Sardar Baldev Singh Vs. Commissioner of
Income-Tax, Delhi & Ajmer  INSC 138 (2 September 1960)
SINHA, BHUVNESHWAR P.(CJ) IMAM, SYED JAFFER
CITATION: 1961 AIR 736 1961 SCR (1) 482
CITATOR INFO :
R 1961 SC 743 (12) D 1961 SC1708 (14,17) F
1961 SC1717 (8) R 1962 SC 123 (5,6) R 1962 SC1323 (2,6) E 1963 SC 491 (2) RF
1963 SC 835 (2,4) R 1964 SC 925 (24) R 1965 SC1375 (11,12,35 ETC.) R 1965
SC1862 (10) MV 1966 SC1089 (55) R 1968 SC 150 (7) E 1968 SC1286 (6) RF 1972 SC
425 (26) RF 1986 SC1099 (9)
Income-tax Assessment-Undistributed dividend
deemed to have been distributed-Reassessment as income escaping assessmentVenue-Constitutional
validity of enactment Indian Incometax Act, 1922 (11 of 1922), SS. 23A, 34, 22,
64Government of India Act, 1935, Seventh Sch., List I, Entry 54.
The appellant, at the time a resident of
Lahore, was assessed to income-tax on an income of Rs. 49,047 for the
assessment year 1944-45 by the Income-tax Officer, Lahore.
After the partition in 1947 he shifted to
Delhi and resided there. He was one of the three share-holders of a company
called Indra Singh and Sons Ltd. of Calcutta, the shares of all the three
shareholders being equal. The company at a meeting held oil April 17, 1943,
passed its accounts for the year ending March 31, 1942, but declared no
dividends although the accounts disclosed large profits. On June 11, 1947, the
Income-tax Officer, Calcutta, passed an order under s. 23A of the Income-tax
Act that the sum of Rs. 4,74,370, being the appellant's share of the
undistributed assessable income of the company, be included in his income for
the assessment year 1944-45. Thereupon the Income-tax Officer, Delhi, on April
10, 1948, issued a notice to the appellant, who was then working as the Defence
Minister of India and residing in Delhi, under s. 34 of the Act to file a
revised return, which he did under protest, reopened the earlier assessment and
by a fresh order made on March 25, 1949, assessed the appellant on an income of
Rs. 5,23,417 for the year in question. It was contended on behalf of the
appellant that the proceeding under S. 34 could be held only in Lahore and not
in India at all. The question for determination was whether the Income-tax
Officer, Delhi, could validly reassess the appellant under s. 34 of the Act.
Held, that the issue of a notice under S. 34
of the Income tax Act, 1922, under the provision of the section itself,
attracted such provisions of the Act as might apply to a notice issued under s.
22(2) of the Act and since s. 64 of the Act was the only provision under which
the place of assessment upon a notice under s. 22(2) could be determined, in
absence of anything to the contrary in the Act, s. 64 applied to an assessment
under s. 34 of the Act. The appellant was, therefore, rightly assessed by the
Income-tax Officer, Delhi, under s. 64(2) of the Act.
483 C. V.Govindarajulu v. Commissioner of
Income-tax, Madras, I.L.R. (1949) Mad. 624 and Lakshminarain Bhadani v. Commissioner
of Income-tax, Bihar and Orissa, (1951) 20 I.T.R. 594, held inapplicable.
The time specified by the proviso to s. 64(3)
could have no application since the contention in the present case was that the
assessment under s. 34 could be made only in Lahore and not in India at all.
Section 23A of the Act, as it then stood,
raised only one fiction, and not two, and that was of an income arising on a
specific date in the past with the purpose that such income might be included
in the income of a share-holder for assessment. That income must, therefore, be
deemed to have existed on the date for the purpose of assessment and, if not
included in the assessment for the relevant year, must be taken to have
actually escaped assessment so as to attract s. 34 of the Act. Dodworth v.
