28 October 1964
Supreme Court


Case number: Appeal (civil) 45 of 1964






DATE OF JUDGMENT: 28/10/1964


CITATION:  1965 AIR 1375            1965 SCR  (1) 909  CITATOR INFO :  R          1965 SC1387  (18)  RF         1965 SC1862  (10)  F          1972 SC 524  (18)  RF         1973 SC1461  (218)  RF         1977 SC1802  (29)  RF         1981 SC1922  (9)  R          1984 SC 420  (45)  D          1985 SC1698  (31)  C          1990 SC 781  (72)  R          1990 SC1637  (38)  D          1990 SC1664  (6)  RF         1992 SC 803  (41,44)  RF         1992 SC1360  (9)

ACT: Constitution of India, 1950, List 1, VII Schedule, Entry 82- Income--Income-tax  Act (11 of 1922), ss. 2(6A) (e)  and  12 (1B)-Legislative competence and constitutional validity.

HEADNOTE: The assessee was a share holder in a private limited company whose ordinary business was not money-lending business.   He took  a loan amounting to over Rs. 4 lakhs from  a  company. The Income-tax Officer computed the assessee’s income at Rs. 3 lakhs and odd, under s. 12(1B) read with s. 2 (6A) (e)  of the  Income-tax  Act, 1922.  That amount included a  sum  of over Rs. 2 lakhs representing the accumulated profits of the company.   The assessee’s share in the accumulated  profits, if distributed as dividend, would be an amount proportionate to  the  number  of  shares  held  by  him.   He   therefore contended,  that the balance of the accumulated profits  was not his income and that the Legislature was not competent to enact  the two sections according to which that  amount  was also  treated as his income.  His writ petition in the  High Court  challenging. the constitutional validity of  the  two sections was dismissed.  He appealed to the Supreme Court. HELD  (Per Gajendragadkar, C. J., Wanchoo, Hidayatullah  and Mudholkar  JJ.)  :  (i)  The sections  are  not  beyond  the legislative competence of Parliament.



The  companies to which s. 12(1B) applies are- companies  in which at least 75% of the voting power lies in the hands  of persons  other  than the public.  They are controlled  by  a group  of  persons  allied  together  and  having  the  same interest.   The controlling group can determine whether  the profits  made  by  the  company  should  be  distributed  as dividends  or  not.   When  they  deliberately  refused   to distribute the accumulated profits as dividends but  adopted the device of advancing the profits by way of loan to one of the  shareholders,  it was with the object  of  evading  the payment  of tax by the company on the  accumulated  profits. Section 12(1B) provides that if a controlled company  adopts the  device of making a loan to one of its shareholders,  he will  be  deemed  to have received the  amount  out  of  the accumulated  profits as dividend and would be liable to  pay tax on his income.  The word "income" in Entry 82 in List  I of the 7th Schedule to the Constitution must receive a  wide interpretation depending on the facts of each case.   Having regard  to  the fact that the Legislature was aware  of  the devices  to evade tax, it would be within its competence  to devise  a  fiction for treating an ostensible  loan  as  the receipt of the dividend. [919 A-H. 920 H; 921 C-D] (ii) The  absence  of a provision  enabling  the  income-tax officer  to  consider  in each case  whether  the  loan  was genuine or the result of a device does not make the  section go beyond the competence of the Legislature. [921 D-E] If  the  Legislature thought that in almost every  case  the advances or loans were the result of a device to evade  tax, it would be competent to 910 it  to  prescribe a fiction and hold that in cases  of  such advances  or  loans,  tax  should  be  recovered  from   the shareholder  on the basis that he had received  a  dividend. [921 G-H] (iii)     Section  12(lB)  does,not impose  an  unreasonable restriction on the appellant’s fundamental rights under Art. 19(1) (f) and (g) of the Constitution. [922 A] The section does not affect the appellant’s right to  borrow money.  There is no element of unfairness, because the other shareholders  have deliberately agreed to make the  loan  or the advance and the shareholder to whom the loan is advanced deliberately  takes it with a view to assist the company  to evade the payment of tax and to have the benefit of the  use of  the  amount  subject to the payment  of  interest.   The company receives interest, the shareholder enjoys the use of the  money and in the process the payment of tax is  evaded. Further, past transactions were excluded from the  operation of  the sections by the issue of a circular by  the  Central Board of Revenue. [922 B-F] Per Raghubar Dayal J. (dissenting) : (i) Sections 2(6A)  (e) and 12(lB) of the Income-tax Act, 1922 as they stood in 1955 are void. [923 B] It  is not open ’to the Legislature to describe any  payment of  money  by  a  company  to  a  shareholder  by  the  word "dividend"  and  then provide that such  payment  will  come within  the  expression  "income"  in item  82,  List  I  of Schedule 7. The definition of dividend must have a  rational connection  with concept of dividend in the context  of  the profits  of  the company and its  distribution  amongst  the shareholders.  The essence of an amount paid as dividend  is that  it  has  to  represent  the  proportionate  amount   a particular shareholder is to get on the basis of the  shares held by him out of the profits of the company set apart  for payment of dividend to shareholders.  Any ad hoc payment  of money  to a shareholder as advance or loan unrelated  to-his



share  in  the accumulated profits  cannot  rationally  come within the expression dividend. [926 E-H] (ii) The   provisions  of  the  impugned   sections   impose unreasonable  restrictions on the fundamental right to  hold property under Art. 19(1)(f) of the Constitution. [928 E] If  any  enactment  provides that  certain  profits  of  the company,  though not distributed as dividend, be treated  as used  for  the payment of dividends  it  should  necessarily follow  that  a  particular shareholder be  deemed  to  have received  a proportionate amount of such profits.  It  would be  unreasonable  to provide that a  particular  shareholder should be deemed to have received an amount in excess of his proportionate share as dividend.  It is unreasonable that  a particular shareholder who receives a loan or advance from a company  be  deemed to have received that entire  amount  as dividend  when his proportionate share would be  much  less. [928 B-E] Navinchandra Mafatlal v. Commissioner of Income-tax,  Bombay City,   [1955]  1  S.C.R.  829,  Sardar  Baldev   Singh   v. Commissioner  of Income-tar, Delhi and Agra [1961] 1  S.C.R. 482 and Balaji v. Income-tax Officer, Special  Investigation Circle, [1962] 2 S.C.R. 983, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 45 of1964. Appeal  from the judgment and order dated July 30, 1962,  of the Bombay High Court in Special Civil Application No. 69 of 1962. G.S.  Pathak,  M.  M. Gharekhan and 1. N.  Shroff,  for  the appellant. 911 C.K.  Daphtary, Attorney-General, R. Ganapathy  Iyer,  Gopal Singh and R. N. Sachthey, for the respondent. The  Judgments of P. B. GAJENDRAGADKAR C.J., K. N.  WANCHOO, M.  HIDAYATULLAH  and J. R. MUDHOLKAR JJ. was  delivered  by GAJENDRAGADKAR C.J. RAGHUBAR DAYAL J. delivered a dissenting Opinion.  Gajendragadkar C.J. This appeal arises from a writ petition filed  by the appellant Navnit Lal C. Javeri in  the  Bombay High  Court in which he challenged the validity  of  section 12(1B) read with s. 2 (6A) (e) of the Indian Income-tax Act, 1922  (No.  11 of 1922) (hereinafter called the Act)  as  it stood in 1955.  The High Court has rejected the  appellant’s contention  that  the  said  section  is  invalid,  and  the appellant has come to this Court with a certificate  granted by the High Court.  The  appellant  holds  11 out of 845 shares  in  a  private limited   company  named  the  Malegaon   Electricity   Co., (Private)  Ltd.  (hereinafter referred to as  the  company). The  value  of each share is Rs. 100.  The business  of  the company  is  to  supply  electricity  to  the  residents  of Malegaon.  Some time during 1955, the appellant took a  loan amounting  to over Rs. 4 lakhs from the company.   A  notice was  issued to the appellant by the 8th, Income-Tax  Officer under  s.  22(2) of the Act calling, upon him  to  make  his return  for  the assessment year  1956-57.   The  Income-tax Officer  computed his income at Rs. 3,58,460.   This  amount included a sum of Rs. 2,83,126 representing the  accumulated profits  of  the company.  The Income-tax Officer  took  the view that under s. 2 (6A) (e) the said amount must be deemed to be dividend received by the appellant, and as such,  must be  included in the total income of the appellant as  income from  other sources within the meaning of s. 12(1B)  of  the



