BALAKRISHNA AYYAR, J. - We shall first set out the material facts. Sir M. CT. Muthiah Chettiar was the kartha of a Hindu undivided family. His family consisted of himself his wife Deivani Achi, his reasons Chidambaram Chettiar and Muthiah Chettiar and has daughters Umayal Achi and Valliammal Achi. The family has an extensive money-lending business in British India, Burma and else where U to and including the year 1927-28 the assessment was made on the Hindu undivided family. In the course of the assessment for 1927-29 it was claimed that a partition had taken place in the family and a partnership taken its place. This claim was recognized and the assessment was made on registered firm consisting and the assessment was made on a registered firm consisting of Sir M. CT. Muthiah Chettiar and has two sons. The firm was called S. RM. M. CT. Firm. In June 1929, Sir M. CT. M. Muthiah Chettiar died but assessment continued to be made on the firm which, after his death, consisted of his sons and his widow. In June 1930, this firm started a new money-lending business at Kuala Lumpur in the Federated Malay States with a capital of twelve lakhs of rupees which it was stated had come out of the realisations from the business in Burma.
On March 24, 1932, a company called the M. CT. M. Banking Corporation Ltd., was incorporated in Pudukottai, and it commenced business on March 31, 1932. One of the purposes for which the Corporation was constituted was to acquire and carry on the business which the S. RM. M. CT. M. Firm had been carrying on in Kuala Lumpur. On September, 22, 1933, the Corporation opened a branch in Kuala Lumpur. Commencing from that date various assets of the firm was transferred to the Corporation. The amounts transferred up to November 1, 1933, aggregated to about the four and half lakhs of rupees. On November, 9, 1933, the firm transferred $ 4.65 lakhs or seven lakhs of rupees to the Corporation. A further sum of $ 9,400 was adjusted in the books with the result, that assets of the firm of the nett value of twelve lakhs of rupees were transferred to the Corporation. In considerations of the assets so transferred the Corporations. allotted to the three partners of the firm 1,200 shares of the face of the Rs. 1,000 each. The shareholders in the Corporation on December 31, 1938, were the two sons of the Sir. M. CT. M. Muthiah Chettiar, his widow Deivanai Achi, has two daughters Umayal Achi and Valliammal Achi and two others. Though the Corporation started business in 1932, it did not declare any dividends, but, in 1938 it distributed bonus shares of the value of five lakhs of rupees out of the profit of Rs. 5,04,084 which the Corporation had accumulated up to December, 31, 1937.
The position on December 31, 1938, was that out of a total of 2,271 shares in the Corporation 1,944 share were held by the sons and widow of Sir M. CT. M. Muthiah Chettiar. Commencing from the assessment year 1933-34 up to and including 1938-39 the firm was treated as the agent of the non-resident Corporation, and its income accruing and arising in British India was assessed in the hands of the resident agent, viz., the fir which had its head office in Madras. In 1939 Chapter VB, which includes section 44-D to 44-F was inserted in the Indian Income-tax Act. For the assessment year 1939-40 a notice was issued by the Income-tax officer on the S. RM. M. CT. M. Firm, which was the agent of the Corporation, to submit a return of income for the preceding year. On January 19, 1943, the Income-tax officer sent a memo indicating that he proposed to apply section 44-D(1) to the assessees and inviting objections thereto. On March 11, 1943, the Income-tax officer passed an order holding that the conditions requisite for the applications of section 44-D(1) had been satisfied; that sub-section (3) of section 44-D did not apply and that the formation of the Corporation was not a bona fide commercial transactions. He therefore made no assessment on the Corporation itself, but computed the income of the Corporation for distribution in the hands of the assesses and assessed them to tax. Chidambaram Chettiar and his brother Muthiah Chettiar and there mother Deivanai Achi, were each of them thus assessed for the assessment year 1939-40, 1940-41 and 1941-42.
