JAGADISAN J. - This is a reference under section 66(1) of the Indian Income-tax Act, and the point in issue between the department and the assessee is an regards the scope and applicability of section 16(1)(c) of the Act to the facts and circumstances of the case. The question that stands referred is :
'Whether the sums of Rs. 2,52,350 and Rs. 2,78,222 representing the gross amounts of dividend on the shares transferred by the assessee to the Thiagarajar Educational Trust were correctly included in the computation of income for the assessment for the years 1957-58 and 1958-59, having regard to the third proviso to clause (c) of sub-section (1) of section 16 of the Income-tax Act ?'
The assessee is an individual deriving income from salary, property, business and dividends as a shareholder in various limited companies. A public charitable trust called the Thiagarajar Educational Trust was constituted on April 29, 1956, by the assessee along with his brother, Sundaram Chettiar, and his father, Karumuthu Thiagaraja Chettiar. These founders of the trust were themselves to be trustees of the institution. At the inception they transferred the shares held by each of them in Saroja Mills Limited, Singanallur, Coimbatore District. Subsequently, the assessee transferred certain other block of shares held by him in Sundaram and Company Limited, Meenakshi Mills Limited, Manickavasagam (Private) Limited and Rajendra Mills Limited to the trust. We shall refer to the terms of the trust a little later. In the previous years relevant to the assessment years 1957-58 and 1958-59 the trustees aforesaid received dividends of Rs. 1,86,108 and Rs. 1,93,919 respectively from the transferred shares. The net dividends when grossed up amounted to Rs. 2,52,350 and Rs. 2,78,222. A good portion of this dividend income of the trust was advanced as loan to three companies, Rukmani Mills Limited, Meenakshi Mills Limited and East India Corporation Limited, in which companies the trustees in their individual capacity and other members of their family held shares. The details of their share position as regards these companies and the amount of loan advanced can conveniently be adverted to later.
In dealing with the assessment for the years 1957-58 and 1958-59 the Income-tax Officer found that the assessee had derived benefit out of the trust funds and that, therefore, the third proviso to section 16(1)(c) of the Act was not applicable and that the income from the transferred assets (shares) was to be included in the assessees total income. The assessees contention that he was not caught within the mischief of section 16(1)(c) and that he was entitled to the benefit of the third proviso thereunder failed. There was an appeal to the Appellate Commissioner by the assessee. He held that the third proviso to section 16(1)(c) applied to the facts of the case and that the dividend income on the transferred shares should not be included in the taxable income of the assessee for the two assessment years. The department preferred an appeal from that adverse decision to the Income-tax Appellate Tribunal and contended that the major portion of the income of the trust was advanced as a loan to three companies in which the assessee had a substantial interest and that, therefore, he had derived indirect benefit from the trust funds and the proviso called in aid by the assessee would not be applicable. The Tribunal allowed the departmental appeal mainly on the ground that the assessee had obtained indirect benefit from the trust funds, taking advantage of his position as a trustee.
The Tribunal observed as follows :
'The long and short of the matter is that the managements of the trust income has taken the very line that it would take if the assessee has continued to receive the income from the investments in question himself without the intervention of the trust; he would have only deposited the receipt with the companies of his own group . . . . . After all that is said and done it cannot be denied that the trust idea was merely to take advantage and obtain exemption through what the assessee must have imagined was a chink in the armour of the tax laws. To what extent he has been able to discover this think successfully is the point to decide in this case.
A borrower is always obliged to the lender, however wide his credit-worthiness has spread . . . . In our opinion by the enabling provision of the trust deed, the assessee derives the necessary indirect benefit out of the income of the trust to exclude him from the exemption envisaged in the last proviso to section 16(1)(c).'
The relevant statutory provision upon which both the department and the assessee rely reads as follows :
'16. (1) In computing the total income of an assessee - . . . .
(c) all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income-tax (Amendment) Act, 1939 (VII of 1939), from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of revocable transfer of assets shall be deemed to be income of the transferor :
Provided that for the purposes of this clause a settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the retransfer directly or indirectly of the income or assets to the settlor, disponer or transferor, or in any way gives the settlor, disponer or transferor a right to reassume power directly or indirectly over the income or assets :
Provided further that the expression settlement or disposition shall for the purposes of this clause include any disposition, trust, covenant, agreement, or arrangement, and the expression settlor or disponer in relation to a settlement or a disposition shall include any person by whom the settlement or disposition was made :
Provided further that this clause shall not apply to any income arising to any person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settlor or disponer derives no direct or indirect benefit but that the settlor shall be liable to be assessed on the said income as and when the power to revoke arises to him.'
