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Commissioner of Income-tax Vs. Sakarlal Balabhai - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 1 of 1966
Judge
Reported in[1968]69ITR186(Guj)
ActsIncome Tax Act, 1922 - Sections 2(6A), 44D and 44F
AppellantCommissioner of Income-tax
RespondentSakarlal Balabhai
Appellant Advocate J.M. Thakore, Adv.
Respondent Advocate N.A. Palkhivala, Adv.
Cases ReferredBilsland v. Commissioners of Inland Revenue. The
Excerpt:
direct taxation - securities - sections 2 (6a), 44d and 44f of income tax act, 1922 - as per section 44f notice served by income tax officer (ito) on person to furnish particulars relating to securities in which he has beneficial interest - no income to be accrued on securities - person required to furnish statement within twenty eight days - where it appears to ito that person would avoid more than 10% of income tax or super tax payable on income deemed to accrue day to day from securities which had been apportioned - deemed income treated as total income from securities covered by section 44f (3) for purpose of income tax or super tax - for assessment to income tax or super tax income from securities deemed to accrue from day to day - in case of sale of securities income deemed to have.....bhagwati, c.j.1. this reference raises an interesting question of construction of section 44f of the income-tax act, 1922. the question is not free from difficulty arising as it does on one of the least happily drafted sections of an act not otherwise known for perspicuity. in order to appreciate the question it is necessary to notice the facts giving rise to the reference in some detail. 2. the assessee is an individual and his income consists mainly of dividends and director's fees. he held at the material time 94 shares out of a total share capital of 640 shares of the face value of rs. 500 each in a company called lallubhai gordhandas and company limited. this company, to which we shall for the sake of convenience refer as these managing agency company, was the managing agent of rohit.....
Judgment:

Bhagwati, C.J.

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

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

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

4. The determination of the principal controversy between the parties rests of the true interpretation of the meaning and effect of section 44F and it would, therefore, be convenient to set out the section in extenso. That section, omitting portions immaterial, provides :

'44F. (1) Any person upon whom notice is served by the Income-tax Officer requiring him to furnish a statement of particulars relating to any securities in which, at any time during the period specified in the notice he has had any beneficial interest, and in respect of which, within such period, either no income was received by him, or the income received by him was less than the sum to which the income would have amounted if the income from such securities had accrued from day to day and been apportioned accordingly, shall, whether an assessment to income-tax or super-tax in respect of his total income has or has not been made for the relevant year or years of assessment, furnish such a statement and such particulars in the form and within the time (not being less than twenty-eight days) required by the notice.

(2) If it appears to the Income-tax Officer by reference to all the circumstances in relation to the securities of any such person (including circumstances with respect to sales, purchases, dealings, contracts, arrangements, transfers or any other transactions relating to such securities) that such person has thereby avoided or would avoid more than ten per cent of the amount of the income-tax or super-tax for any year which would have been payable in his case in respect of the income from those securities if the income had been deemed to accrue from day to day and had been apportioned accordingly, and the income so deemed to have been apportioned to him had been treated as part of his total income from all sources for the purposes of income-tax or super-tax, then those securities shall be deemed to be securities to which sub-section (3) applies.

(3) For the purposes of assessment to income-tax or super-tax in the case of any such person, the income from any securities to which this sub-section applies shall be deemed to accrue from day to day, and in the case of the sale or transfer of any such securities by or to him shall be deemed to have been received as and when it is deemed to have accrued :

Provided that this section shall not apply if such person proves to the satisfaction of the Income-tax Officer that the avoidance of income-tax or super-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any such avoidance of income-tax or super-tax, or the provisions of section 44F have been applied in is case in respect of such income.......

(6) For the purpose of this section the expression 'securities' includes stocks and shares.'

5. Now, it order to arrive at a proper interpretation of section 44F, we must first consider what was the mischief sought to be remedied by enacting section 44F, or, in other words, what was the object and purpose of the enactment of section 44F. Barring two or three differences which are not material for the determination of the present controversy, section 44F follows closely, almost to a word, the corresponding section 33 of the English Finance Act, 1927 - replaced subsequently by section 237 of the English Income Tax Act, 1952 - and, therefore, the observations made in regard to the object and purpose of the English section would be useful in understanding the reason for the enactment of section 44F. Speaking about the genesis of the English section. Wheatcroft says in the Law of Income Tax, Surtax and Profits Tax (1962 edition), page 1669, paragraph 1-1358 :

'It is the custom on British stock exchanges to notify in advance the dates in respect of each security before which a buyer of the security will be entitled to the next income payment. Up to that date the security is sold 'cum-dividend'; after that date the security is sold cum-dividend'; after that date the security is sold 'ex-dividend' and the next income payment, when received after the sale, will remain the property of the seller. Apart from the general market fluctuations, the price will gradually rise up to the day when the security goes 'ex-div.'; it will then normally fall sharply by a sum approximately equal to the anticipated income payment, less tax at standard rate, as the average investor values the income as its net amount. If the income is at a fixed rate, such as on Government stock, the likely fall for this reason can be calculated with considerable accuracy in advance.

A surtax-payer, who pays more than the standard rate of tax, can thus find it profitable to sell his securities just before they go 'ex-div.', as he will receive as capital the equivalent of the net dividend, instead of receiving a dividend subject to tax in his hands at a higher rate than that deducted from the dividend.'

6. The learned author then goes on to say at page 1767, paragraph 1-1588 :

'One obvious method of this type of taxpayer to avoid tax was to buy securities just after they had gone 'ex-div.' and sell them just before they went 'ex-div.' for the subsequent dividend.'

or, we may add, to sell securities just before they went 'ex-div.' and buy them just after they had gone 'ex-div.'. It was 'to deal with taxpayer who used this and similar devices on a substantial scale' that the English section was enacted. The same mischief also existed in India and, therefore, when the legislature made extensive amendments in the Income-tax Act in 1939, the legislature introduced section 44F to remedy such mischief. Originally the Bill did not include any clause corresponding to section 44E and 44F but at the stage of the select committee, these two sections were added and the reason given by the select committee for the addition of these two sections was,to quote from the report :

'The new sections 44E and 44F are designed to prevent avoidance of tax by what are known as 'bond-washing' transactions, involving the manipulation of securities so that the securities will pass temporarily into the legal ownership of some second person who is either not liable at all or liable to a lesser degree to tax, under such conditions that the interest on the securities is the income of this second person.'

