Sudhindra Mohan Guha, J.
1. On an application made by the Commissioner of Income-tax (Central), Calcutta, for a reference under Section 66(1) of the Indian I.T. Act, 1922, the Tribunal referred the question stated below after drawing up a statement of case :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of Section 44F of the Indian Income-tax Act, 1922, were not applicable in the case and the Tribunal was correct in holding the amount of Rs. 94,775 included in the assessment was not taxable for the assessment year 1957-58 ?'
2. The assessment year is for 1957-58. The accounting period is the calendar year ended on 31st December, 1956. The assessee was a registered firm. In making the assessment, the ITO noticed that the assessee had sold during the accounting period 20,300 shares of Auto Distributors Ltd. and 5,200 shares of Hindustan Housing and Land Development Trust Ltd. The two companies whose shares were sold had distributed the dividends of Auto Distributors Ltd. at the rate of 100% on March 27, 1956, for the year ending January 31, 1955, and on May 3, 1956, at the rate of 100% for the year ending January 31, 1956, and of Hindustan Housing and Land Development Trust Ltd., at the rate 23% on August 30, 1956, for the year ending on March 31, 1955, and at the rate of 3% on December 28, 1956, for the year ending March 31, 1956.
3. On examining the transactions as a whole the ITO came to the conclusion that the provisions of Section 44F of the Indian I.T. Act, 1922, applied. The shares were sold to the trusts created for the benefit of minor children of the partners, wives and mothers of the partners and one charitable trust controlled by the family.
4. The shares in question were sold just before the declaration of dividends knowing fully well that 200% dividend was going to be declared in the case of Auto Distributors Ltd. As the assessee was the agent of the company it was taken that the assessee had knowledge about the declaration of such dividends. The sales were made only at the face value whichwas much below the market value. In spite of the transfer of such shares, the assessee continued to be the managing agent and enjoyed the necessary privileges. Under these circumstances, the ITO brought to tax, under the provisions of Section 44F, an amount of Rs. 94,775 as deemed income.
5. The assessee appealed to the AAC. The quantum as computed by the ITO was not disputed but the application of Section 44F was challenged. The stand of the assessee was that there was no avoidance of tax and, secondly, in any event, there was no deliberate intention to avoid tax. It was contended that the sales of the shares in dispute formed only a small part of the transactions in shares amounting to Rs. 45.64 lakhs. It was also contended that if at all there was any avoidance of tax, it was exceptional and not systematic and in any event there was no such avoidance in any of the three preceeding years. Reliance was placed by the assessee on the decision of the Gujarat High Court in the case of CIT v. Sakarlal Balabbai : 69ITR186(Guj) .
6. With reference to the decision mentioned above, the AAC came to the conclusion that for avoidance of tax to exist:
(1) A person should be in receipt of an amount which was really and in truth income which would have been liable to tax, and
(2) The payment of tax was avoided by some artifice or device.
7. The AAC held that the first ingredient was absent in the present case. It was, however, observed that the assessee had sold all the shares only at face value, which was below the market value and this fact was admitted by the ITO. It was also mentioned that it was nowhere shown that the shares were required by the assessee or that the assessee had received the real worth of it. The dividend income was very substantial but the AAC held that there was nothing to show that the assessee had received anything in lieu of the dividend income which went to the transferees. He also held that the question of the second ingredient did not arise when the first itself was absent. This was found to be a simple case of planned reduction of tax liability by transfer of assets to the kith and kin of the partners. The transactions appeared to the AAC as if they were in the nature of family dealings with a view to reducing the tax liability.
8. As to the question of systematic and exceptional avoidance of tax, the AAC came to the conclusion that the multiplicity and the nature of transactions clearly showed that the avoidance was systematic. But, again, to clarify that, he had held earlier that there was no 'avoidance of tax' in the true nature, and what actually resulted was only a reduction of tax liability. It was also found by him that it could not be established that there was such avoidance of tax in the earlier three years. The AAC, therefore, deleted the addition of Rs. 94,775.
9. The department, thereafter, came in appeal to the Tribunal. According to the department, there was a clear reduction in the tax liability on the part of the assessee by transferring the shares in question and it was stated that this was manifestly an 'avoidance of tax'. The submission on behalf of the department was that there was no need to consider all the other share transactions of the assessee and the case had to be decided on the basis of the particular instances which were considered by the ITO. According to the department, the decision in the case of CIT v. Sakarlal Balabhai : 69ITR186(Guj) fully supported the department.
