M.C.T.M. Chidambaram Chettiar Vs.
Commissioner of Income-Tax, Madras [1965] INSC 266 (29 November 1965)
29/11/1965 SUBBARAO, K.
SUBBARAO, K.
SHAH, J.C.
SIKRI, S.M.
CITATION: 1966 AIR 1453 1966 SCR (2) 761
ACT:
Indian Income-tax Act, 1922 (Act 11 of 1922),
s. 44D- Firm transferred assets to Non-resident-Income from Non- resident-If
partners of firm assessable separately.
HEADNOTE:
A firm, constituted by the assessees who were
closely related, transferred assets to a Corporation carrying on money-lending
business in the Federated Malaya States. In consideration of the assets so
transferred the Corporation allotted shares to the partners of the firm.. The
Incometax Officer assessed the partners of the firm separately under s. 44D of
the Act in respect of the income of the Corporation, which on appeals were
upheld by the Appellate Assistant Commissioner. On further appeals by the
assessees, the Tribunal allowed the appeals on the ground that the income from
the assets transferred was not assessable to tax at the time of transfer. At
the instance of the Revenue, the question was referred to the High Court which
was answered against the assessee. In appeal to this Court :
HELD : The High Court was correct in
answering the question against the assessee.
(i) The language of s. 44D(1) of the Act is
plain. It does not say "when any person has transferred any assets"
but it says, "by means of a transfer of assets". The person who
transfers assets is not designated but emphasis is laid on the consequence
flowing from such a transfer.Whosoever effects the transfer, if bY such a
transfer the assessee acquires a right to enjoy the income, he is liable to
tax.
The words "means" and
"acquired" in the context., are only words of passive nature. The
hand that transfers is immaterial; what matters is the result envisaged by the
said section, namely a non-resident is the transferee of the assets, but the
assessee acquires the power to enjoy the income from those assets. 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". [765 E-G; 766 E] Congreve and
Congreve v. Commissioner of Inland Revenue, (1943-49) 30 T.C. 163 and Bambrdige
v. Commissioner of Inland Revenue, (1953-56) 36 T.C. 313, applied.
(ii) The construction that s. 44D(1) can be
invoked only if at the time of the transfer the income from the said assets was
liable to tax, is not only inconsistent with the phraseology used but will
defeat the object of the section. The expressions "any income",
"such income" and "that income" found in the sub-section
refer to the same income. What is assessed in a particular year is that income
which is deemed to be the income in the hand-, of assessee. "That
income" is such income in regard whereof he has "the power to
enjoy". "Such income" is any income which if it were the income
of the assessee would be chargeable to income-tax. The quality of chargeability
is referable only to the income from the assets transferred during the year in
which it is sought to be [766 F; 767 B] 762 (iii) If the assessees were able
directly or indirectly to control the income of the Corporation, they would be
deemed to have the power to enjoy the income. Sub- section (5) of s. 44D gives
an enlarged meaning to the words "power to enjoy" in sub-s. (1).
In the present case, the circumstances were
overwhelming to establish that the assessees had a controlling voice in the
affairs of The Corporation. They were closely related, holding almost all the
shares of the Corporation, and were the partners of the firm which transferred
the assets. [767 H; 768 B-C] (iv) The burden was upon the assesee to show to
the satisfaction of the Income-tax Officer that the transfer was saved under
sub-section (3) of s. 44D inasmuch as it was not for a purpose to avoid tax
liability but was only a bona fide commercial transaction. 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. [768 G-769 A]
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos.
477 to 488 of 1964.
Appeals from the judgment and order dated
October 16, 1959 of the Madras High Court in Case Referred No. 31 of 1954.
N. A. Palkhivala, C. Ramakrishna, 0. C.
Mathur and J. B. Dadachanji for the appellants.
A. V. Viswanatha Sastri, Gopal Singh, R. N.
Sachthey and B. R. G. K. Achar, for the
respondent.
The Judgment of the Court was delivered by
Subba Rao, J. These appeals raise the question of the liability of the
appellants to pay income-tax under S. 44D (1) of the Indian Income-tax Act,
1922, hereinafter called the Act, in respect of the income of the M.C.T.M. Banking
Corporation Limited.
