# M.CT.M. CHIDAMBARAM CHETIIAR v. COMMISSIONER OF INCOME-TAX, MADRAS

- **Citation:** [1966] 2 S.C.R. 761
- **Court:** Supreme Court of India
- **Decided:** 1965-11-29
- **Case number:** Civil Appeals Nos. 477 to 488 of 1964
- **Bench:** K. SUBBA RAo, J. C. Shah Ands. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-ct-m-chidambaram-chetiiar-v-commissioner-of-income-tax-madras-3752
- **Pages:** 9

## Headnote

761
Indian lncome4ax Act, 1922 (Act 11 of 1922), s. 44D-Firm transferred assets to Non-resident--lncon1e from Non-resident-If partners of
firm assessable separately.
A firm, constituted by the assessees who were closely related, transferred assets to a Corporation carrying on money-lending business in the
Federated Malaya States. · In consideration of the assets •o transferred
the Corporation allotted shares to the partners of the firm. The Incometax Officer assessed the partners of the firm separately under s. 44D of
the Act in respect of the income of the Corporation, which on appeals
were upheld by the Appellate
Assistant
Commissioner.
On
further
appeals by the assessees, the Tribunal allowed the appeals on the ground
that the income from the assets transferred was not assessable to tax at
the time of transfer. At the instance of the Revenue, the question was
referred to the High Court which was answered against the a:ssessee. In
appeal to this Court :
HELD : The High Court was
correct
in answering
the
question
against the assessee.
(i) The language of s. 440(1) of the Act is plain. It does not say
"when any person has transferred any assets" but it says, "by means of
a transfer of assets".
The person who transfers assets is not designated
but emphasis is laid on the consequence flowing from such a transfer.
Whosoever effects the transfer, if by such a transfer the assessee acquires
a right to enjoy the income, he is liable to tax. The words "means"
and
1'acquired" in the context., are only words of passive nature. The
hand that transfers is immaterial; what matters is the result envisaged by
the said section, namely a non-resident is the transferee of the assets,
but the assessee acquires the power to enjoy
the income
from those
assets.
The words "by means of a transfer of
assets'' mean nothing
more than "as a result or by virtue or in consequence of the transfer".
[765 E-G; 766 El
c·onttreve and ('t>ngreve v. Commissioner of Inland Ret,.~nu~, (1943-'49)
30 T.C. 163 and Bambrdige v. Commissioner of Inland Revenue, (1953-
'56) 36 T.C. 313, applied.
(ii) The construction that s. 44D(l) can be invoked only if at the
time of the transfer the income from the said assets was liable to tax, is
not only inconsistent with the phraseology used but will defeat the object
of the section.
The express~ons "any income'',
11such income" and "Lbat
income" found in the sub-section refer to the same income.
What is
assessed in a particular year is that income which is deemed to be the
income in the hands of asscssee.
"That income" is such income in re~
gard whereof he has "the power to enjoy".
"Such income" is any income which if it were the income of the assessee would be chargeable
to income-tax.
The quality
of chargeability
is referable only to the
income from the assets transferred during the year in which it is sought
to be asoesocd. [766 F; 767 Bl
762
SUPREME COURT REPORTS
(1966] 2 S.C.R.
(iii) If the asscssees were able directly or indirectly to control the
mcome of the Corporation, they would be deemed to have the power
to enjoy· the income. Sub-section (5) of s. 44D gives an enlarged meaning to the words "power to enjoy" in sub-s. ( 1).
.
In the present case, the circum1Stances were overwhelming to establish that the assessees had a controlling voice in the affairs of the Corporation. They were closely related, holding almost all the shares of the
Corporation, and were the partners of the firm which transferred the
assets. [767 H; 768 B-C]
(iv) The burden was upon the assesee to show to the satisfaction of
the Income-tax Officer that the transfer was saved under sub-section (3)
of s. 44D inasmuch as it was not for a purpose to avoid tax liability but
was only a bona fide commercial transaction. 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

## Text

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M.CT.M. CHIDAMBARAM CHETIIAR
v.
COMMISSIONER OF INCOME-TAX, MADRAS
November 29, 1965
[K. SUBBA RAo, J. C. SHAH ANDS. M. SIKRI, JJ.]
761
Indian lncome4ax Act, 1922 (Act 11 of 1922), s. 44D-Firm transferred assets to Non-resident--lncon1e from Non-resident-If partners of
firm assessable separately.
