TMI Blog1960 (7) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... ully and truly his real income for the year. The officer initiated proceedings under section 34 of the Act, and, after enquiry, found that, during the year of account, the assessee should be held as deemed to have received by way of dividend a sum of ₹ 1,01,695. On that finding, the petitioner was assessed to tax on this total income of ₹ 1,05,057, the tax levied thereon being ₹ 31,830-8-0. The petitioner has filed, before the Appellate Assistant Commissioner, an appeal against the order of assessment under section 30 of the Act. He has also applied under article 226 of the Constitution for quashing the same on the ground that the provisions of the Indian Income-tax Act, namely, sections 2(6A)(e) and 12(1B), under which he was deemed to have received the dividends, were ultra vires of the Union Legislature. The facts necessary to appreciate the question raised are these. The assessee is a shareholder owning one share of ₹ 1,000 in a private limited company, K.M.S. Lakshmana Iyer and Sons Ltd. The Company has its registered office at Madurai and carries on business as dealers in yarn, it being one of the distributors of the yarn produced by the Madura Mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner during the year of account. It is, however, unnecessary to decide at this stage the precise amount of profits available or the extent of the advances made. Section 12(1B) read with section 2(6A)(e) of the Act, which brings to charge such advances up to the limit of undistributed profits of the company, would apply. Arguments in this petition were restricted to the constitutional validity of those provisions, it being agreed that the question relating to the propriety of the assessment should be left to be agitated in the appeal. Section 2(6A)(e) and 12(1B) were introduced by way of amendment in the Indian Income-tax Act, by the Finance Act of 1955, and they came into operation from April 1, 1955. The former section brought into the definition of the term dividend three types of payments made by a controlled company (which had accumulated profits) to or on behalf of its shareholders, namely, (1) payment by way of loan or advance made to a shareholder, (2) payment to a third party on behalf of a shareholder and (3) payment made for the benefit of a shareholder. The payments mentioned above, to the extent to which the company had accumulated profits, were regarded as div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 . That stated: Any payment by a company, not being a company, in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder or any payment by any such company on behalf of or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits. But 'divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by treating the loan made to him as a dividend received by him. In regard to the earlier years, however, the borrowing shareholder could not have known that the loans themselves would attract tax; nor that he would be liable to pay tax on amounts paid by the company for his benefit. Section 12(1B), therefore, restricts the tax liability to the loans outstanding. It must be noticed that sections 2(6A)(e) excludes the operation of the definition to the case of companies, a substantial part of whose business is money lending for in such cases it cannot always be said for certain that the borrowings was a device to get the dividend. The contention of the assessee is that the impugned sections which bring to tax that which is not income, is beyond the constitutional competence of the Parliament, as under article 246 of the Constitution, it would only have a power to enact legislation in regard to the subjects mentioned in Lists I and III of the Seventh Schedule. Entry 82 in List I of the Seventh Schedule runs: Taxes on income other than agricultural income . The learned counsel for the petitioner contended that the enactment was part of the income-tax legislation, and unless the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. In Amina Umma v. Income-tax Officer [1954] 26 I.T.R. 137 the question was raised whether, in enacting section 16(3)(a)(ii) of the Indian Income-tax Act, the Legislature transgressed the powers conferred on it by entry 54 of List I of the Seventh Schedule in the Government of India Act, 1935 (which corresponds to entry 82 of List I of the Seventh Schedule to the Constitution). It was held that, although the impugned provisions purported to tax a person who did not receive the income, it was, nevertheless, only income that was assessed, and that the enactment of a legal fiction shifting the incidence of taxation from the person who received the income to another, would not take it out of the scope of entry 54. A similar point arose in regard to the validity of section 4(2) of the Indian Income-tax Act, where the incidence of taxation was shifted from the non-resident husband to the wife who was a resident within the taxable territories. In Janab Jameelamma v. Income-tax officer [1956] 29 I.T.R. 246 it was held that the basis of taxation was income, and, therefore, within the competence of the Legislature, and that the section did not violate the provisions of article 14 of the Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself in reality belongs to the persons who form the company and the distribution of profits of the company depends entirely on the will of the persons who control the company. Evasion of tax was possible by keeping the dividends undistributed, and at the same time paying monies under the guise of loans. Having regard to the identity of the interest of the shareholders in a controlled company with that of the company, the assumption that the loans advanced are mere camouflages for payment of profits to the shareholders, is one based in reality on a number of cases. If the essence of the transaction were to be looked into, it will be seen that the tax sought to be levied is only on the occasion of the loan, the loan being only a semblance for the payment of the profits. The learned counsel for the petitioner posed a number of possibilities in which the provisions of the Act would work hardship. One illustration mentioned was this: If a particular sum is advanced to a shareholder A and he repays the same, and the same amount is advanced to another shareholder B, both A and B would be liable to pay the tax. We do not consider that the assumption that both A and B would be liable to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that company wants money, he could as well take it out of the profits by declaring a dividend, for ex. concessi the persons who decide to grant the loan, that is, the controlling directors, can themselves declare the dividend. Competence to the legislate regarding income-tax would include a power to legislate in order to check evasion. that power should obviously extend also to subsidiary matters like taxing a loan where the loans are taken as a means of evading tax liability of income. Similar legislation has been made in other countries. Section 108 of the Commonwealth Income-tax states: (1) If amounts are paid or assets distributed by a private company to any of its shareholders by way of advances or loans, or payments are made by the company on behalf of, or for the individual benefit of, any of its shareholders, so much, if any, of the amount or value of those advances, loans, or payments, as, in the opinion of the commissioner, represents distributions of income shall, for all purposes of this Act, be deemed to be dividends paid by the company on the last day of the year of income of the company in which the payment or distribution is made. (2) Where the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication (with any restrictions or modifications) extend any enactment in force in a Part A State to Part C State. Acting under that provision, the Central Government extended the provisions of the Bengal Finance (Sales Tax) Act, 1941, to Delhi, a Part C State. It was held in State of Madras v. Gannon Dunkerley [1959] S.C.R. 379 that a State law imposing a tax on works contract was ultra vires. It would follow that the Bengal Act in so far as it purported to do so would be invalid. Did that invalidity extend also to the sales tax law operating in Delhi? The Supreme Court answered the question in the negative. The reason for the conclusion was that the Sales Tax Act operating in Delhi was not one enacted by a State Legislature but by Parliament (viz., the authority being under the part C states Laws Act, 1950) and that the parliament's authority was extensive enough to impose a tax on building contracts even though there was no sale involved therein. The decision of the Supreme Court upholds the residuary power of the Parliament on all subjects except those that are mentioned in List II. It is next contended that the impugned sections, in their operation, would contravene the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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