Full Judgment Text
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PETITIONER:
SEVANTILAL MANEKLAL SHETH
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX (CENTRAL),BOMBAY
DATE OF JUDGMENT:
22/11/1967
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
SHAH, J.C.
CITATION:
1968 AIR 697 1968 SCR (2) 360
ACT:
Income Tax Act. 1922, ss. 12B, 16(3)(a)(iii)--Appellant
transferring shares to wife--profit made on sale of shares
by way of capital gains--if liable to be included as
appellants ’income’.
HEADNOTE:
The appellant made a gift in 1951 of certain ordinary and
preference shares in a company to. his wife and on the date
of transfer the value of the shares was Rs. 69,730. After
the company had converted the preference shares into
ordinary shares the appellant’s wife sold most of the shares
held by her for Pa. 1,54,800, resulting in a capital
gain of Rs. 70,860 as computed under s. 12B of the Income
Tax Act. 1922. She deposited the entire amount realised
from the sale of shares with a firm and thereby earned an
interest of Rs. 9,288 per year. In the appellant’s
assessment for 1957-58, the Income Tax Officer included the
amount of Rs. 70,860 on the view that the gain resulting
from the sale of the shares was the income of the
appellant’s wife which arose directly or indirectly from
assets transferred by him within the meaning of s. 16
(3)(a)(iii) of the Income Tax Act, 1922. Similarly, in the
appellant’s assessment for the year 1958-59’ and 19591-60,
the interest amount of Rs. 9,288 was also included as
income within the meaning of s. 16 (3) (a) (iii). In
appeals made against the three assessment orders, while the
Appellate Assistant Commissioner dismissed the appeal in
respect of the assessment year 1957-58 be partly allowed the
other two appeals taking the view that only that part of the
interest which was attributable to the monetary value of the
shares at the time of the gift was liable to be included in
the appellant’s total income under s. 16 (3)(a)(iii); since
the monetary value of the shares gifted to the wife at the
time when the gift was made was. only Rs. 69,730. the
interest attributable to it worked, out at Rs. 4,138 and
only this amount could be included in the appellant’s
income. The Appellate. Tribunal dismissed the appellant’s
further appeal and also allowed cross appeals filed by the
Department. The High Court. upon a reference. held that the
sum of Rs. 70,860 was properly included in the appellant’s
income, in 1957-58 but that the interest amount in excess of
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Rs. 4.138 was not liable to be included in his income for
1958-59 and 1959-60.
In the appeal to this Court the only question for
consideration was whether the amount of Rs. 70.860 was the
appellant’s income under s. 16 (3)(a)(iii). It was
contended on his behalf (i) that what comes within the ambit
of s. 16(3.)(a)(iii) is the income from the transferred
assets.which is different from the profits or gains arising
from the sale of the transferred assets. or in other words
"the capital gains" from the transferred assets; and (ii)
that s. 16(3)(a)(iii) was enacted in 1937 when the word
’income’ did not include ’capital gains’ and income from the
property was understood to be income falling under that head
in s. 6 of Act.
HELD: The High Court had rightly decided that the amount.
of Rs. 70,860 was properly included in the assessees income
under s. 16 (3) (a) (iii).
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(i) There is no logical distinction between income
arising from the asset transferred to the wife and arising
from the sale of the assets so transferred. The profits or
gains which arise from the sale of the asset would arise or
spring from the asset, although the operation by which the
profits or gain is made to arise out of the asset is the
operation of sale. [364 G--H]
(ii) Although at the time when s. 16(3)(a)(iii) was
enacted the definition of ’income’ did not include ’capital
gains’, capital gains having been brought within the meaning
of ’income’ in s. 2(6C), the expression ’income’ as used
in s. 16(3)(a)(iii) must be construed according to the
amended definition of the word and would, therefore,
include capital gains. There is nothing in the context or
language of s. 16(3)(a)(iii) of the Act to suggest that
capital gains are excluded from its scope and there is no
reason why a restricted interpretation should be given to
the provisions of s. 16(3) (a) (iii). [365 C--E]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2454 of 1966.
Appeal from the Judgment and order dated February 19/22,
1965 of the Bombay High Court in Income-tax Reference No. 2
of 1962.
Sanat P. Mehta, and J.B. Dadachanji, for the appellant.
Niren De, Solicitor-General, B.R.L. lyengar, and R.N.
Sachthey, for the respondent.
The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought by certificate from
the, judgment of the Bombay High Court dated the 22nd
February, 1965 in Income-tax Reference No. 2 of 1962.
In the year 1951 the assessee Maneklal Ujamshi (hereinafter
referred to as the assessee) made a gift of 1,184 ordinary
and 155 preference shares in Changdeo Sugar Mills Ltd. to
his wife Bai Laxmibai. The total value of these transferred
shares on the date of the transfer was Rs. 68,730/-.