There is no question that a settlement or disposition includes a trust and this is made clear by the second proviso. While the department contends in the present case that the assessee is within the mischief of section 16(1)(c), the assessee relies upon the third proviso. Now, section 16(1)(c) covers two categories of a settlement or disposition. The first category comprises only transfer or income, the source or the assets from which the income emanates continuing to remain as the property of the settlor or disponer. The second category relates to income arising to the settlee by reason of the transfer of the assets themselves from the settlor. All transferred income without any transfer of assets, whether the settlement or disposition is revocable or not, would fall within the first limb of section 16(1)(c), and that would mean the income shall be deemed to be the income of the settlor or transferor. In cases of transfer of assets the income shall be deemed to be the income of the transferor only if the transfer is revocable. The second limb, therefore, necessarily implies that income from the irrevocable transfer of assets would not be within the mischief of that section. But reading the third proviso together with section 16(1)(c), and indeed they ought to be read together, it is also fairly clear that the irrevocability need not be permanent or unalterable. In clear terms the third proviso states that a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the beneficiary and from which income the settlor or disponer derives no direct benefit, is not within the main provision of section 16(1)(c). In other words, where there is a transfer of assets irrevocable for a period exceeding six years, the income accruing to the settlee by reason of such transfer should be deemed to be income of the settlee and should not be included in the income of the settlor. But the important condition is that the settlor should not derive any benefit, direct or indirect. This, in brief, is the substance of the statutory provision.
The first proviso to section 16(1)(c) is a commentary of the word 'revocable' found in the main provision. Income from a revocable transfer of assets shall be deemed to be income of the transferor. The true nature of a transfer, whether revocable or not, can be ascertained from the terms of the transfer, express or implied. By the first proviso the statute creates a fiction of revocability, if the transfer deed contains a provision of retransfer of income to the transfer directly or indirectly, or if the settlor reserves or retains a power to reassume directly or indirectly his right over the income or assets. A potential right or power to enjoy the transferred income by transferor in future is destructive of a complete and unalterable divestiture requisite to free the transferor from the burden of paying tax on the said income. The income-tax law does not recognise an apparent transfer which would not prevent the transferor from taking back what he has given. Such a transfer, effective though it might be between the parties to it, cannot achieve the avoidance of tax by the transferor as regards the income. The artificial definition of revocability should of course be read into the third proviso as well. The first proviso explains and qualifies section 16(1)(c) and the third proviso is an exception to that provision. The exemption envisaged by the third proviso should fulfil the following conditions :
(1) The settlement, disposition or trust should be irrevocable for a period exceeding six years, or, during the lifetime of the settlee or beneficiary.
(2) It should be not provide for retransfer of income or assets to the transfer during the paid period directly or indirectly.
(3) The settlor or disponer should not have a right to reassume power over the income or assets during the said period directly or indirectly.
(4) The settlor should not derive any benefit from the income directly of indirectly.
The repeated use of the word 'indirectly' indicates that the substance of the matter should be looked into by careful scrutiny an scanning and that the assessee cannot keep the department off the tax by a clever manipulation of a circuitous chain of transactions.
In the instant case, conditions (1) to (3) set out above are satisfied. The transfer of the shares is for a period of seven years. There is no provision in the trust deed for retransfer of income or assets during that period directly or indirectly. The settlors have not reserved any rights over the income or assets during the period directly or indirectly. The only point that is mooted is whether condition (4) can be said to be present. The department contends that having regard to the facts and circumstances of the case the settlor obtains or derives a benefit from the income by the very terms of the instrument. The assessee joins issue with the department as regards this matter.