7. This object and purpose of the enactment of the section will have to be borne in mind while interpreting the language of section 44F.

8. Turning to section 44F, the material part of that section consists of three sub-sections and a proviso. Sub-section (1) provides for service of a notice by the Income-tax Officer on the assessee calling for particulars in relation to securities answering a particular description. This sub-section throws considerable light on the nature of the income dealt with in section 44F and it is, therefore, necessary to have a closer look at the sub-section but we shall do that a little later. Keeping aside this sub-section for the time being, let us turn to sub-section (2), which is the main sub-section calling for construction. The first question which immediately arises for consideration on a plain reading of sub-section (2) is : What is the true meaning an import of the expression 'has thereby avoided '; what is the requirement which this expression connotes This question is of some importance for it determines the scope and ambit of operation of section 44F.

9. Now, one thing is clear that the avoidance of tax cannot include every case of reducing of tax liability of an assessee. The assessee may enter into a transaction which has the effect of diminishing his income and consequently reducing his tax liability; there would be no avoidance of tax in such a case. Take for example, a case where the assessee makes a gift of shares to this son. Undoubtedly, by reason of the gift income from the shares would not accrue to the assessee but would accrue to the son and to that extent the income of the assessee would be diminished and his tax liability reduced. But that cannot be regarded as a case of tax avoidance even if the motive of the assessee in making the gift was to save tax on the income from the shares at the higher rate applicable to him. So also, to take another example, the assessee may impress his shares with the character of joint family property or if the shares are joint family property the assessee may effect a partition and the shares may on such partition go to the share of a coparcener as his separate property : neither would be a case of tax avoidance for, in either case, the capital asset itself would be transferred and income from the capital asset would no longer go to the assessee but would go to the Hindu undivided family or the coparcener, as the case may be. The same would be the position where the assessee sells the shares to a purchaser either by way of change of investment or as a dealer. Where the assessee divests himself of the source of income and in consequence his income is reduced leading to dimunition in tax liability, he cannot be charged with avoidance of tax liability. Tax avoidance postulates that the assessee is in receipt of amount which is really and in truth his income liable to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, at the same time making it available for use and enjoyment to the assessee as in a case falling within section 44D or mask the true character of the income by disguising it as a capital receipt as in a case falling within section 44E or assume diverse other forms as in the Australian cases, namely, Jaques v. Federal Commissioner of Taxation, Clarke v. Federal Commissioner of Taxation, Bell v. Federal Commissioner of Taxation, and Newton v. Federal Commissioner of Taxation. But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income. If the assessee parts with his income producings asset, so that the right to receive income arising from the asset which theretofore belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax liability : no part of the income from the asset goes into the hands of the assessee in the shape of income or under any guise. This view is supported by the observations of three judges of the Australian High Court in Deputy Federal Commissioner of Taxation v. Purcell. The section which came up for consideration in that case was section 53 of the Income Tax Assessment Act, 1915-16, which gave power to the revenue to avoid the transaction which had the purpose or effect of avoiding of any liability imposed on any person by that Act and dealing with the construction of this section, Knox C.J., who delivered the judgment in the court of first instance, observed :

'On this point it is clear that the onus is on the respondent to establish facts from which the court may, and should, conclude that the transaction is within these class struck at by the section. The section, if construed literally, would extend to every transaction whether voluntary or for value which had these effect of reducing the income of any taxpayer; but, it in my opinion, its provisions are intended to and do extend to cover cases in which the transaction in question, if recognised as valid, would enable the taxpayer to avoid payment of income tax on what is really and in truth his income. It does not extend to the case of a bona fide disposition by virtue of which the right to receive income arising from a source which theretofore belonged to the taxpayer is transferred to and vested in some other person. The section is intended to protest the revenue against any attempted evasions of the liability to income tax imposed by the Act - that liability is imposed on the taxpayer in respect only of his income (section 10(1); and the bona fide gift or sale by a taxpayer of assets producing income is therefore in no sense an attempt to evade his liability to income tax.................'

10. This view taken by Knox C.J. was affirmed an appeal by Gavan Duffy and Starke JJ. who said :

'The section, as the Chief Justice says, does not prohibit the disposition of property. Its office is to avoid contracts..... which place the incidence of the tax or the burden of tax upon some person or body other than the person or body contemplated by the Act. If a person actually disposed of income-producing property to another so as to reduced the burden of taxation, the Act contemplates that the new owner should pay the tax. The incidence of the tax and the burden of the tax fall precisely as the Act intends, namely, upon the new owner. But any agreement which directly or indirectly throws the burden of the tax upon a person who is not liable to pay it, is within the ambit of section 53.'

11. These observation of the Australian judges dealing with a very similar section of the Australian Act clearly support the view we are taking as to the true meaning and import of the 'tax avoidance' contemplated in section 44F. If the opposite view were taken the consequences would be rather startling. The section would then apply even to a bona fide case of gift where the assessee does not receive even the equivalent value of the shares and yet he would be liable to pay tax son proportionate part of the income deemed to have accrued to him. That surely could not have been intended by the legislature.

12. One other thing also becomes clear if we have a close look at the section. It is not enough to attract the applicability of the section that there is mere incidental escapement of tax liablility as a result of a transaction entered into by the assessee. The avoidance of tax liability must be a deliberate act. The purpose or intention of the assessee must be to achieve avoidance of tax liability. The transaction must be a concerted action directed to the end of avoidance of liability for tax. If the transaction is entered into for a different purpose and is not intended to achieve avoidance of liability for tax, it would not be hit by the section even if, as a result of the transaction, tax liability is in fact avoided. Take for instance a case where shares are sold by the assessee a few days before the date of declaration of dividend and the sale is effected bona fide for the purpose of paying off a pressing liability which the assessee is not otherwise able of to discharge. Here, there would be escapement of tax liability in that the assessee would receive anticipated income payment in the shape of rise in price which being in the nature of capital receipt would not be liable to tax (except of course he capital gains tax in case there is capital appreciation) whereas if the assessee had sold the shares after the declaration of dividend, he would have been liable to pay tax on dividend, accrued to him before sale. But the transaction of sales having been entered into for the purpose of paying off a pressing liability and not for the purpose of achieving avoidance of tax would not be hit by the section. What is necessary in order to attract the applicability of the section is that avoidance of tax must be the end intended to be achieved by the assessee in entering into the transaction.'You must be able to predicate', as observed by Lord Denning in Newton v. Federal Commissioner of Taxation 'by looking at the very act by which' the transaction 'was implemented - that it was implemented in that particular way so as to avoid tax.'

