1. The Income-tax Appellate Tribunal, Chandigarh Bench, has referred the following questions of law for our opinion :

"1. Whether, on the facts and in the circumstances of the case, the Income-tax Officer was justified in applying the provisions of Section 94(2) to the case ?

2. Whether, on the facts and in the circumstances of the case, the assessee was not entitled to the benefit of the provisions of Section 94(3)(b) of the Income-tax Act, 1961 ?"

2. The assessment year in question is 1962-63. The assessee is an individual. He was a managing director of the Hindustan Embroidery Mills (Private) Ltd., Chheharta, Amritsar. He held 16,955 shares in the said company. In his capacity as a managing director, he was actively engaged in the affairs of the company. The board of directors of the company by its report dated 18th December, 1961, made the following recommendation :

"We recommend that a sum of Rs. 1,70,000 be reserved for income-tax and out of the balance, dividend amounting to Rs. 1,41,690 at 20 per cent. of the paid up capital be paid to the shareholders. Out of the balance of Rs. 64,690.85, the sum of Rs. 40,000 be transferred to rehabilitation reserve account. The balance of Rs. 24,690.85 be carried forward."

3. At the ordinary annual general meeting of the company, held on 27th January, 1962, the proposed dividend was declared.

4. Before the declaration of the dividend between 17th January, 1962, and 19th January, 1962, the assessee disposed of 12,500 shares of the company in the following manner :

5. The Income-tax Officer came to the conclusion that the assessee's income from different sources was more than Rs. 80,000. He also observed that by reason of the declaration of the dividend on the shares of the company, his income would exceed Rs. 1,00,000. In order to avoid higher incidence of tax, according to the Income-tax Officer, these shares were transferred so as to reduce his income. Thus, the provisions of Section 94(2) of the Income-tax Act, 1961, were invoked. The Income-tax Officer also rejected the assessee's contention that these transactions of sale and gift were covered by the exception in Section 94(3)(b). The dividend declared by the company amounting to Rs. 25,000 was accordingly included in the assessee's total income under Section 94(2) of the Act.

6. The assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax regarding the inclusion of the dividend of the transferred shares in his income. This appeal was rejected by the Appellate Assistant Commissioner and the order of the Income-tax Officer was affirmed. The Appellate Assistant Commissioner while rejecting the appeal on the points in controversy observed as follows :

"It is impossible to escape from the conclusion that the transfers made by the appellant and Shri Ram Singh Uppal were in furtherance of a common design to reduce the incidence of taxation. The only point which remains for consideration is whether, on these facts, the transfers were 'exceptional and not systematic' in terms of Section 94(3)(b)."

7. After noticing the decision in Bilsland v. Commissioners of Inland Revenue, [1936] 20 T.C. 446 (K.B.) it was observed :

"With great respect, if the object of Section 94(2) is to frustrate a plan for reduction of the incidence of taxation, it would not be served if the interpretation given in Bilsland's case is applied to Section 94 The dictionary meanings of 'system' include 'plan' and the dictionary meanings of 'systematic' are 'pertaining to, or consisting of, for the purpose of, observing, or according to system, methodical, habitual, intentional' (Chambers' Twentieth Century Dictionary). Since the word 'exceptional' is used in Section 94(3)(b) in contradistinction to 'not systematic', it would appear from a reading of the judgment in Bilsland's case that the word 'systematic' was interpreted in that case as the opposite of 'planned', for the court observed that the more planned or devised the avoidance is, the more exceptional it is'. Thus, the interpretation in that case does not appear to fit in with the normally accepted meanings of the word 'systematic'. Another point to be noticed is that under Sub-sections (1) and (2) of Section 94, single transactions resulting in avoidance of tax are brought in the net, for the word 'transaction' is used in those sub-sections in the singular. It, therefore, appears to me that the word 'exceptional' does not have any reference to the number of transactions which have resulted in the avoidance of tax, but has reference to the absence or presence of a plan behind the transactions. If the avoidance was unintentional, it must be held to be exceptional but if the circumstances indicated that there was a plan behind it, it was not exceptional but systematic. In the case under consideration, I have held that there was a plan to avoid tax. This plan is clear from the nature of transfers and the circumstances in which they have been effected, in favour of close relations of the appellant, without any financial necessity in the case of sales. I, therefore, hold that the Income-tax Officer was justified in rejecting the appellant's case that the avoidance of income-tax arising from the transaction was exceptional and not systematic."