The appeal which the assesses took to the Appellate Assistant Commissioner failed. The assessee then went up to the Tribunal. It held that there had been a transfer of the assets of the firm to the Corporation between September 22, 1933, and November, 1933, and that these transfers fell within the ambit of section 44-D. Ultimately, however, the Tribunal allowed the appeals the assesses on the ground, that the order to attract the operations of section 44-D the income from assets which were transferred should have been initially chargeable to tax. The assets which were transferred in the instant case lay in Kuala Lumpur, that is, outside instant case lay in Kuala Lumpur that is outside British India, and therefore the unremitted income therefrom was not chargeable to income-tax the assets which were transferred in the instant as lay in the Kuala Lumpur that it is outside British India and therefore the unremitted income therefrom was not chargeable to income-tax in 1933 when the transfers were effect. For that reasons the Tribunal concluded that section 44-D(1) did not apply. Thereupon the Commissioner asked the for a reference to the court and the question he posed was :
'Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that, though otherwise section 44-D was applicable, it is not warranted because the transfer in question happened before 1939 and at a time when foreign income was assessable on the remittance basis alone ?'
The Tribunal, however, considered that the proper question that arose was :
'Whether the income made by the Corporation can be assessed under the provisions of section 44-D of the Income-tax Act in the hands of the present assessees and if so to what extent ?' And, accordingly, the Tribunal has referred this question to this court. We have referred at length to the frame of the question only to emphasise that none of the contentions of the assessee, to which we shall advert in due course, is outside the scope of the reference.
Section 44-D(1) runs as follows :
'Where any person has, by means of a transfer of assets, by virtue or in consequence where of, either alone or in conjunctions with associated operations by income which if it were the income of such person should be chargeable to income-tax becomes payable to a person not resident or to a person resident but not ordinarily resident in the taxable territories, acquired any rights by virtue or in consequence of which he has with in the meaning of this section power to enjoy such income, whether forth with or in the future, that income shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this sections, be deemed to be income of such first mentioned person for all the purposes of this Act.'
When this subsection is broken up list complaint part are found to consist of the following :
(1) There must be transfer of assets either alone or together with other associated operations.
(2) There must be some income traceable to this transferred assets, which income if it belonged to the assessee would subject to tax.
(3) In consequence of the transfer and the associated operations if any such income must be payable to a person who is either not resident or ordinarily resident in the taxable territories.
(4) The assessee must have acquired right by virtue of which he has the power to enjoy such income, whether in the present or in the future.
(5) When these conditions are satisfied such income would be deemed to be the income of the assessee.
The first contention of Mr. Jagadisa Ayyar, the learned advocate for the assessee, was that in order to attract section 44-D(1) the transfer of assets referred to in that sub-section must have been made by the assessee himself. He pointed out that in this case the transfer of assets to the corporation was made by the S. RM. M. CT. M. Firm. He explained that thought a firm may not be jurisdiction person for all the purposes, it has been held to be a person of the Indian Income-tax Act. Vide Commissioner of Income-tax v. C.W. Figgies and Company the transfer in this case was not made by the assessee section 44-D(1) was not attracted.
We are unable to accept this contentions of Mr. Jagadisa Ayyar. The sections does not say 'when any person has transferred any assets.' On the other hands it reads, 'where any person has, by means of a transfer of assets' etc. The section does not specify who should have made the transfer and in terms it does not require that the assessee should be the transferor. Though in the large majority of cases it may be found that the transferor is the assessee himself and transferred is some person over whom he has a measure of control the section is actually silent as to who the transferred should be. It proceeds on the basis that it is of no consequence who the who the transfers is. If there has been a transfer a assets and if by reason thereof (whether alone or in conjunctions with associated operations certain consequence follow, the section would apply and the liability to pay the tax will arise). The matter is covered by authority. Vide Congreve and Congreve v. Commissioner of Inland Revenue and Bambridge v. Commissioner of Inland Revenue. We may mention at once that the language of the English statute on which these two decisions were given are of this point in pari material with the words of section 44-D(1). An argument exactly similar to that which Mr. Jagadisa Ayyar urged before us urged by the Mr. Tucker before the Court of appeal. Dealing with that argument Cohen L.J., observed :
'I return to Mr. Tuckers main argument. We do not think the words by means of connote activity by the individual concerned. According to the Shorter Oxford Dictionary the primary meaning of the words is by the instrumentality of a person or thing, and they are fully satisfied if the avoidance of tax is effected through the instrumentality of the transfer by whosoever it is executed. A fortiori is this the case if we take the secondary meaning given in that dictionary, in consequence of, owing to. Nor do we think that the use of the phrase in the preamble in conjunction with the word avoiding compels us to interpolate something that is not there and read by means of transfers of assets as if it were by means of transfers of assets made by them. Moreover, we agree with the learned Judge that the appellants argument derives no support from the use of the word acquired in connection with the words by means of in sub-section (1), since, as he points out : As used by lawyers the word 'acquired' has long covered transactions of a purely passive nature and means little more than receiving. Indeed, that is the second ordinary meaning given in the Shorter Dictionary. In addition, it would be contrary to the expressed object of the section if the words mans and acquired were construed in their active sense for which the appellants contend. It would put back on the Revenue the burdens of proving affirmatively that the benefits to the taxpayer, resulting to him in fact through transfers and associated operations, had all been brought about by his own activities, whereas the section is, in our opinion, plainly and successfully drafted with the intent of casting the burden of disproving tax avoidance on the a taxpayer. For these reasons we agree on this point with the conclusion of the Commissioners.'
