SARDAR BALDEV SINGH versus COMMISSIONER OF INCOME-TAX, DELHI & AJMER

SARDAR BALDEV SINGH

COMMISSIONER OF INCOME-TAX, DELHI & AJMER.

(B. P. SINHA, c. J., JAFER IMAM, A. K. SARKAR, K. SuBBA RAO an<l J. C. SHAH, JJ.)

Income-tax-Assessment-Undistributed dividwd deemed to have been distributed--Reassessment as incutne escaping assessment -Venue-Constitutional validity of rnactment--Indian Income-tax Act, 1922 (II of 1922), ss. 23A, 34, 22, 64- Government of India Act, I935, Seventh Sch., List /, Entry 54.

The appellant, at the time resident of Lahore, was asses-sed to income-tax on an income of Rs. 49,047 for the. assessment year 1944-45 by the Income-tax Officer, Lahore. After the partition in 1947 he shifted to Delhi and resided there. He was one of the three share-holders of company called hclra Singh and Sons Ltd. of Calcutta, the shares of all the three share-holders being equal. The company at meeting held Gn April 17, 1943· passed its accounts for the year ending Mar~h 31, 1942, but declared no dividends although the accounts disclosed large profits. On June Ir, 1947, the Income-tax Officer, Calcutta, passed an order under s. 23A of the Income-tax Act that the sum of Rs. 4,74,370, being the appellant's share of the undistri-buted assessable income of the company, be included in his income for the assessment year 1944-45. Thereupon the Income-tax Officer, Delhi, on April ro, 1948, issued notice to the appel-lant, who was then working as·the Defence Minister of India and residing in Delhi, under s. 34 of the Act to file revised return, which he did under protest, reopened the earlier assess-ment and by fresh order made on ~larch 25, 1949, assessed the appellant on an income of Rs. 5,23,417 for the year in ques-tion. It was contended on behalf of the appellant that the roceeding under s. 34 could be held only in Lahore and not in fndia at all. The question for determination was whether the Income-tax Officer, Delhi, could validly reassess the appellant under s. 34 of the Act.

Held, that the issue of notice under s. 34 of the In-come-tax Act. 1922, under the provision of the section itself, attracted such provisions of the Act as might apply to notice issued under s. 22(2) of the Act and since s. 64 of the Act was the only provision under which the place of assessment upon notice under s. 22(2) could be determ11:1ed, in absence of anything to the contrary in the Act, s. 64 applied to an assess-ment under s. 34 of the Act. The appellant was, therefore, rightly assessed by the Income-tax Officer, Delhi, under s. 64(2) of the Act.

C. V. Govindarajulu v. Commissioner of Income-tax, Madras, I.LR. (1949) Mad. 624 and Lakshminarain Bhadani v. Commissio-ner of Income-tax, Bihar and Orissa,, (1951) 20 l.T.R. 594, held inapplicable.

The time specified by the proviso to s. 64(3) could have no application since the contention in the present case was that the assessment under s. 34 could be made only in Lahore and not in India at all.

Section 23A of the Act, as it then stood, raised only one fiction, and not two, and that was of an income arising on specific date in the past with .the purpose that such income might be included in the income of share-holder for assess-ment. That income must, therefore, be deemed to have existed on the date for the purpose of assessment and, if not included in the assessment for the relevant year, must be ta!>en. to have actually escaped assessment so as to attract s. 34 of the Act. , Dodworth v. Dale, 20 T. C. 285, D. & G. R. Rankine v. Com-missioners of Inland Revenue, 32 T. C. 520 and Chatturam Horli-ram Ltd. v. Commissioner of Income-tax, Bihar and Orissa, [1955] 2 S.C.R. 290, held inapplicable.There is no warrant for the proposition that s. 23A of the Act was meant to apply' only to cases where pending assessment for any year, an order is made under that section creating fictiona I income that year. Such an order could, therefore, be made even after the assessment of the income of the share-holder for the year concerned'had already been completed. Buts. 23A does not itself provide for any assessment being made and that has to be made under other provisions of the Act authorising assessmentincluding s. 34.

It is not correct to say thats. 23A(1), as it then stood, was beyond the competence of the Legislature and was as such unconstitutional. Under Entry 54 -of List I of the Seventh Schedule to the Government of India Act, 1935, the Legislature could pass not only law imposing tax on person on his own income but also law preventing him from· evading the tax pay-able on his income and there can be no doubt that s. 23A, pro-perly construed, was meant to prevent such evasion ..