8. The assessee preferred a further appeal to the Income-tax Appellate Tribunal. The Tribunal rejected the appeal of the assessee and affirmed the decision of the Appellate Assistant Commissioner. After considering the Bilsland's case: and the decision of the Gujarat High Court in Commissioner of Income-tax v. Sakarlal Balabhai, [1968] 69 I.T.R. 186 (Guj.) the Judicial Member of Tribunal observed as follows :

In the facts before us, there was no such emergency. The assessee had simply sold 2,500 shares to his wife and another 2,500 shares to his son and gifted the equal number of shares to his one daughter-in-law and another to his future daughter-in-law. The transfer had been made only a few days before the declaration of the managing agency company in respect of the profits of the accounting year ending July 31, 1961. A recommendation of dividend of 20% out of the paid-up capital had earlier been made on December 18, 1961. The assessee was not in any sort of predicament either of discharging any imminent liability or in a process of winding-up or the declared dividend was not deemed dividend within the meaning of Section 2(22)(c) of the 1961 Act. The contentions of the learned counsel for the assessee, therefore, cease to be as effective as it appears to be on the face of it because the facts of the case before the Gujarat High Court were at complete variance from the facts before us. The state of law as it was under the old Act of 1922, and the state of law as it is under the 1961 Act, also appears to be different and differ significantly.

9. Thereafter, the Tribunal contrasted the language of Section 44F, Income-tax Act, 1922, and Section 94, Income-tax Act, 1961, and quoted extensively from the decision in Sakarlal Balabhai's case, and observed as follows :

The omission of the words 'avoided or would avoid' in Section 94 assumes greater significance in view of the fact that Section 94 merely mentions that 'the result of any transaction relating to such securities or the income thereof is that in respect of such securities within such year either no income is received by him or the income received by him is less than the sum, etc.' Therefore, the observations of the learned Chief Justice 'may not apply wholly to the provisions of section 94 inasmuch as the emphasis in Section 94(2) is not on 'avoidance of tax', but on 'either no income is received by him or the income received by him is less than the sum, etc., to which the income would have amounted, etc. Even under Section 44F, the learned judges had held that in the case before them there was avoidance of tax. I, therefore, feel that the judgment of the Gujarat High Court is of little avail to the assessee even when the same is very illuminating on the provisions of Section 44F, The omission of the words 'more than ten per cent. of the amount of income-tax and super-tax' from Section 94 is also of interest inasmuch as under Section 44F it appears that the avoidance of tax should have been of more than 10 per cent. of the amount whereas in Section 94 there is no such limitation imposed. The only criterion is 'either no income is received by him or the income received by him is less . . . .' Section 94(2) concludes that 'then the income from such securities for such year shall be deemed to be the income of such person '. But, the words used in Section 44F are 'then those securities shall be deemed to be securities to which Sub-section (3) applies'. The intention of the legislature in omitting the words as used in Section 44F and using entirely new language in Section 94(2) of the new Act is clearly directed to the sole purpose of spreading the net wider than it was under Section 44F of the old Act. It might be a compliment to the farsightedness of the draftsmen of the new Act of 1961, with particular reference to Section 94,

10. While dealing with the contention of the assessee that the case was covered by Section 94(3)(b), again reference was made to the decision in Sakarlal Balabhai's case, and after noticing the contention of the assessee that the case was covered by Section 94(3)(b), observed :

"But this construction cannot be accepted and there are several reasons why it does not appeal to us. One reason is that the requirement that the avoidance must be intentional or designed is already brought in by Sub-section (2) and if the avoidance is not designed or deliberate it would not be avoidance within the meaning of that Sub-section and Section 44F would not apply and there would be no necessity to provide for exemption under the proviso. Secondly, if the legislature wanted to prescribe in the proviso that avoidance must not be designed or deliberate, 'no legislature could have used the words 'designed' or 'purposeful' or 'deliberate' or 'intentional' but instead, the legislature used the word 'systematic'. Moreover, it is well-settled rule of interpretation that where two or more words susceptible of analogous meaning are coupled together noscitur a sociis they take as it were their colour from each other. Being associate words they explain and limit the application of each other. The juxtaposition of the words 'exceptional and not systematic' shows that the legislature was using the words systematic in contradistinction to 'exceptional'. The avoidance of tax must be exceptional, that is, by way of exception to the normal practice of the assessee and it should not be systematic, that is, part of a regular reprehensible practice carried on by the assessee.

