Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX
Vs.
RESPONDENT:
SMT. PELLETI SRIDERAMMA, NELLORE
DATE OF JUDGMENT11/10/1995
BENCH:
JEEVAN REDDY, B.P. (J)
BENCH:
JEEVAN REDDY, B.P. (J)
MAJMUDAR S.B. (J)
CITATION:
1996 AIR 463 1995 SCC (6) 315
JT 1995 (7) 225 1995 SCALE (5)690
ACT:
HEADNOTE:
JUDGMENT:
J U D G M E N T
B.P. JEEVAN REDDY, J.
This appeal is preferred against the judgment of the
Andhra Pradesh High Court answering the question referred to
it in the negative, i.e., against the Revenue and in favour
of the assessee. The question referred is "whether on the
facts and in the circumstances of the case, the capital gain
of Rs.58,000 was assessable in the hands of the assessee in
terms of Section 64(1) (iv) of the Income Tax Act, 1961."
The assessment year concerned herein is 1966-67. Section
64(1) (iv), as it stood at the relevant time, read thus:
"64(1). In computing total income of
any individual, there shall be included
all such income as arises directly or
directly --
(iv) subject to the provisions of clause
(i) of section 27, to a minor child, not
being a married daughter of such
individual, from assets transferred
directly or indirectly to the minor
child by such individual otherwise than
for adequate consideration.
Reference to clause (i) of Section 27 is not necessary since
it has no relevance to the facts of this case.
The respondent-assessee is an individual. She was
carrying on the business of mica mining and was also having
income from property and money lending. During the financial
year 1956-57, the respondent made a cash gift of Rupees
ninety thousand to her minor son, Suryanarayana Reddy. This
amount was immediately utilised for purchasing a house
property at Gudur. The said house property was being
utilised for the purpose of the assessee’s business. Eight
years after the purchase of the house, i.e., on July 5,
1967, the said house property was sold to Tirupati
Devasthanam for a consideration of Rs.1,48,000/-. On the
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date of this sale also, Suryanarayana Reddy was a minor. The
Income Tax Officer included the capital gain of Rs.58,000/-
in the assessee’s income in terms of Section 64(1), which
was objected to by the assessee. Her appeal to the Appellate
Assistant Commissioner was dismissed. Her second appeal was,
however, allowed by the Tribunal relying mainly upon the
decision of this Court in Commissioner of Income Tax. West
Bengal-III v. Prem Bhai Parekh & Ors.[(1970) 77 I.T.R.27].
Thereupon, the said question was referred for the opinion of
the High Court at the instance of the Revenue. The High
Court too held in favour of the assessee, again relying
mainly upon the decision in Prem Bhia Parekh.
Sri J.Ramamurthy, learned counsel for the Revenue,
submits that the High Court has misunderstood the ratio of
Prem Bhai Parekh. He submits that the ratio of the said
decision has no application herein. On the contrary, the
learned counsel submits, the facts of Sevantilal Maneklal
Sheth v. Commissioner of Income Tax (Central). Bombay
[(1968) 68 I.T.R.503] are quite similar to the facts of this
case and that the ratio of the said decision squarely
governs it and concludes the issue in favour of the Revenue.
Learned counsel also pointed out that the decision in Prem
Bhai Parekh was explained and distinguished by this Court in
Smt. Mohini Thapar v. Commissioner of Income Tax (Central).
Calcutta & Ors. [(1972) 83 I.T.R.208]. Counsel submits that
though both these decisions were brought to the notice of
the High Court, it has erred in distinguishing these two
decisions and in following Prem Bhai Parekh. We are inclined
to agree with Sri Ramamurthy.
Let us first see what does clause (iv) of Section 64(1)
say. In computing the total income of an individual, it
says, there shall be included all such income as arises
directly or indirectly to a minor child (not being a married
daughter of such individual) from assets transferred
directly directly or indirectly to the minor child by such
individual otherwise than for adequate consideration. The
facts of this case squarely fall within the said rule. The
respondent-assessee made a gift of Rupees ninety thousand to
her minor son, Suryanarayana Reddy. The said money was
utilised immediately for purchasing a house property. As a
matter of fact, the said house property was also being
utilised for the purpose of assessee’s business until it was
sold eight years later. Even at the time of the said sale,
Suryanarayana Reddy was a minor. It is true that what was
gifted by the assessee to her minor son was the cash of
Rupees ninety thousand but it cannot be forgotten that that
money was utilised for purchasing the said house property.
It was only a case of substitution of one form of property
by another form of property. When the said house property
was sold, a capital gain of Rupees fifty eight thousand was
made. Capital gain is undoubtedly a type of income. The
definition of "income" in Section 2(24) includes "capital
gains". It was, therefore, liable to be included in the
income of the assessee.
In Sevantilal Maneklal Sheth, the facts were the
following: in the year 1,184 ordinary and 155 preference
shares of a particular sugar mills to his wife, Bai
Laxmibai. On the date of transfer, their total value was
Rs.69,730/-. Subsequent to the said gift, the sugar mills
converted the preference shares into ordinary shares giving
eight ordinary shares for each preference share, with the
result that on December 31, 1954 Bai Laxmibai held a total
of 2,424 ordinary shares of the said sugar mills. Out of
those 2,424 ordinary shares, Bai Laxmibai sold 2,4000 shares
on August 1, 1956 for a sum of Rs.1,54,8000/-, resulting in
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a capital gain of Rs.70,860/-, as computed under Section 12-
B of the Indian Income Tax Act, 1922. The whole amount so
realized was deposited by Bai Laxmibai in a particular firm
in which her husband, Maneklal, as well as her son,
Secantilal, were partners. The said deposit earned yearly
interest of Rs.9,288/-. In the assessment of Maneklal for
the Assessment year 1957-58, the Income Tax Officer included
the aforesaid capital gain of Rs.70,860/- under Section
16(3)(a)(iii) of the Indian Income Tax Act (which
corresponds to Section 64(1)(iv) concerned herein).