The case was taken up to the House of Lords. In the speech which Lord Simonds judgments delivered, he dealt with this argument :
'My Lords, on this question I agree at all points with the unanimous judgment of the Court of Appeal, which was delivered by Cohen L.J. The preamble or introductory words of the section which state its purpose do not, in my view, assist the contention, which was developed upon its operative words, that the avoidance by an individual of liability to tax must be achieved by means of a transfer of assets effected by that individual. They are, on the contrary, in the widest possible terms, and I do not know what better words could be used if the Legislature intended to define its purposes as covering a transfer of assets by A, by means of which B avoided liability to tax. When I turn to the operative words, I cannot reach any other conclusion. It was urged that in their context the words by means of any such transfer can mean only a transfer effected by the individual who avoids tax liability. It was said that they do not mean the same as as a result of or by virtue or in consequence of, and the immediate proximity of the latter phrase was referred to as pointing the contrast. My Lords, this is altogether too fine a distinction. The difference of language is sufficiently explained by the wish of the draftsman not to use the same expression twice. But it is to my mind clear, first, that in their ordinary grammatical sense the words by means of do not connote any persona activity on the part of the person who is said to enjoy or suffer something by those means, and, secondly, that in their present context it is not necessary or legitimate in order to give a limiting sense to the words to read them as if they were followed by such words as effected by him. It was suggested in the course of the argument that other limiting words should be written in, such as effected by him or by his procurement, for it was reasonably apprehended that to read the section as excluding a case where an individual did not himself transfer assets but procured their transfers by another would be to ignore the substance of the Legislatures intention. But I seen no reason for any limiting words. The language of the section is plain. If there has been such a transfer as is mentioned in the introductory words, and if an individual has by means of such transfer (either alone or in conjunction with associated operations) acquired the rights referred to in the section, then the prescribed consequences follow.'
In Bambridge v. Commissioners of Inland Revenue, the decision from which we have just quoted was followed and applied. Harman, J., referred to Congreve and Congreve v. Commissioners of Inland Revenue, and observed :
'That case decided in circumstances very different from the present, that a person may acquire rights by means of a transfer within the meaning of the section although the transfer was not made by himself or his agent or anyone whom he could influence to make it. It is argued by the Crown therefore that the appellant has acquired rights by means of transfers made by each of her parents, and as those rights admittedly confer on her the power to enjoy the income or part of the income of Kamouraska, the Crown maintain that she can properly be charged as being entitled to the appropriate portions of the income of that company. This contention has been upheld by the Commissioners. Having regard to the decision in the House of Lords to which I have referred it is not open to the appellant to argue that she may not be liable by reason of the transfers made by her parents.'