Dale, 20 T. C. 285, D. & G. R. Rankine v. Commissioners of Inland Revenue,
32 T. C. 520 and Chatturam Horliram Ltd. v. Commissioner of Income-tax, Bihar
and Orissa,  2 S.C.R. 290, held inapplicable.
There is no warrant for the proposition that
S. 23A of the Act was meant to apply only to cases where pending assessment for
any year, an order is made under that section creating a fictional income that
year. Such an order could, therefore, be made even after the assessment of the
income of the share-holder for the year concerned had already been completed.
But S. 23A does not itself provide for any assessment being made and that has
to be made under other provisions of the Act authorising assessment including
It is not correct to say that s. 23A(1), as
it then stood, was beyond the competence of the Legislature and was as such
unconstitutional. Under Entry 54 of List I of the Seventh Schedule to the
Government of India Act, 1935, the Legislature could pass not only a law
imposing a, tax on a person on his own income but also a law preventing him
from evading the tax payable on his income and there can be no doubt that s.
23A, properly construed, was meant to prevent such evasion.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 317 of 1955.
Appeal by special leave from the judgment and
order dated October 18, 1952, of the Income-tax Appellate Tribunal, Calcutta
Bench, in Income-tax Appeal No. 807/1950-51.
A. V. Viswanatha Sastri and S. C. Mazumdar,
for the appellant.
62 484 C. K. Daphtary, Solicitor-General of
India, K. N. Rajagopal Sastri, R. Ganapathy Iyer, R. H. Dhebar and D. Gupta,
for the respondent.
1960. September 2. The Judgment of the Court
was delivered by SARKAR J.-In 1944, the appellant was a resident of Lahore.
On October 14, 1944, he was assessed to
income-tax by the Income-tax Officer, Lahore, for the assessment year 1944-45
on an income of Rs. 49,047. As is well-known, in August, 1947, India was
partitioned and Lahore came to be included in the newly created Dominion of
Pakistan and went out of India. After the partition, the appellant shifted to
Delhi and was residing there at all material times.
The appellant held shares in a company called
Indra Singh and Sons Ltd. which had its office at Calcutta. The other shares in
that company were held by Indra Singh and Ajaib Singh. The holdings of all the
shareholders were equal. An annual general meeting of this company was held on
April 17, 1943, in which the accounts for the year ending March 31, 1942, were
placed for consideration. The accounts were passed at the meeting but no
dividend. was declared though the accounts disclosed large profits.
On June 11, 1947, an Income-tax Officer of
Calcutta passed an order under s. 23A of the Income-tax Act that Rs. 14,23,110
being the undistributed portion of the assessable income of the company for the
year ending March 31, 1942, after the deductions provided in the section, be
deemed to have been distributed as dividend among the three shareholders on the
date of the general meeting, that is, April 17, 1943. As a result of this order
a sum of Rs. 4,74,370. being his share of the amount directed to be
distributed, had under the section, to be included in the income of the
appellant for the assessment year 1944-45.
The validity of this order was never
The Income-tax Officer, Calcutta, informed
the Income-tax Officer, Delhi, of the order made by him under a. 23A.
Thereupon the Income-tax Officer, Delhi, on
April 10, 1948, issued a notice under a. 34 485 of the Act to the appellant
then residing in Delhi, requiring him to file within thirty-five days, a
revised return for the year 1944-45 as a part of his income for that year had
escaped assessment. Obviously the notice was on the basis that the said sum of
Rs. 4,74,370 had escaped assessment for the year 1944-45. On February 10, 1949,
the appellant submitted a revised return under protest and included in it the
said sum of Rs. 4,74,370. The Income-tax Officer, Delhi, then reopened the
earlier assessment and on March 25, 1949, made a fresh assessment order for
1944-45 assessing the appellant on an income of Rs. 5,23,417. The appellant
appealed against this order to the Appellate Assistant Commissioner but his
appeal was dismissed. He then appealed to the Income-tax Appellate Tribunal but
was again unsuccessful. He has filed the present appeal with special leave of
this Court against the judgment and order of the Income-tax Appellate Tribunal.