'Exceptional' has been defined by Cassell's New English Dictionary as 'forming an exception, unusual, extraordinary, unprecedented' and 'systematic' as methodically done, formed or arranged on a regular plan, not haphazard, and in the Oxford Shorter Dictionary, as 'methodical' 'according to a plan', 'not casual or sporadic or unintentional'. Looking to the plain meaning of the word 'systematic' and facts of the case before us and the point of time at which the transfer has been effected, I can arrive at the only conclusion that the said transfer was 'methodically done, formed or arranged on a regular plan, not haphazard'; it was not 'casual or sporadic or unintentional' because the assessee was neither in the imminent need of discharging a liability nor was there any immediate business need for such transfer. The transfer has been made in favour of persons who were otherwise affluent and whose assessed income was considerable. The assessee being a managing director of the company, a closely held company by the members of the family, was well aware of his mounting tax liability in view of the fact that his income was already being assessed in the range of about a lakh of rupees, the transfer was a designed and deliberate, well-planned act so that 'no income is received by him' in respect of the shares so transferred. When looking to the circumstances in their entirety and the time of the resolution recommending the dividends the transfer of shares and the actual declaration of dividends, the only irresistible conclusion which I can arrive at is that the transfer was a well-designed, deliberate act of the assessee to circumvent the provisions of Section 94(2) and was, therefore, completely systematic and the avoidance of income-tax, therefore, was not exceptional."

11. The Accountant Member of the Tribunal agreed with the Judicial Member but summed up his reasons as follows :

"1. After going through the facts, my learned brother, is of the opinion that the main purpose, if not the only purpose, behind the sale and gift was avoidance and reduction of tax liability. I agree with him that there is a good case for coming to the conclusion or finding of fact that the main purpose was avoidance or reduction of tax liability. The reason for this conclusion is proximity of dates and the fact that Shri Gurdial Singh Uppal, being the managing director of the private limited company, was in the know of things and he could easily calculate the tax effect of the transfer of shares by way of sales or gifts. I agree that the main purpose was reduction of tax liability.

2. The second conclusion in law which my learned brother arrives at is that Section 94(2) is more onerous than Section 44 F. I agree with this conclusion also. In this connection, I may point out that both Sections 44F as well as 94(2) are anti-avoidance sections and, originally, the idea was to tax such dividends which were apparently transferred to a third person, but which came back to the assessee in some form or the other. The new Act, undoubtedly, gives an impression that the intention of the legislature now is to tax dividends which have been transferred to some one else with a purpose to reduce the tax incidence. In the present case, the facts are still against the assessee, although the shares did not come back, because the transfer of shares was to close relations. I agree with my learned brother that Section 94 as drafted is more onerous than Section 44F. Although I am clear in my mind that this inference can be read into the new Act yet I am not very sure whether the intention of the scheme of the legislature was to make it more onerous. Be that as it may, we must interpret these sections as they are, i.e., against the assessee.

3. The third conclusion of my learned brother is that the decision of Justice Bhagwati is not applicable in the present case because the law is substantially different. I have already said that Section 94 is more onerous (and in any case certainly not in pari materia with the old section). Therefore, the judgment of Justice Bhagwati cannot be bodily taken over for the solution of the present case."

and concluded :

"In this case, the assessee, Shri Gurdial Singh Uppal, has parted with both the corpus and the dividends. Prima facie, it would, therefore, appear that there is no case for invoking the, anti-avoidance section. However, this benefit would only cover the subsequent years and only in subsequent years, the dividend income ought to be assessed in the hands of the donees or the donor, as the case may be. I do not think that the Income-tax Officer would be justified in including the dividend income of the subsequent years in the hands of the assessee. However, in the first year of transfer, Shri Gurdial Singh Uppal is caught in the net of Section 94(2). In other words, in the first year of transfer, it becomes taxable in the hands of Shri Gurdial Singh Uppal, because the main purpose was 'avoidance or reduction of the tax liabilities'. Consequently, the income would not be assessable in the hands of Shri Gurdial Singh Uppal or will be assessable in the hands of the donees."