13. This construction is clearly borne out by the language of section 44F. Reading the marginal note of the section which can certainly be looked at for the purpose of understanding the drift of the section, we find that the words used are 'avoidance of tax by sales-cum-dividends.' These words 'avoidance of taxation' are not colourless words. They are strong and compelling words connoting a positive volition - a deliberate intention - on the part of the assessee to avoid tax. Moreover, the opening part of sub-section (2) refers to various transactions relating to the securities entered into the by assessee and then proceeds to say that the assessee heys 'thereby avoided' a certain amount of tax, clearly suggesting that the assessee has by adopting those transactions avoided tax or, in other words, the transaction are entered into by the assessee for the purpose of avoiding tax. These words in the opening part of sub-section (2) leave no doubt that what the section has in view is a deliberate action on the part of the assessee directed to the end of achieving avoidance of tax liability. Furthermore, the opening part sub-section (2) also requires the Income-tax Officer to be satisfied as regards avoidance of tax by the assessee by reference to all the circumstances in relation to the securities of the assessee 'including the circumstances with respect to sales, purchases, dealings, contracts, arrangements, transfers or any other transactions' relating to the securities. Now, all the circumstances in relation to the securities including the circumstances with respect to sales, purchases, dealings, contracts, arrangements, transfers or any other transactions would be material only if what is required to be judged is the purpose of the assessee in entering into the transactions. They would have not bearing if what is required to be found is merely whether there is actual saving or escapement of tax liability. Whether there is actual saving or escapement of tax liability would be a matter of mere mathematical calculation. But in order to determine whether the transactions are entered into by the assessee for the purpose of achieving such saving or escapement of tax liability the circumstances relating to the transactions would be very material and the opening part of sub-section (2), therefore, requires the Income-tax Officer to determine by reference to all the circumstances relating to the securities 'including the circumstances with respect to sales, purchases, dealing, contracts, arrangements, transfers or any other transactions' relating to securities, whether the assessee has thereby avoided tax liability. The language of the section thus clearly indicates, that what the legislature seeks to hit at, is not merely incidental effect of escapement of tax but a deliberate avoidance of tax where means are adopted by the assessee for the purpose of achieving the end of avoidance of tax. But even if the language of the section were open to two constructions, we would prefer the narrower constriction which limits the applicability of the section to deliberate and intentional avoidance of tax liability - where the transaction is entered into by the assessee for the purpose of achieving avoidance of tax liability rather than the wider construction which extends the applicability of the section to all cases where there is the end effect of escapement of tax liability irrespective of whether such end effect is merely incidental or is the result of a transaction entered into by the assessee for the purpose of achieving such and effect. The section is punitive in character and must be construed strictly and if two constructions are possible, one which favours the taxpayer must be preferred as against the other which throws a greater burden upon him. If the wider constriction were adopted, the result would be that even a bona fide investor who changes his investment at an opportune time by selling his shares just before the date of declaration of dividend with a view to gather the maximum profit for his investment would be hit by the section. We do not think the legislature could have intended to bring about such a startling interference with the activities of bona fide investors.

14. The context in which section 44F occurs also lends support to this construction which we are inclined to place on the language of section in 44F. Section 44F is the last of a fasciculus of three sections in Chapter V-B. Section 44D, which is the first in this group of section, strikes at avoidance of income-tax by transaction resulting in transfer of income ot persons resident or ordinarily resident abroad. Where the assessee adopts the artifice or devise set out in section 44D so that income from the asset in law accrues to some other person but it remains available to the assessee for his use and enjoyment or, in other words, remains virtually his income, section 44D provides that such income shall be deemed to be the income of the assessee for all purposes of the Act. But even here, the transaction is exempted from the operation of section 44D if it is a bona fide commercial transaction not designed for the purpose of avoiding liability to taxation or it did not have for its purpose or for one of its purposes avoidance of liability to taxation. The purpose or intention of the assessee to avoid liability to taxation is thus made the determining factor for attracting the applicability of section 44D. Having regard to the nature of the transaction the legislature has raised a presumption that the purpose or intention must be to avoid liability to taxation but the assessee is permitted to prove the contrary in order to escape the consequences of section 44D. So also in section 44E, the nature of the transaction itself is such that intention to avoid tax liability is writ large on the transaction. One might apply the maxim res ipsa loquitur to the transactions of the kind specified in section 44E and say that the transaction speaks for itself and declares the intention to avoid tax liability. Section 44F must also likewise be construed as directed to cases where action is taken by the assessee to the end of avoidance of tax liability - where avoidance of tax liability is the end sought to be achieved by the assessee by entering into the transactions. Genuine and bona fide transaction 'capable of explanation' by reference to ordinary business or family dealings without necessarily being labelled as a means to avoid tax are not intended to be hit by the section though their effect may be saving or escapement of tax liability. We may in this connection quote the following words from the judgment of Lord Denning in Newton v. Federal Commissioner of Taxation :

'In order to bring the arrangement within the section you must be able to predicate by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transaction are capable of explanation by the reference to ordinary business or family dealings, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section. Thus, no one, by looking at a transaction of shares cum dividend, can predicate that the transfer was made to avoid tax. Nor can anyone by seeing a private company turned into a non-private company, predicate that it was done to avoid Div. 7 tax, see W.P. Keighery Pty. Ltd. v. Commissioner of Taxation. Nor could anyone, on seeing a declaration of trust made by a father in favour of his wife and daughter, predicate that it was done to avoid tax, see Deputy Federal Commissioner of Taxation v. Purcell. But when one looks at the way the transfer were effected in Jaques v. Federal Commissioner of Taxation, Clarke v. Federal Commissioner of Taxation and Bell v. Federal Commissioner of Taxation, the way the cheques were exchanged for like amounts and so forth - there can be on doubt at all that the purpose and effect of that way of doing things was to avoid tax.'

