Case: M.C.T.M. Chidambaram Chettiar Vs. Commissioner Of Income-Tax, Madras

2. Sir. M. Ct. M. Muthiah Chettiar, his wife Deivanai Achi, his two sons Chidambaram Chettiar and Muthiah Chettiar, and his two daughters Umayal Achi and Villia Murai Achi constituted an undivided Hindu family. The said family carried on moneylending business on an extensive scale in British India, Burma and elsewhere. Upto and inclusive of the year 1927-28, the undivided Hindu family was assessed to income-tax as such. During the assessment year 1928-29 it was claimed that a partition had taken place in the said family and that Sir M. Ct. M. Muthiah Chettiar and his two sons constituted a firm. The said firm was duly registered and it was assessed to income-tax. After the death of the said Sir M. Ct. M. Muthiah Chettiar in 1929, his two sons and his wife continued the firm and it was assessed to income-tax as a firm. In June 1929 the said firm started a new money lending business at Kuala Lumpur in the Federated Malaya States with a capital of Rs. 12 lakhs. The said capital was transferred from its business in Burma. On March 24, 1932, a company called the M. Ct. M. Banking Corporation, hereinafter called the Corporation, was incorporated in Pudukkotai. It commenced business on and from March 31, 1932. One of the purposes of the said Corporation was to acquire and carry on business which was being carried on by the firm in Kuala Lumpur. A branch of the Corporation was opened in Kula Lumpur on September 22, 1933. Between November 1, 1933, and November 9, 1933, assets of the firm of net value of Rs. 12 lakhs were transferred to the Corporation and in consideration of the assets so transferred, the Corporation allotted to the partners of the firm 1,200 shares of face value of Rs. 1,000 each. Though the Corporation commenced business in 1932, no dividends were declared by it. But in 1938 the Corporation distributed bonus shares of value of Rs. 5 lakhs out of the profits of Rs. 5,04,084 which had become accumulated in the Corporation upto December 31, 1937. On December 31, 1938, out of the total shares of 2, 271 in the Corporation, the said two sons and the widow of Sir M. Ct. M. Muthiah Chettiar held 1,944 shares. From the assessment year 1933-34 to the assessment year 1938-39 the firm was treated as the agent of the Corporation and its income arising and accruing in British India was assessed in the hands of the firm which had its head office in Madras. For the assessment years 1939-40, 1940-41 and 1941-42, the Income-tax Officer, I Circle, Madras, assessed the said partners of the firm separately under S. 44D of the Act in respect of the income of the Corporation. Against the order of the Income-tax Officer, the three partners preferred appeals to the Appellate Assistant Commissioner, who rejected the same. Against the Orders of the Appellate Assistant Commissioner rejecting the appeals the assessees preferred appeals to the Income-tax Appellate Tribunal, Madras, Bench A. The Tribunal allowed the appeals of the assessees on the ground that the income from the assets transferred to the Corporation was not assessable to income-tax at the time of the transfer and that, therefore, the income therefrom was not liable to tax during the assessment years under S. 44D of the Act. At the instance of the Revenue, the following question of law was referred to the High Court of Madras for itsthe income made by the Corporation can be assessed under the provisions of S. 44-D of the Income-tax Act in the hands of the present assessees and if so, to whatDivision Bench of the High Court, by its judgment, dated August 4, 1958, held that the said income of the Corporation was attracted by S. 44-D of the Act, but before giving a final answer to the question propounded, it directed the Tribunal to furnish a further statement of case on the question whether the assessee were entitled to relief under sub-s. (3) (a) of S. 44-D of the Act. On December 23, 1958, the Tribunal submitted a finding that the assessees did not satisfy the requirements of the said sub-section. The High Court accepted the said finding and answered the question against the assessees in the affirmative. The present appeals were filed against the order of the High Court after obtaining a certificate from the said High Court.

Court's reasoning:
8. If the assessees were able directly or indirectly to control the income of Corporation, they would be deemed to have the power to enjoy its income. In the present case, the circumstances are overwhelming to establish that the assessees had a controlling voice in the affairs of the Corporation. They are closely related: two of them are brothers and the third is their mother. They were the partners of the firm which transferred the assets. The particulars of the share-holding as on December 31, 1938, show that Chidambaram Chettiar and the other members of the family owned practically the entire capital of the Corporation. The three partners owned 1,944 shares out of 2,271 shares of the Corporation and the balance was held by their close relatives. Apart from the three partners, the other share-holders were the son, sisters and the wife of Chidambaram Chettiar. It is obvious that the Corporation was a close one and the partners of the firm had the controlling voice in the management of the affairs of the Corporation. The argument that there is no evidence that there was unity of interest among the partners ignores the realities of the situation, for the history of the firm, the constitution of the Corporation, the manner the assets were transferred and the other circumstances brought out in the record lead to the only inference that the partners were acting in unison throughout. Indeed it is recorded in the statement of case that it was conceded before the Tribunal that the assessees had power to enjoy the income of the assets transferred with the meaning of S. 44-D (1) of the Act. In the circumstances, the High Court rightly held that the assessees had the power to enjoy the income within the meaning of S. 44-D (1) of the Act.9. Lastly it was contended that the income in question was saved from the operation of sub-s. (1) of S. 44-D of the Act by sub-s. (3) thereof. To state it differently, the transfer of the assets to the Corporation was not for a purpose to avoid the tax liability but was only a bona fide commercial transaction. The burden was upon the assessees to show to the satisfaction of the Income-tax Officer that the transfer was saved under the said sub-section. The Tribunal found as a fact on the material placed before it that the transfer was to avoid the liability to taxation; and that being a finding of fact, the High Court rightly accepted it. The correctness of the said finding of fact cannot be permitted to be canvassed in these appeals.