A firm, constituted by the assessees who were closely related, transferred assets to a Corporation carrying on money-lending business in the
Federated Malaya States. · In consideration of the assets •o transferred
the Corporation allotted shares to the partners of the firm. The Incometax Officer assessed the partners of the firm separately under s. 44D of
the Act in respect of the income of the Corporation, which on appeals
were upheld by the Appellate
Assistant
Commissioner.
On
further
appeals by the assessees, the Tribunal allowed the appeals on the ground
that the income from the assets transferred was not assessable to tax at
the time of transfer. At the instance of the Revenue, the question was
referred to the High Court which was answered against the a:ssessee. In
appeal to this Court :
HELD : The High Court was
correct
in answering
the
question
against the assessee.
(i) The language of s. 440(1) of the Act is plain. It does not say
"when any person has transferred any assets" but it says, "by means of
a transfer of assets".
The person who transfers assets is not designated
but emphasis is laid on the consequence flowing from such a transfer.
Whosoever effects the transfer, if by such a transfer the assessee acquires
a right to enjoy the income, he is liable to tax. The words "means"
and
1'acquired" in the context., are only words of passive nature. The
hand that transfers is immaterial; what matters is the result envisaged by
the said section, namely a non-resident is the transferee of the assets,
but the assessee acquires the power to enjoy
the income
from those
assets.
The words "by means of a transfer of
assets'' mean nothing
more than "as a result or by virtue or in consequence of the transfer".
[765 E-G; 766 El
c·onttreve and ('t>ngreve v. Commissioner of Inland Ret,.~nu~, (1943-'49)
30 T.C. 163 and Bambrdige v. Commissioner of Inland Revenue, (1953-
'56) 36 T.C. 313, applied.
(ii) The construction that s. 44D(l) can be invoked only if at the
time of the transfer the income from the said assets was liable to tax, is
not only inconsistent with the phraseology used but will defeat the object
of the section.
The express~ons "any income'',
11such income" and "Lbat
income" found in the sub-section refer to the same income.
What is
assessed in a particular year is that income which is deemed to be the
income in the hands of asscssee.
"That income" is such income in re~
gard whereof he has "the power to enjoy".
"Such income" is any income which if it were the income of the assessee would be chargeable
to income-tax.
The quality
of chargeability
is referable only to the
income from the assets transferred during the year in which it is sought
to be asoesocd. [766 F; 767 Bl
762
SUPREME COURT REPORTS
(1966] 2 S.C.R.
(iii) If the asscssees were able directly or indirectly to control the
mcome of the Corporation, they would be deemed to have the power
to enjoy· the income. Sub-section (5) of s. 44D gives an enlarged meaning to the words "power to enjoy" in sub-s. ( 1).
.
In the present case, the circum1Stances were overwhelming to establish that the assessees had a controlling voice in the affairs of the Corporation. They were closely related, holding almost all the shares of the
Corporation, and were the partners of the firm which transferred the
assets. [767 H; 768 B-C]
(iv) The burden was upon the assesee to show to the satisfaction of
the Income-tax Officer that the transfer was saved under sub-section (3)
of s. 44D inasmuch as it was not for a purpose to avoid tax liability but
was only a bona fide commercial transaction. 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
te permitted to be canvassed in these appeals. [768 G-769 A]
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 477 to
488 of 1964.
Appeals from the judgment aud order dated October 16,
1959 of the Madras High Court in Case Referred No. 31 of
1954.
N. A. Palkhivala, C. Ramakrishna, 0. C. Mathur and J. B.
Dadachanji for the appellants.
A. V. Viswanatha Sastri, Gopal Singh, R. N. Sachthey and
B. R. G. K. Achar, for the respondent.
The Judgment of the Court was delivered by
Sobba Rao, J.
These appeals raise the question of the liability of the appellants to pay income-tax under s. 44D (1) of the
Indian Income-tax Act, 1922, hereinafter called the Act, in respect
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<>f the income of the M.C.T.M. Banking Corporation Limited.
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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 Vallia 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
finn 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
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CHIDAMBARAM v. C.I.T. (Subba Rao, J.)
763
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 Kuala Lumpur on
September 22, 1933. Between November 1, 1933, and November 31, 1937.
On December 31, 1938, out of the total shares
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 up to DecemD ber 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
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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 orders of the Income-tax Officer, the three partners
F 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
~he income from the assets trailsferred to the Corporation was
G '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 its opinion :
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"Whether the income made by the Corporation can
be assessed under the provisions of Section 44-D of the
Income-tax Act in the hands of the present assessees and
if so, to what extent."
764
SUPREME
COURT
REPORTS
[1966] 2 S.C.R.