CIVIL APPELLATE .JURISDICTION: Civil Appeal No. 317of1955.

Appeal by ~pecial leave from the judgment and order dated October 18, 1952, of the Income-tax Appellate Tribunal, Calcutta Bench, in Income-tax Appeal No. 807/1950-51.

A. V. Viswanatha Sastri a.nd S. 0. Mazumdar, for the appellant.

Sardar Bal4ev Singh v. Comrnissioner of Income·tax, Delhi 6- Ajmer

C. K. Daphtary, Solicitor.General of India, K. N. Rajagopal Sastri, R. 0Ganapathy Iyer, R. H. Dhebar a.nd D. Gupta, for the respondent.

Sa.du' Balde• s1,,g;,

1960. September • 2. wa.s delivered by .

The J udgrnent of the Court

o"un1ss1ot1tr . v., o Inc1m1e-tax, Delhi 6- Ajmtr

SARKAR J.-In 1944, the appellant wa.s resident of Lahore. On October 14, 194·l, he wa.s assessed to incom·e.ta.x by the Income-tax Officer, Lahore, for the assessment yea.r 1944-45 on an income of Rs. 49,04 7. As is well-known, in August, 1947, India was parti-tioned a.nd Lahore ca.me to be included in the newly created Dominion of Pa.kista.n a.nd went out of India.. After the partition, the appellant shifted to Delhi and was residing there a.t a.II material times.

Sarkar j.

The appellant held shares in a. company called Indra. Singh and Sons Ltd. which had its office at Calcutta.. The other shares in that company were held by Indra. Singh and Aja.ib Singh. The holdings of a.II the shereholders were equal. An annual genera.I meeting of this company was hold on April 17, 1943, in which the accounts for the yea.r ending March 31, 1942, were placed for consideration. The accounts were passed a.t the meeting but no dividend wa.s declared though tbe accounts disclosed large profits.

On June 11, 1947, an Income-tax Officer of Calcutta. passed an order under s. 23A of the Income-tax Act tha.t Rs. 14,23,110 being the Wldistributed portion of the assessable income of the company for the year ending March 31, 1942, after the deductions provided in the section, be deemed to ha.ve been distributed a.s dividend among the three shareholders on the date of the genera.I mooting, that is, April 17, 1943. As a. result of this order ·a. sum of Rs. 4,74,370 being his share of the a.mount directed t-0 be distributed, had under the section, to be included in the income of the appellant for the assessment year 1944-45. The va.Ji. ditv of this order was never challenged.

The Income-tax Officer, Calcutta., informed the Income-tax Officer, Delhi, of the order ma.de by him under s. 23A. Thereupon the Income-tax Officer, Delhi, on April 10, 1948, issued a. notice under s. 34

of the Act to the appellant then residing in Delhi, '9[60 ]requiring him to file within thirtyfi ve days, revised Sarda. return for the year 1944·45 as part of his income B;ld•v Singh for that year had escaped assessment. Obviously; v. the notice was on the basis that the said sum of Commissioner of Rs. 4,74,370 had escaped assessment for the year Incom•-tax, 1944-45. On February 10, 1949, the appellant sub-D.thi & Ajm" mitted revised return under protest and included in .Sarkar 1. it the said sum of Rs. 4,74,370. The Income-tax . Officer, Delhi, then reopened the earlier assessment and on March 25, 1949, made fresh assessment order for 1944-45 assessing the appellant on an income of Rs. 5,23,417. The appellant appealed against this order to the Appellate Assistant Commissioner but his appeal was dismissed. He then appealed to the Income.tax Appellate Tribunal but was again unsuc-cessful. He has filed the present appeal with speoial leave of this Court against the judgment and order of the Income-tax Appellate Tribunal. ·