15. These words though uttered with reference to section 260 of the Australian Income-tax and Social Services Contribution Assessment Act, 1936-1950, are wholly applicable to a case under section 44F. We must, therefore, proceed to see whether the transaction in the present case was a means adopted by the assessee for the purpose of achieving avoidance of tax liability. If it was, the requirement of the opening part of sub-section (2) would be satisfied, for it was common ground between the parties that if there was any avoidance of tax within the meaning of sub-section (2) such avoidance was for an amount exceeding the limit of ten per cent. specified in the sub-section.

16. Turning to the facts of the case, the argument of the assessee was that the managing agency of Rohit Mills Ltd. having come to an end and decision having been taken to wind up the managing agency company, the said 94 shares in the shareholding of the managing agency company had no longer any use for the assessee, and the assessee, therefore, sold those shares to Balabhai Damodardas Trust and Nita at the price of Rs. 1,600 per share which was a fair market price and realised the value of those shares. It was also urged on behalf of the assessee that the sale was effected in favour of Balabhai Damodardas Trust Trust with a view to benefiting the said trust, as the said trust being a public charitable trust would obtain refund of the tax deducted at source, and that would represent the net gain of the said trust. The sale of she said 94 shares was thus not effected by the assessee for the purpose of achieving avoidance of tax liability and section 44F was accordingly not attracted. This argument, plausible though it may seem, is in our view not well founded. If we look at all the circumstances relating to the sale of 94 shares it would be apparent that these shares were sold by the assessee for the purpose of avoiding tax liability which would otherwise have fallen upon him if he had not sold the shares and received the distribution of Rs. 1,760 per share made in respect of the shares. The decision to wind up the managing agency company was taken by the board of directors on 20th January, 1958, and immediately thereafter on 24th January, 1958, the said 94 shares were sold by the assessee to Balabhai Damodardas Trust and Nita. The assessee being a director and major shareholder of the managing agency company must have known that on the managing agency company being taken in liquidation, a large amount of accumulated profits of the earlier years would be distributed by the liquidator and it would be liable to be taxed as dividend in the hands of the shareholders by reason of section 2(6A)(c). The assessee, therefore, sold the said 94 shares at the fair market price which would necessarily reflect the value of the distribution to be made by the liquidator on li quidation and thus obtained as caiptal receipt an amount substantially equivalent to the amount of distribution to be made by the liquidator. The assessee, in reality and substance, obtained the amount of distribution to be made by the liquidator without the liability to taxation which would have certainly fallen upon him if he had not sold the said 94 shares and received the amount of distribution directly from the liquidator, and this was achieved by the assessee by the artifice or device of sale of the said 94 shares at the fair market price. It is in these circumstances impossible to resist the conclusion that the assessee sold the said 94 shares for the purpose of avoiding liability to taxation. It is no doubt true that the assessee had no longer any use for the said 94 shares since the managing agency company was to be wound up but these shares were equally of no use to the purchaser. The only benefit to arise from these shares was the distribution to be made by the liquidator and this distribution could as well as distribution to be made by the liquidator and this distribution could as well be received by the assessee as by the purchaser. It the assessee received it, he would be liable to be taxed under section 2(6A) and he, therefore, adopted the artifice or device of sale of these shares with a view to getting its equivalent as capital receipt which would not be liable to be taxed as income. The assessee in selling these shares might have had the intention to benefit Balabhai Damodardas Trust but that does no negative the intention to avoid his own liability. If, for example,the assessee had gifted these shares to Balabhai Damodardas Trust it would have been possible to say that there was no intention on the part of the assessee to avoid tax liability. But when the assessee sold these shares at the fair market price, it is a necessary inference that the intention of the assessee was to avoid tax liability on himself and even if that was one of the purposes for which the sale of these shares was effected, it would be sufficient to attract the applicability of section 44F. We must, therefore, hold that the assessee sold the said 94 shares to Balabhai Damodardas Trust and Nita for the purpose of avoiding liability to taxation within the meaning of the opening part of sub-section (2) of section 44F.

17. The next question which falls for determination is as to what is it that the Income-tax Officer is required to consider for the purpose of determining whether the assessee 'has thereby avoided or would avoid' tax liability beyond the limit specified in sub-section (2) of section 44F. The opening part of sub-section (2) of section 44F says that the Income-tax Officer must determine whether there is avoidance of tax liability by reference to 'all the circumstances in relation to securities of any such person including the circumstances with respect to sales, purchases, dealings, contracts, arrangements, transfers or any other transactions relating to such securities.' The argument which found favour with the Tribunal was that the Income-tax Officer must in determining the question of avoidance of tax have regard to the circumstances in relation to all the securities held by the assessee and that his attention must to be confined only to the circumstances in relation to the securities in respect of which it is alleged that there is avoidance of tax liability. The Tribunal held that since the Income-tax Officer had not examined the circumstances in relation to the total holding of the assessee for the purpose of deciding whether the sale of 94 shares effected by the assessee was with a view to avoiding tax liability and had failed to consider what were the other shares and securities held by the assessee apart from the said 94 shares and whether any transaction or transfers were entered into by the assessee relating to those shares and securities and if so what was their effect, the condition set out in the opening part of sub-section (2) of section 44F was not satisfied and section 44F could not, therefore, be properly applied. This conclusion of the Tribunal, we do not think, is supported by the language of sub-section (2) of section 44F. The question really is what is the true import of the expression 'the securities' in the opening part of sub-section (2) of section 44F. Does it refer to all the securities of the assessee or is it confined only to the securities in respect of which in the view of the Income-tax Officer there is avoidance of tax liability On a plain grammatical construction of the language used in sub-section (2) of section 44F, we are of the view that the reference to 'the securities' in the opening part of the sub-section is to the securities in respect of which it is alleged there is avoidance of tax liability. Our reasons for saying so are as follows :

