http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7  

PETITIONER: M.C.T.M. CHIDAMBARAM CHETTIAR

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS

DATE OF JUDGMENT: 29/11/1965

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1966 AIR 1453            1966 SCR  (2) 761

ACT:       Indian Income-tax Act, 1922 (Act 11 of 1922), s.  44D- Firm  transferred  assets to Non-resident-Income  from  Non- resident-If partners of firm assessable separately.

HEADNOTE:        A firm, constituted by the assessees who were closely related,  transferred  assets to a Corporation  carrying  on money-lending  business in the Federated Malaya States.   In consideration  of the assets so transferred the  Corporation allotted shares to the partners of the firm.. The  Incometax Officer  assessed the partners of the firm separately  under s.  44D  of  the  Act  in  respect  of  the  income  of  the Corporation,  which on appeals were upheld by the  Appellate Assistant   Commissioner.    On  further  appeals   by   the assessees,  the Tribunal allowed the appeals on  the  ground that  the  income  from  the  assets  transferred  was   not assessable to tax at the time of transfer.  At the  instance of the Revenue, the question was referred to the High  Court which was answered against the assessee.  In appeal to  this Court :       HELD  :  The High Court was correct in  answering  the question against the assessee.       (i) The language of s. 44D(1) of the Act is plain.  It does not say "when any person has  transferred  any  assets" but it says, "by means of a transfer of assets".  The person who transfers assets is not designated but emphasis is  laid on  the consequence flowing from such  a  transfer.Whosoever effects  the  transfer, if bY such a transfer  the  assessee acquires  a right to enjoy the income, he is liable to  tax. The  words "means" and "acquired" in the context., are  only words  of  passive  nature.   The  hand  that  transfers  is immaterial; what matters is the result envisaged by the said section,  namely  a non-resident is the  transferee  of  the assets,  but  the assessee acquires the power to  enjoy  the income from those assets.  The words by means of a  transfer of assets" mean nothing more than .as a result or by  virtue or in consequence of the transfer". [765 E-G; 766 E]        Congreve  and  Congreve  v.  Commissioner  of  Inland Revenue, (1943-49) 30 T.C. 163 and Bambrdige v. Commissioner of Inland Revenue, (1953-56)  36 T.C. 313, applied.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7  

      (ii)    The  construction  that  s.  44D(1)  can   be invoked only if at the time of the transfer the income  from the said assets was liable to tax, is not only  inconsistent with the phraseology used but will defeat the object of  the section.   The expressions "any income", "such  income"  and "that  income"  found in the sub-section refer to  the  same income.   What  is  assessed in a particular  year  is  that income  which  is deemed to be the income in the  hand-,  of assessee.  "That income" is such income in regard whereof he has "the power to enjoy".  "Such income" is any income which if it were the income of the assessee would be chargeable to income-tax.  The quality of chargeability is referable  only to the income from the assets transferred during the year in which it is sought to be [766 F; 767 B] 762       (iii)   If  the  assessees  were  able   directly   or indirectly  to control the income of the  Corporation,  they would be deemed to have the power to enjoy the income.  Sub- section (5) of s. 44D gives an enlarged meaning to the words "power to enjoy" in sub-s. (1).        In   the   present  case,  the   circumstances   were overwhelming   to  establish  that  the  assessees   had   a controlling  voice in the affairs of The Corporation.   They were  closely related, holding almost all the shares of  the Corporation,  and  were  the  partners  of  the  firm  which transferred the assets. [767 H; 768 B-C]        (iv)    The  burden was upon the assesee to  show  to the satisfaction of the Income-tax Officer that the transfer was saved under sub-section (3) of s. 44D inasmuch as it was not for a purpose to avoid tax liability but was only a bona fide  commercial transaction.  The Tribunal found as a  fact on  the material placed before it that the transfer  was  to avoid the liability to taxation; and that being a finding of fact,  the High Court rightly accepted it.  The  correctness of  the  said  finding of fact cannot  be  permitted  to  be canvassed in these appeals. [768 G-769 A]

