Supreme Court Upholds Revenue's Assessment Under Section 44D of Income-tax Act Despite Income Not Being Taxable at Time of Asset Transfer. Partners of Firm That Transferred Assets to Non-Resident Corporation Assessable on Corporation's Income as They Acquired Right to Enjoy Income by Means of Transfer.

Income tax assessment dispute involving the applicability of section 44D of the Income-tax Act, 1922 to partners of a firm that transferred assets to a non-resident corporation.

The assessees (partners) sought to set aside the assessments made under section 44D in respect of the income of the non-resident corporation.

The Income-tax Officer assessed the partners separately on the income of the corporation, which the assessees contended was not permissible because the income was not taxable at the time of transfer and the transferor was the firm, not the individual partners.

The Appellate Assistant Commissioner confirmed the assessment. The Income-tax Appellate Tribunal allowed the assessees' appeals, holding that the income from the transferred assets was not assessable at the time of transfer. On reference, the High Court answered the question in favour of the Revenue, holding that section 44D applied.

Whether the partners were assessable under section 44D in respect of the income of the non-resident corporation when the transfer of assets was made by the firm and not by the partners individually. Whether section 44D(1) required that the income from the transferred assets be chargeable to tax at the time of transfer. Whether the phrase 'by means of a transfer of assets' in section 44D(1) limits its application to cases where the assessee himself is the transferor.

Assessees argued that since the income from the assets was not liable to tax at the time of transfer, section 44D could not be invoked. Revenue argued that the section uses passive language focusing on the result—the assessee acquiring a right to enjoy income by means of any transfer—and that the identity of the transferor is irrelevant; the section applies regardless of when the income becomes taxable.

Section 44D(1) of the Income-tax Act, 1922 uses the passive expression 'by means of a transfer of assets,' which emphasizes the result or consequence of the transfer, not the identity of the transferor. The words 'by means of' mean 'as a result or by virtue or in consequence of.' Therefore, if by a transfer of assets to a non-resident, the assessee acquires a right to enjoy income from those assets, the assessee is liable to tax, irrespective of who effected the transfer. Further, the word 'any' in 'any income' is wide and includes income that may become chargeable to tax in the future; the section does not require that the income be taxable at the time of transfer.

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.' The construction that s.44D(1) 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 Income-tax Officer assessed the partners under section 44D on the income of the non-resident corporation. On appeal, the Appellate Assistant Commissioner confirmed the assessment. The assessees appealed to the Income-tax Appellate Tribunal, which allowed their appeals on the ground that the income from the transferred assets was not assessable at the time of transfer. At the instance of the Revenue, the Tribunal referred the question of law to the High Court under section 66(1) of the Act. The High Court answered the question against the assessee. The assessees then appealed to the Supreme Court by special leave.

• Indian Income-tax Act, 1922: 44D