preliminary point as to the maintainability of this appeal was taken by the learned Solicitor-Gene-ral appearing on behalf of the respondent Commissio-ner of Income.tax, that the appellant having been unsuccessful in availing himself of the other remedy provided in the Act should not be allowed the extra-ordinary remedy of approaching this Court with special leave. Now; under the Income-tax Act, the appellant could apply to the Tribunal to refer to 8. High Court any question. of law that arose out of the former's decision. The. Act itself gave no right of appeal at all from that decision, nor any other remedy against it. The appellant had applied to the Tribunal for an order referring certain questions arising out of its decision to the High Court at Calcutta but was unsuccessful in getting an order for reasons to be presently stated. The Tribun'al was in Calcutta. Tbe appellant, who was in Delhi, asked firm of inoome-tax practitioners nameq S. K. Sawday & Co. in Cal-cutta, to move the Tribunal for an order of reference. Sawday & Co. had the necessary petition and· papers prep~ed. They sent these to the appellant at Delhi by post on January 5, 19(13, for his signature and ther960 papers reached Delhi on January 7, 1953. The appel-lant who was then the Defence .'.\Iinister of the -'••d., Government of India, was at the time, away from 8aldtt; Si11gh v. Delhi on official tour. Immediately on his return Commissiv"" of from tour he !ligned the papers and on January 21122, IouomHvx. 1953, sent thetp from Delhi by post to Sa.wday & Co. Drlhi & AJ"'" in Calcutta.. The pa.pers reacher! Ca.lcutta on Jan. uary 24, 1953, but were not delivered to Sawday & Sarkar ]. r J Co. e1ore a.nllRry 28, 1953, due to postman's default as was a.dmitted by the pasta.I authority con-cerned. Sa.wday & Co. filed the petition in the Tribu. nal on the same date but tha.t was one day too late as it should have been filed on January 2i, 1953. The Tribunal thereupon dismissed the a.pplication as having been made out of time. The appella.nt appeal. ed against this dismissal to the High Court at Ca.I. cutta but the High (',ourt dismissed the appeal. In thPse Circumstances, the appellant moved this Court for special leave to appeal and a.sked for condonation of delay in moving this Court, placing before it all the facts which we ha.ve ea.rlier mentioned. This · Court on consideration of these facts condoned the delay a.nd gra.nted special leave. There .was no attempt by the a.ppellant to overreach or mislead the C'-0urt and the Court in its discretion gave the leave. In these circumstances, we are una.ble to a.gree with the contention tha.t the appellant is not entitled to pro-ceed with this appeal, beca.use he could ha.ve availed himsrlf of the remedy provided by the Act and was by his own conduct, unable to do so. This Court had inspite of this thought fit to gra.nt leave to the appel-lant to appeal from the decision of the Tribunal. Further the lea.med counsel for the appellant .intends to confine himself to questions uf law arising from the Judgment of the Tribunal. We, thereforo, see no reas0n why the app<•al should not be bee.rd.

The ma.in question in this appeal iR whother the proceedings ta.ken against the appellant under s. 34 of the Act were ve.lid. That section ha.s bren amended but we are concerned with it as it st-0od on April 10, 1948, when the notice under it was issued.

The lirst point is that the proceedings under s. 34

could not be ta.ken by the Income-tax Officer, Delhi.

It is said tha.t the proceedings under that section a.re Sard11r only continuation of the original assessment proceed-Baldev Singh ings, and therefore, it is the Officer who made the v. original assessment order or his successor in office, Camnii."io"" of who alone could start the fresh proceedings. It is 1 .. come-t1u, hence contended that it is the Income-tax Officer, D.thi & Ajmer Lahore, who could proceed against the appellant Sarkar J. under s. 34 and the Income-tax Officer, Delhi, had no jurisdiction to do so. The contention then comes to this that in the circumstances of this case, no pro-ceedings under s. 34 could be taken against the appel-lant in India at all.The learned Solicitor-General said that this was an objection as to the place of assessment under s. 64 of the Act, and could not be entertained as it had not been taken within the time provided under the second proviso to sub-sec. (3) of that section. If that provi-so applied to the present case, the appellant bad to raise the objection that proceedings under s. 34 could not be taken at Delhi within the thirty-five days men-tioned in the notfoe under the section. It is said that this had not been done. It seems to us however that the proviso would apply only if an objection to place of assessment bad been taken under s. 64 and the objection that the appellant has taken in this case is not one under that section. That section applies where the assessment can be ma.de in one place or another in India and an objection is ta.ken tO'·one of such places. Here the contention is that the assess-ment under s. 34 can be made only in Lahore and therefore Mnnot be made in India at all. To such contention s. 64 has no application. The Solicitor. General's point must therefore fail.