A preliminary point as to the maintainability
of this appeal was taken by the learned Solicitor-General appearing on behalf
of the respondent Commissioner of Income-tax, that the appellant having been
unsuccessful in availing himself of the other remedy provided in the Act should
not be allowed the extraordinary remedy of approaching this Court with special
leave. Now, under the Income-tax Act, the appellant could apply to the Tribunal
to refer to a High Court any question of law that arose out of the former's
decision. The Act itself gave no right of appeal at all from that decision, nor
any other remedy against it. The appellant had applied to the Tribunal for an
order referring certain questions arising out of its decision to the' High
Court at Calcutta but was unsuccessful in getting an order for reasons to be
presently stated. The Tribunal was in Calcutta. The appellant, who was in
Delhi, asked a firm of income-tax practitioners named S. K. Sawday & Co. in
Calcutta, to move the Tribunal for an order of reference.
Sawday & Co. had the necessary petition
and papers prepared.
They sent these to the appellant at Delhi by
post on January 5,1953, for his signature and the 486 papers reached Delhi on
January 7, 1953. The appellant who was then the Defence Minister of the
Government of India, was at the time, away from Delhi on official tour.
Immediately on his return from tour he signed
the papers and on January 21/22, 1953, sent them from Delhi by post to Sawday
& Co. in Calcutta. The papers reached Calcutta on January 24, 1953, but
were not delivered to Sawday & Co. before January 28, 1953, due to a
postman's default as was admitted by the postal authority concerned. Sawday
& Co. filed the petition in the Tribunal on the same date but that was one
day too late as it should have been filed on January 27, 1953. The Tribunal
thereupon dismissed the application as having been made out of time. The
appellant appealed against this dismissal to the High Court at Calcutta but the
High Court dismissed the appeal. In these circumstances, the appellant moved
this Court for special leave to appeal and asked for condonation of delay in
moving this Court, placing before it all the facts which we have earlier
mentioned. This Court on a consideration of these facts condoned the delay and
granted special leave. There was no attempt by the appellant to overreach or
mislead the Court and the Court in its discretion gave the leave. In these
circumstances, we are unable to agree with the contention that the appellant is
not entitled to proceed with this appeal, because he could have availed himself
of the remedy provided by the Act and was by his own conduct, unable to do so.
This Court had inspite of this thought fit to grant leave to the appellant to
appeal from the decision of the Tribunal. Further the learned counsel for the
appellant intends to confine himself to questions of law arising from the
Judgment of the Tribunal. We, therefore, see no reason why the appeal should
not be heard.
The main question in this appeal is whether
the proceedings taken against the appellant under s. 34 of the Act were valid.
That section has been amended but we are concerned with it as it stood on April
10, 1948, when the notice under it was issued.
The first point is that the proceedings under
s. 34 487 could not be taken by the Income-tax Officer, Delhi. It is said that
the proceedings under that section are only a continuation of the original
assessment proceedings, and therefore, it is the Officer who made the original
assessment order or his successor in office, who alone could start the fresh
proceedings. It is hence contended that it is the Income-tax Officer, Lahore,
who could proceed against the appellant under s. 34 and the Income-tax Officer,
Delhi, had no jurisdiction to do so. The contention then comes to this that in
the circumstances of this case,' no proceedings under s. 34 could be taken
against the appellant in India at all.
The learned Solicitor-General said that this
was an objection as to the place of assessment under s. 64 of the Act, and
could not be entertained as it had not been taken within the time provided
under the second proviso to sub sec. (3) of that section. If that proviso
applied to the present case, the appellant had to raise the objection that
proceedings under s. 34 could not be taken at Delhi within the thirty-five days
Mentioned in the notice under the section. It is said that this had not been
done. It seems to us however that the proviso would apply only if an objection
to a place of assessment had been taken under s.