Act.   This  order  was  challenged  by  the  appellant   by preferring   an  appeal  before  the   Appellate   Assistant Commissioner.    The   appeal,  however,  failed   and   was dismissed.   The  appellant then preferred a  second  appeal before  the  Income  Tax Appellate  Tribunal.   Whilst  this appeal was pending, before the said Tribunal, the  appellant moved  the  High  Court under Articles 226 and  227  of  the Constitution, and contended that the relevant section  under which  the  department  had  purported  to  levy  assessment against  him  on the sum of Rs. 2,83,126, was  ultra  vires. That  is how the only question which the High Court  had  to decide  in  the present writ proceedings was whether  s.  12 (1B) read with s. 2 (6A) (e) was constitutionally valid. 912  in  order to deal with this point, it is necessary to  read the  two  relevant  provisions of the  Act.   Section  2(6C) defines  "income"  as including dividend.   Section  2  (6A) defines  "dividend" in an inclusive manner.  Section 2  (6A) (e) provides               "Dividend" includes-                (e)  any  payment by a company, not  being  a               company in which the public are  substantially               interested  within the meaning of s.  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 or  for               the  individual benefit of a  shareholder,  to               the  extent  to which the  company  in  either               case,   possesses  accumulated  profits;   but               dividend does not include-               (i)                (ii) any   advance   or  loan   made   to   a               shareholder  by  a  company  in  the  ordinary               course  of its business where the  lending  of               money  is a substantial part of  the  business               ,of the company;                (iii)     any  dividend  paid  by  a  company               which  is set off by the company  against  the               whole  or any part of any sum previously  paid               by  it  and treated as a dividend  within  the               meaning  of sub-clause (e), to the  extent  to               which it is so set off."  Thus,  the inclusive definition of "dividend" takes in  the payments  to which clause (e) of s. 2(6A) refers  and  makes them dividend for the purpose of the Act.     Section 12(1) provides that the tax shall be payable  by an  assessee under the head "Income from other  sources"  in respect of income, profits and gains of every kind which may be  included in his total income (if not included under  any of the preceding heads).  Section 12(lB) provides :-                "any payment by a company to a shareholder by               way  of advance or loan which would have  been               treated  as a dividend within the  meaning  of               clause  (e) of subsection (6A) of s. 2 in  any               previous year relevant to any assessment  year               prior  to  the assessment year ending  on  the               31st day of March, 1956, had that clause  been               in  force in that year, shall be treated as  a               dividend received by him in the previous  year               relevant to the                913                assessment  year  ending on the 31st  day  of               March, 1956, if such loan or advance  remained               outstanding on the first day of such  previous



             year".  Both these provisions viz., s. 2(6A)(e) and s. 12(lB)  were introduced  in the Act by the Finance Act 15 of  1955  which came into operation on the 1st of April, 1955.  It  is  thus clear that the combined effect  of  these  two provisions  is  that  three kinds of payments  made  to  the shareholder of a company to which the said provisions apply, are  treated  as  taxable  dividend to  the  extent  of  the accumulated profits held by the company.  These three  kinds of payments are: (1) payments made to the shareholder by way of advance or loan; (2) payments made on his behalf; and (3) payments  made for his individual benefit.  There  are  five conditions  which must be satisfied before s. 12(lB) can  be invoked against a shareholder.  The first condition is  that the company in question must be one in which the public  are not substantially interested within the meaning of s. 23A as it  stood in the year in which the loan was  advanced.   The second condition is that the borrower must be a  shareholder at  the  date when the loan was advanced; it  is  immaterial what the extent of his shareholding is.  The third condition is that the loan advanced to a shareholder by such a company can be deemed to be dividend only to the extent to which  it is  shown that the company possessed accumulated  profit  at the date of the loan.  This is an important limit prescribed by  the relevant section.  The fourth condition is that  the loan  must  not  have been advanced by the  company  in  the ordinary  course  of  its business.  In  other  words,  this provision  would not apply to cases where the company  which advances  a loan to its shareholder carries on the  business of money-lending itself ; and the last condition is that the loan  must have remained outstanding at the commencement  of the   shareholder’s  previous  year  in  relation   to   the assessment year 1955-56.  In dealing with the question about the  constitutionality  of the impugned  provisions,  it  is necessary to bear in mind these respective conditions  which govern the application of the said provisions.     There  is another material circumstance which cannot  be ignored.   It  appears  that  when  these  amendments   were introduced in Parliament, the Hon’ble Minister for Revenue & Civil  Expenditure save an assurance that outstanding  loans and  advances  which  are otherwise liable to  be  taxed  as dividends  in  the  assessment  year  1955-56  will  not  be subjected to tax if it is shown that they had been genuinely refunded  to the respective companies before the 30th  June, 1955.  It was realized by the Government 914   that  unless such a step was taken, the  operation  of  s. 12(1B) would lead to extreme hardship, because it would have covered the aggregate of all outstanding loans of past years and that may have imposed an unreasonably high liability  on the  respective  shareholders to whom the loans  might  have been  advanced.   In order that the assurance given  by  the Minister  in  Parliament should be carried out,  a  circular [No.  20(XXI-6)/55]  was  issued by  the  Central  Board  of Revenue on the 10th May, 1955.  It is clear that a  circular of  the kind which was issued by the Board would be  binding on all officers and persons employed in the execution of the Act under s. 5(8) of the Act.  This circular pointed out  to all  the  officers  that  it was likely  that  some  of  the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea  was not to affect such transactions and not to bring them within the  mischief  of  the new provision.   The  officers  were, therefore,  asked to intimate to all the companies  that  if the  loans  were  repaid before the 30th  June,  1955  in  a