Sir M.Ct.M. Muthiah Chettiar, his wife
Deivanai Achi, Ms two sons Chidambaram Chettiar and Muthiah Chettiar, and his
two daughters Umayal Achi and Vallia Murai Achi constituted an undivided Hindu
family. The said family carried on moneylending business on an extensive scale
in British India, Burma and elsewhere. Upto and inclusive of the year 1927-28,
the undivided Hindu family was assessed to income- tax as such. During the
assessment year 1928-29 it was claimed that a partition had taken place in the
said family and that Sir M.Ct.M. Muthiah Chettiar and his two Sons constituted
a firm. The said firm was duly registered and it was assessed to income-tax.
After the death of the said Sir M.Ct.M. Muthiah Chettiar in 1929, his two sons
and his wife continued the firm and it was assessed to income-tax as a firm. In
June 1929 the said firm started a new 763 money-lending business at Kuala
Lumpur in the Federated Malaya States with a capital of Rs. 12 lakhs. The said
capital was transferred from its business in Burma. On March 24, 1932, a
company called the M.Ct.M. Banking Corporation, hereinafter called the
Corporation, was incorporated in Pudukkotai. It commenced business on and from
March 31, 1932. One of the purposes of the said Corporation was to acquire and
carry on business which was being carried on by the firm in Kuala Lumpur. A
branch of the Corporation was opened in Kuala Lumpur on September 22, 1933.
Between November 1, 1933, and November 31, 1937. On December 31, 1938, out of
the total shares were transferred to the Corporation and in consideration of
the assets so transferred, the Corporation allotted to the partners of the,
firm 1,200 shares of face value of Rs. 1,000 each.
Though the Corporation commenced business in
1932, no dividends were declared by it. But in 1938 the Corporation distributed
bonus shares of value of Rs. 5 lakhs out of the profits of Rs. 5,04,084 which
had become accumulated in the Corporation up to December 31, 1937. On December
31, 1938, out of the total shares of 2,271 in the Corporation, the said two
sons and the widow of Sir M.Ct.M. Muthiah Chettiar held 1,944 shares. From the
assessment year 1933-34 to the assessment year 1938-39 the firm was treated as
the agent of the Corporation and its income arising and accruing in British
India was assessed in the hands of the firm which had its head office in
Madras. For the assessment years 1939-40, 1940-41 and 1941-42, the Income-tax
Officer, I Circle, Madras, assessed the said partners of the firm separately
under s. 44D of the Act in respect of the income of the Corporation. Against
the orders of the Income-tax Officer, the three partners preferred appeals to
the Appellate Assistant Commissioner, who rejected the same.
Against the Orders of the Appellate Assistant
Commissioner rejecting the appeals the assessees preferred appeals to the
Income-tax Appellate Tribunal, Madras, Bench 'A'. The Tribunal allowed the
appeals of the assessees on the ground that the income from the assets
transferred to the Corporation was 'not assessable to income-tax at the time of
the transfer and that, 'therefore, the income therefrom was not liable to tax
during the assessment years under s. 44D of the Act. At the instance of 'the
Revenue, the following question of law was referred to the High Court of Madras
for its opinion :
"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 present assessees and if so, to what
extent." 764 A Division Branch of the High Court, by its judgment, dated
August 4, 1958, held that the said income of the Corporation was attracted by
s. 44D of the Act, but before giving a final answer to the question propounded,
it directed the Tribunal to furnish a further statement of case on the question
whether the assessees were entitled to relief under sub-s. (3)(a) of S. 44D of
'the Act. On December 23, 1958, the Tribunal submitted a 'finding that the
assessees did not satisfy the requirements of the said sub-section. The High
Court accepted the said finding and answered the question against the assessees
in the affirmative. The present appeals were filed against the order of the
High ,Court after obtaining a certificate from the said High Court.