64 and the objection that the appellant has
taken in this case is not one under that section. That section applies where
the assessment can be made in one place or another in India and an objection is
taken to one of such places. Here the contention is that the assessment under
s. 34 can be made only in Lahore and therefore cannot be made. in India at all.
To such a contention s. 64 has no application. The Solicitor General's point
must therefore fail.
We are however of the opinion that the
contention of the appellant is without foundation. Section 34 provides that in
the cases mentioned in it, the income may be assessed or reassessed and the
provisions of the Act shall, so far as may be, apply accordingly as if the
notice issued under the section had been issued under s. 22(2) of the Act. Now
the place where an assessment is to be made pursuant to a notice under 488
s.22(2) has to be determined under s. 64. Indeed that is the only provision in
the Act for deciding the proper place for any assessment. There is nothing
which makes s. 64 inapplicable to an assessment made under s. 34. Therefore, it
seems to us clear, that the place where an assessment under s. 34 can be made
has to be decided under s. 64. Now the appellant was not carrying on any
business, profession or vocation. He was working as the Defence Minister of the
Government of India and residing in Delhi. He could be properly assessed by the
Income-tax Officer, Delhi, under s. 64(2) if the assessment was the original
assessment. This is not in dispute. It follows that no objection can
legitimately be taken by the appellant to his assessment under s. 34 by the
Income-tax Officer, Delhi.
We find nothing in the two cases cited by
Mr.Sastri, who appeared for the appellant, to support the contention that in
this case the assessment under s. 34 could not have been made in India at all.
In neither of these cases any question as to the place of assessment tinder s.
34 or any other section arose. In the first, C. V. Govindarajulu v. Commissioner
of Income-tax,, Madras (1), it was held that the proceedings under s. 34 and
the original assessment proceedings were not separate and therefore in the
former, a penalty could be levied under s. 28 for failure to submit a return
pursuant to a general notice under s. 22(1) on which the latter were deemed to
have commenced. It does not follow that because the two assessments are not
separate for certain purposes, the latter must take place only where the first
had been made. In the second, Lakshminarain Bhadani V. Commissioner of
Income-tax, Bihar & Orissa (2), this Court held that a proceeding under s.
34 may be taken against a karta of a Hindu undivided family to reopen an
original assessment on the family, though in the meantime, there had been a
disruption of the family and an order in respect of it had been passed under s.
25A(1) of the Act.
It was said that the position was as if the
Income-tax Officer was proceeding to assess the (1) I.L.R. (1949) Mad. 624 (2)
(1951) 20 I.T.R. 594.
489 income of the Hindu undivided family as
in the year (if assessment. This of course does not mean that the assessment
under s. 34 must take place at the place where the original assessment was made
or not at all.
Then it is said that the Income-tax Officer
reassessed the appellant's income under s. 34 on the basis that part of it, namely,
the dividend that became liable to be included in the appellant's income under
s. 23A, had escaped assessment.
It is contended that on a proper reading of
s. 34 this would not be a case of income escaping assessment because that
section applies to income actually escaping assessment and not to income deemed
to have escaped assessment which is all that has happened in the present case.
It is said that in order that income may escape assessment there must in fact
have been an income. It is also said that in order to apply s. 34 to this case
two fictions have to be resorted to, namely, (a) bringing an income into
existence where none existed and (b) holding that income has escaped assessment
where no income actually did so. It is argued that the language of s. 34 does
not permit two fictions being created, and that as the section reopens a closed
transaction, it must be strictly construed.
Reliance was placed on certain decisions in
support of this contention. First, we were referred to two English cases,
namely, Dodworth v. Dale (1) and D. & G. R. Rankine v. Commissioners Inland
Revenue (2). These cases do not assist the appellant for they were not
concerned with a statutory provision like s. 23A on which the present case
turns and which requires that an assessee would be deemed to have received a
certain income on a specified date in the past and also requires that income to
be included in his total income for assessment to tax. The other case to which
we were referred was the decision of this Court in Chatturam Horliram Ltd. V.