We have first to examine the provisions of the trust deed to ascertain whether they would enable the trustees to obtain an indirect benefit or pecuniary advantage out of the trust funds. It cannot be controverted that the trustees cannot benefit themselves directly from the trust funds. Clauses 2, 3 and 4 of the trust deed state that Karumuthu Thiagaraya Chettiar, Sundaram Chettiar and Manickavasagam Chettiar (the assessee herein) have transferred shares belonging to them in Saroja Mills Limited, Singanallur, for a period of seven years from the date of the indenture. The transfer purports to be both as regards the corpus and the income of the shares. It is in favour of Thiagarajar Educational Trust. There is, therefore, an irrevocable transfer for a minimum period of seven years from the date of the trust. The statutory condition necessary to attract the third proviso, so far as irrevocability is concerned, is satisfied. There does not appear to be any provision in the trust deed wherefrom it can be postulated that there was any hidden purpose in the constitution of the trust so as to enable the trustees to obtained personal advantages under cover of a public trust. The objects of the trust are set out and enumerated in clause 11 of the deed. They are, to establish, run and maintain educational, technical or technological institutions of all kinds, in India for the benefit of the public, to establish rural or urban university or universities, college or colleges, school or schools, for imparting education of any kind, technical or non-technical, to make gifts, subscriptions and payments to any educational, technical or technological institutions, university, college or school, and to provide assistance by grants, gifts, scholarships and contributions to students requiring or deserving of assistance in the pursuit of their education of any kind. Clause 19 of the deed may be set out in part as considerable reliance has been placed by the department on a portion of this clause to point out that the trustees themselves can borrow liberally from the trust funds and thereby derive an advantage. Now, that clause reads : 'The trustees shall, in addition and without prejudice to the powers herein before mentioned, be entitled to exercise all or any of the following powers, namely : . . .
(b) to invest the income of the trust in any one or more of the following modes :- (i) in shares, stocks, debentures and securities of any public or private company, public body or Government whether the same be trustee securities within the meaning of the Indian Trusts Act or not; (ii) in loans or advances to any person, firm, body or company in such manner and on such terms an with or without security as they, the trustees, at their absolute discretion, may deem fit;. . .'
Learned counsel for the department submits that this clause which permits the trustees to advanced by way of loans to any person with or without security as the trustees may deem fit, is wide enough to enable the trustees to take loans of trust funds, without committing any breach of trust. This contention has no doubt found favour with the Tribunal. The Tribunal states in its order that there are clauses in the trust deed which permit investment of surplus money in any manner the three trustees pleased. We do not think that the trust deed really authorises or permits the trustees to take loans from the surplus funds of the trust. The provisions of the trust deed have got to be construed in the light of well established principles of law relating to trusts and the rights and obligations of a trustee. A trust is a 'confidence' and the confidantee is the trustee. His position is fiduciary vis-a-vis the cestui que trust. The law is very jealous of the right and interests of the beneficiary for whose benefit the trust is created and is intolerant with the trustee who swerves from the straight line of his duty. It is an established rule that the trustee shall not gain any personal advantage from the administration of the trust property or exploit his position to derive any pecuniary benefit. For example, a trustee who receives an illegal gratification for investing trust money must account for the amount of bribe received : In re Smith. This forbidden thing cannot be done directly or indirectly. The reason for the rule is that a person in a fiduciary position is not entitled to put himself in a position where his interest and duty conflict. Thus, a trustee is absolutely prohibited while he remains a trustee from purchasing, leasing or accepting a mortgage of trust property either from himself or his co-trustees, however fair the transaction may be, unless under an express power in the instrument of trust or with the sanction of a competent court. The question is whether a trustee can borrow money for his own personal purposes from the trust. We have no doubt that a trustee who lends moneys to himself from and out of trust funds is guilty of gross breach of trust. He cannot combine in himself the capacity of both a lender and a borrower, and by doing so, he is placing himself in a position where his duties to the trust would come into conflict with his interests as an individual. If such a thing were to be permitted or recognised, the trustee can by mere efflux of time completely undermine the trust itself.
Learned counsel for the assessee relies upon section 20 and section 54 of the Indian Trusts Act and contends that it would not be proper for a trustee to lend money to himself on his own personal security. The Trusts Act does not apply to public or private religious or charitable endowments. It terms, therefore, neither section 20 nor section 54 would have any application as regards Thiagarajar Educational Trust which is certainly a public charitable trust. But it may be assumed that the provisions of the Trusts Act are really modelled upon the general law governing the relationship of trustee and cestui que trust. Section 20 provides that the trustee is bound to invest the money on the securities mentioned therein. Section 54 states that a trustee or co-trustee whose duty it is to invest trust money on mortgage or personal security must not invest it on mortgage by, or on the personal security of, himself or one of his co-trustees. This provision, in our opinion, correctly embodies the well understood law on the subject.