12. The assessee then moved an application under Section 256(1) of the Income-tax Act, 1961, requiring the Tribunal to state certain questions of law for the opinion of this court. The Tribunal allowed the application and referred the two questions of law set out in the opening part of this judgment.

13. The learned counsel for the assessee has advanced two contentions. His first contention is that the decision of the Gujarat High Court in Sakarlal Balabhai's case does apply in spite of the fact that the language of section 94 of the 1961 act is different from the language of Section 44F of the 1922 Act, under which that decision was rendered. It is maintained that the case does not fall within Section 94(2) and the Income-tax Officer was not justified in applying the same. The second contention is that, in any case, the assessee was entitled to the benefit of the provisions of Section 94(3)(b) of the 1961 Act. On this matter again, reliance is placed on the decision of the Gujarat High Court in Sakarlal Balabhai's case and Bilsland's case.

14. So far as the first question is concerned, it will be necessary to set out the relevant parts of Section 44F of the 1922 Act and Section 94 of the 1961 Act side by side. This course has been necessitated because it has been seriously contended that the decision of the Gujarat High Court under Section 44F still holds good vis-a-vis Section 94.

Section 44F Section 94 "(1) ............

(1) ............

(2) If it appears to the Income-tax Officer by reference to all the circumstances in relation to the securities of any such person (including circumstances with respect to sales, purchases, dealings, contracts, arrangements, transfers, or any other transactions relating to such securities) that such person hag thereby avoided or would avoid more than ten per cent- of the amount of the income-tax or super-tax for any year which would have been payable in his case in respect of the income from those securities if the income had been deemed to accrue from day to day and had been apportioned accordingly, and the income so deemed to have been apportioned to him had been treated as part of his total income from all sources for the purposes of income-tax or super-tax, then those securities shall be deemed to be securities to which sub-section (3) applies.

(2) Where any person lies had at any time during any previous year any beneficial interest in any securities, and the result of any transaction relating to such securities or the income thereof is that, in respect of such securities within such year, either no income is received by him or the income received by him is less than the sum to which the income would have amounted if the income from such securities had accrued from day to day and been apportioned accordingly, then the income from such securities for such year shall be deemed to be the income of such person.

(3) For the purposes of assessment to income-tax or super-tax in the case of any such person, the income from any securities to which this sub-section applies shall be deemed to- accrue from day today, and in the case of the sale or transfer of any such securities by or to him shall be deemed to have been received as and when it is deemed to have accrued:

(3) The provisions of sub-section (l) or sub-section (2) shall not apply if the owner, or the person who has had a beneficial be, proves to the satisfaction of the Income-tax Officer Provided that this section shall not apply if such person proves to the satisfaction of the Income-tax Officer that the avoidance of income-tax or super-tax was exceptional and not systematic and that there was not in his cast: in any of the three preceding years any such avoidance of income-tax or super-tax, or that the provisions of section 44E have been applied in his case in respect of such income.....

(a) that there has been no avoidance of income-tax, or

(b) that the avoidance of income-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any avoidance of income-tax by a transaction of the nature referred to in sub-section (1) or sub-section (2)......"

15. It will appear from a comparison of these two sections that a clear departure has been made in Sub-section (2) of Section 94 from Sub-section (2) of Section 44F. One thing is pertinent, that whereas in sub-section (2) of section 44f, the onus rested on the department to prove avoidance of tax, in Sub-section (3)(a) of Section 94 of the 1961 Act, the onus has been shifted on to the assessee. However, any doubt as to the effect of transfer has been cleared. Irrespective of the transfer, Sub-section (2) of Section 94, by the deeming provision, makes the income of the transferred securities as the income of the transferor during the previous year. In other words, the transfer in a year will not divest the transferor of the income accruing on the transferred securities in that year. However, Sub-section (3) would render the deeming provision inapplicable in case it is established to the satisfaction of the Income-tax Officer that by the transfer of securities there has been no avoidance of tax. In other words, a forced transfer would fall within the ambit of the exception but not a voluntary transfer.

