Ramachandra Iyer, J.
1. The following question was referred to us under Section 66(1) of the Income-tax Act:
Whether the assessment of the entire profits of S.P.K. Kader Mohideen and Co., Ltd, in the hands of the assessee for assessment year 1949-1950 invoking the provisions of Section 44-D of the Indian Income-tax Act is valid?
When the reference came up for hearing, it was found that, in order to answer the question referred to, certain matters had to be elucidated, and accordingly the Income-tax Appellate Tribunal was called upon to send a further statement of the case with specific findings on the following points:
(1) Whether the assessee returned the dividend income of his wife and minor sons in discharge of the statutory liability imposed by Section 16(3) of the Income-tax Act or because of his consciousness that he was the real owner of the shares.
(2) Whether the consideration paid for the shares by P.M. Mohammad Naina Sahib was out of his own monies or was it contributed by the assessee himself from out of his own funds.
(3) Whether the consideration paid for the shares by Md. Salihu, a nephew of the assessee, emanated from Salihu's own funds or did they come out of the assessee's funds.
(4) Did the assessee's power to enjoy the income of the company extend to the whole of the company's income or to any lesser extent, and if so, to what extent?
(5) Was there any fresh material for the Tribunal to come to the conclusion in this appeal different from or in addition to the material the Tribunal considered an relation to the earlier assessment years 1947-1948 and 1948-1949.
2. The Tribunal has submitted a further statement, as directed. The facts relating to the reference are : The Assessee, S.P.K. Kader Mohideen, who was ordinarily resident in Pettai in Tirunelveli District, was carrying on business in the manufacture of ball threads at No. 174, Dam Street, Colombo, for about 20 years, under the name of S.P.K. Kader Mohideen Company. That was his sole proprietary concern. The assessee was assessed to Indian income-tax as an individual on the income that accrued from his business in Ceylon. In the books of the concern there were credits in the names of himself, his wife, Majitha Beevi, and his two minor children, Pir Muhammad and Pir Mohideen. There were also amounts outstanding in the names of Muhammad Salihu and Muhammad Sali. It is stated on behalf of the assessee that the two names represent the same individual, viz., his nephew, Muhammad Salihu. On 1st May, 1946, a private limited company, S.P.K. Kader Mohideen Co., Ltd., was formed at Colombo, and it was incorporated in Ceylon under the Companies Ordinance LI of 1938. The business, till then carried on by the assessee, was transferred to the limited company. In consideration of the transfer of assets, the company allotted shares to the assessee and to his relations, whose respective holdings were:
1. The assessee, 2,000 shares at Rs. 10. .. Rs. 20,0002. His wife, Majitha Beevi, 500 shares at Rs. 10 .. Rs. 5,0003. His minor son, 250 shares, at Rs 10 .. Rs. 2,5004. His another minor son, 250 shares at Rs. 10 .. Rs. 2,5005. His nephew, Mohammad Salihu, 500 shares at Rs. 10 .. Rs. 5,000________________Total .. Rs. 35,000________________
One year later, one P.M. Md. Naina, an employee of the assessee, was allotted 10 shares of the value of Rs. 100, and the share capital of the company became Rs. 35,100. The company was making profits, and the assessee made a return of his income by including also the dividend income in respect of the shares standing in the names of his wife and minor sons.
3. In the assessment year 1947-1948, which related to the year of account in which the company was formed, the Income-tax Officer held that the entire profits of the company be included in the assessment under Section 44-D of the Income-tax Act, as the assessee had failed to prove that the transfer of assets of the foreign company was not made with a view to avoid a liability to taxation. In view of the fact, that the majority of the shares in the company were owned by the assessee, the other shares being in the name of his near relations, the officer held that the assessee had the power to enjoy the income of the Company. He, therefore, included in the assessable income of the assessee the entire profits of the company. There was a similar assessment for the year 1948-1949. Both the assessments were confirmed by the Appellate Assistant Commissioner. Appeals were filed by the assessee to the Appellate Tribunal. The Tribunal held that, out of the total share holdings; in the Company, 2,000 shares alone were owned by the assessee, the remaining 1,600 shares (which is a mistake for 1,510) being acquired by his relations 'out of their own monies which were lying with the business, and that there was no evidence whatever that the money belonging to the assessee was utilised for obtaining the allotment of those shares'. The Tribunal also held that there was no evidence to show that those persons allowed the assessee to enjoy the fruits of their investments. The result was that the assessee was taxed only on his income, which included the dividend income of his wife and children under Section 16(3). This order was passed on 12th November, 1951.