Commissioner of Income-tax, Bihar and Orissa (3) where it was said that the
contention " that the escapement from assessment (1) (1936) 20 T.C. 285.
(2) (1952) 32 T.C. 520.
(3)  2 S.C.R. 290, 300-301.
490 is not to be equated to non-assessment simplicities,
is not without force,". This Court however in the very next sentence
proceeded to state clearly that " it is unnecessary to lay down what
exactly constitutes `escapement from assessment"'. The actual decision in
this case affords no assistance to the appellant and has not been relied on by
him. It is clear from what we have read from the judgment in it that it does
not lay down a test to decide when an income may be said to have escaped
On its own merits also we are unable to
accept the argument of the learned counsel for the appellant. Section 23A
requires that on an order being made under it, the undistributed portion of the
assessable income of the company for a year as computed for income-tax purposes
and after the deductions provided in the section, is to be ',deemed to have
been distributed as dividends amongst the shareholders as at the date of the
general meeting ", being the meeting at which the accounts for the year
concerned were passed, and "thereupon, the proportionate share thereof of
each shareholder shall be included in the total income of such shareholder for
the purpose of assessing his total income ". The section creates a
fictional income arising as on a specified date in the past and it does so for
the purpose of that income is being included in the income of the shareholders
for assessment of their income-tax. The income must therefore be 'deemed to
have been in existence on the date mentioned for the purpose of assessment to
tax. It is as if it actually existed then. Now if the assessment for the
relevant year does not include that income, it has escaped assessment. That is
what happened in this case.
Therefore the case is one to which a. 34
would clearly apply.
It is said that s. 23A was meant to apply
only to cases where pending assessment for any year, an order is made under
that section creating a fictional income in that Year.
We see no reason however so to restrict the
operation of the section: the words in' it do not warrant such restriction.
There is no limitation of time as to when an
order under B.
23A can be made.
491 Therefore it can be made at a time when
the assessment of the income of the shareholder for the year concerned has been
completed. There is no reason why that order should not be given effect to by
proceedings duly taken under s. 34.
We do not also agree that the rejection of
the appellant's present argument will compel us to raise two fictions.
There is only one fiction, namely, that
raised by s. 23A.
That fiction having been raised, the income
that has thereby to be deemed to exist must be held to have actually escaped
assessment. We are unable to agree that in order to apply s. 34 to an income
deemed to exist under s. 23A, we would have to read the former section to cover
a case where income has to be deemed to have escaped assessment. If the income
had come into existence, and not been assessed, it has escaped assessment; it
is not a case where the income has to be deemed to have escaped assessment. In
our view, therefore, the present contention of the appellant must fail and the
income deemed to have been received by him by virtue of the order made tinder
s. 23A on June 11, 1947, must be held to have escaped assessment for the year
1944-45 and his income must therefore be liable to reassessment under s. 34.
It is now necessary to refer to one of the
reasons on which the judgment of the Tribunal is based. It was there said that
" It was incumbent on the Income-tax Officer, Calcutta' passing the order
under s. 23A to have included the sum of Rs. 4,74,370/in the other assessed
income of the assessee and to have recomputed the assessable income and the tax
thereon". It was held that " the Income-tax Officer, Delhi, went
wrong in having recourse to the provisions of s. 34 and making an assessment there
under " but that this amounted to a mere irregularity not vitiating the
assessment made under that section. In the end the Tribunal observed,, "
Anyhow, the Tribunal is empowered to substitute its own order for that of the
Income Tax Officer and acting under that power we assess the assessee under the
provisions of See. 23A(1) of the Indian Income-tax Act 63 492 It seems to us
that the Tribunal was wrong in the view that it took. The learned
Solicitor-General conceded that this is so. We are unable to agree that an
assessment could be made under s. 23A. That section does not provide for any
assessment being made. It only talks of the fictional income being included in
the total income of the shareholders " for the purpose of assessing his
total income". The assessment therefore has to be made under the other
provisions of the Act including s. 34, authorising assessments. In our view,
the assessment in this case had been properly made by the Income-tax Officer, Delhi,
under the pro. visions of s. 34.