genuine  manner,  they would not be taken  into  account  in determining  the tax liability of the shareholders  to  whom they   may  have  been  advanced.   In  other  words,   past transactions   which  would  normally  have  attracted   the stringent  provisions of s. 12(lB) as it was  introduced  in 1955,   were  substantially  granted  exemption   from   the operation  of the said provisions by making it clear to  all the companies and their shareholders that if the past  loans were genuinely refunded to the companies, they would not  be taken  into account under s. 12(lB).  Section 12(1B)  would, therefore, normally Apply to loans granted by the  companies to  their  respective shareholders with full notice  of  the provisions prescribed by it.  Mr.  Pathak  for the appellant contends that  the  impugned provision is constitutionally invalid, because it is  beyond the  legislative competence of Parliament.  He  argues  that Entry 82 in List I of the Seventh Schedule which deals  with "taxes  on  income other than  agricultural  income"  cannot justify the impugned provision, because a loan advanced to a shareholder by the company cannot, in any legitimate  sense, be  treated as his income; and so, the artificial manner  in which  such dividend is ordered to be treated as  income  by the  impugned provision is not justified by the said  Entry. He also contends that the said provision offends Art.  19(1) (f)  & (g) and cannot be said to be justified by clause  (5) or  (6) of the said article.  There is no doubt that if  the impugned  provision  is  beyond the  legislative  powers  of Parliament,  it  would be bad.  Similarly, it is  now  well- settled that even tax  915  legislation  must  stand the scrutiny  of  the  fundamental rights guaranteed by the Constitution, and so, there can  be no  doubt  that  if  the  impugned  provision  invades   the fundamental rights of the appellant and the invasion is  not constitutionally justified, it would be invalid.  In  dealing  with this point, it is necessary  to  consider what exactly is the denotation of the word "income" used  in the relevant Entry.  It is hardly necessary to emphasis that the  entries  in  the Lists cannot be read in  a  narrow  or restricted  sense,  and  as observed by Gwyer  C.J.  in  the United  Provinces  v. Atiqa Begum(1).  " each  general  word should  be  held to extend to all  ancillary  or  subsidiary matters  which  can  fairly and reasonably  be  said  to  be comprehended in it." What the entries in the List purport to do  is  to  confer  legislative  powers  on  the  respective Legislatures  in respect of areas or fields covered  by  the said entries-. and it is an elementary rule of  construction that the widest possible construction must be put upon their words.    This  doctrine  does  not,  however,   mean   that Parliament  can choose to tax as income an item which in  no rational  sense can be regarded as a citizen’s income.   The item taxed should rationally be capable of being  considered as the income of a citizen.  But in considering the question as  to whether a particular item in the hands of  a  citizen can  be  regarded  as  his  income  or  not,  it  would   be inappropriate to apply the tests traditionally prescribed by the Income-tax Act as such.  In Navinchandra Mafatlal v. The Commissioner of Income-tax, Bombay  City(1),  this Court had occasion  to  consider  the question  as  to whether capital gains could be  treated  as income  within  the  meaning of item 54 of  List  I  of  the Seventh  Schedule  to  the Government of  India  Act,  1935. Section  12-B of the Indian Income-tax Act, 1922  which  had been  inserted  in  the said Act by Act XXII  of  1947,  had imposed  tax  on  ’capital gains’.   The  validity  of  this



provision  was challenged on the ground that  capital  gains cannot be treated as income within the meaning of entry  54. This plea was rejected by this Court on the ground that  the words  used in a constitutional enactment conferring  legis- lative  powers ought to be construed most liberally  and  in their widest amplitude.  Adopting this approach Das J. as he then  was,  speaking for the Court, observed that  the  word "income" used in the said entry must be given its  ordinary, natural  and grammatical meaning and that was, income  is  a thing  that  comes  in.  On this view, the  Court  found  no difficulty  in  coming to the conclusion that  income  would include capital gains.  If the traditional (1) [1941] F.C.R. 110.    (2) [1955]1 S.C.R. 829. Sup./65- 916  sense of income had been accepted, then, of course, capital gains  could not be treated as income.  That, in  fact,  was the argument which was pressed by Mr. Kolah who appeared for the  appellant.  "If we hold", observed the  learned  Judge, "as  we  are  asked  to do, that the  meaning  of  the  word ’income’  has become rigidly crystallised by reason  of  the judicial  interpretation  of  that  word  appearing  in  the Income-tax  Act, then logically no enlargement of the  scope of  the Income-tax Act, by amendment or otherwise,  will  be permissible in future." And he has significantly added  that a  conclusion so extravagant and astounding can scarcely  be contemplated  or  countenanced.   This  decision,  therefore shows  that  the  word  "income"  used  in  entry  54  which corresponds  to  the present entry 82 in List I of  the  7th Schedule  to our Constitution, was liberally construed,  and capital gains were deemed to be included within its scope.  This aspect of the matter has also been clearly  enunciated by  Gwyer  C.J. in In re: The Central  Provinces  and  Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 (No. 14  of  1938)  (1).  "I conceive", said  the  learned  Chief Justice,  "that  a broad and liberal spirit  should  inspire those  whose duty it is to interpret it (the  Constitution); but I do not imply by this that they are free to stretch  or pervert  the language of the enactment in the  interests  of any legal or constitutional theory, or even for the  purpose of supplying omissions or of correcting supposed errors". The  next decision to which we ought to refer deals with  s. 23A  of the Act.  In Sardar Baldev Singh v. Commissioner  of Income-tax,  Delhi  &  Ajmer(1) the  validity  of  the  said section  was  challenged.  Section  23A(1)  provides,  inter alia, that subject to the provisions of sub-sections (3) and (4),  where  the  Income-tax Officer is  satisfied  that  in respect   of  any  previous  year  the  profits  and   gains distributed  as dividends by any company within  the  twelve months  immediately  following the expiry of  that  previous year are less than sixty per cent of the total income of the company  of  that previous year as reduced  by  the  amounts specified in clauses (a), (b) & (c) of the said sub-section, the  Income-tax Officer shall, unless he is  satisfied  that having  regard to losses incurred by the company in  earlier years  or  to  the  smallness of the  profits  made  in  the previous  year,  the  payment  of a  dividend  or  a  larger dividend  than that declared would be unreasonable, make  an order in writing that the company shall, apart from the sum (1) [1939] F.C.R. 18 at p. 37. (2) [1961] 1 S.C.R. 482.  917  determined as payable by it on the basis of the  assessment under  s.  23,  be  liable to  pay  super-tax  at  the  rate specified  by  the  said sub-section.  The  object  of  this