In the first place, it may be noticed that the legislature has not used the comprehensive adjective 'all' before the expression 'the securities' in the opening part of sub-section (2) as it has used before the expression 'the circumstances' in the same sub-section. The parenthetical portion which follows uses the expression 'such securities' and that expression has obviously reference to 'the securities' referred to in the opening part of the sub-section. The sub-section then proceeds to say that the assessee should have 'thereby avoided' more than 10 per cent. of the amount of the income-tax or super-tax for any year which would have been payable in his case in respect of income from 'those securities'. The expression 'those securities' must necessarily, as a matter of plain requirement of grammar and syntax, refer to 'the securities' referred to in the earlier part of the sub-section. The word 'those' is a demonstrative adjective and it must refer to the securities mentioned earlier in the sub-section and 'the securities' referred to earlier must, therefore, mean the securities in respect of which there is avoidance of tax and to which the provisions of sub-section (3) are made applicable. The words 'such person has thereby avoided' tax liability 'in respect of income from those shares' also support this construction. How could the assessee avoid tax liability 'in respect of income from those securities' by entering into transactions relating to other securities What the sub-section seeks to hit are transactions in relation to the securities entered into by the assessee for the purpose of avoiding tax liability in respect of the income from such securities. The expression 'the securities' in the opening part of the sub-section does not, therefore, extend to the total holding of the assessee but is confined only to the securities in respect of which action is sought to be taken under the deterrent provision contained in the section. The Income-tax Officer was, therefore, not required to take into account all the circumstances in relation to the total holding of the assessee but was quite justified in focussing his attention only on the circumstances with respect to the sale of 94 shares in respect of income from which there was, according to the Income-tax Officer, avoidance of tax liability and which, therefore, formed the subject-matter of action under section 44F.

18. That takes us to second question arising in the reference, namely, as to what is the true connotation of and the word 'income' in section 44F. Does the word 'income' include the artificial categories of income referred to in the several clauses of section 2(6A) Section 2(6A) includes within the category of dividend certain distributions and payments which are not dividend according to the accepted connotation of that word and by reason of section 2(6C)(i) which defines 'income' as including dividend, such distributions and payments are included within the category of 'income'. The distribution of Rs. 1,750 per share made in the present case was a distribution falling within section 2(6A)(c) and the learned Advocate-General, therefore, argued that it was dividend within the meaning of section 2(6A)(c) and hence income within the meaning of section 2(6C)(i) and was consequently within the ambit and operation of section 44F. This argument of the learned Advocate-General rested on a strictly mechanical construction based on transplantation of the definition of 'dividend' in section 2(6A)(c) in the definition of 'income' in section 2(6C)(i) and the transplantation of the latter in the reading of section 44F. But it is clear, and the opening part of the section 2 emphasizes, that the definitions of 'dividend' and 'income' in section 2(6A)(c) and section 2(6C)(i) could be read in section 44F only if there was nothing repugnant to them in the subject or context of section 44F. Mr. Palkhivala, learned advocate, appearing on behalf of the assessee, urged that the definition of 'dividend' in section 2(6A)(c) was repugnant to the subject as well as the context of section 44F and 'income' from shares and securities referred to in section 44F did not comprehend fictional income of the nature specified in section 2(6A)(c). It was confined, said Mr. Palkhivala, only to periodic income, that is, income relatable to a period of time such as interest on securities or dividend on shares according to the ordinary accepted connotation of the word 'dividend' and it had no reference to fictional income which was in reality capital receipt not having any relation to a period of time. This argument we shall now proceed to consider.

19. Let us first examine the nature of the distribution referred to in section 2(6A)(c). Where a distribution is made to the shareholders of a company on its liquidation out of the accumulated profits of the company immediately prior to liquidation it would, but for section 2(6A)(c), be capital receipt and not dividend or income in the hands of the shareholder : Island Revenue Commissioners v. Burrell. But by reason of section 2(6A)(c) what is really a capital receipt is regarded by law as dividend and therefore income within the meaning of section 2(6C)(i). Section 2(6A)(c) read with section 2(6C)(i) creates a legal fiction; what is not income is treated as income falling within the category of dividend. Some argument was addressed before us by the learned Advocate-General that no legal fiction was created by section 26A)(c) but that what that section did was to introduce a different concept of dividend for the purpose of income-tax and that it was not as if what was not dividend was fictional converted into dividend. But this argument does not appeal to us. Fiction of law is not necessarily created by any particular expression. It is no doubt true that the common legislative device employed to create a legal fiction is to use the expression 'deemed' but that is not the only device available to the legislature for creating a fiction of law. It is interesting to note that even the expression 'deemed' does not always create a legal fiction. As observed by Lord Radcliffe, the expression 'deemed' is apt to include not only the impossible but also the obvious and the uncertain. Where a particular receipt is not income but the law says that it shall be regarded as income, the law departs from reality and this departure constitutes a fiction of law. A distribution falling with in section 2(6A)(c) is, therefore, not really income but is fictionally regarded by law as income and the question is whether it is included within the word 'income' in section 44F.

20. Now the first point which arises for consideration is whether there is anything repugnant in the subject to the importation of the fictional income specified in section 2(6A)(c) in the reading of section 44F. The subject, as the marginal note indicates, is avoidance of tax on sales-cum-dividend. The concept of 'sales-cum-dividend' or 'sales ex-dividend' is referable only to dividend in the ordinary sense - dividend which is declared in respect of a particular period at a general meeting of the company. See the quotation from Wheatcroft's Law of Income Tax, Surtax and Profits Tax, page 1669, paragraph 1 - 1358, given in the earlier part of the judgment. Moreover, the section deals with income from shares and securities and by the very nature of these assets income from them would be periodic income. A capital receipt, which is received once and for all and which is fictionally regarded as income, would be a stranger to the concept of periodic income.