Lastly, it is said that a. 23A is
unconstitutional inasmuch as it was beyond the competence of the legislature
that enacted it. This section has been redrafted and amended several times
since it was first enacted in 1930. We are concerned with the section as it
stood on June 11, 1947, when the order under it was made in this case.
Sub-section (1) of the section in the form that it stood then-and that is the
material portion of the section for our purposes-was enacted by Act VII of
1939. It is that sub-section which gave the power to make an order that the
undistributed portion of the assessable income of the company shall be deemed
to have been distributed as dividends and provided that thereupon the
proportionate share thereof of each shareholder shall be' included in his
income for assessment.
The enactment was by the Central legislature
which then derived its competence to legislate from the Government of India
Act, 1935. There is no doubt, and neither is it disputed, that sub-section had
been enacted under the power contained in entry 54 of List I in the Seventh
Schedule to the Government of India Act, 1935. The entry read, " Taxes on
income other than agricultural income". The argument of Mr. Sastri is that
this entry only authorises legislation for taxing a person on his income; under
it a law cannot be made taxing one person on the income of another.
Mr. Sastri says that in law a company and its
shareholders are different persons--a proposition 493 which is indisputable-and
therefore s. 23A is incompetent as it purports to tax the shareholders on the
income of the company in which they hold shares, He points out, and this again
is not in dispute, that the section does not give a right to a shareholder on
an order being made under it, to realise from the company the dividend, which
by the order is to be deemed to have been paid to him. He says, and this also
seems right, that the income remains the income of the company and a
shareholder is taxed on a portion of it representing the dividend deemed to
have been paid to him.
In spite of all this it seems to us that the
legislation was not incompetent. Under entry 54 a law could of course be passed
imposing a tax on a person on his own income. It is not disputed that under that
entry a law could also be passed to prevent a person from evading the tax
payable on his own income. As is well-known the legislative entries have to be
read in a very wide manner and so as to include all subsidiary and ancillary
matters. So Entry 54 should be read not only as authorising the imposition of a
tax but also as authorizing an enactment which prevents the tax imposed being
evaded. If it were not to be so read, then the admitted power to tax a person
on his own income might often be made infructuous by ingenious contrivances.
Experience has shown that attempts to evade
the tax are often made.
Now it seems to us that s. 23A was enacted
for preventing such evasion of tax. The conditions of its applicability clearly
lead to that conclusion. The first condition is that the company must have
distributed as dividend less than sixty per cent of its assessable income after
deduction of income-tax and super tax payable by it. The taxing authority must
then be satisfied Chat the payment of a dividend or of a larger dividend than
that declared, would, in view of losses incurred in earlier years or the
smallness of the profit made, be unreasonable. Lastly, the section does not
apply to a company in which the public are substantially interested or a subsidiary
company of a public company whose shares are held by the parent 494 company or
by the nominees thereof The section provides by an explanation as follows:
For the purpose of this sub-section, a
company shall be deemed to be a company in which the public are substantially
interested if shares of the company (not being shares entitled to a fixed rate
of dividend, whether with or without a further right to participate in profits)
carrying not less than twenty-five per cent of the voting power have been allotted
unconditionally to, or acquired unconditionally by, and are at the end of the
previous year beneficially held by the public (not including a company to which
the provisions of this sub-section apply), and if any such shares have in the
course of such previous year been the subject of dealings in any stock exchange
in the taxable territories or in fact freely transferable by the holders to
other members of the public.
The section thus applies to a company in
which at least 75 per cent of the voting power lies in the hands of persons
other than the public, which can only mean, a group of persons allied together
in the same interest. The company would thus have to be one which is controlled
by a group.