JUDGMENT:         CIVIL  APPELLATE JURISDICTION : Civil  Appeals  Nos. 477 to 488 of 1964.         Appeals  from the judgment and order  dated  October 16, 1959 of the Madras High Court in Case Referred No. 31 of 1954.          N. A. Palkhivala, C. Ramakrishna, 0. C. Mathur  and J. B. Dadachanji for the appellants.          A.  V.  Viswanatha  Sastri,  Gopal  Singh,  R.   N. Sachthey and   B. R. G. K. Achar, for the respondent.           The Judgment of the Court was delivered by     Subba  Rao, J. These appeals raise the question  of  the liability  of the appellants to pay income-tax under S.  44D (1)  of the Indian Income-tax Act, 1922, hereinafter  called the  Act, in respect of the income of the  M.C.T.M.  Banking Corporation Limited.     Sir M.Ct.M. Muthiah Chettiar, his wife Deivanai Achi, Ms two sons Chidambaram Chettiar and Muthiah Chettiar, and  his two daughters Umayal Achi and Vallia Murai Achi  constituted an  undivided  Hindu  family.  The said  family  carried  on moneylending  business  on  an extensive  scale  in  British India, Burma and elsewhere.  Upto and inclusive of the  year 1927-28, the undivided Hindu family was assessed to  income- tax  as  such.  During the assessment year  1928-29  it  was claimed that a partition had taken place in the said  family and  that  Sir  M.Ct.M. Muthiah Chettiar and  his  two  Sons

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7  

constituted  a firm.  The said firm was duly registered  and it was assessed to income-tax.  After the death of the  said Sir  M.Ct.M. Muthiah Chettiar in 1929, his two sons and  his wife continued the firm and it was assessed to income-tax as a firm.  In June 1929 the said firm started a new 763 money-lending  business  at Kuala Lumpur  in  the  Federated Malaya  States  with a capital of Rs. 12  lakhs.   The  said capital  was  transferred from its business  in  Burma.   On March  24,  1932,  a  company  called  the  M.Ct.M.  Banking Corporation,   hereinafter  called  the Corporation,   was incorporated  in Pudukkotai.  It commenced business  on  and from  March  31,  1932.  One of the  purposes  of  the  said Corporation  was to acquire and carry on business which  was being  carried on by the firm in Kuala Lumpur.  A branch  of the Corporation was opened in Kuala Lumpur on September  22, 1933.  Between November 1, 1933, and November 31, 1937.   On December 31, 1938, out of the total shares were  transferred to  the  Corporation and in consideration of the  assets  so transferred,  the  Corporation allotted to the  partners  of the,  firm  1,200 shares of face value of  Rs.  1,000  each. Though  the  Corporation  commenced  business  in  1932,  no dividends were declared by it.  But in 1938 the  Corporation distributed bonus shares of value of Rs. 5 lakhs out of  the profits of Rs. 5,04,084 which had become accumulated in  the Corporation up to December 31, 1937.  On December 31,  1938, out  of  the total shares of 2,271 in the  Corporation,  the said two sons and the widow of Sir M.Ct.M. Muthiah  Chettiar held 1,944 shares.  From the assessment year 1933-34 to  the assessment year 1938-39 the firm was treated as the agent of the  Corporation and its income arising  and  accruing  in British  India was assessed in the hands of the  firm  which had  its  head office in Madras.  For the  assessment  years 1939-40,  1940-41  and 1941-42, the  Income-tax  Officer,  I Circle,  Madras,  assessed  the said partners  of  the  firm separately under s. 44D of the Act in respect of the  income of  the Corporation.  Against the orders of  the  Income-tax Officer,  the  three  partners  preferred  appeals  to   the Appellate  Assistant  Commissioner, who rejected  the  same. Against  the Orders of the Appellate Assistant  Commissioner rejecting the appeals the assessees preferred appeals to the Income-tax  Appellate  Tribunal,  Madras,  Bench  ’A’.   The Tribunal allowed the appeals of the assessees on the  ground that   the  income  from  the  assets  transferred  to   the Corporation was ’not assessable to income-tax at the time of the transfer and that, ’therefore, the income therefrom  was not  liable to tax during the assessment years under s.  44D of the Act.  At the instance of ’the Revenue, the  following question of law was referred to the High Court of Madras for its opinion :                  "Whether the income made by the Corporation               can  be  assessed  under  the  provisions   of               Section  44-D  of the Income-tax  Act  in  the               hands  of the present assessees and if so,  to               what extent." 764 A Division Branch of the High Court, by its judgment,  dated August 4, 1958, held that the said income of the Corporation was  attracted  by s. 44D of the Act, but  before  giving  a final answer to the question propounded, it  directed  the Tribunal  to  furnish  a further statement of  case  on  the question whether the assessees were entitled to relief under sub-s. (3)(a) of S. 44D of ’the Act.  On December 23,  1958, the Tribunal submitted a ’finding that the assessees did not satisfy the requirements of the said sub-section.  The  High