The second contention of Mr. Jagadisa Ayyar was to this effect. Sub-section 44D(1) refers to 'any income which if it were the income of such person would be chargeable to income-tax'. The chargeability referred to here must have arisen in the year in which the income accrued or arose. Before 1939 even a resident was not taxed on his foreign income unless it was brought into the taxable territories. At the time the S. RM. M. CT. M. Firm transferred its assets to the Corporation those assets were still in Kuala Lumpur, and so neither the assets nor the income therefrom was chargeable to tax, and income not chargeable to tax at the time it arose is outside the scope of section 44D. The sub-section speaks of 'a transfer of assets by virtue or in consequence where of, either alone or in conjunction with associated operations'. These words simply that the income must have been chargeable to tax also in the year in which the transfer or associated operations were carried out. In the present case, transfer of the assets of the S. RM. M. CT. M. Firm was completed in 1933, and there was no liability to tax at any time when any operation which can be properly described as associated with the transfer was carried out. Section 44D(1) cannot therefore apply.
We are unable to accept this contention either. As Mr. Rama Rao Sahib explained, the question whether any income is liable or chargeable to tax has ordinarily to be determined with reference to the state of law and the state of facts in the year for which the assessment is made. That is the general rule. No Income-tax Officer can normally take into account circumstances that do not directly relate to the year of assessment.
Further to get the meaning which Mr. Jagadisa Ayyar reads into these words :
'any income which if it were the income of such person would be chargeable to Income-tax',
In other words, the tense of the words used in that passage must be different. As the passage stands, the tenses would refer to the state of things in the assessment year and not to the state of things in the year when the assets were transferred.
Let us read sub-section (1) again. It first speaks of 'any income which if it were the income of such person would be chargeable to income-tax'. It then proceeds to speak of the 'power to enjoy such income' and it ends by saying, 'that income shall.... be deemed to be income' of the assessee. The words 'that income', 'such income' and 'any income', occurring in the sub-section all refer to the same identical income, viz., the income which forms the subject-matter of the assessment proceedings. It cannot possibly refer, as Mr. Jagadisa Ayyar contended, either to the year of transfer or to the year in which any of the associated operations were put through.
The weakness of the contention of Mr. Jagadisa Ayyar will be manifest if we try to visualise the matter in concrete terms. Let us suppose that an assessee starts an enterprise which has not yet begun to bring in any returns but which is really very sound and expected to yield large profits in future years. In a year in which there has been no profit the assessee transfers this business to a non-resident company, but he so arranges matters that he will be able to have the benefit of the profits when they begin to appear. Now, if Mr. Jagadisa Ayyar were right, the profits the assessee may derive through or via., the non-resident company would not be liable to tax, because in the year the business was transferred (or the associated operations took place) there was no profit and consequently no liability to pay any tax. One would have thought that section 44D was deliberately inteded to catch transactions of this kinds in the net of taxation. A construction that would defeat the manifest purpose of a statute is not to be readily adopted unless of course that is the only reasonably possible construction. As explained on page 28 of Volume 20 of Halsburys Laws of England, third edition :
'Taxing Acts are to be construed strictly, in the sense that one has to look merely at what is clearly said, there being no room for any intedment; but a fair and reasonable construction must be given to the language without leaning to one side or the other. Whether in applying the terms of the charge or the terms of an exemption no considerations of equity or hardship affect the construction of the Act.'
We must read the words as they appear in the statute, and when we do so it will become manifest that the construction which Mr. Jagadisa Ayyar invites us to put on the words used is not an appropriate one, much less is it the only reasonably possible construction.
In support of this part of his argument Mr. Jagadisa Ayyar was not able to cite any authority, and, as it appears to us to in consistent with the language used and the manifest purpose of the enactment, it must be overruled.
A further requirement of section 44-D(1) is that the assessee should have :
'Within the meaning of this section power to enjoy such income, whether forthwith or in the future.'
The assessees in this case, said Mr. Jagadisa Ayyar, are the three individuals who hold shares in the Corporation and not the firm. Because they happen to be relations and because also it happens that they have a common case just now it must not be assumed that they are a single unit for the purpose of taxation. Vis-a-vis the Corporation they are in the position of shareholders. Though shareholders have a right to dividends when they are declared, no shareholder has a right to insist that dividends should be declared. So, we cannot say that the assessees are entitled to enjoy anything. The mere hope or even prospect that the Corporation will pay dividends is not sufficient to satisfy the requirements of Section 44D(1).
