AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
1962 (7) TMI 62
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....(2) of the Act calling upon him to file his return. The Income-tax Officer computed his income at Rs. 3,53,460. The said sum included a sum of Rs. 2,83,126 representing the accumulated profits of the company, which was, under the provisions of section 2(6A)(e), deemed to be dividend received by the petitioner and, therefore, the said sum of Rs. 2,83,126 was included in the total income of the petitioner as income from other sources within the meaning of section 12(1B) of the Act. Against the order of the Income-tax Officer, the petitioner filed an appeal before the Appellate Assistant Commissioner raising various grounds. But the appeal was dismissed by the Appellate Assistant Commissioner and now a second appeal is pending before the Income-tax Appellate Tribunal. The petitioner, however, has filed this petition also before this court challenging the constitutionality of the aforesaid two provisions of the Act. The petition, thus, is only limited to the contention of the petitioner as regards the constitutionality of these two provisions. As regards the correctness or otherwise of the order on merits is concerned, that will be a matter for the Tribunal to decide. The challenge ....
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....ssessment year ending on the 31st day of March, 1956, had that clause been in force in that year, shall be treated as a dividend received by him in the previous year relevant to the assessment year ending on the 31st day of March, 1956, if such loan or advance remained outstanding on the first day of such previous year." It may be stated that section 2(6A)(e) as well as section 12(1B) were introduced in the Act by the Finance Act of 1955 which came into operation on 1st April, 1955. Now the combined effect of these two provisions is that it brings to tax in the hands of the shareholder of a company, which is not a company in which the public are substantially interested, three kinds of payments, to the extent the company is in possession of accumulated profits. These three kinds of payments are: (1) payments made to him by way of advance or loan; (2) payment made on his behalf; and (3) payment made for his individual benefit. These three kinds of payments are brought to tax in the hands of a shareholder where they are made after the Act has come into force or before provided the loan was outstanding on the 1st day of the year previous to the assessm....
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....rovides: "Notwithstanding anything in clauses (2) and (3) , Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the 'Union List') ". Clause (2) provides: "Notwithstanding anything in clause (3) , Parliament, and, subject to clause (1) , the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the 'Concurrent List') ." Clause (3) provides: "Subject to clauses (1) and (2) , the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the 'State List') ." Article 248 provides: "(1) Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or the State List." Clause (2) of Article 248 provides: "Such power shall include the power of making any law imposing a tax not mentioned ....
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....uing Entry No. 54 in List I of the Seventh Schedule of the Government of India Act, 1935, which was identical in terms with Entry 82 in the Union List or List I of the Seventh Schedule of the Constitution, the Supreme Court in Sardar Baldev Singh's case (supra) observed: "As is well-known the legislative entries have to be read in a very wide manner and so as to include all subsidiary and ancillary matters. So Entry 54 should be read not only as authorising the imposition of a tax but also as authorising an enactment which prevents the tax imposed being evaded. If it were not to be so read, then the admitted power to tax a person on his own income might often be made infructuous by ingenious contrivances. Experience has shown that attempts to evade the tax are often made." Now the aforesaid observations made by Chagla C.J. and the Supreme Court relate to entries in the legislative list under the Government of India Act, but there can be no doubt that they would apply with equal force in construing the language of the entries in the legislative list in the Seventh Schedule of the Constitution of India. We may here mention that the challenge raised to the legislative ....
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....d surtax on his real total income or on a portion of it, and one method involved the formation of what is popularly called a 'one-man company'. The individual transferred his assets, in exchange for shares, to a limited company, specially registered for the purpose, which thereafter received the income from the assets concerned. The individual's total income for tax purposes was then limited to the amount of the dividends distributed to him as practically the only shareholder, which distribution was in his own control. The balance of the income, which was not so distributed, remained with the company to form, in effect, a fund of savings accumulated from income which had not immediately attracted surtax. Should the individual wish to avail himself of the use of any part of these savings he could effect this by borrowing from the company, any interest payable by him going to swell the savings fund; and at any time the individual could acquire the whole balance of the fund in the character of capital by putting the company into liquidation." What is said in the aforesaid passage about "one-man company" is equally true in respect of controlled companies where members ar....