21. Turning to the context, we find that what the subject demands, the context supplies. There are three decisive indications in the section which show clearly and beyond doubt that the 'income' from shares and securities referred to in the section does not include the fictional category of income referred to section 2(6A)(c). The income referred to in the section is periodic income, that is, income referable to a period of time and since the fictional category of income mentioned in section 2(6A)(c) is not referable to a period of time, it is not 'income' within the meaning of the section. The first indications is afforded by the words 'income from any securities', 'income from those securities' and 'income from any securities' occurring in the different sub-sections of the section. These words postulate the existence of the securities and refer to income arising by way of fruit from the securities. They cannot income emanating from the source, the source remaining intact and unaffected. But where an amount is received not by way of produce from the source but in lieu or substitution of the source, it cannot be properly and legitimately described as income from the source. The distribution referred to in section 2(6A)(c) is a distribution of the property of the company in liquidation amongest the shareholders in lieu or substitution of their shares in the shares capital of the company. When distribution is made, the shares held by the shareholders cease to have any meaning or value : they become mere pieces of paper incapable of producing any income. Therefore, as a matter of plain grammatical English, it would not be correct to speak of a distribution of the property of the company on liquidation as income from shares. The words 'income from securities' are referable only to income by way of yield from securities and as such they signify only periodic income, that is, income referable to a period of time. It is no doubt true that at one place in sub-section (1), the legislature while referring to income has used the words' in respect of which' and not 'from' but the repeated use to of words referring to the income as income from securities along with the general drift of the section that the way in which the section is couched clearly indicate that what the legislature had in view was not fictional income of the kind specified in section 2(6A)(c) but periodic income, that is, income referable to a period of time.

22. The second indication of the legislative intent is to be found in sub-section (1) of section 44F. The words '.... the income received by him was less than the sum to which the income would have amounted if the income from such securities had accrued from day to day and been apportioned accordingly' clearly show that the income which the legislature had in contemplation was income capable of accruing from day to day and apportionable by time. Interest on securities accrues at fixed stated intervals and dividend on shares accrues at the date when it is declared but both being payments in respect of a period of time are capaable of accruing from day to day over such period. And this proposition is true whether the yield is fixed or fluctuating. The yield in the case of securities is invariably fixed in respect of a period of time and so also is dividend on debenture and preference shares though occasionally we do find debentures participating in profits in which case the yield would fluctuate with profits. In the case of ordinary shares the yield is ordinarily fluctuating with profits but even where the yield is fluctuating, it is declared in respect of a period of time. This is apparent from the language of regulation 88(3) of Table A given in the First Schedule to the Companies Act, 1956. That regulation says that all dividends shall be apportioned and paid proportionately to the amounts paid or credited as paid on the shares during any portion or portions of the period in respect of which dividend is paid. The common denominator of both fixed and fluctuating yields therefore is that they are both periodic payments referable to a period of time. They are capable of accruing from day to day over the period of time in respect of which they are declared but they do not, in the eye of the law, accrue from day to day but accrue only at fixed stated intervals in the case of interest on securities and at the date of declaration of dividend in the case of dividend on shares. Now, taking advantage of the fact that the yield on the shares or securities does not accrue from day to day over the period in respect of which it is declared but accrues only at a single point of time, an assessee may attempt to avoid tax on income from the shares or securities by effecting sale-cum-dividend and then buying ex-dividend or by resorting to some such transaction by which he receives income in the shape of capital. The legislature therefore said to the Income-Tax Officer : take a period of time and if you find that during that period the assessee has either not received any income from the shares or securities or the income received by him from the shares or securities is less than the sum to which the income would have amounted if, instead of accruing at stated points of time, the income had accrued from day to day and been apportioned accordingly for the period in question proceed to take action against the assessee under the section in respect of the shares or securities. Sub-section (1) thus clearly postulates that the income from the shares or securities is capable of accruing from day to day and is apportionable by time but in law it does not accrue from day to day and accrues only at stated points of time. Where in respect of such income the conditions specified in sub-section (1) are satisfied, the Income-tax Officer would issue notice to the assessee as contemplated by that sub-section and if the conditions specified in sub-section (2) are satisfied in respect of such income for any year, sub-section (3) says that though the income from the shares or securities did not in law accrue from day to day, it shall be deemed to have accrued from day to day. Sub-section (1) - and for the matter of that even sub-section (2) - merely contemplates fictional accrual from day to day : it does not supply a fictional or artificial period over which the accrual from day to day shall be deemed to have taken place. Now, in order that the fiction as to accrual from day to day may operate, there must be a period of time over which the income would be deemed to have accrued from day to day the income from the shares or securities referred to in sub-sections (1) and (2) must, therefore, necessarily be periodic income, that is, income referable to a period of time so that it can be deemed to accrue from day to day over such period of time.

23. The argument of the revenue was that it was not necessary to the applicability of the section that the income from shares or securities should be periodic income referable to a period of time. What, according to the revenue, sub-sections (1), (2) and (3) contemplated was a fiction deeming the income to accrue from day to day and such fiction was equally applicable to fictional category of income specified in section 2(6A)(c) which was not periodic income referable to a period of time. But if that be true, one might ask the question : Over what period of time would the fictional category of income specified in section 2(6A)(c) be deemed to accrue from day to day The only answer which could be given on behalf of the revenue was that it would be spread over the period from the commencement of the relevant account year upto the date of actual accrual and that was, as a matter of fact, the basis on which the revenue in the present case sought to apportion the distribution of Rs. 1,750 per share made by the liquidator on 7th March, 1958. But we do not think this answer fits into the language of sub-section (1) and provides a satisfactory solution to the requirement of that sub-section. If we look at the language of sub-section (1) it is clear that the inquiry posed in that sub-section is not to be made by reference to any accounting year so that the income can be deemed to accrue from day to day from the commencement of the accounting year. The Income-tax Officer acting under sub-section (1) can take any period of time for the purpose of his inquiry. It may comprise one accounting year or it may comprise more than one accounting year or it may even comprise a part of one accounting year and a part of another. The inquiry to be made by him would be whether during that period of time the income received by the assessee was less than the sum to which the income would have amounted if the income from the shares or securities had accrued from day to day and been apportioned accordingly. There being no reference to an accounting year in the scheme of the sub-section and the inquiry being in reference to a specified period of time, it is difficult to see how the fictional accrual of income from day to day could be related to the commencement of an accounting year. Sub-section (1) does not say so and to so read the sub-section would be to add words which are not there. Moreover, even as a fiction, it would be most artificial to treat the income as having accrued from day to day over the period from the commencement of the accounting year in which it has accrued up to the date of actual accrual. There is no logic or principle for relating fictional accrual of income from day to day to the commencement of the accounting year which may vary from assessee to assessee. As a matter of fact, if we consider the historical background against which the corresponding English section was enacted, it becomes clear that the fictional accrual from day to day which the legislature had in mind was accrual from day to day over the period of time in respect of which the income was declared. In England when one talks of accrual from day to day and apportionment in respect of income from shares and securities, it is invariably accrual from day to day over the period of time for or in respect of which payment of income is declared or expressed to be made. Section 2 of the Apportionment Act, 1870, 33 and 34 Vict. c. 35, provides that rents, annuities, dividends and other periodical payments in the nature of income shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly. The interpretation clause in section 5 defines 'dividends' to include '(besides dividends strictly so called) all payments made by the name of dividend, bonus, or otherwise out of the revenue of trading or other public companies, divisible between all or any of the members of such respective companies, whether such payments shall be usually made or declared, at any fixed times or otherwise, and all such divisible revenue shall, for the purpose of this Act, be deemed to have accrued by equal daily increment during and within the period of or in respect of which the payment of the same revenue shall be declared or expressed to be made.' The concept of fictional accrual from day to day and apportionment in respect of time in England has clearly reference to periodic income, that is, income referable to a period of time and it is in reference to that period of time that the fiction of accrual from day to day has to be applied and apportionment accordingly made. Barring two differences which are not material to the present question, our section closely follows the English section even to the point of borrowing wholly the language of the English section and it would be reasonable to assume that the legislature by exacting our section intended to bring about the same effect which the English section did in England. We are, therefore, of the view that section 44F applies only in relation to income from shares or securities which is periodic income or, in other words, income referable to a period of time.