4. In the meanwhile, the Income-tax Officer had taken up the assessment for the-year 1949-1950. Following his former view which stood then affirmed by the Appellate Assistant Commissioner, he held that the profits earned by the Company should be treated as the profits of the assessee, by applying the provisions of Section 44-D. An appeal was taken to the Appellate Assistant Commissioner; by the time the appeal came to be heard, the Income-tax Appellate Tribunal had rendered its judgment in respect of the assessment for the years, 1947-1948 and 1948-1949. As there was no fresh evidence, the Appellate Assistant Commissioner applied the decision of the Tribunal for the previous years, and held that the assessee could not be taxed on the basis of Section 44-D. The Department contested that order in an appeal to the Income-Tax Appellate Tribunal. The Tribunal reversed their former conclusion, and held that the entire assets transferred to the company belonged exclusively to the assessee, that the various credits in the names of his wife,, nephew and children were fictitious, and the assessment should be completed by applying the provisions of Section 44-D.
5. Section 44-D is designed to prevent avoidance of income-tax by persons who were liable to tax in respect of income-producing assets by adopting the device of transferring them to persons outside the taxable territories, retaining in themselves the power of enjoyment of the income. In such a case, even if the income is received by a person who is not taxable by reason of his not being a resident, it is deemed to be income received by the transferor and rendered liable to tax. A company incorporated in a foreign country should be considered to be a person domiciled in that country. Therefore, if assets are transferred to a company incorporated outside India (e.g., Ceylon), the income earned by the company in respect of those assets; would be treated as that of the assessee who transferred the assets, provided he had the power to enjoy the income. If the assets transferred constituted the entire capital of the foreign company, it would follow that the entire profits of the company (the assessee having a power to enjoy its income), and not merely the dividends which the company chose to declare, should be held to be the income of the assessee. The section will not, however, apply if the transfer of assets was not for the purpose of avoidance of tax liability, or if it was a bona fide commercial transaction, not designed for the purpose of avoidance of tax liability. That a transfer of income-producing assets of an assessee to a person of foreign domicile is not one for the purpose of not avoiding a liability to tax or one of a bona fide commercial nature not designed for the purpose of avoiding such a liability should be proved by the assessee. Where there is no such proof, two conditions must be satisfied before the provisions of Section 44-D are applied : (1) That the transfer of assets should be by a resident in India to a person not so resident or not ordinarily resident in India, in such a way that the income in respect of those assets becomes payable to the latter, and (2) that notwithstanding the transfer, the transferor has power to enjoy at present or in future the income received by the transferee in the foreign country.
6. In the present case, there has been a transfer of income-producing assets by the assessee to the company incorporated at Ceylon, which should be considered as a person having foreign domicile. The interest possessed by the assessee in the company, and the fact, that the other shares in the company are vested in his wife, children and nephew, (the 10 shares in favour of his clerk being left out of account) would justify the conclusion that the assessee had power to enjoy the income of that company, as he would be able, whether directly or indirectly, to control the application of the income within the meaning of Section 44(55)(e).
7. Section 44-D provides for the assessment of the person who transferred the assets. If two persons transfer their respective assets, simultaneously or otherwise, it stands to reason that Section 44-D should be applied to them individually, and each of them taxed in respect of the assets transferred by him. We have already indicated that, if the assets transferred, covered the entire capital of a company, the entire profits of the company would be taxed as the income of the transferor. But, if what is transferred is only part of the capital of the company, the other being supplied by another person, the entire profits of the company could not be taxed in the hands of one alone or not even both taken as a single assessee.
8. Therefore, the question to be-decided, as the Tribunal has rightly pointed in the further statement of the case, is as to whether the entire assets, which were transferred to the company, belonged to the assessee.
9. In the further statement of the case, the Tribunal observed that the shares standing in the names of all the shareholders were paid for by the assessee, and that, therefore, he was the real owner of all the shares.
10. In the books of S.P.K. Kader Mohideen Company, there were credits in the names of Majitha Beevi, his wife, his children and Salihu, his nephew. These monies were also transferred to the company. If the monies belonged to the persons, in whose names they were credited, the assets transferred could not be said to be those of the assessee alone; the allotment of shares would be genuine. This leads us to consider whether the Tribunal had the material to come to a conclusion that the entire share capital of the company belonged to the assessee, or whether part only belonged to him.
11. Majitha Beevi, the wife of the assessee, had two accounts in the books of the assessee's former concern, namely, Nos. 4 and 39. Rents, from two properties, Nos. 172 and 174, Dam Street, Colombo, were regularly credited in those pages, while the tax thereof were debited. No. 39 account showed a credit balance of Rs. 3,251 as on 31st March, 1946. That was transferred to No. 4 account on that date which already showed a credit balance of Rs. 3,885, which together, with the sum of Rs. 150 which was credited next month as rent for the premises, made the total credit of Rs. 7,286. On 29th May, 1946, an amount of Rs. 5,000 is debited against Majitha Beevi for purchase of 500 shares in the company. The question is to whom did this money belong? The assessee's case is that the credit balance represented the accumulation of rental income of Majitha Beevi in respect of Nos. 172 and 174, Dam Street, which he purchased and gifted to her. The Tribunal has now discredited this case on the ground the gift had not been proved. In our opinion, the truth or validity of the gift was not open to challenge at that stage of the proceedings. In the original agreed statement of the case, it was stated as follows:
The ledger account of Majitha Beevi, a copy whereof is annexed hereto as Annexure 'B' and forms part of the case, contains in bulk rent collected from a property in Ceylon originally bought by the assessee out of his own funds and in his own name on 1st July, 1942, but subsequently gifted by him to her on 1st September, 1943.