section is to prevent avoidance of super-tax by shareholders of  a  company  in which the public  are  not  substantially interested.   As  is  well-known,  the  rates,of   super-tax applicable  to  companies  are much  lower  than  the  rates applicable to individual assessees.  The legislature thought that individuals tried to avoid the payment of super-tax  at a  higher rate by transferring to a private limited  company it). return for shares the sources of their income, and then the  profits made by the company were allowed to  accumulate in  the hands of the company, dividends not being  declared, and  the said profits would ultimately be distributed  in  a capital form by one device or another.  The object of s. 23A was  to  defeat  such  attempts.  The  main  effect  of  the provisions of s. 23A appears to be that a company should not accumulate more than 40 per cent of its net profits to build up reserves or to provide for capital expenditure.It   will be recalled that s. 2(6A) has taken within the definition of ’dividend" the accumulated profits of such companies, and so s.   23A attempts to reach such accumulated profits for  the purpose of     taxation.     The  argument which was urged before this Court  in  the cast  of Sardar Baldev Singh(1) was that a company  and  its share,  holders  are different persons, and so, s.  23A  was ultra vires inasmuch as it purported to tax the shareholders on the income of the company in which they hold shares.   If the   accumulated  profits  are  distributed   amongst   the shareholders  by  way of dividends, the  shareholders  could legitimately  be taxed in respect of the dividends  received by  them; but when s. 23A attempts to tax  the  shareholders for accumulated profits even though they are not distributed as dividends, what, the section purports to do is to tax the share-holders for the profits made by the company; and that, according  to  the  appellant, made s.  23A  invalid.   This argument  was repelled by this Court on the ground that  the obvious  intention of s. 23A was to prevent evasion of  tax, and  it  was held that entry 54 should be read not  only  as authorising the imposition of a tax, but also as authorising an  enactment which prevents the tax imposed  being  evaded; otherwise  the  power to tax a person on  his  income  might often  be made in fructuous by ingenious  contrivances.   It would be noticed that s. 23A wanted to deal with a situation where  shareholders  did  not  deliberately  distribute  the accumulated   profits  as  dividends   amongst   themselves. Section (1)  [1961] 1 S.C.R. 482. 918  23A,  therefore,  provides that these  accumulated  profits will be deemed to have been distributed to the  shareholders and  tax  levied against them on that basis.  It  is  likely that  in such a case, hardship may be caused in some  honest cases;   but  this  Court  made  it  perfectly  clear   that considerations  of hardship are irrelevant  for  determining questions of legislative competence.  It is thus clear  that the  result of the decision of this Court in  Sardar  Baldev Singh(1)  is that the income which technically  belonged  to the ’company, was treated, as income belonging to the share- holders  in  proportion  to  the shares  they  held  in  the company, and on that footing tax was levied on them; and yet the said tax was held to be constitutionally valid.  There  is yet another case in which a similar question  was considered.   In  Balaji  v.  Income-tax  Officer,   Special Investigation  Circle,  (2) a person and  his  wife  started business in partnership and admitted their three minor  sons to it.  In computing the total income of the said person for the  purpose of assessment, the Income-tax Officer  included



the  share  of the income of his wife and three  minor  sons under S. 16 (3) (a) (i) & (ii) of the Act.  The validity  of this  provision  was  challenged  on  the  ground  that  the impugned section purported to tax a person for the income of other  persons,  namely,  his  wife  and  minor  sons.    In rejecting the contention raised against the validity of  the impugned  section, this Court held that the Entries  in  the Legislative  Lists are not powers but fields of  legislation and the widest import and significance should be attached to them.   On this view, the conclusion reached by  this  Court was  that Entry 54 of the Federal Legislative  List  covered legislation  like s. 16 (3) (a) (i) & (ii), because  it  was intended  to  prevent evasion of tax.  It appears  from  the judgment  that  the validity of the said  section  was  also challenged on the ground that it contravened Articles 14 and 19(1)  (f)  & (g) of the Constitution.  This plea  was  also rejected.  One of the considerations which weighed with  the Court  in  repelling the said plea was that  the  additional payment  of tax made on the income of the wife or the  minor children  would  ultimately  be home by them  in  the  final accounting  between  them.   Having  regard  to  this   con- sideration  and  bearing in mind the fact that the  mode  of taxation  authorised by the impugned section, though  harsh, was thought to be necessary to prevent evasion of payment of tax, this Court held that the said section was valid.  It is in  the  light of these decisions that we  must  proceed  to consider Mr. Pathak’s argument that s. 12(1B) of the Act  is ultra wires. (1) [1961] 1 S.C.R. 482.   (2) [1962] 2 S.C.R. 983.  In dealing with Mr. Pathak’s argument in the present  case, let  us recall the relevant facts.  The companies  to  which the impugned section applies are companies in which at least 75 per cent of the voting power lies in the hands of persons other than the public, and that means that the companies are controlled by a group of persons allied together and  having the  same  interest.   In the case of  such  companies,  the controlling  group can do what it likes with the  management of the company, its affairs and its profit within the limits of  the  Companies Act.  It is for this group  to  determine whether   the  profits  made  by  the  company   should   be distributed  as  dividends  or  not.   The  declaration   of dividend  is entirely within the discretion of  this  group. When   the  legislature  realized  that  though  money   was reasonably  available  with  the  company  in  the  form  of profits, those in charge of the company deliberately refused to  distribute  it  as dividends to  the  shareholders,  but adopted the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, it was plain that the object of such a loan or advance was to evade the payment of tax on accumulated profits under s. 23A.   It will  be  remembered  that an advance or  loan  which  falls within  the mischief of the ’impugned section is advance  or loan  made  company which does not normally deal  in  money- lending  is  made  with full  knowledge  of  the  provisions contained   impugned   section.   The  object   of   keeping accumulated  without distributing them obviously is to  take the   benefit  lower  rate  of  super-tax   prescribed   for companies.  This was defeated by s. 23A which provides  that in the case distributed profits, tax would be levied on  the shareholders on the basis that the accumulated profits  will be deemed to have been distributed amongst them.  Similarly, s.  12(1B) provides that if a controlled company adopts  the device   of  making  a  loan  or  advance  to  one  of   its shareholders,  such  shareholder  will  be  deemed  to  have received the said amount out of the accumulated profits  and