10. In reply, the assessee reiterated the points which were taken before the AAC as the grounds of appeal.
11. The Tribunal found as a fact that in all cases (excepting the instance of June 12, 1956) the transfers took place prior to the dates of declaration of dividends and thus the assessee had completely divested itself of all its interest in the shares before the declaration of the dividends. In the solitary instance of the transfer on June 12, 1956, the dividends thereon had been assessed in full in the assessee's hands. According to the Tribunal, the shares were sold at the face value of the shares and the assessee had not received in the form of capital accretion any amount which, it could be argued, would have represented the dividends which might have accrued to it. According to the Tribunal, the assessee had divested itself of the shares and had thus divested itself of the source of income. In the result, there might be a reduction in tax liability but the assessee could not be charged with avoidance of tax liability. In short, in the opinion of the Tribunal, the transactions had not resulted in the avoidance of tax, when alone the provision of Section 44F would apply. The Tribunal upheld the order of the AAC. The Tribunal then stated that this finding would not affect the conclusion it'had reached but were the Tribunal to have held that there was tax avoidance in view of the large number of transactions, the Tribunal would have agreed with the AAC that such avoidance was not exceptional but was systematic.
12. In order to appreciate the points involved in this case it would be better to set out Section 44F in extenso. That section, omitting the portions immaterial, provides:
'(1) Any person upon whom notice is served by the Income-tax Officer requiring him to furnish a statement of particulars relating to any securities in which, at any time during the period specified in the notice he has had any beneficial interest, and in respect of which, within such period, either no income was received by him, or the income received by him was less than the sum to which the income would have amounted if the income from such securities had accrued from day to day and been apportioned accordingly, shall, whether an assessment to income-tax or super-tax inrespect of his total income has or has not been made for the relevant year or years of assessment, furnish such a statement and such particulars in the form and within the time (not being less than twenty-eight days) required by the notice.
(2) If it appears to the Income-tax Officer by reference to all the circumstances in relation to the securities of any such person (including circumstances with respect to sales, purchases, dealings, contracts, arrangements, transfers or any other transactions relating to such securities) that such person has thereby avoided or would avoid more than ten per cent. of the amount of the income-tax or super-tax for any year which would have been payable in his case in respect of the income from those securities if the income had been deemed to accrue from day to day and had been apportioned accordingly, and the income so deemed to have been apportioned to him had been treated as part of his total income from all sources for the purposes of income-tax or super-tax, then those securities shall be deemed to be securities to which Sub-section (3) applies.
(3) For the purposes of assessment to income-tax or super-tax in the case of any such person, the income from any securities to which this subsection applies shall be deemed to accrue from day to day, and in the case of the sale or transfer of any such securities by or to him shall be deemed to have been received as and when it is deemed to have accrued :
Provided that this section shall not apply if such person proves to the satisfaction of the Income-tax Officer that the avoidance of income-tax or super-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any such avoidance of income-tax or super-tax, or that the provisions of Section 44E have been applied in his case in respect of such income......
(6) For the purpose of this section the expression 'securities' includes stocks and shares.'
13. This section is designed to prevent the avoidance of tax by what are known as 'bond-washing' transactions, involving the manipulation of securities so that the security will pass temporarily into the legal ownership of some second person who is either not liable at all or liable to a lesser degree to tax, under such conditions that the interest on the securities is the income of the second person. The word ' interest' includes dividends.
