Anti-avoidance under section 44F applies only to deliberate securities transactions and not statutory liquidation dividends.

Section 44F of the Income-tax Act, 1922 was construed as an anti-avoidance provision aimed at deliberate transactions entered into to reduce tax on income from securities, so it did not cover bona fide dealings or incidental tax reduction. The term "income from securities" was held to mean periodic yield such as interest or ordinary dividend, and it did not extend to a statutory fictional dividend arising on liquidation under section 2(6A)(c), which was treated as capital in substance. The proviso to section 44F(3) required both an exceptional, non-systematic instance and no similar avoidance in the preceding three years; it failed where prior avoidance had occurred.

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Issues: (i) whether section 44F of the Income-tax Act, 1922 applied only where the assessee deliberately adopted transactions to avoid tax on income from securities; (ii) whether the expression "income" in section 44F included the fictional dividend arising on liquidation under section 2(6A)(c); and (iii) whether the proviso to section 44F(3) exempted the assessee on the ground that the avoidance was exceptional and not systematic and there had been no such avoidance in the three preceding years.

Issue (i): whether section 44F of the Income-tax Act, 1922 applied only where the assessee deliberately adopted transactions to avoid tax on income from securities.

Analysis: The provision was construed in the light of its object of preventing tax avoidance by manipulation of securities. The words used in section 44F, read with its structure and marginal note, indicated that the section was aimed at deliberate avoidance, not mere incidental reduction of tax arising from a bona fide transfer or change of investment. The Income-tax Officer was required to examine the circumstances of the impugned transactions to determine whether the assessee had adopted them as a means of tax avoidance.

Conclusion: The section applies only where the transactions are entered into for the purpose of avoiding tax liability.

Issue (ii): whether the expression "income" in section 44F included the fictional dividend arising on liquidation under section 2(6A)(c).

Analysis: The term "income from securities" in section 44F was held to denote periodic income capable of accruing from day to day over a period of time, such as interest or ordinary dividend. A distribution on liquidation treated as dividend by statutory fiction under section 2(6A)(c) was a capital receipt in substance and not income arising from the securities as yield from the source. The statutory context and the scheme of section 44F did not support extending it to such fictional income.

Conclusion: Fictional dividend under section 2(6A)(c) is not income within section 44F.

Issue (iii): whether the proviso to section 44F(3) exempted the assessee on the ground that the avoidance was exceptional and not systematic and there had been no such avoidance in the three preceding years.

Analysis: The phrase "exceptional and not systematic" was interpreted to mean a solitary and non-regular instance of avoidance, not a planned or deliberate act as such. However, the second condition required that there should be no prior instance of the same kind of avoidance in any of the three preceding years. On the facts, there had been such avoidance in one of the preceding years, so the proviso could not assist the assessee if section 44F otherwise applied.

Conclusion: The proviso was not available because the second condition was not satisfied.

Final Conclusion: The reference was answered against the revenue on the principal question, and the assessee was held not liable under section 44F on the footing adopted by the department.

Ratio Decidendi: Section 44F of the Income-tax Act, 1922 applies only to deliberate tax-avoidance transactions in respect of periodic income from securities, and it does not extend to statutory fictional dividends treated as income on liquidation.

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