Ramachandra Iyer, O.C.J.
1. The Tribunal has submitted a revised statement of the case recording its finding that the assessee had a controlling interest in the non-resident company to which he transferred the entire assets and goodwill of his proprietary concern. It has also found that the shares standing in the names of his sons in the company were genuinely allotted to them, that subsequent to the formation of the company, the sons have been enjoying the dividends from the company with respect to such shares and that no benefit accrued to the assessee in respect of the income received by the sons. It has further held that even if the assessee's transfer of his assets to the non-resident company is held to come within the purview of Section 44-D(1) and Clauses (5) and (6) thereof, such a transfer should be held to be saved from the operation of the provisions of the section by Sub-clause (3) as it was a bona fide commercial transaction falling within Clauses (a) and (b) thereto.
2. We shall consider whether the Tribunal was right in its conclusion that the transaction was one that is saved by the provisions of Section 44-D, Sub-clause (3)(a) of the Income-tax Act. There is no controversy about the facts. The assessee was originally carrying on business in hardware and as general merchant, exporter and importer at Colombo. The business itself was established as early as 1826 during the time of the great grandfather of the assessee. Sometime in 1948 the assessee appears to have made up his mind to leave Ceylon for good and to settle down in this country. He had six sons who were then all majors and to them he made a gift of six out of the 8 items of immovable properties he owned in Ceylon. The assets and the goodwill of the business he was carrying on were then transferred to a private limited company of which he was the major shareholder the other shareholders being his sons. The Tribunal has found that the transfer to the newly formed company was made by reason of the advancing age of the assessee and with a view to put the business on a secure foundation and that the controlling interest which the quondam proprietor reserved to himself in the affairs of the company was with the object of guiding his sons, the other directors of the company, who had not yet gained sufficient experience therein. On the materials available there can be no doubt that the transfer to the non-resident company was a bona fide one with a view to preserve the business to the family. It is true that the assessee could have achieved this object by forming a partnership between himself and his sons; but a partnership might be dissolved and anything like permanence could not be ensured. It is not surprising that the assessee with a view to preserve the business carried on by his ancestors and which had been existing for more than a century, formed the company the continued existence of which would not depend upon the vagaries of the individual partners. The dominant object of the transfer of the assets could not therefore be said to be for the purpose of avoidance of liability to tax. But at the same time it cannot be disputed that the effect of the transfer will, be to avoid Indian Income-tax. The assessee who was till then liable to tax on the income earned by the business would no longer be liable to pay such tax as the income had become that of the non-resident company which would not be liable to income-tax in this country. The Tribunal while holding that the transfer to the non-resident company was not made with the object of avoidance of Indian Income-tax stated:
No doubt the subject of taxation must have entered into the mind of the assessee at that time, but it must have been only in a general way; nowadays no businessman would enter into any commitments without a proper consideration of the tax effects and implications of any scheme he intends to put through. The assessee must first have decided upon the scheme and then checked up the tax effect. Upon his satisfaction that such a scheme could not involve him in any worse position, he must have decided to put it through.
3. It is argued on behalf of the department that as the assessee envisaged avoidance of Indian Income-tax, the transactions could not be saved by the provisions of Section 44-D(3)(a). Under that provision in order to take the transfer outside the purview of the section, the assessee should satisfy the Income-tax Officer about the absence of an intention to avoid liability to taxation. To be more precise, he has got to satisfy that the purpose or one of the purposes for which the transfer was made was not avoidance of liability to taxation. Now the word 'purpose' signifies an intention or design to achieve a particular result, namely, the avoidance of liability to taxation. Where the purpose is shown to be other than the avoidance of liability to taxation the exemption given by the section would apply. There may be cases where the sole object of the transfer would be the avoidance of the Indian Income-tax : there may also be cases where the object to avoid the tax liability would be one of the purposes. In either case the essential element is the intention to avoid the tax liability. The mere fact that the transfer results in the avoidance of the tax liability (as it always would), cannot mean that there was an intention to avoid such liability. There can be cases where the transfer is made for other purposes or with other objects. In such a case the avoidance of liability to taxation is merely an incident or effect of the transaction.
4. Mr. Ranganathan appearing for the department contended that in order that the provisions of Section 44-D(3)(a) should apply, the avoidance of tax liability should not have entered into the mind of the assessee at all and that even in a case where the main purpose of the transaction was not the avoidance of taxation, the assessee should be deemed to have had the purpose of avoiding tax when once it is established that he was conscious of the effect of the transaction. We cannot, however, accept the contention. To do so, would mean that in no case can the provisions of Section 44-D(3)(a) apply : for in every case where there is a transfer of an income producing asset to a non-resident company, there will be avoidance of tax and the assessee who transfers such assets would certainly know or be presumed to know that the effect of the transfer would be that the tax liability would be avoided. The provisions of Section 44-D(3)(a) can if the argument were to be accepted, never apply.
5. The real question that has to be decided in each case is whether the factual avoidance of tax was as the result of a design on the part of the assessee and not merely an incident or effect of the transaction entered into for other reasons.
6. In the present case the transfer of the assessee's assets to the non-resident company was not with the object of avoiding Indian Income-tax but with a view to facilitate the continuance of the business which he was carrying on.
7. In our opinion the transfer could not be held to be for one of the purposes for the avoidance of liability to taxation. The provisions of Section 44-D(3)(a) would apply to such a case. In this view it is unnecessary to consider the correctness or otherwise of the other findings of the Tribunal. We answer the question in the negative and in favour of the assessee who will be entitled to his costs. Counsel's fee Rs. 250.