When developing his argument on this part of the case, Mr. Jagadisa Ayyar also stressed the fact that during the years we are concerned with the Corporation declared no dividends. It is no doubt true that in 1938 bonus shares were distributed, but, a bonus share, though it may give a right to the income that the Corporation may subsequently earn, is not the same thing as a dividend and it is not income.
This contention of Mr. Jagadisa Ayyar ignores the factual position and the realities of the matter. No doubt no shareholder, or even all the shareholders together, can insist that any dividends shall be declared. But, that is only part of the picture. The directors can declare dividends and the directors are chosen by the shareholders. The holding of a sufficient number of shares would, it seems to us, amount to acquiring.
'any rights by virtue or in consequence of which he (the assessee) has..... power to enjoy such income, whether forthwith or in the future.'
though in the present case no single assessee has a controlling share in the Corporation, the holding of each is very substantial, chidambaram Chettiar holds a little less than one-third of the shares, his brother Muthiah Chettiar a little less than one-fourth and Lady Deivanai Achi more than one-fourth. The holdings of all the others put together are less than half of the number of shares which Chidambaram Chettiar alone holds. The Corporation is an extremely close Corporation, and, as a matter of actual fact, the assessees should have no difficulty in getting the Corporation to do what they want it to do. It is no doubt true that the assessees do not form an association which could be assessed on that basis and that again, they do not constitute one assessable unit. But that is only technically so. As a matter of actual fact their close relationship and identity of interests would induce them to act together and in substance enable them to do what they liked with the corporation. It should be remembered that it was then firm which consists of the three assessees that was constituted the agent of the Corporation.
It must also be borne in mind that the sub-section does not require that there should be a right to present enjoyment of the income. It is sufficient if the assessee has acquired rights which give him the power to enjoy the income in the future. And, normally it is difficult to see what more is required to enjoy the income of a company than the holding of shares in it.
It is convenient at this stage to read clauses (a), (c) and (e) of section (5) of section 44D :
'(a) the income 4 is in fact so dealt with by any person as to be calculated at some point of time and, whether in the form of income or not, to enure for the been it of the first-mentioned person, or
(c) such first-mentioned person receives or is entitled to receiveat any time any benefit provided or to be provided out of that income or out of moneys which are or will be available for the purpose by reason of the effect or successive effects of the associated operations on that income and on any assets which represent that income, or
(e) such first-mentioned person is able, in any manner whatsoever and whether directly or indirectly, to control the application of the income.'
The case of the present assessees appears to us to fall under every one of these three clauses. It will be recalled that the Corporation made profits exceeding five lakhs of rupees up to December 31, 1937, and that out of this bonus shares of the value of five lakhs of rupees were distributed. Now, the holder of a bonus shares would be a 'dealing' with the income of the Corporation which is calculated at some point of time to ensure for the benefit of the assessee within the meaning of clause (a). The matter would also come under clause (c) because the present is a case where the assessee is entitled to receive benefit to be provided out of the income which will be available for the purpose by reason of the effects of the associated operations on the income and assets which represent that income. The matter also falls under clause (e) because in the present case the assessee would be able both directly and indirectly to control the application of the income.
We shall now refer to some of the cases cited before us and which have a bearing on this point.
The first is reported in Lee v. Commissioner of Inland Revenue. The facts of that case were as follows : In 1930 the appellant who was ordinarily resident in the United Kingdom transferred to a Canadian company certain shares of which he and his wife were the beneficial owners together with the benefit of a debt owing to him by one of the companies. The consideration for that transfer was (1) the issue to the appellant of a derives of promissory notes payable on demand, (2) the issue of shares to the appellant and to his wife, and (3) the issue of further shares at the appellants direction to his sons. Under the bylaws of the Canadian company, the appellant, by virtue of the rights attaching to his shareholding, had full control as he was able to select and remove the directors, to amend the by-laws and to decide the allotment and transfer of shares.