Godefroi in his book on Trusts and Trustees, fifth edition, point out at page 384, that a general power authorising the trustee to lend on personal security does not authorise a loan to a co-trustee. He refers to the following cases : In re Walker and Strickney v. Sewell. He further observers as follows :
'A power to place out trust money at interest, or on real and personal security, does not authorise the advance of it as a loan to the husband of the tenant for life, or for carrying on a trade . . .'
We have to construe the provision of the trust deed in the light of the law governing the limitations of trustee to lend or invest trust moneys and should not take a view repugnant to the settled law on the subject by understanding the words used in their plain and grammatical sense. Where one of two constructions is possible in regard to a clause in a deed of settlement or trust, the one literal but contrary to law and the other restricted but consistent with law, the courts should prefer the latter construction as it would be improper to assume that the authors of the instruments determined to do something which was neither proper nor legal. We are inclined to take the view that the proper construction of clause 19 of the instrument of trust should be that the trustees have not been authorised to invest moneys of the trust with themselves. Learned counsel for the department cited the decision of the Bombay High Court in Commissioner of Income-tax v. Sir Kikabhai Premchand in support of the contention that a power reserved by the settlor in the instrument of trust to lend money to himself with or without interest would amount to a derivation of benefit which would take away the exemption created by the third proviso to section 16(1) (c) of the Indian Income-tax Act. In that case a trust deed was executed by Sir Kikabhai Premchand for the purposes of establishing a sanatorium called Lady Lily Kikabhai Premchand Sanatorium at Poona for the benefit of the deserving and needy persons and their families belonging to specified Hindu communities. The question raised was whether two sums of Rs. 4,259 and Rs. 4,741 representing the income of the trust were rightly held to be saved from the application of the provisions of section 16(1)(c) of the Income-tax Act. Under the trust deed the founder himself was one of the trustees. Clause 8 of the trust deed dealing with investment gave powers to the settlor to make a loan to any person including himself with or without security or 'howsoever as the settlor shall determine as if he were absolutely entitled to such moneys.' The High Court of Bombay construed this clause an held that it would be competent to the settlor to make a loan of a part of the income of the trust estate to himself without security and even without interest. The contention raised on behalf of the assessee was that the interest contemplated under the third proviso to section 16(1)(c) was an actual interest. This was repelled. Chagla C.J. observed thus (at page 213) :
'The whole object of the third proviso is to consider a revocable trust irrevocable provided that the settlor enjoys no benefit whatever in the income of the trust for a period exceeding six years. During these six years when he cannot revoke the trust benefit is to be enjoyed solely by the beneficiaries. If, on the other hand, he does retain any benefit in the enjoyment of the income, then even during these six years the trust dies not become irrevocable and the third does not apply. Now in this case the very fact that the settlor is to be at liberty to loan a part of the income to himself without security and without interest undoubtedly leads one to the conclusion that he does derive at least an indirect benefit. It would be an absurd construction to put upon this clause to wait till the benefit is actually derived before the court would say that the trust so made is not irrevocable for a period of six years.'
The ratio of this decision is quite simple and clear. The benefit accruing to the settlor during the period of transfer need not be actual. Even if there is a possibility of the settlor deriving a benefit, taking advantage of a clause in the instrument of trust, that would be a sufficient circumstance to deprive the assessee of the benefit of the third proviso.
With respect we agree with the observation of the learned Chief Justice to this limited extent. But here, we are dealing with a case where we do not find any provision in the trust deed which would enable the authority of the trust to obtain any benefit directly or indirectly from the trust funds by loaning trust amounts to themselves. As stated already, clause 19 of the trust deed would not permit such an user of the trust fund.
The department contends that in fact the trustees have obtained a benefit by utilising the trust funds as advances to various limited companies in which the trustees held large block of shares. We shall now examine the particulars of the share position of the assessee and the other trustees in the borrowing companies, the details of loans advanced from the Thiagarajar Educational Trust and the extent to which the borrowing companies were indebted to the trust in proportion to their other indebtedness. In Rukmani Mills Limited (one of the borrowing companies) the share position as on March 31, 1957, of the assessee, his father and brother was as follows :
Karumuthu Thiagaraja Chettiar.
