COMMISSIONER OF INCOME TAX MADRAS Vs. A M M MOHAMMAD IBRAHIM SAHIB

JUDGEMENT

(1.) THE Tribunal has submitted a revised statement of the case recording its finding that the assessee had a controlling interest in the non-resident company to which he transferred the entire assets and goodwill of his proprietory concern. It has also found that the shares standing in the names of his sons in the company were genuinely allotted to them, that subsequent to the formation of the company, the sons have been enjoying the dividends from the company with respect of the income received by the sons. It has further held that even if the assessee's transfer of his assets to the non-resident company is held to come within the purview of section 44D (1) and clauses (5) and (6) thereof, such a transfer should be held to be saved from the operation of the provisions of the section by sub-clause (3) as it was a bona fide commercial transaction falling within clauses (a) and (b) thereto.

(2.) WE shall consider whether the Tribunal was right in its conclusion that the transaction was one that is saved by the provisions of section 44D sub-clause (3) (a) of the Income Tax Act, 1961. There is no controversy about the facts. The assessee was originally carrying on business in hardware and as general merchant, exporter and importer at Colombo. The business itself was established as early as 1826 during the time of the great grandfather of the assessee. Sometime in 1948 the assessee appears to have made up his mind to leave Ceylon for good and to settle down in this country. He had six sons who were then all majors and to them he made a gift of six out of the eight items of immovable properties he owned in Ceylon. The assets and the goodwill of the business he was carrying on were then transferred to a private limited company of which he was the major shareholder the other shareholders being his sons. The Tribunal has found that the transfer to the newly formed company was made by reason of the advancing age of the assessee and with a view to put the business on a secure foundation and that the controlling interest which the quondam proprietor reserved to himself in the affairs of the company was with the object of guiding his sons, the other directors of the company, who had not yet gained sufficient experience therein. On the materials available there can be no doubt that the transfer to the non-resident company was a bona fide one with a view to preserve the business to the family. It is true that the assessee could have achieved this object by forming a partnership between himself and his sons but a partnership might be dissolved and anything like pursuance could not be ensured.

(3.) IN either case the essential element is the intention to avoid the tax liability. The mere fact that the transfer results in the avoidance of the tax liability (as it always would) cannot mean that there was an intention to avoid such liability. There can be cases where the transfer is made for other purposes or with other objects. IN such a case the avoidance of liability to taxation is merely an incident or effect of the transaction.Mr. Ranganathan, appearing for the department, contended that in order that the provisions of section 44D(3) (a) should apply, the avoidance of tax liability should not have entered into the mind of the assessee at all and that even in a case where the main purpose of the transaction was not the avoidance of taxation, the assessee should be deemed to have had the purpose of avoiding tax when once it is established that he was conscious of the effect of the transaction. We cannot, however, accept the contention. To do so, would mean that in no case can the provisions of section 44D(3) (A) apply for in every case where there is a transfer of an income producing asset to a non-resident company, there will be avoidance of tax and the assessee who transfers such assets would certainly know or be presumed to know that the effect of the transfer would be that the tax liability would be avoided. The provisions of section 44D(3) (a) can, if the argument were to be accepted, never apply.