Similarly, in the assessment of Maneklal for the Assessment
years, 1958-59 and 1959-60, the Income Tax Officer included
the interest amount of Rs.9,288/-, again applying the said
provision. This was objected to by the assessee. The matter
was ultimately carried to this Court. The following
observations in the judgment are relevant:
"In our opinion, 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
gains is made to arise out of the asset
is the operation of the sale.....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.....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
statute."
Now, let us see the facts and ratio of Prem Bhai
Parekh. The assessee was a partner in a firm having seven
annas share therein. He retired from the firm on July 1,
1954. Thereafter, he gifted Rupees seventy five thousand to
each of his four sons, three of whom were minors. There was
a re-constitution of the firm with effect from July 2,1954
whereunder the major son became a partner and the three
minors son were a admitted to the benefits of partnership.
It is on these facts that the question arose whether the
income accruing to the minors by virtue of their admission
to the benefits of partnership could be included in the
total income of the assessee under Section 16(3)(a)(iv. The
said provision read thus at the relevant time: "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." The question that required to be
answered by this Court was: "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
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assessee to those minors". The Court answered it in the
negative, in the following words:
"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.637 (S.C.). 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
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."
It would immediately be seen that the income that arose
to the minors arose on account of their being admitted to
the benefits of partnership firm and not from the assets
transferred by the assessee to them. As pointed out by this
Court, it is true that they were admitted to the benefits of
partnership because of their contribution of the said
capital but the income received by them was not directly
relatable to or proportionate to the said investment. The
income of the partnership arises from its business. It may
be a loss or it may be extraordinary profits; it may also be
a case of no profit at all. The loss or profit of the firm
depends upon the nature and circumstances of the business
carried on by it. It is in this connection that this Court
held that the connection between the transfer of assets and
the income received was a remote one and not proximate. The
proximity referred to by this Court was not proximity in
point of time but proximity between the transfer of assets
and the income in question. This Court repeatedly pointed
out that the income derived by the minors was the result of
their admission to the benefits of partnership and that the
connection, if any, between their investment and the income
derived by them was remote and not proximate.
Indeed, it is in this manner that this decision was
understood and distinguished in the subsequent decision of
this Court in Smt.Mohini thapar. (It would be relevant note
that the decision in Prem Bhai Parekh and the decision in
Smt. Mohini Thapar were both delivered by K.S.Hegde.J.). We
may note the facts in Smt.Mohini Thapar. The assessee made
certain cash gifts to his wife. From out of those cash
gifts, she purchased shares and invested the balance amount
in deposits. The question was whether the income derived by
the assessee’s wife from the deposits and shares is liable
to be included in the income to the assessee-husband under
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Section 16(3) of the Indian Income Tax Act, 1922. Hegde,J.
observed, "(T)he assets transferred in this case is the gift
of the 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 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."
When the learned counsel for the assessee relied upon the
decision in Prem Bhai Parekh in support of his contention
that there was no nexus between the income earned and the
transfer of assets, it was repelled holding that in Prem
Bhai Parekh, "the connection between the gifts made by the
assessee and the income of the minors from the firm was a
remote one and that it could not be said that the income
arose directly or indirectly from the assets transferred".
It was pointed out that it is for this reason, it was held
in that case that the income of the minors cannot be
included in the total income of the assessee. Hegde,J. then
quoted the very same paragraph from Prem Bhai Parekh which
we have quoted hereinabove and held that the said decision
has no application to the facts in Smt.Mohini Thapar.
Now, coming to the judgment under appeal, the main
basis upon which the High Court held in favour of the
assessee is the time lag of eight years between the date of
cash gift and the subsequent sale of the house property.
Because of the said time lag, it was held that there was no
proximate relationship between the cash gift and the income
arising from the sale of the house. In other words, the
expression "proximate" occurring in Prem Bhai Parekh was
understood as proximity in point of time which, in our
respectful opinion, is not a correct understanding of the
ratio of the said judgment. The proximity referred to in
Prem Bhai Parekh, as already pointed out hereinabove, is the
proximity between the assets transferred and the income in
question. The time lag, if any, if any, is of no
significance under Section 64(1)(iv).
It is brought to our notice that a Bench of the Kerala
High Court in Commissioner of Income Tax v. V.J.Aleykutti
[(1991) 189 I.T.R.711] (K.S.Paripoornan and Jagannadha
Raju,JJ.) has distinguished the decision in Prem Bhai Parekh
on these very lines.
Before parting with this case, we may mention that when
this appeal came up for hearing, it was stated by Sri
T.A.Ramachandran, learned counsel, that the Advocate on
Record for the respondent, Smt.Janki Ramachandran, has been
instructed by the client not to oppose the appeal and for
that reason, she would not be participating in the hearing
of the appeal. The said statement was recorded by us in the
proceeding dated September 29, 1995.
For the above reasons, the appeal is allowed, the
judgment of the High Court is set aside and the question
referred under Section 256 is answered in the affirmative,
i.e., in favour of the Revenue and against the assessee. No
costs.