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7  

Court  accepted the said finding and answered  the  question against  the  assessees  in the  affirmative.   The  present appeals  were  filed against the order of  the  High  ,Court after obtaining a certificate from the said High Court.      We shall now proceed to consider the arguments advanced ’by  Mr. Palkhivala, learned counsel for the  assessees,  in support   ,of  his  contention  that  the  income   of   the Corporation  was not assessable to tax in the hands  of  the assessees.  As all his arguments turned upon the  provisions of  s.  44D of the Act, it would be convenient to  read  the same at the outset :               "Where any person has, by means of a  transfer               of   assets,  by  Virtue  or  in   consequence               whereof,  either alone or in conjunction  with               associated operations, any income which if  It               were  the  income  of  such  person  would  be               chargeable to income-tax becomes payable to  a               person  not resident or to a  person  resident               but  not  ordinarily resident in  the  taxable               territories, acquired any rights by virtue  or               in  consequence  of which he  has  within  the               meaning  of this section power to  enjoy  such               income,  whether forthwith or in  the  future,               that  income shall, whether it would or  would               not  have been chargeable to income-tax  apart               from the provisions of this section, be deemed               to  be income of such first  mentioned  person               for all purposes of this Act." Chapter VB was inserted in the Income-tax Act, 1922, by  the Indian  Income-tax (Amendment) Act, 1939 (Act VII of  1939). ’Section  44D is one of the sections of that  Chapter.   The provisions  of  this Chapter were modelled on S. 18  of  the English  Finance  Act of 1936, as amended by s.  28  of  the English  Finance Act of 1938.  The object of S. 44D  of  the Act, as disclosed by the provisions thereof, was to  prevent residents. of ’India from evading the payment of  income-tax by transferring their assets to non-residents while enjoying the  income  by adopting devious methods.   The  sub-section suffers  from want of clarity, but a deeper scrutiny  brings out the following ingredients of it 765 (i)there  must  be a transfer of assets; (ii) by  reason  of that  transfer, income traceable to the said assets  becomes payable to a person non-resident or to a person resident but not  ordinarily resident in the taxable  territories;  (iii) the   resident  by  means  of  the  transfer  alone  or   in conjunction  with associated operations, acquires  right  to enjoy such income; (iv) the income from the said assets,  if it  was the income of the resident, would be  chargeable  to income-tax;  and (v) in that event, the income of  the  non- resident  would be deemed to be the income of  the  resident for,’  all the purposes of the Act.  Shortly  stated,  under this  section, if a resident has power to enjoy  the  income accruing or arising out of the assets transferred to a  non- resident,  he would be deemed to have received  that  income and.  therefore,  would be liable to be assessed  under  the Act.      The  first  contention of Mr. Palkhivala  is  that  the expression "by means of a transfer" in s. 44D(1) of the  Act means a transfer by an assessee and that, as in the  instant case  the  transfer  was by the firm which  was  a  juristic entity  separate  from  the assessees:  the  income  of  the Corporation was not assessable to tax in their hands.       The language of the sub-section is plain.  It does not say  "when  any person has transferred any assets",  but  it