16. In the present case, the Income-tax Officer was not satisfied that the transfers in question were not made in order to avoid tax. It has also not been contended before us by the learned counsel for the assessee that the transfers in question do not result in avoidance of tax. It is, therefore, idle to suggest that the decision of the Gujarat High Court has any material bearing on the interpretation of Section 94(2). We, therefore, agree with the decision of the Tribunal that Section 94(2) is attracted to the facts of the present case.

17. So far as the second question is concerned, we are clearly of the view that the Tribunal as well as the Appellate Assistant Commissioner and the Income-tax Officer have completely erred in holding that the assessee is not entitled to the benefit of Section 94(3)(b) of the 1961 Act. The language of this provision and the language of Section 44F bearing on this matter is almost identical. In our opinion, the decision of Bilsland's case which was followed by the Gujarat High Court in Sakarlal Balabhai's case fully covers the matter. In Bilsland's case Mr. Justice Lawrence observed as as follows :

"In my opinion, the words 'exceptional and not systematic' in Sub-section (4) have relation primarily to number. To read the word 'systematic' as meaning 'planned' or 'devised', as was contended for the Crown, appears to me to be impossible in the context. The more planned or devised the avoidance is, the more exceptional it is. Moreover, 'exceptional' means, in my view, taken out of something ; it cannot mean taken out of the ordinary rule ; it must mean in this context taken out of the system, and that implies that there must be more than one instance in the system. It seems to me impossible to say fairly that a single avoidance of tax is systematic and not exceptional."

18. This is equally true of Section 94(3)(b). We entirely agree with the following observations of the learned judges in Sakarlal Balabhai's case :

"Turning to the first condition, the main question which arises for consideration is as to what is the true meaning of the expression 'exceptional and not systematic '. ' Exceptional' is defined in the Shorter Oxford Dictionary as 'unusual, of the nature of or forming an exception' and 'systematic' is defined as 'involving or observing a system : acting according to system, regular, methodical : carried on as a regular reprehensible practice'. These words according to their plain natural meaning connote that the avoidance of tax must be by way of an exception to the regular practice of the assessee and must not be part of a regular practice followed by the assessee. The revenue, however, pleaded that the word 'systematic' did not involve the idea of number and that it only meant that the avoidance must be according to plan or organised method, that is, must be designed or deliberate. But this construction cannot be accepted and there are several reasons why it does not appeal to us. One reason is that the requirement that the avoidance must be intentional or designed is already brought in by Sub-section (2) and if the avoidance is not designed or deliberate it would not be avoidance within the meaning of that Sub-section and Section 44F would not apply and there would be no necessity to provide for exemption under the proviso. Secondly, if the legislature wanted to prescribe in the proviso that the avoidance must not be designed or deliberate, the legislature could have used the words 'designed' or 'purposeful' or 'deliberate' or 'intentional' but instead the legislature used the word 'systematic'. Moreover, it is a well-settled rule of interpretation that where two or more words susceptible of analogous meaning are coupled together noscitur a sociis they take as it were their colour from each other. Being associate words they explain and limit the application of each other. The juxtaposition of the words 'exceptional and not systematic' shows that the legislature was using the word 'systematic' in contradistinction to 'exceptional'. The avoidance of tax must be exceptional, that is, by way of exception to the normal practice of the assessee and it should not be systematic, that is, part of a regular reprehensible practice carried on by the assessee .....

It may also be noted that Section 44F was introduced in our Act by an amendment made in 1939 after the decision in Bilsland's case. The legislature when it enacted Section 44F must be taken to have been aware of the decision in Bilsland's case interpreting the words 'exceptional and not systematic' and yet the legislature retained the same phraseology as in Section 33, Sub-section (4). It may, therefore, be reasonably assumed that the words 'exceptional and not systematic' were used by the legislature in the proviso in the same sense in which they had been judicially interpreted in Bilsland's case'. If this is the true meaning it is clear that the avoidance of tax in the present case was exceptional and not systematic, for there was only one instance of such avoidance in the accounting year and it is not possible to say that it was part of a regular practice followed by the assessee."

19. For the reasons recorded above, we answer the first question in the affirmative, and the second question also in the affirmative. In other words, the first question is answered in favour of the department and the second in favour of the assessee. Considering the difficult nature of the questions involved, we make no order as to costs.