There was no doubt in that case that the appellant had made a transfer of his assets in consequence whereof the income, viz., the dividends paid on the shares of the companies which had been transferred to the Canadian company, had become payable to the person resident and domiciled out of the United Kingdom viz., the Canadian company, and, that by reason of that transfer the appellant had acquired certain rights. The dispute was as to whether these rights gave him power to enjoy the income or any part of the income of the Canadian company. The Court held (page 214) :
'It was contended by the Attorney-General that this case clearly comes within sub-clause (e) of sub-section (3) of section 18 of the Fiance Act, 1936. The words of that sub-clause are : the individual is able in any manner whatsoever, and whether director directly, to control the application of the income. Mr. Lee had no power to control directly the application of the income of the company; that power was vested in the directors, and Mr. Lee had no power to control directly the application of the income of the company; that power was vested in the directors, and Mr. Lee was not a director. But, although it is true that directors are the person who directly control the application of the income since Mr. Lee is the person who has power to make and unmake the directors, it may, I think, fairly be said that he is able by use of that power to control the application of the income.'
In Lord Howard de Walden v. Commissioners of Inland Revenue, the facts are a little complicated and are thus summarized in the head note :
'During the years 1919 to 1922 the appellant, who was ordinarily resident in the United Kingdom, transferred to an English company formed for that purpose certain freehold estates together with his life interest in other property in consideration for the issue to him of 2,710,000 ordinary shares of pound 1 each in the company and payment of pounds 1,037,821 in cash. During the years 1923 to 1927 he transferred 2,510,000 of these ordinary shares and part of the cash consideration which was still owing to him to various Canadian companies in exchange for (i) shares in these companies, (ii) cash and (iii) the assumption by the companies of various obligation to pay annuities to himself and his wife and a bequest which he might make by will to his children. In 1924 he sold to one of the Canadian companies certain Scottish estates in exchange for shares in the company. There were further transactions between the appellant and the companies, but the relations between term were finally regulated by agreements made on December 11, 1933, between the appellant and four of the companies whereby he became entitled to receive (through another Canadian company as trustee) from each company a aeries of 120 promissory notes payable consecutively from March 31, 1934, at intervals of there months. There were also deposits with each company repayable to the appellant on demand. The notes were paid by the companies out of their income and it was held in Lord Howard de Walden v. Beck, that the notes included an element of interest in respect of which the appellant was liable to income-tax.'
Against the assessments made on him Lord Howard de Walden appealed and contended that he had power to enjoy only small portions of the income of the companies since by means of the transfers and the associated operations the only benefit he received from their income was the interest element in the promissory notes and any dividends on his holding of shares in two of the companies and that he had not therefore 'power to enjoy' the income of the companies within the meaning of sub-section (3) of section 18. This contention was negatived. On page 131 Macnaghten, J., observed :
'But I think the words of the section are too strong to admit of the construction for which Mr. Tucker contended. In the sub-paragraph (e) the word benefit does not appear : power to control the income according to the definition is power to enjoy it; and under sub-paragraphs (b) and (c) the individual who obtains the benefit mentioned in those sub-paragraphs is a person who ex hypothesi has not received any part of the income at all. Since the meaning of the words of sub-section (3) must be read into sub-section (1), it seems to follow that a person who has not got one penny of the income of the person resident or domiciled out of the United Kingdom may nevertheless have power to enjoy the income of that person within the meaning of the section.'
It is no doubt true that in Lord Vesteys Executors and Vestey v. Commissioner of inland Revenue, Lord Vesteys Executors and Vestey v. Colquhoun (H. M. Inspector of Taxes) and Lord Vesteys Executors and Vestey v. Commissioners of Inland Revenue, it was held that there was no power to enjoy. But that was because the court held that the position of the assessee was a fiduciary one. There is no fiduciary element in the instant case.
One matter may be mentioned here. In paragraph 6 of its order the Tribunal has sated :
'It was, however, conceded that there was the power to enjoy as envisaged in section 44D.'
Similarly in paragraph 7 of its order the Tribunal has recorded, 'it was not disputed that the power to enjoy was there'. Likewise in paragraph II it has mentioned that this right to enjoy was not denied. When the Tribunal drew up its reference to this court the objection was taken before it that no such concession had been made, and this fact has been mentioned in paragraph 12 of the reference. The question whether any concession was made or not has really become academic, since we have found that the shares which the assessees hold in the corporation are sufficient in law to give them a power to enjoy the income within the meaning of sub-section (1) and (5) of section 44D.