24. Now the fictional category of income specified in section 2(6A)(c) has no relation to a period of time : it has no dimensional quality which can be spread over a period of time. Such income is, therefore, not within the reach of section 44F. If section 44F were applicable to such income and by reason of the fiction enacted in the section such income was deemed to accrue from day to day from the commencement of the accounting year in which it actually accrued, the result would be that in many cases the very essence of the fiction in section 2(6A)(c) would be destroyed, for the fiction in section 44F would deem a part of the income in respect of the period from the commencement of the accounting year upto the date of liquidation to accrued prior to the date of the liquidation, whereas the very essence of the fiction enacted in section 2(6A)(c) is that the distribution representing the income is made subsequent to the date of liquidation. Moreover, like a distribution under section 2(6A)(c) even an advance or loan taken by a shareholder from the company falling within section 2(6A)(c) would be within the ambit and operation of section 44F and, therefore, if the purchaser of the shares from the assessee takes such an advance of loan, it would be income from the shares within the meaning of section 44F and if the other conditions of the section are satisfied it would be deemed to accrue from day to day from the commencement of the accounting year and be apportioned accordingly so that the apportioned part of it for the period from the commencement of the accounting year up to the date of the sale would be includible in the assessment of the assessee. Such could never have been the intention of the Legislature. We, therefore, reach the conclusion that the fictional category of income specified in section 2(6A)(c) does not attract the applicability of section 44F and the revenue was not entitled to tax the assessee on the basis of the provisions contained in the section.

25. In this view of the matter, it is not necessary for us to consider the last contention of the assessee based on the proviso to section 44F, sub-section (3). But since considerable argument was advanced before us in regard to that contention, we think it proper to express our opinion upon it. The argument of the assessee was that even if there was avoidance of tax within the meaning of sub-section (2) of section 44F, it was exceptional and not systematic and there was not in his case in any of the three preceding years any such avoidance of tax and therefore, by reason of the proviso to sub-section (3), section 44F was not applicable to his case. The revenue, on the other hand, contended that neither of the two conditions requisite for the applicability of the proviso was satisfied; the avoidance of the tax was not such as could be regarded as exceptional and not systematic, nor could it be said that there was not in the case of the assessee in any of the three preceding years any such avoidance of tax. Now it is clear on a plain reading of the proviso that two conditions are necessary for the applicability of the exempting provision contained in the proviso. One is that the avoidance of tax must be 'exceptional and not systematic' and the other is that there should not be in any of the three preceding years any 'such avoidance of tax'. Let us examine whether these two conditions are satisfied in the present case.

26. Turning to the first condition, the main question which arises for consideration is as to what is the true meaning of the expression 'exceptional and not systematic'. 'Exceptional' is defined in the Shorter Oxford Dictionary as 'unusual, of the nature of or forming an exception' and 'systematic' is defined as 'involving or observing a system : acting according to system, regular, methodical : carried on as a regular reprehensible practice.' These words according to their plain natural meaning connote that the avoidance of tax must be by way of an exception to the regular practice of the assessee and must not be part of a regular practice followed by the assessee. The revenue, however, pleaded that the word 'systematic' did not involve the idea of number and that it only meant that the avoidance must be according to plan or organized method, that is, must be designed or deliberate. But this construction cannot be accepted and there are several reasons why it does not appeal to us. One reason is that the requirement that the avoidance must be intentional or designed is already brought in by sub-section (2) and if the avoidance is not designed or deliberate it would not be avoidance within the meaning of the sub-section and section 44F would not apply and there would be no necessity to provide for exemption under the proviso. Secondly, if the legislature wanted to prescribe in the proviso that the avoidance must not be designed or deliberate, the legislature could have used the words 'designed' and 'purposeful' or 'deliberate' or 'intentional' but instead the legislature used the word 'systematic'. Moreover it is a well-settled rule of interpretation that where two or more words susceptible of analogous meaning are coupled together noscuntur a sociis they take as it were their colour from each other. Being associate words they explain and limit the application of each other. The juxtaposition of the words 'exceptional and not systematic' shows that the legislature was using the word 'systematic' in contradistinction to 'exceptional'. The avoidance of tax must be exceptional, that is, by way of exceptions to the normal practice of the assessee and it should not be systematic, that is, part of a regular reprehensible practice carried on by the assessee.