14. As stated earlier, both parties relied on the decision in the case of CIT v. Sakarlal Balabkai : 69ITR186(Guj) . In this case, the Gujarat High Court had an occasion to consider the implication of Section 44F of the Act. The section was fully interpreted by their Lordships of the Gujarat High Court in the most clear terms at pages 203-204 of the report, which we quote hereunder:
'This construction is clearly borne out by the language of section 44F. Reading the marginal note of the section Which can certainly be looked at for the purpose of understanding the drift of the section, we find that the words used are 'avoidance of tax by sales-cum-dividends' These words 'avoidance of taxation ' are not colourless words. They are strong and compelling words connoting a positive volition--a deliberate intention--on the part of the assessee to avoid tax. Moreover, the opening part of Sub-section (2) refers to various transactions relating to the securities entered into by the assessee and then proceeds to say that the assessee has thereby 'avoided' a certain amount of tax, clearly suggesting that the assessee has by adopting those transactions avoided tax or, in other words, the transactions are entered into by the assessee for the purpose of avoiding tax. These words in the opening part of Sub-section (2) leave no doubt that what the section has in view is a deliberate action on the part of the assessee directed to the end of achieving avoidance of tax liability. Furthermore, the opening part of Sub-section (2) also requires the Income-tax Officer to be satisfied as regards avoidance of tax by the assessee by reference to all the circumstances in relation to the securities of the assessee ' including the circumstances with respect to sales, purchases, dealings, contracts, arrangements, transfers or any other transactions' relating to the securities. Now, all the circumstances in relation to the securities including the circumstances with respect to sales, purchases, dealings, contracts, arrangements, transfers or any other transactions would be material only if what is required to be judged is the purpose of the assessee in entering into the transactions. They would have no bearing if what is required to be found is merely whether there is actual saving or escapement of tax liability. Whether there is actual saving or escapement of tax liability would be a matter of mere mathematical calculation. But in order to determine whether the transactions are entered into by the assessee for the purpose of achieving such saving or escapement of tax liability the circumstances relating to the transactions would be very material and the opening part of Sub-section (2), therefore, requires the Income-tax Officer to determine by reference to all the circumstances relating to the securities 'including the circumstances with respect to sales, purchases, dealings, contracts, arrangements, transfers or any other transactions' relating to securities, whether the assessee has thereby avoided tax liability. The language of the section thus clearly indicates, that what the legislature seeks to hit at, is not merely the incidental effect of escapement of tax but a deliberate avoidance of tax where means are adopted by the assessee for the purpose of achieving the end of avoidance of tax. But even if the language of the section were open to two constructions, we would prefer the narrower construction which limits the applicability of the section to deliberate and intentional avoidance of tax liability--where the transaction is entered into by the assessee for the purpose of achieving avoidance of tax liability rather than the wider construction which extends the applicability of the section to all cases where there is the end effect of escapement of tax liability irrespective of whether such end effect is merely incidental or is the result of a transaction entered into by the assessee for the purpose of achieving such end effect. The section is punitive in character and must be construed strictly and if two constructions are possible, one which favours the taxpayer must be preferred as against the other which throws a greater burden upon him. If the wider construction were adopted, the result would be that even a bona fide investor who changes his investment at an opportune time by selling his shares just before the date of declaration of dividend with a view to gather the maximum profit for his investment would be hit by the section. We do not think the legislature could have intended to bring about such a startling interference with the activities of bona fide investors. '
15. This decision of the Gujarat High Court was affirmed by the Supreme Court in the case of CIT v. Vadilal Lattubhai reported in : 86ITR2(SC) .
16. It, therefore, follows that when the assessee divests himself of the sources of income or abstains himself from earning more income and as a result, his income is reduced and in consequence his liability for income-tax becomes lesser, in such circumstances the assessee cannot be charged with avoidance of tax liability. The avoidance of tax liability must be a deliberate act. The purpose or intention of the assessee must be, as if, the avoidance of tax liability. The transaction in order to attract Section 44F must be mala fide or, in other words, must be a concerted action directed to the end of avoidance of Iiability:for tax. Thus, in order to attract the provisions of this section, there must be some device on the part of the assessee to avoid payment of tax on his real and true income. So, if the transaction is bona fide or, in other words, entered into for the purpose of meeting the liability, the question of avoidance of tax would not arise at all. Thus, if the transactions are the result of ordinary business or familiar dealings without any intention to avoid tax, then the provisions of Section 44F would not be attracted.
17. Mr. Balai Pal, learned advocate for the revenue, argues with reference to the transfer of the shares in the present case that this was a clear case of reduction in tax liability on the part of the assessee by transferring the shares in question mala fide immediately before the declaration of dividend with the definite purpose of avoidance of tax. It is also pointed out by Mr. Pal that by the time the sale transaction took place the directors were aware of the large profits in the case of both the companies and theycould very well have visualised payments of large dividends and as the transfers were made with a definite purpose for avoidance of tax, according to Mr. Pal, this was a clear case which would come within the mischief of Section 44F of the Indian I.T. Act. He relies on a decision in the case of CIT v. A. Raman & Co. : 67ITR11(SC) . He refers to the passage at page 17 of the report wherein it is stated that income which accrues to a trader is taxable in his hands ; income which he could have, but has not earned, is not made taxable as income accrued to him. By adopting a device, if it is made to appear that an income which belonged to the assessee had been earned by some other person, that income might be brought to tax in the hands of the assessee. According to him, in this case, exactly this has happened. The assessee is said to have adopted a device whereby the share had been transferred to the kith and kin of the partners for the purpose of avoidance of tax. The dividends thereon should be deemed to be the income of the assessee and according to him that had been rightly brought to tax in the hands of the assessee by the ITO.