T. Sundaram Chettiar .
T. Manickavasagam Chettiar (assessee).
Total of these three.
Share held by third parties.
Total shares of the company .
In Sri Meenakshi Mills Limited, another borrowing company, the share position as on March 31, 1957, was as follows :
Karumuthu Thiagaraja Chettiar.
10,745 Equity shares.
T. Sundaram Chettiar.
T. Manickavasagam Chettiar.
Thiagarajar Educational Trust.
4,800 Pref. shares.
Shares held by third parties.
1,24,569 Equity shares.
19,458 Pref. shares.
In East India Corporation Limited, the third borrowing company, the position was as follows :
Karumuthu Thiagaraja Chettiar.
T. Sundaram Chettiar.
T. Manickavasagam Chettiar.
Total of these three.
Shares held by others.
In all these three companies we find factually that shares held by other exceed the total number of shares held by the three trustees, the father and the two sons.
The balance-sheet of the Thiagarajar Educational Trust for the year ending October 31, 1957, and for the year ending October 31, 1958, show that out of a total of Rs. 14,89,249.75 nP. for the first year an amount of Rs. 5,88,954.83 nP. had been lent out, a good portion of it being in favour of the three borrowing companies, an that for the subsequent year out of a total of Rs. 22,41,279.67 nP. loans and advances to the three companies amounted to about Rs. 8,00,000. Turning to the extent of indebtedness of each of the borrowing companies the following position emerges :
(1) Rukmani Mills Limited. Total borrowing as on 31-3-1957 and 31-3-1958 as per audited balance-sheets.
Loan from Thiagarajar Educational Trust
Percentage of borrowings from trust to total borrowings....
(2) Sree Meenakshi Mills Ltd. Total borrowings as on 31-3-1957 and 31-3-1958.
Loans from Thiagarajar Educational Trust
Percentage of loan taken from educational trust total borrowings ...
(3) East India Corporation Limited. Total borrowings as on 31-12-56 and 31-12-57.
Borrowings from Thiagarajar Educational Trust ...
Percentage of borrowings from trust to total borrowings ...
An analysis of the above figures would bring out two features prominently. The first is that the share position of the assessee in the borrowing companies was not such as to give him a dominant position of control over the company. The second is that the extent of the borrowings itself was a negligible fraction of the total borrowings of these companies.
Learned counsel for the department, however, contends that the taking of the loans by the three companies from the trust would itself amount to an indirect benefit to the assessee who was both a trustee and a shareholder in the borrowing companies. In support of the contention that in certain circumstances loan would amount to a benefit obtained by the borrower from the lender, reliance has been placed on the decision of the House of Lords in St. Aubyn v. Attorney-General. One of the question raised in that case related to proper interpretation of section 46 and 47 of the Finance Act, 1940. Section 46, in so far as it is material, runs thus :
'Where a person dying after the commencement of this Act has made to a company to which this section applies a transfer of any property (other than an interest limited to cease on his death of property which he transferred in a fiduciary capacity), and any benefits accruing to the deceased from the company accrued to him in the three years ending with his death, the assets of the company shall be deemed for the purpose of estate duty to be included in the property passing on his death to an extent determined, in accordance with sub-section (2) of this section....'
Section 47 :
'The following shall be treated as benefits accruing to the deceased from the company, that is to say . . . (a) any income of the company, and any periodical payment out of the resources or at the expenses of the company, which the deceased received for his own benefit whether directly or indirectly, and any enjoyment in specie of land or other property of the company or of a right thereover which the deceased had for his own benefit whether directly or indirectly; . . . . (2) In this part of this Act the expression periodical payment means a payment by way of dividend or interest, a payment by way of remuneration not being a single lump sum payment, and any other payment being one of a series of payments, whether interconnected or nor, whether of the same or of varying amounts and whether payable at regular intervals or otherwise . . . .'