would be liable to pay tax on the basis that he hag received the  said  loan by way of dividend.  It is clear  that  when such  a  device  is adopted by  a  controlled  company,  the controlling   group   consisting   of   shareholders    have deliberately decided to adopt the device of making a loan or advance.   Such  an  arrangement is intended  to  evade  the application of a. 23A.  The loan may carry interest and  the said  interest may be received by the company; but the  main object  underlying the loan is to avoid payment of tax.   It may  ultimately be repaid to the company and when it  is  so repaid, it may or may not be treated as part of 920 accumulated  profits.   It is this kind  of  a  well-planned device which s.   12(1B) intends to reach for the purpose of taxation. It  appears  that  such  a  device  is  adopted  by  private companies  in  many countries.  Simon has referred  to  this device in these words :-               "Generally speaking, surtax is charged only on               individuals, not on companies or other  bodies               corporate.  Various devices have been  adopted               from time to time to enable the individual  to               avoid surtax on his real total income or on  a               portion  of  it, and one method  involved  the               formation of what is popularly called a  ’one-               man  company’.  He individual transferred  his               assets,  in exchange for shares, to a  limited               company, specially registered for the purpose,               which thereafter received the income from  the               assets  concerned.   The  individual’s   total               income  for tax purposes was then  limited  to               the amount of the dividends distributed to him               as  practically  the only  shareholder,  which               distribution  was  in his  own  control.   The               balance  of  the  income,  which  was  not  so               distributed,  remained  with  the  company  to               form, in effect, a fund of savings accumulated               from   income   which  had   not   immediately               attracted surtax.  Should the individual  wish               to  avail  himself of the use of any  part  of               these   savings  he  could  effect   this   by               borrowing  from  the  company,  any   interest               payable  by  him going to  swell  the  savings               fund;  and  at any time the  individual  could               acquire  the whole balance of the fund in  the               character  of capital by putting  the  company               into liquidation."(1)  What  Simon says about one-man company can be equally  true about the controlled company whose affairs are controlled by a  group  of  persons  closely  knit  and  having  the  same interest.  The  question which now arises is, 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. 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 (1)  Simon’s Income-tax, 2nd Ed.  Vol. 3, para 592, p. 341.  921  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.  We have already explained  how  a  small number  of shareholders controlling a private company  adopt this device.  Having regard to the fact that the legislature was aware of such devices, would it not, be competent to the legislature to device a fiction for treating the  ostensible loan  as the receipt of dividend?  In our opinion, it  would be  difficult  to  hold  that in  making  the  fiction,  the legislature  has  traveled  beyond  the  legislative   field assigned to it by entry 82 in List 1.  It  is, however, urged by Mr. Pathak that  while  providing for such a fiction, the legislature should have required the Income-tax Officer to consider in each case whether the loan was  genuine, or was the result of a device; and  he  argues that  since  no such provision has been made and  a  uniform presumption  by  fiction  is,  sought  to  be  raised,   the legislature has gone beyond its legislative competence.   In support  of  this argument, Mr. Pathak has referred  to  the fact  that under s.- 108(1) of the  Commonwealth  Income-tax Act  it is provided that the amount paid to the  shareholder by way of advance or loan can be taxed if in the opinion  of the  Commissioner  it represents  distributions  of  income, Such a provision would have made the impugned section valid, Mr.  Pathak  argues that omission of Parliament  to  exclude from  the operation of s. 12(lB) genuine loans or  advances, and  its  failure  to distinguish  between  such  loans  and advances and loans and advances made as a device shows, that it  has acted blindly and must, therefore, be held  to  have exceeded  its  legislative power.  We are  not  inclined  to accept  this argument.  If the legislature thinks  that  the advances  or loans are in almost every case the result of  a device,  it would be competent to it to prescribe a  fiction and hold that in cases of such advances or loans, tax should be  recovered from the shareholder an the basis that he  has received the dividend.  Therefore, we are satisfied that the High  Court was right in coming to the conclusion  that  the impugned section is not beyond the legislative competence of the legislature. 922  Then it is argued by Mr. Pathak that the impugned provision contravenes  the appellant’s fundamental rights  under  Art. 19(1) (f) & (g) and is not saved by clauses (5) & (6) of the said  article.  It is not easy to appreciate this  argument. Art. 19(1) (f) recognises the right of a citizen to acquire, hold  and dispose of property and Art.  19(1)(g)  recognises the  right  to practice any profession, or to carry  on  any occupation, trade or business.  The impugned provision  does not  contravene either of these rights.   The  shareholder’s right to borrow money from his own company cannot be said to be  a  fundamental  right; besides  all  that  the  impugned section  does is to provide that if a loan is borrowed by  a shareholder  from  a  company to which  the  said  provision applies,  it  will be deemed to be a receipt by him  of  the dividend.   This provision does not affect  the  appellant’s right to borrow money from any other source; and his company from  which he borrows does not ordinarily do  money-lending business.   That  is  why the  restriction  imposed  by  the section  cannot  be  said to be  unreasonable  at  all.   In dealing  with the question about the reasonableness of  this



provision,  we  cannot  also overlook  the  fact  that  past transactions  were excluded from its operation by the  issue of  a circular to which we have already referred.  There  is no  element of unfairness in the fiction, because the  other shareholders  have deliberately agreed to make the  loan  or the advance and the shareholder to whom the loan is advanced deliberately  takes it with a view to assist the company  to evade the payment of tax and to have the benefit of the  use of,  the  amount subject to the payment  of  interest.   The company receives interest, the shareholder enjoys the use of the  money,  and in the process the payment of  due  tax  is evaded.   That is the assumption made by the legislature  in making this provision.  How can it be urged that either  the shareholder  who  is taxed, or the  other  shareholders  who deliberately make the advance to a colleague of theirs,  are unfairly  dealt  with  by the impugned  provision.   In  our opinion, there is no scope for arguing that the  fundamental rights of the shareholder under Art. 19 (1) (f ) & (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  Art. 19(1)(f) & (g).  There is obviously no scope for  suggesting that the impugned provision contravenes Art. 14; and in fact Mr.  Pathak  has not raised this point before us.   In  that connection,  he himself fairly invited our attention to  the decision  of  the Madras High Court in K.  M.  S.  Lakshmana Aiyar v. Additional Income-tax Officer, Special  923  Circle, Madras, (1) where the challenge to the validity  of the impugned section on the ground that it contravened  Art. 14 has been repelled. The result is, the appeal fails and is dismissed with costs.    Raghubar Dayal J. I am of opinion that the appeal  should be  allowed  as ss. 12 (1B) and 2 (6A) (e),  of  the  Indian Income-tax  Act, 1922, hereinafter called the Act,  as  they stood in 1955, are void.  The  two provisions were enacted by Parliament in  view  of Entry 82, List 1, Seventh Schedule of the Constitution which reads  : "Taxes on income other than  agricultural  income". It  is not disputed that whatever wide connotation the  word ’income’  in  this  Entry may have, the  item  taxed  should really be capable of being considered as income, that  there be  some rational connection between the item taxed and  the concept of "income" and that it is not open to Parliament to choose to tax, as income, an item which in no rational sense can  be  regarded as income.  It is also not  disputed  that Parliament  can  enact  a law dealing with  the  evasion  of payment of income-tax.  In Navinchandra Mafatlal v. The Commissioner of Income-tax, Bombay City(1) this Court had to consider the content of the word "income"  as used in Entry 54, List 1, Seventh  Schedule  to the  Government of India Act, 1935 (which is identical  with Entry 82. List 1, Seventh Schedule to the Constitution),  in determining  whether the imposition of a tax under the  head "capital gains" by the Central Legislature, was ultra vires. Section  12-B inserted in the Income-tax Act by  the  Indian Income-tax and Excess Profits Tax (Amendment) Act, 1947 (Act XXII  of  1947)  provided for the imposition  of  a  tax  on capital gains arising from certain transactions mentioned in the  section.  This Court said that "income",  according  to the  dictionary, means "a thing that comes in" and  that  in the  United  States  of  America  and  Australia,  the  word "income" was used in a wide sense so as to include  "capital gains".  It referred to certain cases of those countries  in which a very wide meaning was ascribed to the word  "income"



