1964 (10) TMI 16 - SC - Income Tax

Whether section 12(1B) read with section 2(6A)(e) was constitutionally valid?

If the impugned section treats the loan received by a shareholder as a dividend paid to him by the company, has the legislature in enacting the section exceeded the limits of the legislative field prescribed by the present entry 82 in List I ?

Held that:- As we have already noticed, the word "income" in the context must receive a wide interpretation ; how wide it should be it is unnecessary to consider, because such an enquiry would be hypothetical. The question must be decided on the facts of each case. There must no doubt be some rational connection between the item taxed and the concept of income liberally construed. If the legislature realises that the private controlled companies generally adopt the device of making advances or giving loans to their shareholders with the object of evading the payment of tax, it can step in to meet this mischief, and in that connection, it has created a fiction by which the amount ostensibly and nominally advanced to a shareholder as a loan is treated in reality for tax purposes as the payment of dividend to him. In our opinion, it would be difficult to hold that in making the fiction, the legislature has travelled beyond the legislative field assigned to it by entry 82 in List I.

In our opinion, there is no scope for arguing that the fundamental rights of the shareholder under article 19(1)(f) and (g) have been contravened by the impugned provision. Therefore, we must reject Mr. Pathak's argument that the impugned provision is invalid on the ground that it contravenes article 19(1)(f) and (g). There is obviously no scope for suggesting that the impugned provision contravenes article 14. Appeal dismissed.