The question posed by Lord Simonds was whether advances made were 'benefits' within the meaning of section 46. The learned Law Lord discussed the question and observes as follows at page 40 :
'The loans or advances were payments made to Lord St. Levan out of the resources of the company and they were made periodically, and they were received by Lord St. Levan for his own benefit directly or indirectly. Therefore they were benefits. The company, on the other hand, appeals once more to the plain use of ordinary words and denies that a man can fairly be said to receive for his own benefit a sum which he receives by way of loan an has to repay, and further relies on the omission of loan from a definition which refers to payment by way of dividend or interest or by way of remuneration or any other payment. The latter argument may derive some force from the contention of the Crown that a transaction of loan was just what the section was aimed at. But perhaps that contention had only become common form by the time this stage of the case had been reached. My Lords, here again is a question on which I find it impossible to express a confident opinion. It is indeed strange that no reference is made to a transaction of loan, and the result of holding such a transaction to be a benefit must, as learned counsel for the Crown was constrained to admit, have strange results. But I have come to the conclusion, nevertheless, that the contention of the Crown must be upheld. I cannot escape from the fact that as each periodical loan was made to Lord St. Levan there was a payment to and receipt by him. And I cannot think that he received it any the less for his own benefit because he had, or his estate had, at a later date to repay it. He had the beneficial use of what he received and can fairly be said to have received it for his own benefit.'
Lord Radcliffe, who concurred with the judgment of Lord Simonds, observes thus at page 57 :
'I would answer this question by saying that they were benefits because section 47 of the Act has declared them so to be. That section does in terms declare that among the things to be treated as benefits accruing to a deceased transferor from a company are any periodical payments out of the resources of the company which the deceased received for his own benefit. A man receives for his own benefit moneys paid to him on an advance by way of loan, not the less because the transaction involves an obligation to repay an equivalent amount at a future date with interest in the meantime. A periodical payment is defined by section 47(2) in terms which give it the widest possible scope and show at any rate that a payment may be a benefit by way of periodical payment even though it is made in consideration of services rendered or by way of interest on money lent.'
A reading of the judgment of Lord Simonds shows that he was rather hesitant to take the view that a loan would be a benefit. Nor does Lord Radcliffe lay down as a general proposition of law that a loan simpliciter would constitute a benefit in favour of the borrower. It is plain that the case really turned upon the expression 'periodical payment' occurring in the Finance Act of 1940. A payment was held not the less a payment because it took the form of a loan.
The decision in St. Aubyn v. Attorney-General was referred to by the Court of Appeal in a later decision in Commissioner of Inland Revenue v. Chappie Ltd. That was a case under the Finance Act of 1947 levying profits tax. The appellants company carried on business of manufacturing food for domestic animals. In 1946 the company wanted to extend its business to Eire and formed an associated company at that place. On 16th September, 1947, that Eire Company acquired shares in the appellants company which were later forfeited because of non-payment of calls. On the same date the appellant company advanced pounds 35,000 to the Eire company on the security of debentures carrying interest at 5 per cent. per annum. No interest was paid and in November, 1947, and May, 1949, the company waived the interest due for the periods up to 31st October, 1947, and 31st October, 1948, respectively. In the assessment to profits tax made on the company for the chargeable accounting period ending 16the March, 1948, the loan made to its associated company was treated as a distribution to proprietors by virtue of the provision of section 36(1)(c), Finance Act, 1947. The company contended that while the advance on the security of the debentures was an amount applied by way of loan, it was not applied for the benefit of any person, since the money was lent on commercial terms, and that the subsequent waiver of interest could not, respectively, have the effect of altering the original nature of the loan. The Court of Appeal held that the loan was a distribution within the meaning of section 36. At page 523 Sir Raymond Evershed M. R. after referring to St. Aubyns case observed as follows :
'Having due regard therefore to the weight of all the observation made in each of those cases, I cannot find that they really assist at all towards a solution of the present problem. I have said more than once that had it not been for the three matters of what I have called context I should have been comfortable by the language of Lords Morton of Henryton in concluding that the phrase applied for the benefit of any person did not including an ordinary loan; but I have also said - and I am but repeating myself - that the other indications in this section seem too compelling to allow me to conclude the matter of construction on those words alone and to decide in favour of the appellants company.'
Earlier at page 522 Sir Evershed M. R. observes :
'I should not construe the phrase applied for the benefit of any Person as apt to describe a loan made in the ordinary commercial sense.'
