Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, WEST BENGAL,CALCUTTA
Vs.
RESPONDENT:
SHRI PREM BHAI PAREKH AND ORS.
DATE OF JUDGMENT:
20/04/1970
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
SHAH, J.C.
GROVER, A.N.
CITATION:
1970 AIR 1518 1971 SCR (1) 308
1970 SCC (3) 784
CITATOR INFO :
RF 1972 SC 7 (16)
R 1990 SC 270 (8)
ACT:
Indian Income-tax Act (11 of 1922), s. 16(3) (a) (iv) Income
art as a, result of transfer-What is.
HEADNOTE:
The assessee was a partner in a firm. On the last day of
the accounting year of the firm, namely, 1st July 1954 he
retired from the firm and gifted ’to each of his four sons
Rs. 75,000. The firm was reconstituted and the first son,
who was a major, became a partner in the firm. The other
sons who were minors, became entitled to the benefits of the
partnership because, they invested in the firm the amounts
received by them as gifts from their father. In the
assessment year 1956-57 the Income-tax Officer held that the
income arising to the minors by virtue of their admission to
the benefits of the partnership, came within the purview of
s. 16(3) (a) (iv) of the Income-tax Act, 1922, and included
that income in the total income of the assessee. The order
was confirmed by the Appellate Assistant Commissioner and
the Tribunal, but the High Court on a reference, held in
favour of the assessee.
In appeal to this Court,
HELD : The section creates an artificial income and must be
construed strictly, that is. before an income can be held to
come within the ambit of s. 16(3) it must be proved to have
arisen-directly or indirectly-from a transfer of assets made
by the assessee in favour of the minor children. The
connection between the transfer and the income must be
proximate. It must arise as a result of the transfer and
not in some manner connected with it. [310 H; 311 A-E]
In the present case, the income of the minors arose as a result
of their admission to the benefits, of partnershiip
and there is no proximate nexus between the transfer and the
income. [310 G]
C.I.T., Gujarat v. Keshavlal Lallubhai Patel, 55 I.T.R. 637,
(S.C.) followed.
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JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil, Appeal No. 2272
of 1966,
Appeal from the judgment and order dated January 6, 1966 of
Calcutta High Court in Income-tax Reference No. 211 of 1961.
S. Mitra, A. S. Nambiar, R. N. Sachthey and B. D. Sharma,
for the appellant.
M. C. Chagla and P. K. Chatterjee, for the respondents-
309
The Judgment of the Court was delivered by
Hegde, J. This is, an appeal by certificate, granted by the
High Court of Calcutta under s. 66A(2) of the Indian Income
Tax Act, 1922 (to be hereinafter referred to as the Act)
against the decision of that Court in a reference under s.
66 (1) of that Act.
The two questions of law referred to the High Court by the
tribunal are : (1) Whether s. 16(3) of the Act was ultra
vires the Central Legislature and (2) Whether on the facts
and in the circumstances of the case, the income arising to
the three minor sons of the assessee by virtue of their
admission to the benefits of the partnership of Messrs.
Ajitmal Kanhaiyalal was rightly included in the total income
of the assessee under s. 16 (3) (a) (iv) of the Act.
The assessee at whose instance those question were referred
did not press for an answer in respect of question No. 1.
Therefore that question was not dealt with by the High
Court. Hence we need not go into that question. The High
Court answered the second question in favour of the
assessee.
The facts necessary for the purpose of deciding the point in
dispute as set out in the statement of the case submitted by
the tribunal are as follows :
The assessee Shri Ajitmal Parekh was a partner of the firma
M/s. Ajitmal Kanhaiyalal having annas share therein. He
continued to be a partner of that firm till July 1, 1954
which was the last date of the accounting year of the firm,
relevant for the, assessment year 1955-56. On July 1, 1954,
the assessee retired from the firm. Thereafter he gifted to
each of his four sons Rs., 75,000/-. Out of his four sons,
three were minors at that time. There was a reconstitution
of the firm with effect from July 2, 19.54 as evidenced by
the partnership deed dated July 5, 1954. The major son of
the assessee became a partner of the reconstituted firm and
his minor sons were admitted to the benefits of that
partnership in the reconstituted firm. The major son had 2
annas share. His three minor brothers were admitted to the
benefits of the partnership, each one of them having 2 annas
share. In the assessment year 1956-57, the Income-tax
Officer held that the income arising to the minors by virtue
of their admission to the benefits of the partnership came
within the purview of s. 16(3) (a) (iv) of the Act. He
included that income in the total income of the assessee for
that year. In appeal the Appellate Assistant Commissioner
substantially upheld the order of assessment made by the
Income-tax Officer but he held that the
2Supe Cl/7C-6
310
minors were entitled to only 1-9 pies share in the firm.
The assessee took up the matter in appeal to the Income-tax
Appellate ’Tribunal. The tribunal upheld the decision of
the Appellate Assistant Commissioner.
On the facts found by the tribunal, the High Court came to
the conclusion that answer to question No. 2 should be in
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the negative and in favour of the assessee.
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. That finding was not open to question
before the High Court nor did the High Court depart from
that finding. But on an interpretation of S. 16(3) (a) (iv)
the High Court opined that the answer to the question must
be in favour of the assessee. Section 16(3) (a) (iv) reads
"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.
(iv) from assets transferred directly or
indirectly to the minor child, not being a
married daughter by such individual otherwise
than for adequate consideration."
Before any income of a minor child can be brought within the
scope of s. 16(3) (iv), it must be established that the said
income arose directly or indirectly from assets transferred
directly or indirectly by its father. There is no dispute
that the assessee had transferred to each of his minor sons,
a sum of Rs. 75,000,/-. It may also be that the amount
contributed by those minors as their share in the firm came
from those amounts. But the question still remains whether
it can be said that the income with which we are concerned
in this case arises directly or indirectly from the assets
transferred by the assessee to those minors. 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 he 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, Gujarat v. Keshavlal Lallubhai
Patel(1). In our
(1) 55, I.T.R. 637.
311
judgment before an income can be held to come within the
ambit of s. 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.
V.P.S. Appeal dismissed.
312