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 ... Deeming provision in section 94(2) - exceptional and not systematic exception under section 94(3)(b) - anti-avoidance provision - onus on the assessee to prove absence of avoidance - deeming of income of transferred securities - interpretation of 'exceptional and not systematic'Deeming provision in section 94(2) - deeming of income of transferred securities - anti-avoidance provision - Whether section 94(2) applies so as to include dividend income of the transferred securities in the transferor's income for the year in question. - HELD THAT: - The Court compared the language of section 44F of the earlier Act with section 94 of the 1961 Act and held that subsection (2) of section 94 departs clearly from the earlier provision. Section 94(2) contains a deeming provision which makes the income from transferred securities the income of the transferor for the year, irrespective of the transfer, where the result of the transaction is that no income is received by him or the income received is less than it would have been. The Court observed that under section 94 the onus has been shifted onto the assessee under subsection (3)(a) to prove absence of avoidance. Given that the transfers here were proximate to the dividend declaration, to close relatives, and in circumstances admitted or not controverted as resulting in avoidance of tax, the Court agreed with the Tribunal that section 94(2) is attracted to the facts and the Income-tax Officer was justified in applying it.Section 94(2) is attracted and the Income-tax Officer was justified in applying it.Exceptional and not systematic exception under section 94(3)(b) - interpretation of 'exceptional and not systematic' - onus on the assessee to prove absence of avoidance - Whether the assessee was entitled to the benefit of the proviso in section 94(3)(b) that the avoidance was 'exceptional and not systematic'. - HELD THAT: - Although the Court found section 94(2) attracted on the facts, it held that the question whether the transfers were 'exceptional and not systematic' must be interpreted in the sense established by precedent. The Court accepted the construction in Bilsland's case and the Gujarat High Court decision in Sakarlal Balabhai to the effect that 'exceptional and not systematic' primarily relates to number and whether the avoidance is by way of exception to the assessee's regular practice rather than denoting mere planning or design. Applying that principle, the Court concluded that the proviso's language in section 94(3)(b) is almost identical in import and the earlier interpretations govern. On that basis the Court held that, contrary to the findings of the authorities below, the assessee was entitled to the benefit of section 94(3)(b).The assessee is entitled to the benefit of section 94(3)(b); the proviso's phrase 'exceptional and not systematic' is to be read in the sense indicated in Bilsland's case and Sakarlal Balabhai.Final Conclusion: The Court answered the first question in the affirmative (section 94(2) attracted and its application by the Revenue justified) and answered the second question in the affirmative in favour of the assessee (the assessee entitled to the benefit of section 94(3)(b) as construed). 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.