Mr. Jagadisa Ayyar then made an attempt to bring the case of the assessees within the scope of sub-section (3) of section 44D which runs as follows :
'(3) sub-sections (1) and (2) shall not apply if such first-mentioned person shows to the satisfaction of the Income-tax Officer either -
(a) that neither the transfer nor any associated operation had for its purpose or for one of its proposes the avoidance of liability to taxation; or
(b) that the transfer and all associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to taxation.'
Before the Department and the Tribunal it appears to have been argued that the transfer of the assets of the S. RM. M. CT. M. Firm was a bona fide commercial transaction within the meaning of clause (b) of this sub-section. It was contended that the object of forming the Corporation and registering it in Pudukottai was to serve the interests of the larg number of Nattukottai Chettiars in Pudukottai State who were doing money-lending and transacting other business in Malaya and Burma and who had no banking and exchange facilities in the State of Pudukottai It was also stated that the hope was entertained that the Corporation would grow in stature into the State Bank of Pudukottai. It was explained before the departmental officers that the idea of forming the Corporation originated in the mind of late Sir M. CT. M. Muthiah Chettiar as early as 1929, but that he died before he could put his ideas into effect. His son took up the matter in 1930 and got a firm of solicitors in Bombay to prepare the memorandum and the articles of association and to comply with the other requirements of law.
Mr. Jagadisa Ayyar contended that neither the Department nor the Tribunal has expressly found that the transaction was not a bona fide commercial transaction. In paragraph 14 of the order in I.T.A. 619 of 1947-48 dated May 5, 1952, which the Appellate Assistant Commissioner of Income-tax made he posed the question whether subsection (1) of section 44D was rendered in applicable by sub-section (3). In paragraph 14 he recorded the view that it was incumbent on the assessee to prove that 'as a matter for actual fact the service of the Corporation had actually been to a substantial extent rendered to the Nattukottai Chettiars of the State and that the service to the community was not merely incidental to the business of the Corporation'. And he found that this had not been proved.
'On this point, I invited from the appellants representative figures to prove if a major portion of Corporations income from hundies and exchange discount arose from transactions relating to the Nattukottai Chettiars of the State. No material information was furnished on this point. I must therefore hold the contention in this regard as vague and unproved.'
In paragraph 15 he also disposed of the contention :
'that it was expected by the promoters of the Corporation that ultimately it would gain the banking business of the Pudukottai State and might become the States bank and treasury.'
By saying :
'In any case, no material evidence has been placed before me to prove this point.'
It would not be therefore correct to say that the Department has not recorded a finding on the question whether the starting of the Corporation was a bona fide commercial venture or not.
In paragraph 15 the Tribunal also agreed with this finding of the Appellate Assistant Commissioner :
'But as matter of fact, it had not been proved that the services of the Corporation had actually been utilised to a substantial extent, or indeed to any extent, for rendering aid to the Nattukottai Chettiars of the State who did business in the Federated Malay States. Therefore, this contention fails. It was also mentioned that the Corporation was started with a view to ultimately become the Pudukottai states bank and treasury. On this too, evidence is lacking.'
But, in respect of his next objection Mr. Jagadisa Ayyar was no firmer ground. Clauses (a) and (b) of sub-section (3), he pointed out, are in the alternative, though there may be a certain amount of overlapping. Even if it be found that the transfer and all associated oprati ons were not proved to have been bona fide commercial transactions, and, if by reason of such finding the claim of the assessees is found to fall outside clause (b), the assessees can still invoke clause (a), and, in order to obtain the benefit of clause (a) it s is sufficient to show that neither the transfer nor the associated operation had for its purpose or for any of its purposes the avoidance of liability to taxation.
That these clauses are in the alternative appear to have been overlooked both by the Appellate Assistant Commissioner and by the Tribunal. The requirements of the two sub-clauses have been mixed up. In paragraph 14 of his order dated May 5, 1952, the Assistant Commissioner says :
'The two points on which satisfaction has got to be given under sub-section (3) are :
(a) that it was not the purpose of the creation of the non-resident Corporation to avoid taxation in British India; and
(b) that the transfer of the assets constituted bona fide commercial transactions.'