A Division Bench of the High Court, by its judgment, dated
·August 4, 1958, held that the said income of the Corporation
was attracted by s. 44D 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
assessees were entitled to relief under sub-s. (3)(a) of s. 44D 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.
We shall now proceed to consider the arguments advanced
by Mr. Palkhivala, learned counsel for the assessees, in support
of his contention that the income of the Corporation was not
assessable to tax in the hands of the assessees.
As all his arguments tnrned upon the provisions of s. 44D of the Act, it would
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be convenient to read the same at the outset :
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"Where any person has, by means of a transfer of
assets, by virtue or in consequence whereof, either alone
or in con junction with associated operations, any
income which if it were the income of such person
would be chargeable to income-tax becomes payable
to a person not resident or to a person resident but not
ordinarily resident in the taxable territories, acquired
any rights by virtue or in consequence of which he has
within the meaning of this section power to enjoy such
income, whether forthwith or in the future, that income
shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this
section, be deemed to be income of such first mentioned
person for all purposes of this Act."
'Chapter VB was inserted in the Income-tax Act, 1922, by the
indian Income-tax (Amendment) Act, 1939 (Act VII of 1939).
'Section 44D is one of the sections of that Chapter. The provi·
sions of this Chapter were modelled on s. 18 of the English
Finance Act of 1936, as amended by s. 28 of the English
Finance Act of 1938. The object of s. 440 of the Act, as
disclosed by the provisions thereof, was to prevent residents of
'India from evading the payment of income-tax by transferring
'their assets to non-residents while enjoying the income by adopting devious methods. The sub-section suffers from want of clarity,
but a deeper scrutiny brings out the following ingredients of it :
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CH!DAMBARAM v. C.I.T. (Subba Rao, J.)
765
(i) there must be a transfer of assets; (ii) by reason of that transfer,
income traceable to the said assets becomes payable to a person
non-resident or to a person resident but not ordinarily resident
in the taxable territories; (iii) the resident by means of the transfer alone or in conjunction with associated operations, acquires
right to enjoy such income; (iv) the income from the said assets,
if it was the income of the resident, would be chargeable to
income-tax; and (v) in that event, the income of the non-resident
would be deemed to be the income of the resident for all the
purposes of the Act. Shortly stated, under this section, if a resident has power to en joy the income accruing or arising out of the
assets transferred to a non-resident, he would be deemed to have
received that income and, therefore, would be liable to be assessed
under the Act.
The first contention of Mr. Palkhivala is thac .the expression
"by means of a transfer" in s. 44D(l) of the Act means a transfer
by an assessee and that, as in the instant case the transfer was
by the firm which was a juristic entity separate from the assessees,
the income of the Corporation was not assessable to tax in their
hands.
The language of the sub-section is plain. It does not say
"when any person has transferred any assets", but it says, "by
means of a transfer of assets".
The person who transfers assets
is not designated but emphasis is laid on the consequences flowing from such a transfer. Whosoever effects the transfer, if by
such a transfer the assessee acquires a right to enjoy the income,
he is liable to tax.
The words "means" and "acquired" in the
context are only words of passive nature. The hand that transfers
is immaterial : what matters is the result envisaged by the said
section, namely, a non-resident is the transferee of the assets but
the assessee acquires the power to enjoy the income from those
assets.
This construction is supported by the decisions of English
Courts given on a section which is in pari materia with the
relevant part of s. 44D(i) of the Act. The material part of s. 18
of the English Finance Act, 1936, as amended by s. 28 of the
English Finance Act, 1938, reads:
( 1) Where such an individual has by means of any
such transfer, either alone or in conjunction with associated operations, acquired any rights by virtue of which
he has, within the meaning of this section, power to
enjoy, whether forthwith or in the future, any income
of a person resident or domiciled out of the United
Kingdom which, if it were income of that individual
766
SUPREME
COURT
REPORTS
[1966] 2 S.C.R.
received by him in the United Kingdom, would be
chargeable to income-tax by deduction or otherwise,
that income shall, whether it would or would not have
been chargeable to income-tax apart from the provisions of this section, be deemed to be income of that
individual for all the purposes of the Income-tax Acts.
It would be noticed that in the said sub-section, as in s. 440(1)
of the Act, both the expressions "by means of any such transfer"
and "acquired" are present.
In Congreve
and
Congreve v.
Commissioners of Inland Revenue('), Lord Simonds, repelling
the argument similar to that presented to us, observed :
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" ...... it is to my mind clear, first, that in their
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ordinary grammatical sense the words "by means of"
do not connote any personal activity on the part of the
person who is said to enjoy or suffer something by those
means, and, secondly, that in their present context it
is not necessary or legitimate in order to give a limiting
sense to the words to read them as if they were followed
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by such word as "effected by him"."
