Full Judgment Text
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PETITIONER:
MOHINI THAPAR (DEAD) BY L. RS.
Vs.
RESPONDENT:
C.I.T. (CENTRAL) CALCUTTA & ORS.
DATE OF JUDGMENT23/09/1971
BENCH:
ACT:
Income-tax Act, 1922, s. 16(3)(a)(iii)-Scope of.
HEADNOTE:
The assessee made certain gifts to his wife out of those
gifts she purchased shares and made investments. On the
question whether the dividends earned and the interests
realised were income "from assets transfer-red directly or
indirectly" by the assessee to his wife within the meaning
of s. 16(3) (a) (iii) of the Income-tax Act, 1922,
HELD : Section 16(3) (a) (iii) includes not merely the
income that :arises directly from the assets transferred but
also the income that arises indirectly ’from. those assets.
In the present case the income has a nexus with the assets
transferred and they are income indirectly received in
respect of the transfer of cash directly made. Therefore
the department is entitled to include the dividends and
interest in question in computing the taxable income of the
assessee. [885 C-D]
C.I.T. West Bengal III v. Prem Bhai Parakh & Ors., [1970] 77
I.T.R. 27, held inapplicable.
JUDGMENT:
CIVIL APPELLATE JURISDICTION Civil Appeals Nos.
1374 and 2146 to 2149 of 1970.
Appeals from the judgments and order dated July 30, 1963 and
February 11, 1965 of the Calcutta High Court in Income-tax
Reference No. 48 of 1959, and 69 of 1961 respectively.
D.Pal, T. A. Ramachandran and D. N. Gupta, for the appel-
lants and respondents Nos. 2 to 4 (in all the appeals).
S.C. Manchanda, P. L. Juneja, R. N. Sachthey and B. D.
Sharma, for respondent No. 1 (in all the appeals).
The Judgment of the Court was delivered by
Hegde, J. All these appeals by certificate are filed by the
legal representatives of Late Karam Chand Thapar who was the
assessee in this case. He died after the assessments were
made. The assessment years with which we are concerned in
these appeals are 1949-50, 1950-51, 1951-52, 1952-53 and
1953-54. The facts of the case lie within a narrow compass.
Late Karam Chand Thapar made certain cash gifts to his wife
Smt. Mohini Thapar. From out of those gifts, she purchased
certain shares and the balance amount she invested. The
shares earned dividends and the investments yielded
interest. The interest realised and the dividends earned
were included in the income of Karam Chand Thapar for the
purpose of assessment in
884
the assessment years mentioned earlier. The assessee
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objected to the inclusion of that amount in his income. The
question is whether the department was entitled to include
the dividends and interest in question in computing the
taxable income. of the assessee. The Income-tax Officer
held that they were liable to be included in the income of
the assessee. That decision was upheld by- the Appellate
Assistant Commissioner. On a further appeal, taken by the
assessee to the Tribunal the Tribunal upheld the order of
the Assistant Commissioner. Thereafter at the instance of
the assessee, the question set out below was submitted to
the High Court under section 66(1) of the Indian Income-tax
Act, 1922, in respect of the assessment year 1949-50 :
"(1) ’Whether on the facts and on the circums-
tances of the case, the income of Rs. 21,225
derived from deposits and shares held by the
assessee’s wife, Smt. Mohini Devi Thapar was
income from assets directly or indirectly
transferred by the assessee to his wife within
the meaning of Section 16(3) of the Income-tax
Act."
Similar questions were referred in respect of other
assessment year. The High Court answered these questions in
favour of the revenue. Hence these appeals.
Section 16(3)(a)(iii) of the Act-the provision relevant for
the purpose of these appeals reads thus:
(2) "In computing the total income of any
individual for the purpose of assessment,
there shall be included-
(a) so much of the income of a wife or minor
child of such individual as arises directly or
indirectly-
(i).................
(ii).................
