalf of Chidambaram Chettiar and another of May 28, 1937, from Chidambaram Chettiar that he would not be liable to tax on the remuneration received in the form of shares. These letters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... became taxable whenever they were sent to British India without any time limit. (The relevant portions are quoted below): Before 1933 After April 11, 933. Profits and gains of a business accruing or arising without British India to a person resident in British India shall be deemed to be profits and gains of the year in which they are received or brought into British India, notwithstanding the fact that they did not so accrue or arise in that year, provided that they are so received or brought in within three years of the end of the year in which they accrued or arose. Income, profits and gains accuring or arising without British India to a person resident in British India shall, if they are received in or brought into British India, be deemed to have accrued or arisen in British India and to be income profits and gains of the year in which they are so received or brought, notwithstanding the fact that they did not so accrue or arise in that year Provided that nothing contained in this sub-section shall apply to any income, profits or gains so accruing or arising prior to the 1st day of April 1933, un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er contentions of the assessee were negatived by the order dated August 4, 1958. On the question specifically reserved for decision, further findings of the Tribunal were considered necessary and those findings were called for. Sub-section (3)(a) runs : Sub-sections (1) and (2) shall not apply if such first-mentioned person shows to the satisfaction of the Income-tax Officer, either- (a) that neither the transfer nor any associated operation had for its purpose or for one of its purposes the avoidance of liability to taxation. Thus where the sole purpose of the transfer was avoidance of taxation or where even one of the purposes of the transfer was avoidance of taxation, the provisions of sub-section (1) of section 44D would come into play. The finding of the Tribunal was in effect that the assessee had not satisfied the requirements of sub-section (3)(a) of section 44D. How they put it in paragraph 9 of their further statement was : We hold that the promoters of the Corporation certainly had at the back of their minds the tax effect on the Kuala Lumpur business carried on previously by the firm when transferring the firm's assets to the Corporation in 1933 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assets held at Kuala Lumpur, or at least a portion thereof, the assessee was assessed between 1930 and 1937. That was certainly one of the relevant factors the Tribunal was entitled to take into account in deciding whether by effecting a transfer of the assets in 1933 one of the objects at least of the firm was to avoid tax liability in what was then British India. The strongest argument learned counsel for the assessee could urge was that in 1933 the position still was that income that accrued abroad could be taxed only on a remittance basis. The only change effected in 1933 by the amendment which came into force with effect from April 1, 1933, was the abolition of the earlier limit of three years. Even after April 1, 1933, remittance was the main basis of liability to Indian income-tax. Learned counsel for the assessee therefore urged that, if the profits that could be traced to the assets transferred by the firm from Burma to Kuala Lumpur were received at Kuala Lumpur and retained there they could not be taxed. It would be of no relevance if these profits were transferred to Pudukottai. But whether those profits or any portion thereof were brought direct from Kuala Lum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies before they became taxable. So, failure to declare a dividend by itself may not be quite so relevant in deciding what the intention was either in transferring the funds or in refraining from declaring dividends or even in subsequently capitalising the undeclared dividends. In paragraph 7 of its order the Tribunal said : It is therefore reasonable to infer that the transfer of the firm's assets to the Corporation was made with a view to avoid tax on remittances from Kuala Lampur to Madras. We have already referred to the contention of the learned counsel for the assessee that this ignored the real position, that whether the amount came from Kuala Lumpur to Madras or whether the amount came from Kuala Lumpur via Pudukottai to Madras, once it came to Madras, that is, once the moneys were remitted to the taxable territories, those remittances became taxable before 1937. So the Tribunal would not be quite correct when it observed that from the one fact of transfer it could be said the intention was to avoid tax on remittances, in the absence of any evidence to show that a probability or even a possibility of remittances from Kuala Lumpur had been established by the evide ..... X X X X Extracts X X X X X X X X Extracts X X X X
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