This view was followed by Harmam, J., in Bombridge v. Commissioners of Inland Revenue( 2 ).
The words "by means of a
transfer of assets" mean nothing more than "as a result or by
virtue or in consequence of the transfer".
We, therefore, reject
the first contention of the learned counsel.
The second contention is that the said sub-section can be
invoked only if at the time of the transfer the income from the
said assets was liable to tax and that, as in the present case when
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the transfer of the assets was effected in 1933 the income therefrom was not chargeable to income-tax-for it was foreign
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income not remitted to India-the said assets fell outside the ken
of the said sub-section.
This argument was sought to be sustained on the express terms of s. 440(1) of the Act. The clause
"any income which if it were the income of such person would
be chargeable to income-tax'', it is said, is descriptive of the
assets transferred and constitutes a limitation on the operation of G
the section. This construction is not only inconsistent with the
phraseology used but will defeat the object of the section. The
expressions "any incon1e", "such income" and "that inco1ne"
found in the sub-section refer to the same income.
What is
assessed in a particular year is that income which is deemed to
be the income in the hands of the assessee.
"That income" is
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such income in regard whereof he has "the power to enjoy''.
(1) (1943-'49) 30 T.C. 163.
(2) (1963-'56) 36T.C. 313.
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CHIDAMBARAM v. C.I.T. (Subba Rao, J.)
767
"Such income" is any income which if it were the income of the
assessee would be chargeable to income-tax.
The quality of
chargeability is referable only to the income from the assets
transferred during the year in which it is sought to be assessed.
As Balakrishna Ayyar, J., pointed out in the judgment under
appeal, to accede to the argument of the assessee, the words in
s. 44D(l) of the Act should actually read this way : "any income
which had it been the income of such person would have been
chargeable to income-tax." But the words read otherwise thus :
"any income which if it were the income of such person would
be chargeable to income-tax".
The tense refers to the assessment year and not to the year when the transfer was affected.
Learned counsel for the assessees contended that this construction
would affect adversely a bona fide transferor of assets who could
not possibly have anticipated that the income from such assets
would be chargeable to tax in future and that that could not have
been the intention of the· Legislature.
As indicated earlier, the
sub-section is not concerned with the transferor but only with
the result brought about by means of the transfer of the assets
in conjunction with associated operations.
The sub-section was
designedly couched in the widest phraseology to prevent evasion
of tax in the manner prescribed thereunder. If it was not so,
a person can transfer his assets to another in a year they have
not yielded any income at all, reserving indirectly the right to
enjoy the income therefrom in future or he may transfer his
assets when they are not yielding any income, but which may,
under a scheme of future development, yield enormous profits.
On the other hand, a bona fide transferor is amply protected by
sub-s. (3) of s. 440 of the Act.
We, therefore, find no merits
in this contention either.
The next submission of the learned counsel for the assessees
is that the assessees had not acquired, by means of the said
transfer of assets to the Corporation or in consequence
thereof, any power to enjoy the income therefrom within the
meaning of s. 440(1) of the Act.
While conceding that, if the
assessees had the controlling share in the corporation, they would
have the power to enjoy its income, it was said that there was no
evidence on which it could be held that the assessees, though
closely related, were acting in unison and were controlling the
affairs of the Corporation. Sub-section ( 5) of s. 440 gives all'
enlarged meaning to the words "power to enjoy" in sub-s. (!).
The relevant clause of that sub-section is cl. (e), which reads:
(5) A person shall, for the purposes of this section,
be deemed to have power to enjoy income of a person
768
SUPREME
COURT
REPORTS
[1966) 2 S.C.R.
not resident, or resident but not ordinarily resident, in
the taxable territories, if-
(e) such first-mentioned person is able, in any
manner whatsoever and
whether
directly
or
indirectly, to control the application of the income.
If the assessees were able directly or indirectly to control the
income of the 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 1944 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 shareholders 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 within the meaning
of s. 44D(l) 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. 44D(l) of the Act.
Lastly it was contended that the income in question was
saved from the operation of sub-s. (1) of s. 44D of the Act by
sub-s. (3) thereof.
To state it differently, the trans'.er 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
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CHIDAMBARAM v. C.I.T. (Subba Rao, !.)
769
it.
The correctness of the said finding of fact cannot be permitted to be canvassed in these appeals.
In the result, we hold that the High Court has answered the
question correctly.
The appeals fail and are dismissed with costs.
One hearing fee.
Appeal dismissed.