It has been noticed that the Assistant Commissioner used the word 'and' for 'or' as appears in the statute. The Tribunal has also fallen into the same error because in paragraph 15 it says :
'It was next argued that under sub-section (3) of section 44D the assessees were entitled to show to the satisfaction of the Income-tax Officer :-
(1) that neither the transfer nor any associated operation had for its purpose or for one of its purposes any avoidance of liability to taxation; and
(2) that the transfer and all associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to taxation.'
Here also the word 'and' has been used.
If, therefore, contended Mr. Jagadisa Ayyar, the assessee can show that neither the transfer nor the operations the avoidance of liability to tax he would be entitled to relief.
Now, on the question whether there was any such purpose there is no explicit finding, and a finding on that matter is required before this reference can be completely disposed of. We, therefor, direct the Tribunal to submit a finding on this question.
We may here mention some of the arguments placed before us in this connection. Mr. Rama Rao Sahib pointed out that at the time the funds were transferred from Burma to Kuala Lumpur, Burma was part of the taxable territories and, therefore, the income earned in Kuala Lumpur was not taxable. The inference is, therefore, reasonable that the purpose of shifting the business from Burma to Kuala Lumpur was the avoidance of tax. But Mr. Jagadisa Ayyar explained that one cannot say this about the formation of the Corporation because at that time the funds were already in Kuala Lumpur and, therefore, not liable to tax. How can it be said, asked Mr. Jagadisa Ayyar, that the intention was to avoid tax when at that time there was no tax liability at all It is too much to suppose that at the time the Corporation was formed its promoters anticipated that some years later the Indian Legislature would amend the Income-tax Act in the manner it did. What the intention was must be decided, said Mr. Jagadisa Ayyar, with reference to the State of things when the transfer was made, and, at the time the transfer was made, nobody could have visualised the future state of the law, and it is not, therefore, right to say that the intention was to avoid tax. The transfer that is being investigated was in effect a transfer from Kuala Lumpur to Pudukottai, where too there was no tax liability. The question of avoidance arose only because of the change made in the Act in 1939, and nobody could have thought of that in 1933. The test must be, not has tax been avoided, but was there any intention to avoid tax, and, in order to decide that, said Mr. Jagadisa Ayyar, we must place ourselves in the position of the promoters of the Corporation when they promoted the company. Mr. Jagadisa Ayyar asked, how can it be said that the intention was to avoid tax, because the moment the Corporation declared dividends and the dividends came into the hands of the assessees they will be liable to pay tax.
Mr. Rama Rao Sahib explained that there are other ways of bringing money into the taxable territories than in the shape of dividends. For instance, bonus shares issue by the company could be sold and the sale proceeds thereof would not attract tax. Again, the Corporation may reduce its capital and return the amount by which the capital was reduced to its shareholders. In that case again, there will be no liability to tax. The corporation may go into voluntary liquidation and the assets may be returned that way. It may make loans to the shareholders with no intention of collecting the money. But then, as was explained before, the Corporation is a close Corporation, and the question has still to be considered with the assessees would have resorted to the decide of selling their bonus shares or other shares as the result of such a step would be to introduce strangers who should claim a voice in running the Corporation. Similarly it has to be considered whether the assessee were likely to break up the Corporation or force it to go into liquidation merely in order to avoid tax. No doubt the Corporation can make to its shareholders loans which are never intended to be repaid. The fact however remains that so far no attempt has been made to adopt any such method.
these are some of the considerations placed before us. But, it is essentially a question of fact on which the Tribunal must give its finding.
The case will be posted again for disposal after the finding is received.
The Tribunal is directed to submit a further statement of the case and the finding called for by us, Within six weeks after the receipt of the records by the Tribunal. The Tribunal will afford opportunities both to the assessees and the Department to place such further material as is available to them to answer the question with reference to which we have called for a finding. Time for objections, if any, ten days after the receipt of the further statement of the case from the Tribunal.
Printing will be dispensed with when the further statement of the case is received from the Tribunal. The Department will furnish typed papers.
T. C. M. P. No. 43 of 1958 will stand allowed and the additional evidence will be forwarded to the Tribunal for its consideration in submitting the further statement of the case.