We are however of the opinion that ·the contention of the appellant is without foundation. Section 34 provides that in the cases mentioned in it, the income may be assessed or reassessed and the provisions of the Act shall, so far as may be, apply accordingly as if the notice issued under the section bad been issued under s. 22(2) of the Act. Now the place where an assessment is to be made pursuant to notice under

s. 22(2) has to be determined under s. 64. Indeed Satdar that is the,only provision in the Act for deciding the Baldt1.· S111gh prnpcr place for any assessment. There is nothing v, which makes s. 64 inapplicable to an assessment made c,,.,,,,,,,w,,., "/ under s. 34. Therefore, it seems to us clear, that the Income-tax, place where an assessment under s. 34 can be made Dell.i [6 ]"1"'" has to be decided under s. 64. Xow the appellant Sarkar J. was not carrying on any business, profession or voca-tion. He was working as the Defence .Minister of the Government of India and residing in Delhi. He could be properly assessed by the Income-tax Officer, Delhi, under s. 64(2) if the assessment was the original aBSess-mont. This is not in dispute. It follows that no objection can legitimately be taken by the appellant to his assessment under s. 34 by tho Income-tax Officer, Delhi.

Wo find nothing in the two cases cited by .'.\Ir. Sastri, who appeared for the appellant, to support the con-tention that in this case t.he assessment under s. 34 could not have been made in India at all. In neither of these cases any question as to the plare of assess-ment under s. 34 or any other section arose. In the first, C. V. Govimlaraj1tlu v. Commissioner of lncom~­tax, Madras (1), it- was hdd that the proceeding~ under s. 34 and the original assessment proceedings were not soparate and thereforo in the former, penalty could be levied under s. ~8 for failure to submit return pursuant to general notice under' s. 22(1) on which the latter wore deemed to have commenced. It doeH not follow that because the two assessments are not sepamui for certain purposes, tho latter must take place only where tha first had been made. In the second, Lakshminarain Bhadani v. Commissioner of Income-tax, Bihar & Orissa ('), thi• Court held that proceoding under s. 34 may be taken against karta of Hindu undivided family to reopen an original assc·ssmcnt on the family, though in the meantime, there had been disruption of the family and an ordl'r in respect of it had I.Jeon pa!ise<l,under s. 25A(l) of the Act. It watt said that the position was as if the Income-tax Officer was proceeding to assoss the (1) LL R. (1949) Mad. 624. (>) (1951) 20 l.T.H. 594·

income of the Hindu undivided family as in the year of assessment. This of course does not mean that the assessment under s. 34 must take place at the place where the original assessment was made or not at all.

Sardar Ba!dtv Singh v

Comtnissioner of I ncome-taX', Drlhi c; .... Ajnur

Then it is said that the Income-tax Officer re-assessc ed the appellant's income under s. 34 on the basis that part of it, namely, the dividend that became liable to be included in the appellant's income under s. 23A, had escaped assessment. It is contended that on proper reading of s. 34 this would not be ca!fe of income escaping assessment because that section applies to income actually escaping assessment and not to income deemed 'to have escaped assessment which is all that has happened in the present case. It is said that in order that income may escape assess-ment there must in fact have been an income. It is also said that in order to apply s. 34 to this case two fictions have to be resorted to, namely,(a) bringing an income into existence where- none existed and (b) holding t.hat that income has. escaped assessment where no income actually did so. It is argued that the language of s. 34 does not· permit two fictions being created, and that as the section reopens closed transaction, it must be strictly construed.

Saikar ].

Reliance was placed on certain decisions in support of this contention. First, we were referred to two English cases, namely, Dodworth v. Dale(') and D. & G. R. Rankine v. Commissioners of Inland Revenue ('). These cases do not assist the appellant for they were not concerned with statutory provi-sion like s. 23A on which the present case turns aud which requires that an assessee would be deemed to have received certain income on specified date in the past and also requires that income to be included in his total income for assessment to tax. The other case to which we were referred was the decision of this Court in Chatturam Horliram Ltd. v. Commissioner of Income-tax, Bihar and Orissa (')where it was said that the contention "that the escapement from assessment

(1) (1936) 20 T.C. 285. (2) (1952) 32 T.C. 520.

(3) [1955] 2 s.c.R. 290, 300-301.