Subsequent to the transfer the company converted the
preference shares into ordinary shares giving the
shareholders 8 ordinary shares for each preference share
with the result that on December 31, 1954, Bai Laxmibai held
in all 2,424 ordinary shares of the mills. Out, of these
2,424 shares. Bai Laxmibai sold 2,400 shares on August 1.
1956, for the sum of Rs. 1,54,800/- resulting in a
capital gain of Rs. 70,860/- as computed under s. 12B of
the Income-tax Act. The whole amount realised by the sale of
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the shares was deposited’ by Bai Laxmibai with M/s. A.H.
BhivandiwaIla & Co., in which Maneklal as well as his son,
Sevantilal, happened to be partners. The amount deposited by
Bai Laxmibai fetched a yearly interest of Rs. 9,288/-. In
the assessment of Maneklal for the assessment year 1957-58
the Income Tax Officer included the amount of Rs. 70,860/-
which was the profit made by Bai Laxmibai on the
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sale of the shares, as income of Maneklal under s.
16(3)(a)(iii) of the Indian Income Tax Act. Similarly, in
the assessment of Maneklal for the assessment years 1958-59
and 1959-60, the Income Tax Officer included in each year
the amount of Rs. 9,288 which was the interest earned by Bai
Laxmibai on the deposit of the sale proceeds with M/s.
Bhivandiwalla and Co. as the income of Maneklal under s.
16(3)(a)(iii). According to the Income Tax Officer the gain
which had resulted from the sale of the shares was the
income of the wife of the assessee which arose directly or
indirectly from the assets transferred by the assessee to
his wife otherwise than for adequate consideration and
therefore was required to be included in the computation of
the total income of Maneklal. The Income Tax Officer also
took the view that the amount of interest which Bai Laxmibai
had received from the sale proceeds deposited by her with
M/s. Bhivandiwalla & Co. was also income of the wife of
Maneklal which arose directly or indirectly from the assets
transferred by Maneklal to her. Accordingly, in the
assessment order for the first year, the Income Tax Officer
included the amount of Rs. 70,860/- and in the assessment
orders for the next two years, he included the amount
of Rs. 9,288/- in the total taxable income of Maneklal.
Appeals against all these three assessment orders were
filed before the Appellate Assistant Commissioner. In the
appeal against the first assessment order for the assessment
year 1957-58 the Appellate Assistant Commissioner agreed
with the view taken by the Income Tax Officer and
dismissed the appeal. In the other two appeals, he partly
allowed the appeals taking the view that only that part of
the interest which was attributable to the monetary
value of the shares covered by the shares at the time of the
gift was liable to be included in the total income of
Maneklal in accordance with the provisions o.f s.
16(3)(a)(iii) and the
balance could not be included under the said provision.
Since the monetary value of the shares gifted to Bai
Laxmibai at the time when the gift was made was only Rs.
69,730/-, the interest attributable to it worked out at Rs.
4,l 38/-. Out of the total interest of Rs. 9,288/- which
was received by Bai Laxmibai in each of those years, he
directed that only an amount of Rs. 4,183/- should be
included in the total income of Maneklal in each of those
two years and the balance of Rs. 5,105/- should be deleted.
Against the orders of the Appellate Assistant Commissioner
on these appeals the assessee appealed to the Appellate
Tribunal. The Department, on the other hand, appealed
against the orders of the Appellate Assistant Commissioner
for the years 1958-59 and 1959-60 insofar as they allowed
exemption in respect of Rs. 4,183/- out of the total
amount of Rs. 9,288/- for each year. The Appellate Tribunal
dismissed the appeal of the assessee with regard to the
assessment year 1957-58. For the assessment years
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1958-59 and/959-60, the Appellate Tribunal allowed the
appeals of the Department and dismissed the appeal of the
assessee for the assessment. year 1959-60. According to
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these decisions of the Appellate Tribunal the result was
that for the assessment year 1957-58 the order of the
Income Tax Officer that the amount of Rs, 70,860/- which was
the profit or gain on the sale of the shares by Bai
Laxmibai was liable to be included in the total income of
Maneklal was upheld and for the later two, years the entire
amount of interest viz., Rs. 9,288/- was held to be liable
to be included in the total income of Maneklal in each of
those two years. Thereafter, at the instance of the
assessee, the Appellate Tribunal stated a case to the High
Court on the following questions of law:
"1. Whether in computing the total
income of Maneklal for the assessment year
1957-58, the sum of Rs. 70,860/- has been
properly included therein in accordance with
the provisions of s. 16(3)(a)(iii) of the
Income-tax Act, 1922 ?