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....ble only in the controlled. companies and not in those where the public have a substantial interest. It can be expected that in the latter category of companies the public would see to it that they get their dividends properly and in time. In the controlled companies, however, the persons controlling would decide what is to be done. Profits distributable to the shareholders could ostensibly be accumulated; the persons in control could nevertheless have the benefit of the money by taking it under the guise of a loan or advancing it to a shareholder who would make it over to them and thus avoid tax on dividends. It is to check this type of evasion that the legislature introduced sub-clause (e) to section 2(6A) which contained the definition of the term 'dividend'." This decision has also been followed by the same High Court in S. Kumaraswami v. Income-tax Officer, Nagercoil [1961] 43 ITR 423 . Mr. Joshi has also argued before us that even assuming Parliament had no legislative competence to enact these provisions under Entry 82, the legislation could be upheld under Entry 97 in the Union List. In view of our aforesaid finding, it is not necessary to consider this altern....
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....hat the income of the wife or the income of the minor child is not the income of the husband or the father, but by a fiction created by the legislation, the income of the wife and minor child is so deemed and included in the income of the husband or the father. The reason, therefore, was that taking the wife as a partner in the business or admitting the minor child to the benefits of partnership was a device employed to avoid payment of tax. The constitutionality of this provision has also been upheld. It is not necessary to multiply instances of this kind by referring to sections which are embodied in the Act. Suffice it to say that creating a legislative fiction under which income of one is taxed in the hands of another does not render the legislation invalid on the ground of legislative incompetence when such a fiction is enacted to arrest evasion of tax. Looking at the Act and the substance of the provisions, the subject of tax is the accumulated and undistributed profits of a controlled company in the hands of the shareholders, which profits are taken by them by way of a loan. The reason, as already stated, for enacting these provisions is to arrest or prevent avoidance and ev....
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....oan. Nor would it, having regard to the various factors mentioned above, be reasonable to assume such a hypothetical case. Even in the instant case before us, the loan has been borrowed in the year 1955 and there is no averment in the petition that the petitioner has at any time repaid the loan. The decision on which reliance is placed is distinguishable on facts. Tax at the uniform rate was levied on all lands irrespective of the quality of those lands. In these circumstances the Act was held offending article 14 of the Constitution, because it equally acted on lands unequally situated. Such, however, is not the case here. The provisions uniformly act on all members, who borrow. We may also here note that no plea had been raised by the petitioner in this form in his petition. For reasons stated above, this ground of attack must fail. It is next argued that the provisions treat differently borrowers, who have repaid the loan prior to 30th June, 1955, and who might repay the loan after 30th June, 1955. The legislation was thus discriminatory in treating borrowers who repay loan differently. Again it may be stated that a plea in this form has not been raised. Even on merits there ....
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.... fundamental right to carry on business is violated by these provisions. The plea in paragraph 11 is in the following terms: "Every citizen has got a fundamental right to carry on his trade or business subject only to such reasonable restrictions as may be imposed by law. In the course of carrying on trade or business the company is entitled to give or take loans to or from shareholders. Legislation which changes the incidence of such loans is, it is submitted, an encroachment upon the fundamental right of a citizen under article 19 of the Constitution. It is submitted that the restriction imposed by the amendment in question is not in the interest of general public nor is it reasonable. . . . . " We fail to see how these provisions violate the company's right to practise any trade or carry on any business. It is to be remembered that the provisions operate where loan is advanced by a company, whose business, or the substantial part thereof, is not money-lending. We also fail to see how these provisions violate the petitioner's or any other borrower's right to practise any trade or carry on any business. It does not prohibit borrowing ; it does not prohibit ....