We shall now proceed to consider the
arguments advanced 'by Mr. Palkhivala, learned counsel for the assessees, in
support ,of his contention that the income of the Corporation was not
assessable to tax in the hands of the assessees. As all his arguments turned
upon the provisions of s. 44D of the Act, it would be convenient to read the
same at the outset :
"Where any person has, by means of a
transfer of assets, by Virtue or in consequence whereof, either alone or in
conjunction with associated operations, any income which if It were the income
of such person would be chargeable to income-tax becomes payable to a person
not resident or to a person resident but not ordinarily resident in the taxable
territories, acquired any rights by virtue or in consequence of which he has
within the meaning of this section power to enjoy such income, whether
forthwith or in the future, that income shall, whether it would or would not
have been chargeable to income-tax apart from the provisions of this section,
be deemed to be income of such first mentioned person for all purposes of this
Act." Chapter VB was inserted in the Income-tax Act, 1922, by the Indian
Income-tax (Amendment) Act, 1939 (Act VII of 1939).
'Section 44D is one of the sections of that
Chapter. The provisions of this Chapter were modelled on S. 18 of the English
Finance Act of 1936, as amended by s. 28 of the English Finance Act of 1938.
The object of S. 44D of the Act, as disclosed by the provisions thereof, was to
prevent residents. of 'India from evading the payment of income-tax by
transferring their assets to non-residents while enjoying the income by
adopting devious methods. The sub-section suffers from want of clarity, but a
deeper scrutiny brings out the following ingredients of it 765 (i)there must be
a transfer of assets; (ii) by reason of that transfer, income traceable to the
said assets becomes payable to a person non-resident or to a person resident
but not ordinarily resident in the taxable territories; (iii) the resident by
means of the transfer alone or in conjunction with associated operations,
acquires right to enjoy such income; (iv) the income from the said assets, if
it was the income of the resident, would be chargeable to income-tax; and (v)
in that event, the income of the non- resident would be deemed to be the income
of the resident for,' all the purposes of the Act. Shortly stated, under this
section, if a resident has power to enjoy the income accruing or arising out of
the assets transferred to a non- resident, he would be deemed to have received
that income and. therefore, would be liable to be assessed under the Act.
The first contention of Mr. Palkhivala is
that the expression "by means of a transfer" in s. 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 language of the sub-section is plain. It
does not say "when any person has transferred any assets", but it says,
"by means of a transfer of assets". The person who transfers assets
is not designated but emphasis is laid on the consequences flowing from such a
transfer. Whosoever effects the transfer, if by such a transfer the assessee
acquires a right to enjoy the income, he is liable to tax.
The words "means" and
"acquired" in the context are only words of passive nature. The hand
that transfers is immaterial : what matters is the result envisaged by the said
section, namely, a non-resident is the transferee of the assets but the
assessee acquires the power to enjoy the income from those assets. This
construction is supported by the decisions of English Courts given on a section
which is in pari materia with the relevant part of s. 44D(i) of the Act. The
material part of s. 18 of the English Finance Act, 1936, as amended by s. 28 of
the English Finance Act, 1938, reads (1) Where such an individual has by means
of any such transfer, either alone or in conjunction with associated
operations, acquired any rights by virtue of which he has, within the meaning
of this section, power to enjoy, whether forthwith or in the future, any income
of a person resident or domiciled out of the United Kingdom which, if it were
income of that individual 766 received by him in the United Kingdom, would be
chargeable to income-tax by deduction or otherwise, that income shall, whether
it would or would not have been chargeable to income- tax apart from the
provisions of this section, be deemed to be income of that individual for all
the purposes of the Income-tax Acts.
It would be noticed that in the said
sub-section, as in S. 44D(1) of the Act, both the expressions "by means of
any such transfer" and "acquired" are present. In Congreve and
Congreve v. Commissioners of Inland Revenue(1), Lord Simonds, repelling the
argument similar to that presented to us, observed :
"........ it is to my mind clear, first,
that in their ordinary grammatical sense the words "by means or, do not
connote any personal activity on the part of the person who is said to enjoy or
suffer something by those, means, and, secondly, that in their present context
it is not necessary or legitimate in order to give a limiting sense to the
words to read them as if they were followed by such word as "effected by him"."
This view was followed by Harmam, J., in Bombridge v. Com- missioners of Inland
Revenue(2). 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". We, therefore, reject the first contention of the learned
counsel.