(iii)from assets transferred directly or
indirectly to the wife by the husband
otherwise than for adequate consideration or
in connection with an agreement to live
apart;"
The assets transferred in this case is the gift of cash
amounts made by the assessee to his wife. The transfers in
question are direct transfers. But those assets, as
mentioned earlier, were invested either in shares or
otherwise. Hence it was urged on behalf of the revenue that
the incomes realised either as dividends
885
from shares or as interest from deposits are income
indirectly received in respect of the transfer of cash
directly made. This contention of the revenue appears to be
sound. That position clearly emerges from the plain
language of the section.
It was urged by Dr. Pal, learned counsel for the assessee
that there is no nexus between the income earned and the
transfer of the assets. According to him before an income
can come within section 16(3) (a) (iii) it must be an income
directly arising from the assets transferred. In other
words, he urged that only such income which can be said to
have directly sprung from the assets transferred "Can come
within the scope of section 16 (3) (a) (iii). We are unable
to accept this contention as sound. Otherwise the
expression ’as arises directly or indirectly’ in section
16(3)(a) would become redundant. The net cast by section
16(3)(a) (iii) includes not merely the income that arises
directly from the assets transferred but also that arises
indirectly from the assets transferred. We are in agreement
with the contention of Dr. Pal that the income that can be
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brought to tax under section 16 (3) (a) (iii) must have a
nexus with the assets transferred directly or indirectly.
But in this case the income with which we are concerned has
a nexus with the assets transferred.
In support of his contention Dr. Pal relied on the decision
of this Court in Commissioner of Income-Tax, West Bengal III
v. Prem Bhai Parakh and others(1). The facts of that case
are as follows : The assessee, who was a partner in a firm
having 7 annas share therein, retired from the firm on July
1, 1954. Thereafter, he gifted Rs. 75,000 to each of his
four sons, three of whom were minors. There was a
reconstitution of the firm with effect from July 2, 1954,
whereby the major son became a partner and the minor sons
were admitted to the benefits of partnership in the firm.
The question was whether the income arising to the minors by
virtue of their admission to the benefits of partnership in
the firm could be included in the total income of the
assessee under section 16 (3) (a) (iv) a provision similar
to section 1 6 (3) (a) (iii) The Tribunal found that the
capital invested by the minors in the firm came from the-
gift made in their favour by their father, the assessee.
This Court overruling the contention of the revenue came to
the conclusion that the connection between the gifts made by
the assessee and the income of the minors from the firm was
a remote one and it could not be said that income arose
directly or indirectly from the asses transferred. Hence I
income arising to the three minor sons of the assessee by
virtue of their admission to the benefits of partnership in
the firm could not
(1) [1970] 77 I.T.R. p. 27.
886
be included in the total income of the assessee. The ratio
of the decision is found at page 30 of the report. This is
what the Court observed in that case :
"The connection between the gifts mentioned
earlier and the income in question is a remote
one. The income of the minors arose as a
result of their admission to the benefits of
the partnership. It is true that they were
admitted to the benefits of the partnership
because of the contribution made by them. But
there is no nexus between the transfer of the
assets and the income in question. It cannot
be said that that income,’ arose directly or
indirectly from the transfer of the assets
referred to earlier. Section 16(3) of the Act
created an artificial income. That section
must receive strict construction as observed
by this court in Commissioner of Income-tax v.
Keshavlal Lallubhai Patel-(1965) 55 I.T.R. p.
637. In our judgment before an income can be
held to come within the ambit of section
16(3), it must be proved to have arisen-
directly or indirectly from a transfer of
assets made by the assessee in favour of his
wife or minor children. The connection
between the transfer of assets and the income
must be proximate. The income in question
must arise as a result of the transfer and not
in some manner connected with it."
The ratio of that decision is inapplicable to the facts of
the present case.
Here we are dealing with an income which has proximate con-
nection with the transfer of the assets made by the
assessee.
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In the result, these appeals fail and they are dismissed
with costs. Costs one set.
K.B.N. Appeals dismissed.
887