Share transfer before dividend declaration attracted deemed income taxation, while the isolated-transaction exception under section 94(3)(b) applied.

Section 94(2) was applied to a transfer of shares made before declaration of dividend, because the deeming fiction treated the dividend income as taxable in the transferor's hands where the statutory conditions were met. The court also construed section 94(3)(b) strictly, holding that the phrase "exceptional and not systematic" means an isolated or non-habitual transaction rather than merely a planned or deliberate one. On the facts, the transfer was a single instance and not part of any regular practice, so the statutory exception was available.

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Issues: (i) Whether section 94(2) of the Income-tax Act, 1961 applied to the transfer of shares so as to tax the dividend income in the transferor's hands. (ii) Whether the assessee was entitled to the benefit of section 94(3)(b) of the Income-tax Act, 1961.

Issue (i): Whether section 94(2) of the Income-tax Act, 1961 applied to the transfer of shares so as to tax the dividend income in the transferor's hands.

Analysis: Section 94(2) creates a deeming fiction where, in respect of securities in which a person has a beneficial interest, the result of a transaction is that no income is received or the income received is reduced during the previous year. The provision departs from section 44F of the Income-tax Act, 1922 by shifting the emphasis from proof of avoidance by the department to the statutory consequence of the transfer. On the facts, the transfer of shares before declaration of dividend brought the case within the deeming provision.

Conclusion: The provision applied and the dividend income was liable to be included in the assessee's income under section 94(2).

Issue (ii): Whether the assessee was entitled to the benefit of section 94(3)(b) of the Income-tax Act, 1961.

Analysis: The expression "exceptional and not systematic" was construed in its ordinary sense as referring to a single or unusual instance as opposed to a regular practice, not as meaning merely planned or deliberate. The words were read in context and the legislature was taken to have used them to distinguish an isolated exception from a habitual pattern. Since the transfer was a single instance and not part of any regular practice, the statutory exception was attracted.

Conclusion: The assessee was entitled to the benefit of section 94(3)(b), and the revenue's contrary view was rejected.

Final Conclusion: The reference was answered partly against the assessee and partly in his favour, with section 94(2) held applicable but the statutory exception under section 94(3)(b) held available on the facts.

Ratio Decidendi: For the purposes of section 94(3)(b), "exceptional and not systematic" refers to an isolated or non-habitual avoidance transaction and not merely to one that is planned or deliberate.

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