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7  

says,  "by means of a transfer of assets".  The  person  who transfers  assets is not designated but emphasis is laid  on the  consequences flowing from such a  transfer.   Whosoever effects  the  transfer, if by such a transfer  the  assessee acquires  a right to enjoy the income, he is liable to  tax. The  words  "means" and "acquired" in the context  are  only words  of  passive  nature.   The  hand  that  transfers  is immaterial  :  what matters is the result envisaged  by  the said  section, namely, a non-resident is the  transferee  of the assets but the assessee acquires the power to enjoy  the income from those assets.  This construction is supported by the decisions of English Courts given on a section which  is in  pari materia with the relevant part of s. 44D(i) of  the Act.  The material part of s. 18 of the English Finance Act, 1936, as amended by s. 28 of the English Finance Act,  1938, reads                      (1) Where  such  an individual  has  by               means of any such transfer, either alone or in               conjunction   with   associated    operations,               acquired any rights by virtue of which he has,               within  the meaning of this section, power  to               enjoy, whether forthwith or in  the  future,               any  income of a person resident or  domiciled               out  of the United Kingdom which, if  it  were                             income of that individual 766               received  by him in the United Kingdom,  would               be  chargeable to income-tax by  deduction  or               otherwise, that income shall, whether it would               or  would not have been chargeable to  income-               tax apart from the provisions of this section,               be deemed to be income of that individual  for               all the purposes of the Income-tax Acts. It  would be noticed that in the said sub-section, as in  S. 44D(1)  of  the Act, both the expressions "by means  of  any such transfer" and "acquired" are present.  In Congreve  and Congreve   v.  Commissioners  of  Inland  Revenue(1),   Lord Simonds, repelling the argument similar to that presented to us, observed :                     "........ it is to my mind clear, first,               that  in their ordinary grammatical sense  the               words  "by  means  or,  do  not  connote   any               personal  activity on the part of  the  person               who  is said to enjoy or suffer  something  by               those,  means,  and, secondly, that  in  their               present   context  it  is  not  necessary   or               legitimate  in order to give a limiting  sense               to  the  words to read them as  if  they  were               followed by such word as "effected by him"." This  view was followed by Harmam, J., in Bombridge v.  Com- missioners  of Inland Revenue(2).  The words "by means of  a transfer  of assets" mean nothing more than "as a result  or by   virtue  or  in  consequence  of  the  transfer".    We, therefore,  reject  the  first  contention  of  the  learned counsel.      The second contention is that the said sub-section  can be  invoked only if at the time of the transfer  the  income from  the said assets was liable to tax and that, as in  the present case when the transfer of the assets was effected in 1933  the income therefrom was not chargeable to  income-tax for  it  was foreign income not remitted to  India-the  said assets  fell outside the ken of the said sub-section.   This argument was sought to be sustained on the express terms  of s.  44D(1) of the Act.  The clause " any income which if  it were  the  income  of such person  would  be  chargeable  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7  

