1971 (9) TMI 34 - HC - Income Tax

Court upholds tax law on systematic share transfers but rules for assessee on exceptional avoidance

The court affirmed the applicability of section 94(2) of the Income-tax Act, 1961, in a case where transfers of shares were deemed systematic and aimed at ... Transfer of shares to wife and children before declaring dividend – whether transfer is to avoid tax - Whether Income-tax Officer was justified in applying the provisions of section 94(2) – Held, yes - Whether assessee was entitled to the benefit of the provisions of section 94(3)(b) of the Income-tax Act, 1961 which says that the provisions of s. 94(2) would apply only if the avoidance of income-tax was exceptional and not systematic or regular practice of assessee – Held, yes Issues Involved:1. Application of section 94(2) of the Income-tax Act, 1961.2. Entitlement to the benefit of section 94(3)(b) of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Application of Section 94(2)Facts and Circumstances:The assessee, a managing director of Hindustan Embroidery Mills (Private) Ltd., transferred 12,500 shares to close relatives before the declaration of a dividend. The Income-tax Officer concluded that these transfers were made to avoid higher tax incidence and invoked section 94(2) of the Income-tax Act, 1961.Tribunal's Findings:The Tribunal observed that the assessee's transfers were systematic and planned to avoid tax, thus falling under section 94(2). The Tribunal noted that the language of section 94(2) differs from section 44F of the 1922 Act, emphasizing that the new section is more onerous and designed to prevent tax avoidance by deeming the income from transferred securities as the income of the transferor.Court's Analysis:The court compared section 44F of the 1922 Act with section 94 of the 1961 Act, noting that the onus of proving tax avoidance has shifted to the assessee under the new Act. The court agreed with the Tribunal that section 94(2) applied to the facts of the case, as the transfers were voluntary and aimed at avoiding tax.Conclusion:The court affirmed that section 94(2) is applicable, as the transfers were systematic and aimed at reducing tax liability.Issue 2: Entitlement to the Benefit of Section 94(3)(b)Facts and Circumstances:The assessee argued that the transfers were exceptional and not systematic, thus qualifying for the benefit under section 94(3)(b).Tribunal's Findings:The Tribunal held that the transfers were not exceptional but systematic, rejecting the assessee's claim for the benefit under section 94(3)(b). The Tribunal distinguished the facts from the Gujarat High Court's decision in Commissioner of Income-tax v. Sakarlal Balabhai, noting that the avoidance was planned and deliberate.Court's Analysis:The court disagreed with the Tribunal, referring to the decision in Bilsland's case and the Gujarat High Court's interpretation in Sakarlal Balabhai's case. The court emphasized that 'exceptional and not systematic' primarily relates to the number of transactions, not their planned nature. Since there was only one instance of tax avoidance, it was deemed exceptional and not part of a regular practice.Conclusion:The court held that the assessee was entitled to the benefit of section 94(3)(b), as the avoidance was exceptional and not systematic.Summary:The court answered both questions in the affirmative. The first question was answered in favor of the department, confirming the applicability of section 94(2). The second question was answered in favor of the assessee, granting the benefit of section 94(3)(b). No order as to costs was made due to the complexity of the issues involved.