Sar·dar lla/dcu ~"·ingli v. Con11ni.~~·io11r1 "f f.11romt.fn,t, lJ~l/11 l'~ Ajmcr S111kar j.

is not t.o be Pquated to non-assessment simpliciter, is not without force". This Court however in the very next sentence proceeded t-0 state clearly that " it is unnecessary to lay down what exactly constitutes 'escapement from assessment'". The act ua.l decision in this case affords no assistance to the appellant and has not been relied on by him. It is clea.r from what we ha\•e read from the judgment in it that it does not lay down tt1st t-0 decide whon an income may be said to have escaped assessment.On its own merits also we are unable to accept t.he argument of the learned counsel for the appellant. Section 23A requires that on an order being made under it, tho undistributed portion of tho assessable income of the company for year as computed for income.tax purposes and after the deductions provid-ed ·in the section, is to be "deemed to have been distributed as dividends amongst I he shareholders as at the dato of the general meeting", being the meeting at which the accounts for the year concerned were passed, and "thereup-0n, the proportionate 8h&re thereof of each shareholder shall be included in the total income of such sha.reholdrr for tho purpose of assessing his total income ". The section creates fictional income arising as on specified date in the past and it does RO for the purpose of that income bPing included in the income of the shareholders for assessment of their income-tax. The income must t.herefore be deemed to have been in existence on the date mentioned for the purpose of assessment to tax. It is as if it actually existed then. Now if the assess-ment for the relevant vear does not include that income, it has escaped' assessment. That is what happened in this case. Therefore the case is one t-0 which s. 34 would clearly &J.>ply.

It is said that s. 23A was meant to apply only to cases where pending assessment for any year, an order is made under that section creating & fictional income in that year. We see no reason however so to restrict the operation of tl\fl section: the words in it do not warrant such restriction. There is no limitation of time e.s to when an order under s. 23A can be made.

Therefore it can be made at time when the assess-

ment of the inco·me of the shareholder for the year concerned has been completed. There is no reason why that order should not be given effect to by pro-ceedings duly taken under s. 34.

We do not also agree that the rejection of the appPl-lant's present argument will compel us to raise two fictions. There is only one fiction, namely, that raised bys. 23A. That fiction having been raised, the income that has thereby to be deemed to exist m·ust be held to have actually escaped assessment. We are unable to agree that in.order to apply s. 34 to an income deemed to exist under s. 23A, we would have to read the former section to cover case where income has to be deemed to have escaped assessment. If the income had come into existence, and not been assessed, it has escaped assessment i it is not case where the income has to be deemed to have escaped assessment. In our view, therefore, the present contention of the appel-lant must fail and the income deemed to have been received by him by virtue of the order made under s. 23A on June ll, 1947, must be held to have escaped assessment for the year 1944.45. and his income must therefore be liable to reassessment under s. 34.

It is now necessary to refer to one of the reasons on which the judgment of the Tribunal is based. It was there said that " It was incumbent on the Income-tax Officer, Calcutta, passing the order tinders. 23A to have included the sum of Rs. 4,74,370/· in the other assessed income of the assessee and to have recomput-ed the assessable income and the tax thereon". It was held that" the Income-tax Officer, Delhi, went wrong in having recourse to the provisions of s. 34 and making an assessment thereunder " but that this amounted to mere irregularity not vitiating the assessment made under that sectioh. In the end the Tribunal observed, "Anyhow, the Tribunal is em-powered to substitute its own order for that of the Income Tax Officer and acting under that power we assess the assessee under the provisions of Sec. ·23A(l) .of the Indian Income-tax Act "~ .

Sardar Baldtv Singh v.

Connnissi(lnet of l 11rn111t~I ax, Dtllii & Ajnur

Sarka_r ].

~!Hda, Hn/drt· Sn11:l1

Cnmmi.~_<i(lner <'f ''''"'::r-:11x, Delhi & Ajmo Sa1kar J.

It sroms to us tha.t the Tribune.I we.a wrong in the view tha.t it took. The learned Solicitor-General con-ceded that this is so. We are unable to agree that an assessment could be made under s. 23A. That sec-tion does not µrovide fol' any assessment. being ma.de. It only talks of the fictional income being included in the tot.a.I income of the shareholders "for the purpose of assessing his tote.I income''. The assessment there-fore has to be made under the other pl'ovisions of the Act. including s. 34, authorising assessments. In our view, the assessment in this case ha.d been properly made by the Income-tax Officer, Delhi, under th11 pro-visions of s. 34.