27. This is the view we are inclined to reach on a plain natural constructi on of the words used but we find that it is amply supported by a decision of the English Court in Bilsland v. Commissioners of Inland Revenue. The provision which came up for construction in that case was sub-section (4) of section 33 of the English Finance Act, 1927, which was couched in the same language as our proviso and construing the words 'exceptional and not systematic', Lawrence J. said :

'In my opinion, the words 'exceptional and not systematic' in sub-section (4), have relation primarily to number. To read the word 'systematic' as meaning 'planned' or 'devised', as was contended for the Crown, appears to me to be impossible in the context. The more planned or devised the avoidance is, the more exceptional it is. Moreover, 'exceptional' means, in my view, taken out of something; it cannot mean taken out of the ordinary rule; it must mean in this context taken out of the system, and that implies that there must be more than one instance in the system. It seems to me impossible to say fairly that a single avoidance of tax is systematic and not exceptional.'

28. It is significant to note that though this decision deprived the revenue of a large amount of tax which it would otherwise have obtained if section 33 of the English Finance Act, 1927, were held applicable, the Crown accepted the decision as correct and did not appeal from it. Since the time it was given in 1936 it has always been regarded as good law by authors of all standard text books. Wheatcroft says in his book on Income Tax Law at page 1767 :

'....... But it should be noted that his provision only applies when this method is used systematically; in this, as in some otherare as the law, the dog is allowed but one bite.'

29. It may also be noted that section 44F was introduced in our Act by an amendment made in 1939 after the decision in Bilsland's case. The legisamendment when it enacted section 44F must be taken to have been aware of the decision in Bilsland's case interpreting the words 'exceptional and not systematic' and yet the legislature retained the same phraseology as in section 33, sub-section (4). It may, therefore, be reasonably assumed that the words 'exceptional and not systematic' were used by the legislature in the proviso in the same sense in which they had been judicially interpreted in Bilsland's case. If this is the true meaning it is clear that the avoidance of tax in the present case was exceptional and not systematic, for there was only one instance of such avoidance in the accounting year and it is not possible to say that it was part of a regular practice followed by the assessee.

30. The revenue is, however, on firmer ground when we turn to the second condition which requires that there should not be 'in any of the three preceding years any such avoidance of income-tax or super-tax'. The assessment year in question being 1959-60, the three preceding years were 1956-57, 1957-58 and 1958-59. There was admittedly no avoidance of tax within the meaning of sub-section (2) in the assessment year 1958-59. In the assessment year 1957-58, there was a gift of 270B ordinary shares in the share capital of Sakarlal Balabhai and Co. Ltd. by the assessee to Sakarlal Balabhai Trust. But the transaction being a gift, no tax could be said to have been avoided by the assessee within the meaning of sub-section (2) by entering into the transaction for reasons which we have already discussed above. There was, however, avoidance of tax by assessee in the assessment year 1956-57 by means of a sale of 180 preference shares in the share capital of Sakarlal Balabhai and Co. Ltd. by the assessee to Nita. These shares were redeemable preference shares and a resolution was passed by the company on 23rd August, 1955, for redeeming these shares out of the accumulated profits of the company. Immediately thereafter, on 15th September, 1955, the assessee effected a sale of these shares to Nita so that when these shares were redeemed on 31st December, 1955, the distribution of accumulated profits went into the hands of Nita as her income taxable under section 2(6A)(a) and the assessee obtained the full amount of fact value of these shares, namely, Rs. 18,000, as a capital receipt. The assessee thus avoided more than ten per cent. of the amount of the tax in the assessment year 1956-57 as contemplated by sub-section (2). We must, of course, make it clear that when we say this, we proceed on the assumption that, contrary to what we have held, the fictional category of income specified in the different clauses of section 2(6A) is income to which section 44F applies. It would not, therefore, be possible to say that there was not in the case of the assessee 'such avoidance of income-tax or super-tax' in the assessment year 1956-57. The assessee, however, sought to escape this conclusion by an ingenious argument. He urged that the words 'such avoidance of income-tax or super-tax' were referable to the kind of avoidance mentioned in the first condition of the proviso and that what was required by these words was that there should not be in any of the three preceding years any avoidance of income-tax or super-tax which was not exceptional but systematic. Basing himself on this construction he contended that, since the avoidance of tax referred to above was a solitary instance of avoidance of tax in the assessment year 1956-57 and was, therefore, exceptional and not systematic, the second condition was satisfied in regard to all the three preceding years and the assessee was entitled to the benefit of the exemption given by the proviso. But this contention is based on a misconstruction of the words 'such avoidance of income-tax and super-tax.' We agree that these words refer to the avoidance of the income-tax or super-tax mentioned in the first condition but the avoidance of income-tax or super-tax mentioned in the first condition is the avoidance referred to in sub-section (2) and that is the avoidance of income-tax or super-tax which is connoted by these words. These words do not import the quality of 'exceptional and not systematic' which the avoidance of income-tax or super-tax is required to possess by virtue of the first condition. The first and the second conditions are cumulative and in construing the second condition, it would not be correct to read the words 'such avoidance of income-tax or super-tax' as referable to the quality of 'exceptional and not systematic' prescribed by the first condition. On a plain grammatical construction, the words 'such avoidance of income-tax or super-tax' throw us back to the avoidance of income-tax or super-tax referred to in the first condition and that is the avoidance of income-tax or super-tax referred to in the sub-section (2). If the words 'such avoidance of income-tax or super-tax' were interpreted in the manner suggested on behalf of the assessee, the quality of 'exceptional and not systematic' would be incorporated in regard to the avoidance of income-tax or super-tax referred to in the second condition and the requirement of that condition would be that there should not be in any of the three preceding years avoidance of income-tax or super-tax which is 'exceptional and not systematic.' That would indeed be an absurd conclusion never intended by the legislature. We are, therefore, of the opinion that if the view taken by us as to the true meaning and import of the word 'income' is not correct and fictional income described in section 2(6A)(c) is within the reach of section 44F, the assessee is not entitled to claim exemption from the operation of the section under the proviso.

31. Our answer to the questions referred to us therefore are : question No. - 1 in the negative; question No. 2 - in the negative; questions Nos. 3 and 4 - do not arise in view of our answer to questions Nos. 1 and 2. The Commissioner will pay the costs of the reference to the assessee.


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