The second contention is 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. This argument was
sought to be sustained on the express terms of s. 44D(1) of the Act. The clause
" any income which if it were the income of such person would be
chargeable to income-tax", it is said, is descriptive of the assets
transferred and constitutes a limitation on the operation of the section. This
construction is not only inconsistent with the phraseology used but will defeat
the object of the section. The expressions "any income", "such
income" and "that income" found in the sub-section refer to the
same income. What is assessed in a particular year is that income which is
deemed to be the income in the hands of the assessee. "That income"
is such income in regard whereof he has "the power to enjoy".
(1) (1943-'49) 30 T.C. 163.
(2) (1963-'56) 36 T.C. 313.
767 "Such income" is any income
which if it were the income of the assessee would be chargeable to income-tax.
The quality of chargeability is referable only to the income from the assets
transferred during the year in which it is sought to be assessed. As
Balakrishna Ayyar, J., pointed out in the judgment under appeal, to accede to
the argument of the assessee, the words in s. 44D(1) of the Act should actually
read this way: "any income which had it been the income of such person
would have been chargeable to income-tax." But the words read otherwise
thus : " any income which if it were the income of such person would be
chargeable to income-tax". The tense refers to the assessment year and not
to the year when the transfer was affected. Learned counsel for the assessees
contended that this construction would affect adversely a bona fide transferor
of assets who could not possibly have anticipated that the income from such
assets would be chargeable to tax in future and that that could not have been
the intention of the Legislature.
As indicated earlier, the sub-section is not
concerned with the transferor but only with the result brought about by means
of the transfer of the assets in conjunction with associated operations. The
sub-section was designedly couched in the widest phraseology to prevent evasion
of tax in the manner prescribed there under. 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 there from 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-s. (3) of s. 44D of the
Act. We, therefore, find no merits in this contention either.
The next submission of the learned counsel
for the assessees is that the assessees had not acquired, by means of the said
transfer of assets to the Corporation or in consequence thereof, any power to
enjoy the income there from within the meaning of s. 44D(1) of the Act. While
conceding that, if the assessees had the controlling share in the corporation,
they would have the power to enjoy its income, it was said that there was no
evidence on which it could be held that the assessees, though closely related,
were acting in unison and were controlling the affairs of the Corporation.
Sub-section (5) of s. 44D gives an enlarged meaning to the words "power to
enjoy" in sub-s. (1). The relevant clause of that sub-section is cl. (e),
which reads (5) A person shall" for the purposes of this section, be
deemed to have power to enjoy income of a person 768 not resident, or resident
but not ordinarily resident, in the taxable territories, if- (e) such
first-mentioned person is able, in any manner whatsoever and whether directly
or indirectly, to control the application of the income.
If the assessees were able directly or
indirectly to control the income, of the Corporation, they would be deemed to
have the power to enjoy its income. In the present case, the circumstances are
overwhelming to establish that the assessees had a controlling voice in the
affairs of the Corporation. They are closely related : two of them are brothers
and the third is their mother. They were the partners of the firm which
transferred the assets. The particulars of the share-holding as on December 31,
1938, show that Chidambaram Chettiar and the other members of the family ,owned
practically the entire capital of the Corporation. The three partners owned
1944 shares out of 2,271 shares of the Corporation and the balance was held by
their close relatives. Apart from the three partners, the other shareholders
were the son, sisters and the wife of Chidambaram Chettiar. It is obvious that
the Corporation was a close one and the partners of the firm had the
controlling voice in the management of the affairs ,of the Corporation. The
argument that there is no evidence that there was unity of interest among the
partners ignores the realities of the situation, for the history of the firm,
the constitution of the Corporation, the manner the assets were transferred and
the other circumstances brought out in the record lead to the only inference
that the partners were acting in unison throughout, Indeed 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 S. 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
s. 44D(1) of the Act.
Lastly it was contended that the income in
question was saved from the operation of sub-s. (1) of s. 44D of the Act by
sub-s. (3) thereof. To state, it differently, the transfer of the assets to the
Corporation was not for a purpose to avoid the tax liability but was only a
bona fide commercial transaction. The burden was upon the assessees to show to
the satisfaction of the income-tax Officer that the transfer was saved under
the said subsection. 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 769 it. The correctness of the said finding of fact
cannot be permitted to be canvassed in these appeals.
In the result, we hold that the High Court
has answered the question correctly. The appeals fail and are dismissed with
costs. One hearing fee.
Appeal dismissed.
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