La.stly, it is said that s. 23A is unconstitutional in-asmuch as it was beyond the comµetenco of the legis-l1~ture that ena()tcd iL This section has been redrafted 1in<l amended several times since it was fir8t. ena..ct!'d in 1930. We arc concerned with the section as it. stood 011 June II, 1947, when the order under it wa.s macif> in this ca.sc. Sub-section (I) of the section in t.he form t.bat it stood then-and that is the matt>rial portion of the section for our purposi·s-was enacted I.Ji· Act VII of 1939. It is that sub-section which gave the power to make an order tha.t the undistri-buted portion of the assessable income of the company she.II be deemed to have been distributed a~ dividends and provided that thereupon the proportionate share thereof of each shareholdn shall be included in his income for assessment. The i>nactment was by the Central legisla.turc which then derived its competence to legislate from the Government of India Act, 1935. There is no doubt, and neither is it disputed, that that sub-section had been enacted under the pow~r contaiued in entry 54 of List I in the Seventh Sche-dule to the Government of India Act, 1935. The entry read, "Taxes on income other than agricultural income". The argument of ~Ir. Sa.stri is that this entry only authorises legisla.tion for taxing a. person on his income; under it a. law canuot lie made taxing one person on the income of another.

J\lr. Sastri sa.ys that in law company a.nd its shareholders arc different µerson~ -a proposition

which is indisputable-and therefore s. 23A is incom-

petent as it purports to tax the shareholders on the Sardar income of the company in which they hold shares. Baltfev Singh He points out, and this again is not in dispute, that v. the section does not give right to shareholder on Commi.,sfoner of an order being made under it, to realise from the com-Income-tax, pany the dividend, which by tho order is to be deemed Delhi {~ Arner to have been paid to him. He says, and this also Sarkar J, seems right, that the income remains the income of the company and shareholder is taxed on portion of it representing the dividend deemed to have been paid to him.

In spite of all this it seems to us that the legislation was not incompetent. 'Under entry 54 law could of course be passed imposing tax on person on his own income. It is not disputed that under that entry .a law could also be passed to prevent person from evading the tax payable on his o~;n income. As is well-known the legislative entries have to be read in very wide manner and so as to include all subsidiary and ancillary matters. So Entry 54 should be read not only as authorising the imposition of tax hut also as authorizing an enactment which prevents the tax imposed being evaded. If it were not to be RO read, then the admitted power to tax person on his own income might often be made infructuous by ingenious contrivances. · Experience has shown that attempts to evade the tax are often made.Now it s11ems to us that s. 23A was enacted for preventing such evasion of tax. The conditions of its applicability clearly lead to that conclusion. The first condition is that the company must have distri-buted as dividend less than sixty per cent of its assess-able income after deduction of income-tax and super-tax payable by it. The taxing authority must then be satisfied that the payment of dividend or of larger dividend than that declared, would, in view of losses incurred in earlier years or the smallness of the profit made, be unreasonable. Lastly, the section does not apply to company in which the public are sub-stantially interested or -a subsidiary company of public company whose shares are held by the parent

Sardar

llaldtr' Sing/~ ". CoJJ1111issiontr r.J

111cnmt·fa,r, /Jtlhi ( . .,., Ait11t1

company or by the nominees thereof. The section provi<l(•s by 11.n explanation a.A follows:

For the purpose of this sub-section, a. company shall be d<>emed to he company in which the public are suhste.ntie.lly interested if she.n•s of the company (not being she.res entitled to fixed rate of <lividenci, whether with or without a. further right to pe.rticipa.te in profits) carrying not less the.n twenty-five per cent oft.he voting power have been allotted unconditio-nally to, or acquired unconditionally by, e.nd a.re a.t the end of the previous yea.r beneficially held by the public (not including a. company to which the provi-sions of this sub-section apply), a.nd if a.ny such shares ha.ve in the course of such previous year heen the subject of dee.lings in a.ny stock exchange in the taxable territories or in fa.ct freely transferable by the holders to other members of the public.

