Navnitlal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner Of Income-Tax, D Range, Bombay

NA VNITLAL C. JA VERI K. K. SEN, APPELLATE ASSISTANT COMMISSIONER OF INCOME-TAX, 'D' RANGE, BOMBAY October 28, 1964 (P. B. GAJENDRAGADKAR C.J., K. N .. WANCHOO, M. HIDAYATULLAH, R.AGHUBAR DAYAL AND J, R. MUDHOLKAR JJ.) Constitution of India, 1950, List I, '·vu Schedule, Entry 82-Income--Income-tax Act (11of1922), ss. 2(6'.)(e) and 12(18)-Legislative com-petence and constitutional validity. ·· c The assessee was a share holder in a private limitod company whose ordi-naiy business was not money-lending -~usiness. He took a loan amounting to 1!fer Rs. 4 lakhs from a company. The Income-tax Officer computed the assessee's income at Rs. 3 lakhs and odd, under s. 12(1B) read with s. 2( 6A) ( c) of the Income-tax Act, 1922. That amount included a sum of over Rs. 2 lakhs representing tho accumulated profits of the company. The assessee's share in the accumulated profits, if distributed as dividend, D would be an amount proportionate to the number of shares held by him. He therefore contended, that the balance of the accumulateu profits was not his income and that the Legislature was not competent to enact the two sectiO,!lS according to which that amount was also treated as his income. His writ petition in the High Court challenging the constitutional validity of the two sections \Vas dismissed. He appealed to the Supre1ne Court. E HELD (Per Gajendragadkar, C. J. Wanchoo, Hidayatullah and Mudhol-kar JJ.) : (i) The sections are not beyond the legislative competence of Parliament. The companies to which s. 12( lB) applies are companies in which at least 75% of the voting power lies in the hands of persons other than the public. They are controlled by a group of persons allied together and having the same interest. The controlling group can dete~mine \vhether the profits made by the company should be distributed as dividends or not. F When they deliberately refused to distribute the accumulated profits as dividends but adopted the deYice of advancing the profits by way of loan to one of the shareholders, it was with the object of evading the pa}ment of tax by the company on the accumul_ated protits. Section 12( IB) provides that if a controlled company adopts 'the device of making a loan to one of its shareholders, he will be deemed to have1 received the amount out of the accumulated profits as dividend and would be liable to pay tax on his 'income. The word "income" in Entry 82 in List I of the 7th Schedule to G the Constitution must receive a wide interpretation depending on the facts of each case. Having regard to the fact that the Legislature was aware of the devices to evade tax, it would be within its competence to devise a fiction for treating an ostensible loan as the receipt of the dividend. [919 A-H: 920 H; 921 C-DJ (ii) The absence of a provision enabling the. income-tax officer to consider in each case whether the loan was genuine or the result of a H device does not make the section go. beyond the competence of the Legis" lature. [921 D-EJ If the Legislature thought that in almost every case the advances or Joans were the result of a device to evade tax, it would be competent to· it to prescribe a fiction and hold that in cases of such advances or loans, tax should be recovered fro1n the shareholder on the basis that he had received a d1v1<le11d. [921 G-J;ll (iiiJ Sec1ion 12(18) docs not impose an unreasonable restriction on the appcdant's fundiimental rights under An. 19(1 )(() antl (g) ot the Cons1itu1ion. [922 A] 909