COMMISSIONER OF INCOME Vs. SAKARLAL BALABHAI

JUDGEMENT

(1.) This reference raises an interesting question of construction of section 44F of the Income-tax Act, 1922. The question is not free from difficulty arising as it does on one of the least happily drafted sections of an Act not otherwise known for perspicuity. In order to appreciate the question it is necessary to notice the facts giving rise to the reference in some detail.

(2.) The assessee is an individual and his income consists mainly of dividends and director's fees. He held at the material time 94 shares out of a total share capital of 640 shares of the face value of Rs. 500 each in a company called Lallubhai Gordhandas and Company Limited. This company, to which we shall for the sake of convenience refer as these managing agency company, was the managing agent of Rohit Mills Limited and was a company in which the public are not substantially interested within the meaning of section 23A. By a resolution dated 3rd Dec., 1957, passed at an extraordinary general meeting of Rohit Mills Limited, it was resolved that the managing agency should be determined and accordingly it came to an end an 31st Dec., 1957. Since the managing agency of Rohit Mills Limited was the only business of the managing agency company and it came to an end, the directors of the managing agency company resolved on 20th Jan., 1958, to wind up voluntarily the managing agency company and a notice calling the annual general meeting, inter alia, for the purpose of passing the necessary resolution was issued to the shareholders on the same day. The annual general meeting was convened to be held on 18th Feb., 1958, but before that, an extraordinary general metting was held on 10th Feb., 1958, and at that meeting a dividend of Rs. 399 per share was declared in compliance with a direction of the Income-tax Officer to make further distribution to avoid an order under section 23A. Prior to the declaration of this dividend the assessee sold his 94 shares in the managing agency company on 24th Jan., 1958, at the price of Rs. 1,600 per share; 93 shares to Balabhai Damodardas Trust, a public charitable trust created by his father, and one share to his grand-daughter, Nita. These sales were ex-dividend and the dividend of Rs. 399 per share on 94 shares was, therefore, received by the assessee and not by the purchasers. Thereafter, on 18th Feb., 1958, the annual general meeting was held and at that meeting an extraordinary resolution was passed for voluntary winding up of the managing agency company and a liquidator was appointed. On 7th March, 1958, the liquidator distributed Rs. 1,750 per share and this distribution in so far as it related to 94 shares was received by the purchasers. This distributions was admittedly out of the accumulated profits of the earlier years and was, therefore, dividend within the meaning of section 2(6A)(c). We do not know what was the incidence of tax on Nita in respect of the distribution with reference to one share purchased by her, but so far as Balabhai Damodardas Trust was concerned, it was a public charitable trust whose income was exempt from tax under section 4(3)(i) and the trustees of the trust, therefore, applied for refund of the tax deducted at source in respect of 93 shares purchased by them. When this application came up for consid eration on 27th May, 1961, the Income-tax Officer came to known for the first time that a distributed of Rs. 1,750 per share had been made by the liquidator on 7th March, 1958, after the sale of 94 shares by the assessee to Balabhai Damodardas Trust and Nita. The Income-tax Officer, on coming to know this fact, was of the view that section 44F applied to the facts of the case and he, therefore, decided to proceed under that section. But by this time the original assessment of the assessee for the assessment year 1959-60, the corresponding account year being Samvat year 2014, that is, 24th Oct., 1957, to 11th Nov., 1958, had already been completed on 29th Jan., 1960 and the Income-tax Officer, therefore, initiated proceedings for reassessment by issuing a notice dated 25th July, 1961, under section 34(1)(b). The Income-tax Officer also served a notice dated 9th Jan., 1961, on the assessee under section 44F, sub-section (1), calling for particulars relating to the shares held by the assessee in the managing agency company and two other companies, namely, Chinubhai Naranbhai and Company Limited and Sakarlal Balabhai and Company Limited. Further correspondence thereafter took place between the assessee and the Income-tax Officer in the course of which the assessee disputed the applicability of section 44F but the Income-tax Officer rejected the contention of the assessee and applied the provisions of section 44F to the sale of 94 shares effected by the assessee in favour of Balabhai Damodardas Trust and Nita. The assessee preferred an appeal to the Appellate Assistant Commissioner but the appeal was unsuccessful and the matter was thereupon carried in further appeal to the Tribunal. The Tribunal took the view that section 44F was wrongly applied by the revenue authorities to the facts of the cease and there were in the main three grounds on which this view was based. First, the Tribunal held that, on a true construction of section 44F, sub-section (2), the Income-tax Officer was bound to take into account all the circumstances in relation to the total holding of the assessee for the purpose of deciding whether a particular transaction of sale was with a view to avoiding tax liability and since the Income-tax Officer had failered to consider what were the other shares and securities held by the assessee apart from 94 shares in the managing agency company and whether any transactions or arrangements were entered into by the assessee relating to those shares and securities and, if so, what was their effect, the condition requisite for the applicability of section 44F was not satisfied and it was to possible to say that the assessee had avoided more than ten per cent of the tax by effecting the sale of 94 shares to Balabhai Damodardas Trust and Nita.

(3.) The Tribunal then proceeded to state - and this was the second ground - that in any event section 44F had no applications since the income to which the section was sought to be applied was fictional dividend within the meaning of section 2(6A)(c) and, lastly, the Tribunal held that in any view of the matter, even if section 44F was otherwise applicable and there was avoidance, it was exceptional and not systematic within the meaning of the proviso to section 44F, sub-section (3), and no assessment could, therefore, be made on the assessee under section 44F, sub-section (3). The Tribunal on this view concluded that the provisions of section 44F were not attracted and it accordingly allowed the appeal of the assessee. This view taken by the Tribunal is challenged in the present reference made at the instance of the Commission.