Section 44D applies to indirect transfers and practical control, while tax-avoidance purpose defeats the statutory saving.

Section 44D was construed broadly to cover transfers of assets by a firm even where the assessees were not the direct transferors, because the statutory language did not require personal transfer by the taxpayer. The phrase referring to income chargeable to tax was read by reference to the assessment year and the applicable law and facts, not as limiting the provision to income chargeable in the year of transfer. Substantial shareholding in a closely held corporation was treated as sufficient practical power to enjoy the income. Relief under section 44D(3)(a) was unavailable where surrounding circumstances showed that avoidance of tax was one of the purposes of the transfer or associated operations.

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Issues: (i) whether section 44D(1) applied even though the transfer of assets was made by the firm and not by the assessees themselves; (ii) whether the phrase "any income which if it were the income of such person would be chargeable to income-tax" required the income to be chargeable in the year of transfer; (iii) whether the assessees, as shareholders in a close corporation, had acquired a sufficient power to enjoy the income within the meaning of section 44D; and (iv) whether the assessees could claim the benefit of section 44D(3)(a) by showing that avoidance of tax was not one of the purposes of the transfer or associated operations.

Issue (i): whether section 44D(1) applied even though the transfer of assets was made by the firm and not by the assessees themselves.

Analysis: The statutory language did not require that the transferor must be the assessee. The section was framed to apply where a person acquired rights by means of a transfer of assets, and it was enough that the transfer existed and the prescribed consequences followed. The identity of the transferor was not treated as material. The construction was supported by analogous English authorities construing similar language.

Conclusion: The objection failed and section 44D(1) was not confined to transfers made personally by the assessee.

Issue (ii): whether the phrase "any income which if it were the income of such person would be chargeable to income-tax" required the income to be chargeable in the year of transfer.

Analysis: The words were read as referring to the income which formed the subject of the assessment and to the state of law and facts in the assessment year, not to the year in which the transfer took place. The language did not justify rewriting the provision so as to confine it to income chargeable only in the year of transfer. Such a construction would defeat the evident purpose of the section.

Conclusion: The objection failed and the provision was not limited to income chargeable in the year of transfer.

Issue (iii): whether the assessees, as shareholders in a close corporation, had acquired a sufficient power to enjoy the income within the meaning of section 44D.

Analysis: The holding of substantial share blocks in a closely held company was sufficient to give the assessees practical power to enjoy the income in future. The provision did not require a present right to immediate enjoyment. The control exercised through shareholding, the ability to influence directors, and the actual family and business identity of interest brought the case within the concept of power to enjoy. The case also fell within the statutory illustrations of dealing with income for benefit, entitlement to benefit, and control of application of income.

Conclusion: The assessees had the requisite power to enjoy the income for the purposes of section 44D.

Issue (iv): whether the assessees could claim the benefit of section 44D(3)(a) by showing that avoidance of tax was not one of the purposes of the transfer or associated operations.

Analysis: Clause (a) of sub-section (3) was distinct from clause (b) and was not satisfied merely because the transaction was said to be commercial. The Tribunal's further finding showed that the tax effect was present to the minds of the promoters when the assets were transferred. The surrounding circumstances, including the sequence of the Burma, Kuala Lumpur and Pudukottai transactions, the later tax treatment of the firm and the Corporation, the accumulation of profits without dividend distribution, and the issue of bonus shares, provided material on which the Tribunal could infer that avoidance of tax was one of the purposes of the transfer.

Conclusion: The assessees were not entitled to the saving under section 44D(3)(a).

Final Conclusion: The reference was answered against the assessee, section 44D was held applicable, and the income was assessable in the hands of the assessees.

Ratio Decidendi: A transfer may fall within section 44D even if made by someone other than the assessee, and the statutory escape under section 44D(3)(a) is unavailable where avoidance of tax is one of the purposes of the transfer or associated operations, judged on the surrounding circumstances and not confined to the year of transfer.

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