The section thus applies to e. coropany in which a.t (pa.st 75 per cent of the voting power lies in the hands of persons other the.n the public, which ca.n only mean, a. group of persons a.Hied togt\thPr in the same interest. The company would thus ha.ve to be one which is controlled by group. The group can do what it likes with the affairs of the company, of course, within the bounds •Jf the Companies Act. It lies solelv in its hancis to rlt>cirlc whether a. dividend shall be 'declared or not. When therefore in spite of there- being money reasonably available for the pur-pose, it der.ides not. to dt>cle.re dividenrl it is clear that it doeR so beca.11Re it rloes not want to take the dividend. Now it may not want to take the divi-dend if it wants to evade payment of te.x thereon. Thus by not declaring the dividend the persons cons-tituting the group in control, could evade payment of super-tax, which, of course, is a. form of income-tax. They would be able to evade the super-tax beca.uRe super-tax is payable on the divirfond in tho he.nds of the shareholders even though it may have been paid by the company on the profits out of which the dividend is pa.id, &nd because the r&t.e at which super-tax is pa.ya.hie by company me.y be !own than the rate at whi<"h that tax is pa.ye.hie by other

assessees. _ By providing that in the circumstances 1960 mentioned in it,' the available assessable income of Sardar company would be deemed to have been distribut-Raldev Singh. ed as dividend and be taxable· in the hands of the v. shareholders .as income received by them, the section Commissioner of would prevent the members of such _group from Iizcome-tM, evading by the exercjse of their controlling power · Delhi & Ajmer over the company, payment of tax on income that Sarkar J. · would ha ye come to them. That being so, the section would be within entry 54.

In conceivable circumstances the section may work hardship on members of the public who hold shares in such company but that would not take the sec-tion outside the competence of the legislature. It would still be an enactment preventing evasion of tax. Considerations of hardship are irrelevant for deciding questions of legislative competence.

It is further .quite clear that in the absence of pro-vision likes. 23A it is possible so to manipulate the affairs of company of this kind as to prevent the undistributed profits from ever being taxed and expe-rience seems to have shown that this has often hap. pened. The following passage from Simon's Income Tax, .2nd Edn., Vol. 3, p. 341, fully illustrates the situ-ation:

"Generally speaking, surtax is charged only on individuals, not on companies or· other bodies corpo-rate. Various devices have been adopted from time to time to enable the individual to avoid surtax on his real total income or on portion of it, and one method involved the formation of what is popularly called 'one.man company'. The. individual transferred his assets, in exchange for shares, to limited company, . specially registered for the purpose, which thereafter received the income from the assets concerned. The individual's total income for tax ·purposes was then limited to the amount of the dividends distributed to him as practically the only shareholder, which distri-bution was in his own control. The balance of the income, which was not _so distributed, remained with the company to form, in effect, fund of savings aco11mulated frvm incoma which had not immediately

1Y60 attracted surtax. Should the individual wish to avail .'·:ardar himself of the USP. of any -part of these savings he /J"!""' -'"'-'" could 1>1fect this by borrowing from the company, any " intert'st pa.y11ble by him going to swell the savings c""""'"'""' "! fund; and at a11y time the individual could acquire '"""""-'"'· t.he whole balance of the fund in the charactrr of /!ti/ii ,,,_ AJ"'" capital by putting the company into liquidation." .':iarkar j. The section prevents the evasion of tax b'" J among others, the means mentioned by Simon.

The learned Solicitor-Genera°I sought to support the competence of the legislature to enact the section also on another ground. He said that entry 54 permittrd tax on income and contended that it authorised taxing of on the income of B. He said that, where ghare-holder was taxed on the income oft.he company, the two being considered separate legal entities, the tax was none the less on income though the burden of _the tax was put on one t.o whom. the income had not accrued or by whom it had not been received and so was within tho scope of entry .54. In support of t.his contention he reforred to B. ,ll. Amina Umma '" In-come 1'ax Officer, Kozhikode ([1]), .Janab Jameelamma ''· The Incame-tax Oj]icer, Nagapattnam (') and G. W. Spencer v. Income Tax Officer ([3]). As earlier stated, Mr. Sastri disputes the correct.nr-s" of this contention. We do not consider it necessary to pronounce on this question or as to the corrPctness of tht> decisions cit.ed so far as they support it. In om vie,v, the legi81ativc c·omp!'tence to enact the St>ction can be clea.rly uphelcl on tho ground that it was to prevent c•vasion of in-eome-t.ax and that would bo enough to dispose of th<' argument advanced. by ~Ir. Sastri that the section was an incompetent piece of legislation. 'l'hi• appeal therefore fails and it is dismissed with costs.

AppPcil di.•missed.

(1) (19Si) 261.T.R. 1J7-

(2) (1955) 29 l.T.R. 2.6.

(3) (1Q56) 3l I T.R. 107.