as  its natural meaning and held that "its  natural  meaning embraces any profit or gain which is actually received".  In  the United States, the word "income" was first  defined in Stratton’s Independence v. Howhert(3) decided on December 1, 1913, as "gain derived from capital, from labour, or from both (1) (1960) 40 I.T.R. 469. (2) [1955] 1 S.C.R. 829. (3)  231 U.S. 399-59 L. Ed. 285.                             924  combined".  The court had to construe the word "income"  as used in S. 38 of the Corporation Excise Tax Act of August 5, 1909,  which  imposed an excise tax "equivalent to  one  per centum  upon the entire net income .... received by it  from all sources during the year".  In  Eisner  v.  Macomber(1) referred to by  this  Court  in Mafatlal’s  case(1),  the  court had to  construe  the  word "income" as used in the XVI Amendment of the Constitution of the United States, which is :                   "The Congress shall have power to lay  and               collect taxes on incomes, from whatever source               derived,   without  apportionment  among   the               several  States,  and without  regard  to  any               census  or enumeration." and observed,  at  p.               206:                "  Congress cannot by any definition  it  may               adopt conclude the matter, since it cannot  by               legislation alter the Constitution, from which               alone  it derives its power to  legislate,  and               within whose limitations alone that power  can               be lawfully exercised.               .... For the present purpose we require only a               clear definition of the term ’income,’ as used               in  common speech, in order to  determine  its               meaning  in the Amendment; and, having  formed               also a correct judgment as to the nature of  a               stock  dividend,  we  shall find  it  easy  to               decide the matter at issue.                After examining dictionaries in common use we               find little to add to the succinct  definition               adopted   in  two  cases  arising  under   the               Corporation Tax Act of August 5, 1909. ’Income               may  be  defined  as  the  gain  derived  from               capital, from labour, or from both  combined,’               provided  it be understood to  include  profit               gained through a sale or conversion of capital               assets.  to which it was applied in the  Doyle               case               Brief    as   it   is,   it   indicates    the               characteristic and distinguishing attribute of               income,  essential for a correct  solution  of               the present controversy." The  definition  of  "income" given in this  case  has  been followed  in the other two cases referred to  in  Mafatlal’s case(2)  ViZ., Merchants’ Loan & Trust Co.  v.  Smietanka(3) and United States (1)252 U.S. 189=64 L. Ed. 521. (2) [19551 1 S.C.R. 829. (3)  255 U.S. 509=65 L. Ed. 751.  925  v.  Stewart(1),  cases  which dealt with  the  taxation  of gains from the sale of capital assets.  The  question  in the Australian case viz.,  Resch  v.  The Federal  Commissioner of Taxation(1) was about the  validity of the provinces in the income-tax legislation to the effect



that distribution of profits in the course of winding-up  of a  company  would  be treated on the  same  footing  as  the distribution  by  the  company  as  a  going  concern.   The provision  was held valid as Parliament possessed  power  to bring  to charge in an income-tax Act all profits and  gains accruing to a tax-payer, without distinguishing whether  the profit or gain should be regarded as a receipt on capital or on income or revenue account.  The  word "income" has been interpreted in a natural  sense in these cases and the definition given in Eisner’s  case($) is  much  narrower and limited in content  than  the  widest meaning  which  is  now  sought to be given  to  it  by  the respondent.  In Mafatlal’s case (4) too, this Court has  not given such a wide meaning to the word "income" as to include "anything  which  comes  in" and therefore  to  include  the amount  of a loan which may be said to come in the hands  of the  borrower.   Loans borrowed by a  shareholder  from  the company  do  not,  as such, come within  the  above  general definition  of "income".  They do not represent  gains  from his  labour  or capital or profits gained  through  sale  of capital  assets.   The  borrower has to repay  them.   If  a shareholder  is  really  paid  his  share  of  the   profits ostensibly as a loan, such a nominal loan but really a share of  profits-can  be taxed as "income" under  an  appropriate enactment.  We  may now consider the nature of what had been  taxed  in this  case  and  to which objection has been  taken  on  the ground that ss. 2 (6A) (e) and 12 ( 1 B) are invalid.  The  appellant  holds  11 out of 845 shares  in  a  private limited  company.  The value of each share is Rs.  100.   In 1955  he took a loan of over Rs. 4,00,000 from the  company. Rs. 2,83,126, the amount of accumulated profits the  company had  then, have been added to the appellant’s  total  income for  the relevant assessment year, in view of  ss.  2(6A)(e) and  12(1B)  of  the  Act.   He  appellant’s  share  in  the accumulated  profits,  if distributed as dividend  would  be 11/845the  of Rs. 2,83,126 i.e., Rs. 3,686.   Rs.  2,79,440, the balance, would then be the dividend payable to the other co-sharers.  The appellant contends that Rs. 2,79,440 (1)  311 U S 60 = 85 Ed 40 (3)  252 U.S. 189=64 L. Ed. 521. (2)  66 C.L.R. 198. (4)  [1955] 1 S.C.R. 829. 926  is not his income and that Parliament was not competent  to enact  ss.  2 (6A) (e) and 12 ( 1B) which treat  it  as  his "income" from dividend.  Before  dealing with the contention, reference may be  made to  what the impugned sections provide.  Section 2 (6A)  (e) defines  "dividend", in the circumstances mentioned in  that clause,  to include any payment by a company of any  sum  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.  Section  12(1B) provides that any such payment to a shareholder made by  way of advance or loan in certain circumstances would be treated as dividend received by him in the previous year relevant to the  assessment year ending March 31, 1956, if such loan  or advance  remained  outstanding  on the  first  day  of  such previous  year.   Now, the contention for the  appellant  is that though Parliament can enact a law dealing with  evasion of  payment  of  income-tax,  it  cannot  tax  what  is  not "income",  that  the amount in excess of  his  proportionate share  in Rs. 2,83,126, if it had been actually  distributed