12. Annexure 'B' to that statement of the case is a copy of the accounts which shows that the income from those properties was credited in the name of the lady. There was no question, therefore, that the monies standing to the credit of Majitha Beevi in the accounts of the assessee did not belong to her. The finding of the Appellate Tribunal was that the shares were taken benami by the assessee himself. That would depend upon the circumstance, whether the assessee paid for the shares standing in the name of Majitha Beevi or whether Majitha Beevi's monies were utilised for them. It is not disputed that the sum of Rs. 5,000 subscribed for the shares held in the name of Majitha Beevi, came from the income from the two properties which should be held belong to her. The source of the money being shown as Majitha Beevi's it cannot be held that she held the shares benami for her husband. She, and not the assessee, should be held to have transferred that sum to the company.
13. The same cannot, however, be said of the other shareholders, namely, the two minor sons of the assessee, and Md. Salihu, his nephew. By a transfer of amounts standing in the name of Md. Salihu there was a credit in the name of Md. Salihu forRs. 7,065. On 3 1st April, 1945, a sum of Rs. 2,500 was transferred to the assessee's son, Pir Muhammad, from that account, and, a year later, the balance was wholly transferred for the purchase of shares in the name of the nephew. On this material the Tribunal should come to the conclusion that these operations indicated that the assessee and not the nephew was the real owner of the money. The Tribunal found that the monies standing to the credit of Md. Salihu and the minor sons belonged to the assessee. We accept that finding. But the matter stands on a different footing in regard to the 10 shares allotted in 1947 to Md. Naina. There is the uncontradicted evidence that he paid for them. That is also corroborated by the entries in the account books. There is no evidence to show that those shares were held by Md. Naina benami for the assessee.
14. The result is that a transfer of the assets to the foreign company was made by the assessee as well as by his wife, Majitha Beevi, and his servant, Md. Naina, each out of their own monies.
15. The Tribunal has given three reasons, which, in their opinion, would show that the assessee was solely entitled to the profits from the foreign company. The first was that, while the assessee had overdrawn his account, the dividend accounts of his wife and children and nephew remained undrawn. We cannot see how this circumstance, can, in any way, suggest that the assessee was the real owner of the shares standing in the name of his wife.
16. The second reason was that the dividends of the year ending 31st March, 1947, were issued by bearer cheques. That circumstance can have no relevance to the determination of the question involved, as it is not suggested that the assessee himself realised and appropriated the dividend amounts. The Tribunal has relied on a letter, dated 9th August, 1947, written by the assessee's auditor to him as supporting a case, that the formation of the Company was designed to avoid tax liability. There is nothing in that letter to support any such inference.
17. The next reason given was that the assessee did not inform the Income-tax Officer, in September, 1946, of the formation of the new company, when he was called upon to pay advance tax under Section 18-A. The fact, that the individual business was closed and a limited company had taken over its place, had been proved by the registration of the company and the Memorandum of Articles of Association therefor. The circumstance, that the company came into existence from 1st May, 1946, was never in dispute.
18. In view of the fact, that the entire assets which were transferred to the limited company did not belong to the assessee, it follows that the assessee would be entitled only to the dividends from that foreign company, and not the entire profits. The assessee has disclosed, under Section 16(3), the income from the dividends received by his wife and minor sons in his return. It could not, therefore, be said that the transfer of assets was made for the purpose of avoiding income-tax.
19. In the further statement of the case, the Tribunal has not indicated as to whether there was any fresh material which induced them to come to a conclusion contrary to the one they did in respect of the assessment years, 1947-1948 and 1948-1949. The order in the previous case shows that the accounts must have been looked into by the Tribunal. It is clear from the order of the Income-tax Officer as well as the Appellate Assistant Commissioner that no fresh evidence was produced in the case. Under the circumstances, there was really no basis for the Tribunal to come to a different conclusion. That apart, the circumstances indicated above show that the transfer of assets from the proprietary concern of the assessee to the limited company was not made with the object of avoiding Indian income-tax, and that, even otherwise, Section 44-D will not apply to the present case to the extent of rendering the entire profits of the company assessable. The question referred is answered in the negative and in favour of the assessee.
20. The assessee will be entitled to costs. Advocate's fee Rs. 250.