income-tax",  it  is  said, is  descriptive  of  the  assets transferred and constitutes a limitation on the operation of the  section.   This construction is not  only  inconsistent with the phraseology used but will defeat the object of  the section.   The expressions "any income", "such  income"  and "that  income"  found in the sub-section refer to  the  same income.   What  is  assessed in a particular  year  is  that income which is deemed to be the income in the hands of  the assessee.  "That income" is such income in regard whereof he has "the power to enjoy". (1) (1943-’49) 30 T.C. 163. (2) (1963-’56) 36 T.C. 313. 767 "Such  income" is any income which if it were the income  of the assessee would be chargeable to income-tax.  The quality of  chargeability is referable only to the income  from  the assets transferred during the year in which it is sought  to be  assessed.  As Balakrishna Ayyar, J., pointed out in  the judgment  under  appeal, to accede to the  argument  of  the assessee, the words in s. 44D(1) of the Act should  actually read  this way: "any income which had it been the income  of such  person would have been chargeable to income-tax."  But the  words read otherwise thus :  " any income  which  if it were  the  income  of such person  would  be  chargeable  to income-tax".   The tense refers to the assessment  year  and not  to  the year when the transfer was  affected.   Learned counsel  for the assessees contended that this  construction would affect adversely a bona fide transferor of assets  who could  not  possibly have anticipated that the  income  from such  assets would be chargeable to tax in future  and  that that  could not have been the intention of the  Legislature. As indicated earlier, the sub-section is not concerned  with the  transferor  but only with the result brought  about  by means  of  the transfer of the assets  in  conjunction  with associated  operations.   The  sub-section  was   designedly couched in the widest phraseology to prevent evasion of  tax in  the manner prescribed thereunder.  If it was not  so,  a person  can  transfer his assets to another in a  year  they have not yielded any income at all, reserving indirectly the right  to  enjoy the income therefrom in future  or  he  may transfer  his assets when they are not yielding any  income, but  which may, under a scheme of future development,  yield enormous profits.  On the other hand, a bona fide transferor is amply protected by sub-s. (3) of s. 44D of the Act.   We, therefore, find no merits in this contention either.     The  next  submission  of the learned  counsel  for  the assessees  is that the assessees had not acquired, by  means of  the  said transfer of assets to the  Corporation  or  in consequence thereof, any power to enjoy the income therefrom within the meaning of s. 44D(1) of the Act.  While conceding that,  if  the assessees had the controlling  share  in  the corporation, they would have the power to enjoy its  income, it was said that there was no evidence on which it could  be held that the assessees, though closely related, were acting in   unison  and  were  controlling  the  affairs   of   the Corporation.   Sub-section (5) of s. 44D gives  an  enlarged meaning  to the words "power to enjoy" in sub-s.  (1).   The relevant clause of that sub-section is cl. (e), which reads                   (5)  A person shall" for the  purposes  of               this section, be deemed to have power to enjoy               income of a person 768               not  resident, or resident but not  ordinarily               resident, in the taxable territories, if-               (e)   such first-mentioned person is able,  in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7  

             any manner whatsoever and whether directly  or               indirectly, to control the application of  the               income. If the assessees were able directly or indirectly to control the income, of the Corporation, they would be deemed to have the  power  to enjoy its income.  In the present  case,  the circumstances are  overwhelming  to  establish  that   the assessees  had  a controlling voice in the  affairs  of  the Corporation.   They  are closely related : two of  them  are brothers  and  the  third is their mother.   They  were  the partners  of  the firm which transferred  the  assets.   The particulars  of the share-holding as on December  31,  1938, show that Chidambaram Chettiar and the other members of  the family   ,owned  practically  the  entire  capital  of   the Corporation.   The three partners owned 1944 shares  out  of 2,271 shares of the Corporation and the balance was held by their  close relatives.  Apart from the three partners,  the other  shareholders  were the son, sisters and the  wife  of Chidambaram  Chettiar.  It is obvious that  the  Corporation was  a  close  one  and the partners of  the  firm  had  the controlling  voice in the management of the affairs ,of  the Corporation.   The argument that there is no  evidence  that there  was unity of interest among the partners ignores  the realities of the situation, for the history of the firm, the constitution of the Corporation, the manner the assets  were transferred  and the other circumstances brought out in  the record  lead  to the only inference that the  partners  were acting  in unison throughout, Indeed it is recorded  in  the statement  of case that it was conceded before the  Tribunal that  the  assessees had power to enjoy the  income  of  the assets  transferred within the meaning .of S. 44D(1) of  the Act.  In the circumstances, the High Court rightly held that the  assessees had the power to enjoy the income within  the meaning of s. 44D(1) of the Act.      Lastly it was contended that the income in question was saved from the operation of sub-s. (1) of s. 44D of the  Act by  sub-s.  (3)  thereof.  To  state,  it  differently,  the transfer  of  the assets to the Corporation was  not  for  a purpose to avoid the tax liability but was only a bona  fide commercial  transaction.  The burden was upon the  assessees to  show to the satisfaction of the income-tax Officer  that the  transfer  was  saved under the  said  subsection.   The Tribunal  found as a fact on the material placed  before  it that  the transfer was to avoid the liability  to  taxation; and  that  being a finding of fact, the High  Court  rightly accepted 769 it.  The correctness of the said finding of fact  cannot  be permitted to be canvassed in these appeals.      In the result, we hold that the High Court has answered the question correctly.  The appeals fail and are  dismissed with costs.  One hearing fee.                                 Appeal dismissed. 770