The group can do what it likes with the
affairs of the company, of course, within the bounds of the Companies Act.
It lies solely in its hands to decide whether
a dividend shall be declared or not. When therefore in spite of there being
money reasonably available for the purpose, it decides not to declare a
dividend it is clear that it does so because it does not want to take the
dividend. Now it may not want to take the dividend if it wants to evade payment
of tax thereon. Thus by not declaring the dividend the persons constituting the
group in control, could evade payment of super-tax, which, of course, is a form
of income tax. They would be able to evade the super-tax because super-tax is
payable on the dividend in the hands of the shareholders even though it may
have been paid by the company on the profits out of which the dividend is paid,
and because the rate at which super-tax is payable by a company may be lower
than the rate at which that tax is payable by other 495 assessees. By providing
that in the circumstances mentioned in it, the available assessable income of a
company would be deemed to have been distributed as dividend and be taxable in
the hands of the shareholders as income received by them, the section would
prevent the members of such a group from evading by the exercise of their controlling
power over the company, payment of tax on income that would have come to them.
That being so, the section would be within entry 54.
In conceivable circumstances the section may
work hardship on members of the public who hold shares in such a company but
that would not take the section outside the competence of the legislature. It
would still be an enactment preventing evasion of tax. Considerations of
hardship are irrelevant for deciding questions of legislative competence.
It is further quite clear that in the absence
of a provision like s. 23A it is possible so to manipulate the affairs of a
company of this kind as to prevent the undistributed profits from ever being
taxed and experience seems to have shown that this has often happened. The
following passage from Simon's Income Tax, 2nd Edn., Vol. 3, p. 341, fully
illustrates the situation :
" Generally speaking, surtax is charged
only on individuals, not on companies or other bodies corporate. Various
devices have been adopted from time to time to enable the individual to avoid
surtax on his real total income or on a portion of it, and one method involved
the formation of what is popularly called a 'one-man company'. The individual
transferred his assets, in exchange for shares, to a limited company, specially
registered for the purpose, which thereafter received the income from the
The individual's total income for tax
purposes was then limited to the amount of the dividends distributed to him as
practically the only shareholder, which distribution was in his own control.
The balance of the income, which was not so distributed, remained with the
company to form, in effect, a fund of savings accumulated from income which had
not immediately 64 496 attracted surtax. Should the individual wish to avail
himself of the use of any part of these savings he could effect this by
borrowing from the company, any interest payable by him going to swell the
savings fund; and at any time the individual could acquire the whole balance of
the fund in the character of capital by putting the company into
liquidation." The section prevents the evasion of tax by, among others,
the means mentioned by Simon.
The learned Solicitor-General sought to
support the competence of the legislature to enact the section also on another
ground. He said that entry 54 permitted tax on income and contended that it.
authorised taxing of A on the income of B. He said that, where a shareholder
was taxed on the income of the company, the two being considered separate legal
entities, the tax was none the less on income though the burden of the tax was
put on one to whom the income had not accrued or by whom it had not been
received and so was within the scope of entry 54. In support of this contention
he referred to B. M. Amina Umma v. Income Tax Officer.
Kozhikode (1), Janab Jameelamma v. The
Income-tax'Officer, Nagapattnam (2) and C. W. Spencer v. Income Tax Officer(3).
As earlier stated, Mr. Sastri disputes the
correctness of this contention. We do not consider it necessary to pronounce on
this question or as to the correctness of the decisions cited so far as they
support it. In our view, the legislative competence to enact the section can be
clearly upheld on the ground that it was toprevent evasion of income-tax and that
would be enough to dispose of the argument advanced by Mr. Sastri that the
section was an incompetent piece of legislation.
This appeal therefore fails and it is
dismissed with Costs.
(1) (1954) 26 I.T.R. 137.
(2) (1955) 29 I.T.R. 246.
(3) (1956) 31 I.T.R. 107.