as  profits by the company, could not have been  his  income from  dividend,  that he could not have  evaded  payment  of income-tax on this amount from its being not distributed  as dividend and that therefore Parliament could not enact  that such  excess amount be treated as dividend paid to him  and, consequently, as his "income".  The contention has force.  The essence of an amount paid as dividend  is  that  it has to  represent  the  proportionate amount  a particular shareholder is to get on the  basis  of the shares held by him out of the profits of the company set apart  for payment of dividend to shareholders.  Any ad  hoc payment  of  money  to  a shareholder  as  advance  or  loan unrelated  to  his share in the accumulated  profits  cannot rationally  come  within the expression  "dividend".   I  am therefore of opinion that it is not open to the  legislature to  describe  any  payment  of  money  by  a  company  to  a shareholder  by  the word "dividend" and then  provide  that such   payment  (called  dividend)  will  come  within   the expression  "income" for the purposes of any law enacted  by virtue  of  Entry  82,  List  1,  Seventh  Schedule  to  the Constitution.   The  definition  of  "dividend"  must   have rational  connection with the concept of "dividend"  in  the context  of  the profits of a company and  its  distribution amongst shareholders at any time after the profits have been earned.  Clauses (a) to (d) of S. 2 (6A) may be said to have such a connection.  927  It  is conceivable, and not disputed for the  appellant,  I that  attempts  are  made by persons  to  evade  payment  of income-tax  and  that  one mode of  such  attempts  is  that companies accumulate profits, do not use them for payment of dividends and later pay the amount to shareholders by way of profits  but  in the form of advance of moneys or  loans  to some  shareholders  who  pass on the ratable  share  of  the remaining  shareholders  and the  shareholders  thus  escape payment  of  super-tax at a higher rate as  their  receiving such  amounts  could not be treated as  "dividends"  and  so could not be added to their "income’.  At the same time,  it is not disputed for the respondent that there can be genuine cases of loans taken by shareholders from a company when the company  was in a position to lend money out of  its  funds. In  fact,  after the enactment of s. 2(6A)(e),  the  Central Board of Revenue issued a Circular directing its officers to intimate  to  all companies that if loans advanced  by  them were repaid before June 30, 1955, in a genuine manner,  they would  not  be  taken into account in  determining  the  tax liability of the shareholders to whom they had been advanced as  it  was likely that some companies might  have  advanced loans   to  their  shareholders  as  a  result  of   genuine transactions  of loans and the idea was not to  affect  such transactions  and not to bring them within the  mischief  of the  new  provision.  The provisions of s. 2 (6A)  (e)  take into  account  all  cases  of  advances  or  loans  made  by companies  to  their shareholders, be they bona fide  or  be they  for the purpose of evading payment of super  tax,  and make the borrower liable for the tax on even such amount  of the  loan as be in excess of his proportionate share in  the accumulated profits up to the amount of the loan.  Reference  may be made to the fact that in other  countries too,  notice has been taken of attempts to evade payment  of income-tax by similar devices, and that enactments to defeat the  devices  have been made by the  legislatures  of  those countries.   We have been referred to s. 108 of  the  Income Tax and Social Services Contribution Assessment Act  1936-53 (of the Commonwealth of Australia) which deals with loans to



shareholders.   Its  provisions  materially  differ  in  one respect  from those of the impugned sections.  Only so  much of the advances  or loans are deemed to be dividends paid by the company as in the opinion of the Commissioner represents distributions  of income.  The entire amount of  advance  of loan  is not treated as dividend received by  the  borrower- shareholder.  Imposition  of a tax is a restriction on the, right  of  an assessee 928  to hold property and a particular tax can be justified only as a reasonable restriction on the exercise of that right in the  interests of the general public.  The  shareholder  who takes  a  loan  or advance from a  company  which  possesses accumulated  profits  is,  under  the  impugned  provisions, treated  to have received the amount of the loan or  advance to  the extent of the accumulated profits, as dividend.   As already  stated,  the  amount  of  profits  set  apart   for dividends  is  to be proportionately distributed  among  the various  shareholders.   If  any  enactment  provides   that certain  profits of the company, though not  distributed  as dividend,  be treated as used for the payment of  dividends, it  should necessarily follow that a particular  shareholder be  deemed to have received a proportionate amout   of  such profits  as dividend.  It would be unreasonable  to  provide that  a  particular  shareholder should be  deemed  to  have received  an amount in excess of his proportionate share  as dividend.   The  other shareholders should, in  the  circum- stances,  be  deemed to have  received  their  proportionate shares  of  the profits deemed to have been  distributed  as dividends.    A  reasonable  law  may  provide   for   their assessment as wan on the amount of dividends deemed to  have been distributed to them. It appears to me unreasonable that a particular shareholder who receives a loan or advance from a  company be deemed to have received that entire amount  as dividend  when  his  proportionate share be  much  less.   I would, for this reason also, consider the provisions of  the impugned   sections  to  amount  to  imposing   unreasonable restrictions on the fundamental right to hold property under Art. 19(1)(f).  I  would  now refer to certain cases on which  reliance  is placed  for the proposition that this Court has  held  valid laws  made to cover attempts for evasion of  income-tax  and that therefore the impugned provisions enacted with the same object  to  cover  attempts to evade  payment  of  super-tax should be held valid.  These case are : Mafatlal’s  case(1), already referred to; Sardar Baldev Singh v. Commissioner  of Income-tax,  Delhi  & Ajmer (2) ; and Balaji  v.  Income-tax Officer, Special Investigation Circle(a).  Mafatlal’s  case(1) dealt with the validity of the  tax  on capital  gains under S. 12B of the Act.  In that  case  what was  taxed  was what had been gained by the  assessee  as  a result of some dealing in capital assets.  The capital  gain was to be computed after making certain deductions including the actual cost to the assessee of (1)[1955] 1 S.C.R. 829.   (3) [1962] 2 S.C.R. 983. (2) [1961] 1 S.C.R. 482.                             929 The capital assets, and did not represent the entire  amount that  came in as a result of the transaction.  This case  is therefore  an authority for the simple proposition that  the word "income" in Entry 82, List 1, Seventh Schedule ’to  the Constitution,  has  wide  connotation  and  is  not  to   be restricted  to have the same content as  judicial  decisions had given to that word as used in the Act.  "Income", in the



