NAVNITLAL C. JAVERI versus K. K. SEN, APPELLATE ASSISTANT COMMISSIONER OF INCOME-TAX, D RANGE, BOMBAY

Citation: [1965] 1 S.C.R. 909 · Decided: 28-10-1964 · Supreme Court of India · Bench: P.B. GAJENDRAGADKAR · Disposal: Dismissed

Cited by 8 judgment(s) · cites 2 · see the full citation network in Lexace

Judgment (excerpt)

A 
B 
c 
D 
E 
F 
G 
H 
NA VNITLAL C. JA VERI 
v. 
K. K. SEN, APPELLATE ASSISTANT COMMISSIONER OF 
INCOME-TAX, 'D' RANGE, BOMBAY 
October 28, 1964 
(P. B. GAJENDRAGADKAR C.J., K. N .. WANCHOO, 
M. HIDAYATULLAH, R.AGHUBAR DAYAL AND 
J, R. MUDHOLKAR JJ.) 
Constitution of India, 1950, List I, '·vu Schedule, Entry 82-Income--
Income-tax Act (11of1922), ss. 2(6'.)(e) and 12(18)-Legislative com-
petence and constitutional validity. 
·· 
The assessee was a share holder in a private limitod company whose ordi-
naiy business was not money-lending -~usiness. He took a loan amounting 
to 1!fer Rs. 4 lakhs from a company. The Income-tax Officer computed 
the assessee's income at Rs. 3 lakhs and odd, under s. 12(1B) read with 
s. 2( 6A) ( c) of the Income-tax Act, 1922. That amount included a sum 
of over Rs. 2 lakhs representing tho accumulated profits of the company. 
The assessee's share in the accumulated profits, if distributed as dividend, 
would be an amount proportionate to the number of shares held by him. 
He therefore contended, that the balance of the accumulateu profits was 
not his income and that the Legislature was not competent to enact the 
two sectiO,!lS according to which that amount was also treated as his 
income. His writ petition in the High Court challenging the constitutional 
validity of the two sections \Vas dismissed. 
He appealed to the Supre1ne 
Court. 
HELD (Per Gajendragadkar, C. J. Wanchoo, Hidayatullah and Mudhol-
kar JJ.) : (i) The sections are not beyond the legislative competence of 
Parliament. 
The companies to which s. 12( lB) applies are companies in which at 
least 75% of the voting power lies in the hands of persons other than the 
public. 
They are controlled by a group of persons allied together and 
having the same interest. The controlling group can dete~mine \vhether the 
profits made by the company should be distributed as dividends or not. 
When they deliberately refused to distribute the accumulated profits as 
dividends but adopted the deYice of advancing the profits by way of loan 
to one of the shareholders, it was with the object of evading the pa}ment 
of tax by the company on the accumul_ated protits. Section 12( IB) provides 
that if a controlled company adopts 'the device of making a loan to one 
of its shareholders, he will be deemed to have1 received the amount out of 
the accumulated profits as dividend and would be liable to pay tax on his 
'income. The word "income" in Entry 82 in List I of the 7th Schedule to 
the Constitution must receive a wide interpretation depending on the facts 
of each case. 
Having regard to the fact that the Legislature was aware 
of the devices to evade tax, it would be within its competence to devise a 
fiction for treating an ostensible loan as the receipt of the dividend. [919 
A-H: 920 H; 921 C-DJ 
(ii) The absence of a provision enabling the. income-tax officer to 
consider in each case whether the loan was genuine or the result of a 
device does not make the section go. beyond the competence of the Legis" 
lature. [921 D-EJ 
If the Legislature thought that in almost every case the advances or 
Joans were the result of a device to evade tax, it would be competent to· 
• 
910 
SUPRnlE COURr REPORTS 
[1%5] I S.C.R. 
it to prescribe a fiction and hold that in cases of such advances or loans, 
A 
tax should be recovered fro1n the shareholder on the basis that he had 
received a d1v1<le11d. [921 G-J;ll 
(iiiJ Sec1ion 12(18) docs not impose an unreasonable restriction on 
.l. 
the appcdant's fundiimental rights under An. 19(1 )(() antl (g) ot the 
Cons1itu1ion. [922 A] 
l'hc sc..:tion doc5 not a!Tcct the appellant's right to borrcv• nl~)ncv. There 
is no clcn1cnt of unfairness, because the orhcr .<1hJrcholt.lc1s 
h·~1\'C deli-
berately agreed to make the loan or the advance and the shareholder to 
whom lhe Ivan is ::i.dvanccd deliberately ta!~es it \Vith a view 10 assist the 
company to evade the payment of tax ~nd to have the benefit of the use 
of the amount subject to the payment of interest. 
The company receives 
interest, the shareholder enjoys the use of the money and in tlle process 
I.he payment of tax is evaded. 
Further, past tr<>.nsactions were excluded 
1rom the or-cration of the sc..:tion,; by the i!:~uc oi a circular by t!1c Central 
B::;ud u! Kc\ cnuc. 
l922 B-FJ 
Prr R"ghub .. r Dayal J. 
(disscntingi: 
(il 
Sections 2(6AI (e) and 
12(18) ol the lncon1c-1ax Ac1, 1922 as thl'.y s1ood 
in 
19)5 
a:·c 
void. 
[923 HJ 
It is n

Excerpt shown. Read the full judgment & AI analysis in Lexace.