2. Whether in computing the total income
of Maneklal for the assessment year 1958-59
the sum of Rs. 5,104/- has been properly
included therein in accordance with provisions
of s. 16(3)(a)(iii) of the Income-tax Act,
1922?
3. Whether in computing the total
income of Maneklal for the assessment year
1959-60, the sum of Rs. 4,183/- has been
properly included therein in accordance
with the provisions of s. 16(3)(a)(iii) of
the Income-tax Act, 1922 ?
4. Whether in computing the total income
of Maneklal for the assessment year 1959-60,
the sum of Rs. 5,105/- has been properly
included therein in accordance with the
provisions of s. 16(3)(a)(iii) of the Income-
tax Act,1922 ?"
By its judgment dated February 19, 1965 the High Court
answered the first question in the affirmative and against
the assessee. It answered questions Nos. 2 & 4 in favour of
the assessee and against the Department. As regards
question No. 3, the High Court answered it in the
affirmative and in favour of the Department. The reason was
that Counsel for the assessee did not press it or challenge
the correctness of the view taken by the Appellate
Tribunal and accepted as correct the conclusion of the
Tribunal with regard to the point involved in that question.
Section 16(3)(a)(iii) of the Income Tax Act, 1922
provides as follows:
364
"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 of such individual as
arises directly or indirectly ..........
(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".
Section 2(6C) of the Income-tax Act, 1922 states:
"Income’ includes ............
(vi) ’any capital gain chargeable under section 12B;
Section 12B of the Income Tax Act enacts:
(1) The tax shah be payable by an assesee under the head
’capital gains’ in respect of any profits or gains arising
from the sale, exchange, relinquishment or transfer of a
capital asset effected after the 31st day of March, 1956,
and such profits and gains shall be deemed to be income of
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the previous year in which the sale. exchange,
relinquishment or transfer took place;......"
With regard to the first question Mr. Mehta put forward
the argument that what comes within the ambit of s.
16(3)(a)(iii) is the income from the transferred assets,
which is different from the profit or gain arising from the
sale of the transferred assets, or in other words, "the
capital gains" from the transferred assets. It was argued in
the first place that what comes within the ambit of s. 16
(3) (a) (iii) was ’the income from the assets’ i.e., the
income which the asset produces while it continues to remain
in the hands of the assessee and does not include the gain
which the assessee makes by selling the asset and parting
with possession of it. We see no justification for this
argument. In our opinion there is no logical distinction
between income arising from the asset transferred to the
wife and income arising from the sale of the assets so
transferred. The profits or gains which arise from the sale
of the asset would arise or spring from the asset, although
the operation by which the profits or gains is made to arise
out of the asset is the operation of the sale. If the asset
employed, say by way of investment and produces income, the
income arises or springs from the asset; the operation,
which causes the income to spring from the asset, is the
operation of the investment. In the operation of the
investment, income is produced,
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while the asset continues to belong to the assessee, while
in the operation of a sale, gain is produced, which is still
income but in the process the title to the asset is parted
with. Although the processes involved in the two cases are
different, the gain which has resulted to the owner of the
asset, in each case, is the gain, which has sprung up. or
arisen from the asset. There is hence no warrant for the
argument. that the capital gain is not income arising from
the assets but it is income which arises from a source
which is different from the asset itself. It was argued in
the second place that s. 16(3)(a)(iii) was enacted in 1937
when the word ’income’ did not include ’capital gains’ and
income from property was understood to be income falling
under that head in s. 6 of the Act. The inclusion of
’capital gains’ in the definition of ’income’ was for the
first time enacted in 1947. It is true that at the time
when s. 16(3)(a)(iii) was enacted, the definition of’
’income’ did not include ’capital gains’ but capital gains
having been brought within the meaning of ’income’ in s.
2(6C) the expression ’income’ as used in s. 16(3) (a)
(iii) must be construed according to the amended definition
of the word and would, therefore, include capital gains.
There is nothing in the context or language of s. 16(3) (a)
(iii) of the Act to suggest that capital gains are excluded
from its scope. We see no reason why a restricted
interpretation should be given to the provisions of s.
16(3)(a)(iii) as contended for the appellant. On the
contrary, the object of the enactment of the section is to
prevent avoidance of tax or reducing the incidence of tax
on the part of the assessee by transfer of his assets to.
his wife or minor child. It is a sound rule of
interpretation that a statute should be so construed as to
prevent the mischief and to advance the remedy according to
the true intention of the makers of the statute. We are,
therefore, unable to accept Mr. Mehta’s argument on this
aspect of the case.
For the reasons given we hold that the High Court has
rightly answered the first question against the assessee and
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this appeal is accordingly dismissed with costs.
R.K.P.S. Appeal dismissed.
L1Sup.CI/68--9
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