S KUMARASWAMI Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) THE Income-tax Officer assessed the petitioner to income-tax on Rs. 2, 46, 510 in the assessment year 1957-58 and on Rs. 3, 95, 185 in the assessment year 1958-59. THE petitioner applied under article 226 of the Constitution for the issue of writs of certiorari to set aside the orders of these assessments THE relevant facts were as follows THE petitioner was the managing director of Palkulam Estates (Private) Ltd. This company was in receipt of income, which was claimed to be wholly agricultural.

(2.) IN the year of account corresponding to the assessment year 1957-58 the petitioner borrowed sums from Palkulam Estates (Private) Ltd. He also borrowed monies from two other firms, Pioneer Works (Private) Ltd., of which also he was a managing director, and from Pioneer Motor (Private) Ltd., of which he was only a shareholder. All these were companies in which the public had no substantial interest, and they thus came within the scope of section 23A of the INcome Tax Act, 1961. The amounts on which the petitioner was assessed to tax represented the total of the advances or loans taken by the petitioner from these three firms. The INcome-tax Officer applied section 2(6A)(e) of the INcome Tax Act, 1961 and brought these sums to tax One of the objections taken by the petitioner to the assessment was that section 2(6A)(e) was invalid and inoperative. The Parliament had not the legislative competence to enact the statutory provision under which the loans which were not income in fact were deemed to be the income of the assessee. That contention was negatived by the department and by the Tribunal. It has since been held by this court in Lakshman Aiyar v. Additional INcome-tax Offirer that section 2(6A)(e) was not beyond the legislative competence of the Parliament, and that entry 82 in List I of Schedule VII of the Constitution conferred the requisite legislative competence on Parliament. It was also held that competence to legislate in respect of taxes on income also included a power to legislate in order to check evasion of taxes, and that it extended to such matters like taking a loan where loans were taken as a means of evading tax liability. It was pointed out in that case

(3.) THE further contention of the learned counsel for the petitioner is that what was agricultural income in the hands of the company continued to retain that character when it came into the hands of the petitioner as a loan, and that, therefore, it falls outside the scope of section 2(6A)(e), which can only apply to taxes on income assessable to tax under the Indian Income Tax Act, 1961. This plea raised only a question of interpretation, because the presumption is in favour of the constitutional validity of a legislative provision, and where no express provision is made to tax agricultural income, section 2(6A)(e) should be so interpreted to be consistent with its constitutional validity and exclude agricultural income from its scopeTHE short question then is whether on the distribution of profits being effected by a company to its shareholders---whether the distribution is actual or whether it is fictional---the money in the hands of the shareholder still continues to partake of the character of the income as it was in the hands of the company Under section 2(6A)(e) dividend includes