Act, has been construed in the context of the scheme of  the Act and has been considered to mean generally what one earns mostly in a recurring form from some existing sources.   The profits that one earns from the transfer of a capital  asset could be rationally considered, as held by this Court, to be income,  as it represented the amount in excess of what  the transferor-assessee had spent in acquiring that asset.  Baldev Singh’s case(1) was concerned about the validity  of the  provisions  of s. 23A of the Act which  authorised  the Income-tax   Officer   to   order  in   writing   that   the undistributed portion of the ostensible income of a  company calculated  as profit therein shall be deemed to  have  been distributed as dividends amongst the shareholders as at  the date of the general meeting aforesaid and that thereupon the proportionate  share  thereof of each shareholder  shall  be included  in  the total income of such shareholder  for  the purpose  of  assessing  his total  income.   The  Income-tax Officer was to make such an order only when he was satisfied that  the profits and gains distributed as dividends by  any company up to the end of the sixth month after its  accounts for the previous year are laid before the company in general meeting, were less than 60% of the assessable income of  the company  and that payment of a larger dividend would not  be unreasonable  keeping  in view the losses  incurred  by  the company  in  the earlier years and of the smallness  of  the profits made.  It will be noticed that the order of the Income-tax Officer could  not be to the effect that the  undistributed  profits would  be deemed to be the dividend paid to  any  particular shareholder or shareholders but could be to the effect  that they   were  distributed  as  dividends  amongst   all   the shareholders.   The  validity  of  this  provision  was  not questioned in the case.  What was questioned in the case was that  the proportionate share of Baldev Singh, assessee,  in such undistributed profits, could not be added to his  total income of the particular year to which it was added.  It was held  that in view of the deeming provision with respect  to the   distribution   of   profits   as   dividends   amongst shareholders, the proportionate share of the dividends would be deemed to be (1)  [1961]1 S.C.R. 482. 930  income of the assessee and that therefore, when it was  not taxed,  would be deemed to have escaped assessment  for  the purposes  of s. 34 of the Act.  The case is  distinguishable on  several grounds.  One is that the Income-tax Officer  is to  make  the  order  when he is  satisfied  that  a  larger dividend  could  have been justifiably distributed,  a  view necessarily  leading to the inference that a lower  dividend was  distributed in order to escape payment of super tax  by shareholders liable to pay such tax.  The other is that  the Income-tax  Officer was given power to make the  order  only when  profits  less than 60% of the assessable  income  were distributed  as dividend.  This indicates that  the  company could accumulate profits up to 40% of the assessable  income for  reasons  which  would be deemed to  be  genuine.   This should  lead  to  the inference  that  the  accumulation  of profits with respect to which no action has been taken under s. 23A was justified and that therefore if in case a company could  spare the money to advance to a shareholder  for  his needs, that alone should not lead to the inference that  the advance  was made to evade the payment of super-tax  by  the shareholder.  The third point of distinction, and of  signi- ficance,  is that no individual shareholder is  made  liable for tax on an amount of the undistributed profits in  excess



of   his   proportionate  share  in  those   profits.    The shareholder  is  not  thereby  prejudiced.   His  income  is increased by an amount which he could have legitimately  got from  the  company  if  the persons  in  control  had  acted reasonably  and had retained such profits  undistributed  as were necessary for the purposes of the company.  Another objection taken in Baldev Singh’s case(1) was about the  constitutionality  of  s. 23A on  the  ground  that  it purports  to  tax  the shareholders on  the  income  of  the company  in which they held shares, especially when it  does not  give  a right to the shareholders to realise  from  the company  the dividend which by the order is deemed  to  have been   paid   to  them.   The  section  was   held   to   be constitutionally  valid  as it was  enacted  for  preventing evasion   of   tax  in  view  of  the  conditions   of   its applicability.  In the circumstances of the cases covered by S. 23A, there was a reasonable connection between the amount deemed  to  be  distributed as  dividend  and  the  possible attempt  for  evading payment of super  tax.   The  assessee could not have been prejudiced if the persons in control  of the  management  of  the company  had  acted  reasonably  or actually  distributed that amount as profits  subsequent  to the order of the Income-tax-Officer. (1)  [1961] 1 S.C.R. 482.  931  In Balaji’s case(1), the validity of s. 16(3) (a),  clauses (i)  and  (ii), came up for  consideration.   These  clauses provide that in computing the total income of any individual for  the  purpose of assessment there shall be  included  so much  of  the income of his wife or minor  child  as  arises directly or indirectly from the membership of the wife in  a firm of which her husband is a partner or from the admission of  the  minor to the benefits of partnership in a  firm  of which  such  individual is partner.  These  provisions  were held  valid.   The Court left open the  question  whether  A could  be  taxed  on  the income of  B  and  formulated  the question  for decision as whether s. 16(3) (a), clauses  (i) and (ii), is a provision made by the Legislature to  prevent evasion  of tax and answered it in the affirmative,  as  the husband or the father could nominally take his wife or minor child,  in partnership with him, so that the tax burden  may be  lightened  and as this device enabled  the  assessee  to secure  the  entire  income of the business  and  yet  evade income-tax which he would otherwise have been liable to pay. It was said at p. 999:                "The scope of the provisions is limited  only               to  a few of the intimate members of a  family               who ordinarily are under the protection of the               assessee  and  are  defendants  of  him.   The               persona  selected by the  provisions,  namely,               wife and minor children, cannot also be  ordi-               narily  expected  to carry on  their  business               independently  with their own funds  when  the               husband  or the father is alive and when  they               are under his protection." It  is therefore clear that the basis for  holding s.  16(3) (a),  clauses  (i) and (ii), valid was that  in  effect  the husband  or the father was the real person who ran the  firm and  that  the  others  were  made  partners  nominally  and therefore  the partnership was not genuine.  In  this  view, there  could be no question of the provisions affecting  the husband  or  the father prejudicially or  including  in  his income  amounts which were not his income.   This,  however, cannot  be said in the present case or in cases  which  come within the purview of the impugned sections.



In dealing with the contention that the provisions of s. 16 (3)  (a), clauses (i) and (ii), contravened Art. 14  of  the Constitution, it was said at p. 991 :                 "We  have  held  that  the  object  of   the               legislation was to prevent evasion of tax.   A               similar   device  would  not   ordinarily   be               resorted to by individuals by entering               (1) [1962) 2 S.C.R. 983.               Supp. 1/65-               932                into  partnership  with  persons  other  than               those  mentioned  in the  sub-section,  as  it               would involve a risk of the    third-party               turning round and asserting his own rights.     The               Legislature,   therefore,  selected  for   the               purpose    of  classification only that  group               of persons who in fact are used as a cloak  to               perpetrate fraud on taxation."  Such a risk is always involved in a company making payments as  advances  or loans to a shareholder when  it  possesses- accumulated  profits as the other shareholders run the  risk of  not getting their proportionate share of  profits  which they  would have got if they had been really distributed  as dividends.    This  consideration,  again,  points  to   the conclusion  that the probability of such an advance or  loan being  genuine  would  be  dependent  not  so  much  on  the existence  of  accumulated  profits but  on  the  number  of shareholders in the company and the proportion of the number of  shares  the borrower has to the total number  of  shares held  by  the shareholders of the company.  The  lesser  the proportion, the greater is the chance of the advance or loan being  genuine, as there would in that case be greater  risk of the other shareholders losing their share in the  profits deemed to be distributed as dividends.     I  am  therefore of opinion that the  impugned  sections viz., ss. 2(6A) (e) and 12(1B) of the Act are void and  that this appeal should be allowed. Appeal allowed. 933