Law:

Section:

Section 94 of the Income-tax Act, 1961 - (Corresponding to section 44 F of the Indian Income -tax Act, 1922) - Avoidance of tax by certain transactions in securities - Assessment year 1957-58 - Assessee-firm sold shares of certain companies to trusts created for benefit of family members of partners and one charitable trust controlled by their families - Tribunal found as fact that transfers in question had been made prior to declaration of dividends and thereby, assessee, was completely divested of ownership of shares prior to declaration of dividends - Whether avoidance of tax in aforesaid circumstances was permissible, and, therefore, provisions of section 44 F of 1922 Act, were not attracted - Held, yes FACTS During the relevant accounting period, the assessee-firm had sold the shares of certain companies, to the trusts created for the benefit of minor children of the partners, wives and mothers of the partners and one charitable trust controlled by the family. The transfers of shares took place just before the declaration of dividends. As the assessee-firm was the agent of the company it was taken that it had knowledge about the declaration of such dividends. The sales were made only at the face value which was much below the market value. In spite of the transfer of such shares, the assessee continued to be the managing agent and enjoyed the necessary privileges. Under these circumstances, the Income-tax Officer brought to tax, under the provisions of section 44 F, certain amount as deemed income. On appeal, the AAC came to the conclusion that for avoidance of tax to exist : (1) A person should be in receipt of an amount which was really and in truth income which would have been liable to tax, and (2) The payment of tax was avoided by some artifice or device. The AAC held that the first ingredient was absent. There was nothing to show that the assessee had received anything in lieu of the dividend income which went to the transferees. He also held that the question of the second ingredient did not arise when the first itself was absent. This was found to be a simple case of planned reduction of tax liability by transfer of assets to the kith and kin of…

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