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

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 assessees 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. 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. It is not surprising that the assessee with a view to preserve the business carried on by his ancestors and which had been existing for more than a century, formed the company the continued existence of which would not depend upon the vagaries of the individual partners. The dominant object of the transfer of the assets could not, therefore, be said to be for the purpose of avoidance of liability to tax. But at the same time it cannot be disputed that the effect of the transfer will be to avoid Indian Income-tax. The assessee who was till then liable to tax on the income earned by the business would no longer be liable to pay such tax as the income had become that of the non-resident company which would not be liable to income-tax in this country. The Tribunal while holding that the transfer to the non-resident company was not made with the object of avoidance of Indian Income-tax stated :

(3.) IN our opinion, the transfer could not be held to be one of the purposes for the avoidance of liability to taxation. The provisions of section 44D(3) (a) would apply to such a case. IN this view it is unnecessary to consider the correctness or otherwise of the other findings of the Tribunal. We answer the question in the negative and in favour of the assessee who will be entitled to his costs. Counsels fee Rs. 250.