Deemed dividend provisions upheld as valid anti-avoidance measures within Parliament's income-tax power and consistent with article 14.

Sections 2(6A)(e) and 12(1B) of the Indian Income-tax Act were treated as valid anti-avoidance provisions because they deemed loans and advances by controlled companies to shareholders, up to accumulated profits, as dividends to curb diversion of profits through loans. The court held that such provisions fell within Parliament's legislative competence over taxes on income, given the wide scope of that power and its ancillary reach, and could also be supported by residuary competence. The classification was upheld under article 14 because it applied uniformly to a rational class of controlled companies and shareholders, with the distinction directly linked to preventing tax evasion.

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Issues: (i) Whether sections 2(6A)(e) and 12(1B) of the Indian Income-tax Act were within the legislative competence of Parliament as provisions relating to taxes on income. (ii) Whether those provisions were discriminatory and violative of article 14 of the Constitution of India.

Issue (i): Whether sections 2(6A)(e) and 12(1B) of the Indian Income-tax Act were within the legislative competence of Parliament as provisions relating to taxes on income.

Analysis: The provisions created a legal fiction by treating loans and advances made by controlled companies to shareholders, to the extent of accumulated profits, as dividends. The object of the enactment was to prevent evasion of income tax through devices by which profits were taken out in the form of loans instead of declared dividends. A legislative entry conferring power to tax income receives the widest construction, and matters ancillary or subsidiary to taxation of income fall within that power. Even if the provisions were viewed as extending beyond the strict concept of income, Parliament could derive authority from its residuary legislative power.

Conclusion: The provisions were held to be within legislative competence and valid.

Issue (ii): Whether those provisions were discriminatory and violative of article 14 of the Constitution of India.

Analysis: The classification was confined to controlled companies not substantially engaged in money-lending and to shareholders who drew monies while accumulated profits were available. The provisions applied uniformly to all persons within that class. The possibility of hardship in hypothetical situations did not establish unconstitutional discrimination, and the distinction adopted was held to rest on a real and rational basis connected with the object of preventing tax evasion.

Conclusion: The provisions were not violative of article 14.

Final Conclusion: The constitutional challenge failed, and the impugned assessment provisions were upheld as valid.

Ratio Decidendi: A statutory fiction enacted to prevent evasion of income tax, which treats loans or advances from controlled companies to shareholders as dividends to the extent of accumulated profits, is a valid exercise of legislative power over taxes on income and does not offend article 14 if it rests on a rational classification.

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