Jenkins L. J. who delivered a separate but concurrent judgment, dealt with the matter thus at page 524 :
'If the words in paragraph (c) of sub-section (1) had been simply an amount is applied for the benefit of any person it would have be at least open to question whether that expression would have included a loan made to any person, at all events if that loan was made on ordinary commercial terms. But the matter does not depend simply upon the words applied for the benefit of any person because between the word applied and the words for the benefit of any person there appear, in a parenthetical clause standing between commas, the words whether by way of remuneration, loans or otherwise.'
This again was a decision rendered on the peculiar phraseology of a particular enactment. The learned judges of the Court of Appeal have indicated with sufficient clarity, if we may say so with respect, that in normal an popular conception an advance of loan on commercial terms would not amount to a conferment of benefit.
We therefore on appeal repel the contentions urged by the department that the obtaining of loans by the three companies referred to above from the Thiagarajar Educational Trust would constitute a benefit either to the borrowing companies or to the shareholders of those companies.
Assuming that it would be permissible to treat the advances as amounting to benefits, can it be said that those benefits were derived by the assessee who was only a shareholder of the companies which borrowed Learned counsel for the assessee contends that a company is a corporate body distinct and separate from the shareholders, and any benefit to the company would not amount to a benefit to the shareholder. This argument is met by learned counsel for the department by contending that the shareholders prosperity is linked with the prosperity of the company, and whatever benefit a company might derive would ultimately enure for the shareholders. This is surely problematical. The question now is whether the assessee who is a shareholder obtained a benefit directly of indirectly as a result of the loans for the trust. Benefit may be direct or indirect but it must be benefit. Anything which is abstract, remote or contingent cannot be called a benefit. The characteristic of a benefit is that the it is real, and not notional, concrete and not abstract, certain and not conjectural. The arguments of benefit to the assessee (shareholder) runs thus. The company gets a benefit by borrowing from the trust. This benefit to the company permeates to the shareholder who are the residuary beneficiaries, whether the company functions or not. This argument, in our opinion, is unsound. Every borrowing by the company would not redound to the benefit of the shareholder. The 'benefit' to the shareholders under such circumstances would be illusory.
Now, the word 'company' has no strictly technical meaning : per Buckley J. in In re Stanley. A company so constitutes a distinct legal person subject to legal duties and entitled to legal rights separate from those of its members. It is a fiction created by law. It cannot be said that it is a conglomeration of the personality of its component members. Its individual and separate character distinct from its shareholders is really beyond question.
'Since the Salomon case the complete separation of the company and its members has never been doubted. . . . but in general it is as opaque and impassable as an Iron Curtain.' (Gower on Modern Company Law, second edition, page 66). It is on this principle a parent company was held not entitled to deduct its subsidiarys trading losses as a revenue expenditure from its taxable income (Smith, Stone & Knight v. Birmingham Corporation). But the veil of corporate personality can be lifted or pierced where the corporate form has been for fraud or for tax evasion. Statute can give power to get over the barrier of corporate personality where it is used as a mask or device for tax dodging (See English Finance Act, 1938, section 41; English Finance Act, 1939, section 38). But the courts power to do so is not quite certain and it is indeed a matter of some doubt. There is lack of judicial consistency in the matter of lifting of the curtain between the member and the company even if the company were to be an one man company in Salomons case. The necessity to look beyond the corporate character would arise only when it is used as a camouflage to cover a fraud. Otherwise the veil hangs and need not be lifted. It cannot, surely, be contended in the present case that the companies which borrowed the moneys were formed only for the purpose of taking loans from the trust and then to pass on an indirect benefit t their shareholders for purpose of escapement of tax.
Indeed, such a contention has not been urged and it seems to us that on the facts of the present case it would be impossible to do so. In our opinion, all the necessary conditions and ingredients for the operation of the third proviso to section 16(1)(c) are clearly present, and the assessee would not be within the mischief of the main provision.
The Tribunal appears to have been obsessed with the view that the assessee had devised a plan to avoid taxation. No subject is compelled to pay tax unless he falls clearly within the scope of the taxing enactment, and, the avoidance of tax, which goes by the name of 'tax planning' in modern times is quite legitimate provided it is done without any subterfuge or fraud. It is open to a taxpayer to keep out of the taxing enactment and so to order his affairs in such a fashion as to achieve that purpose. We may observed that we see nothing improper in it.
In the result, the question is answered in favour of the assessee. He will get his costs from the department. Counsels fee Rs. 250.
Question answered in favour of the assessee.