18. Mr. Kalyan Roy, learned advocate for the assessee, contends that the question of avoidance of tax or evasion of tax would arise only in the case of income accruing to a party. If a party takes steps not to earn an income, that is not prohibited under the provisions of the Act, and that party shall not come within the mischief of Section 44F of the Act. He refers to the decision of the Gujarat High Court in the case of Wood Polymer Ltd., In re : 109ITR177(Guj) . In this case the quotation was made by their Lordships from the decision of the Supreme Court in the case of CIT v. A. Raman and Co. : 67ITR11(SC) . It was observed by the Supreme Court as under :
'Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it my lawfully be circumvented. '
19. Exactly such view was also expressed by the Supreme Court in the case of CIT v. Calcutta, Discount Co. Ltd. : 91ITR8(SC) of the report, their Lordships observed as follows:
' It is a well accepted principle of law that an assessee can so arrange his affairs as to minimise his tax burden. Hence, if the assessee in this case has arranged its affairs in such a manner as to reduce its tax liability by starting a subsidiary company and transferring its shares to that subsidiary company and thus forgoing part of its own profits and atsame time enabling its subsidiary to earn some profits, such a course is not impermissible under law.'
20. Thus, it would follow that it is within the competence of an assessee to arrange his affairs or matters in such a way that there might be reduction in his tax liability.
21. It is only to be seen whether the intention of the transfer is mala fide or bona fide. If the transfer is made with a particular artifice or device for avoidance of tax, the provision of Section 44F would surely be attracted. But if the assessee arranges its affairs in such a manner as to reduce its tax liability or if the assessee takes steps beforehand not to earn any income, in such a case no exception can be taken. The assessee by way of transfer of certain shares abstained from earning dividends thereon and thereby enabled the transferees to earn some profit. Such a course is not impermissible under law. The Tribunal, in this case, found as a fact that the transfers in question had been made prior to the declaration of dividends and thus the assessee was completely divested of the ownership of the shares prior to the declaration of dividends. It was also observed by the Tribunal that looking at the whole transaction there was no doubt that there was a plan behind all these transactions. The shares had been transferred by the assessee to the various members of the partners' families and the trust was created for their benefit. Avoidance of tax, under these circumstances, was found by the Tribunal to be permissible.
22. On the facts found by the Tribunal and on the point of law discussed above, the views expressed by the Tribunal appear to be reasonable and plausible and we find absolutely no reasons to differ with the Tribunal.
23. In this view of the matter, we answer the question in the affirmative and in favour of the assessee.
24. There will, however, be no order as to costs.
Sabyasachi Mukharji, J.
25. I agree with the answer given by my learned brother and the order proposed. I only wish to add that Section 44F of the Act is attracted only when there is avoidance of tax without genuine avoidance of the income. That is to say, transfer of asset does not make us believe that the mischief of Sub-section (2) of Section 44F is attracted. Where no income is earned no question of avoiding tax arises. Where income is avoided by a genuine transaction--genuine in the sense that the transfer which is not an artifice or device by which income is really enjoyed by the transferor but is meant to be enjoyed by the transferees, though the motive for such transfer may be the reduction of a liability of the transferor, or to benefit a transferee--in such a case no question of avoidance of tax arises because no income has arisen and as such no question of avoidance of tax arises. It is for this purpose that Section 44F of the Act was enacted and on this aspect we respectfully agree with the ratio of the principle enunciatedby Bhagwati C.J. in the decision of the Gujarat High Court referred to by my learned brother. Whether on the ratio of that decision the actual finding made by the decision is correct or consistent is a question with which we are not concerned, in view of the facts that have been found by the Tribunal in the instant case. I for my part also respectfully enter a caveat to the observation of the Chief Justice of the Gujarat High Court that 'all circumstances in relation to securities of such a person ' in Sub-section (2) of Sections 44F must be construed in a narrow sense meaning thereby only circumstances pertaining to the sale of particular securities. If holding of such securities and consequently a transaction in respect of the said securities is part of a larger business dealing of the assessee, then such facts, in my opinion, would come within the ambit of the expression 'all circumstances' mentioned in Sub-section (2) of Section 44F of the Act.
26. For the reasons aforesaid, I concur with the conclusion reached by my learned brother.