Commissioner Of Income-Tax, West Bengal, Calcutta v. Shri Prem Bhai Parekh And Ors

30$ COMMISSIONER OF INCOME·TAX, WEST BENGAL, CALCUITA SHRI PREM BHAI PAREKH AND ORS. April 20, 1970 [J. c. SHAH; K. s. HBGDE AND A. N. GROVER, JJ.] Indian Income-tax Act ( lJ of 1922), s. 16(3 )(a)(iv)-Lncome arising as a result of transfer-What is. The assessee was a partner in a firm. On the last day of the account-ing year of the ftrin, namely, lst July 1954 he retired 'from the firm and C gifted to each of his four so~1s 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 pu.r-D view 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 : Tile section creates an artificial income- and must be cons-trued 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 indirect-ly-from a transfer of assets made by the assessee in ifa.vour 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. (31~ H; 311 A-B] In the present case, the income of the minors arose as a result of their admission to the benefits of partnership, and there is no proximate ne:tus between the transfer and 1he income. [31 0 G J C.I.T., Gujarat v. Keshavlal LallubluJi Patel, 55 I.T.R. 637, (S.C.) 1ollowed. CtVIL APPELLATE JURISDICTION: Civil Appeal No. 2272 of G 1966. Appeal from the judgment and order dated January 6. 1966 of Calcutta High Court in Income-tax Reference No. 211 c.f 1961. S. Mitra, A. S. Nambiar, R. N. Sachthey and B. D. Sharma, H for the appellant. M. C. Chagla and P. K. Chatterjee1 for the respondents. A 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 Inc<Jme 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 B Act. The two questions of law referred to the High Court by the · tribunal are : ( I ) Whether s. 16 ( 3) of the Act was ultra vires the Central Legislature and (2) Whether on the. facts and in the cir· cumstances of the case, the income arisin~ to the three minor c sons of the assessee by virtue of their adm1ssion to the benefits of lhe partnership of Messrs. Ajitmal Kanhaiy~lal was rightly in· eluded in the total income of the assessee under ~o. J6 ( 3) (a) ( iv) of the Act. The assessee at whose instance those ql!.'!stiom were referred did not press for an answer in respect of question No. I. There-fore lhat question was not dealt with by the High Court. Hence we need not go into that question. The High Court ~mc;wered 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 E tribunal are as follows : ATRL aged, Tea TAT, HATA TATA aft Ta ws ne akeeT (The Commissioner of Income-tax, West Bengal, Calcutta Shri Prem Bhai Parekh and Others)(20 wie, 1970) (Fato Ho Alo atte, Fo Uaqo ate WNT Vo Uo Wa) afvena gam dq Baz, 1922 (1922 BT 11)—aTet 16(3).(8) (iv)raeafeoraeareT A ate AI— sa ATT‘et faeare — Sa are F weata Fae agt ara ot aaa FHT fFseat at aaa wa & fautfedt gro mais at ag oe a& saaa gf t—ara ate arfeaal F wearerSoaetoey aeareypraia ce ah Xo anare ari a & Barat & afar feral ag wa 8 aar-frge a war ate vat aaa a Ga A a TH FT75,000 sam ara # faq 1 oat at geifed frat war atte samoa aT feqaen a GH A arttert aa wart wea ga ot fH aaaeH AY Tiare Fmat & Rat at Twi seit GT A rae far a araSTqed at Te Ha fatafer Fe ai fraizr ad 1956-57 & fat arateafsarat & ag afafaaifes fear fe weitere & sorrel & afrafea feray & oferraeaeg aayent a dt areit ara afesat gran caetae, 1922 a aren 16(3) () (iv) & aeata ardt Fale Gar Ja aAat farifedt at ger araafeafaa He frat 1 THAT Bl ARIAT AAAI(atta) ate afsacr art gfe wt at ag) fg Tea eaTaTAT FT ata aged, Wa aT, FARA mare aft TT ws afer ale aa CcVs. Shri Prem Bhai Parekh and Others)(20 wa, 1970) (#10 Ho Ato ME, Ho YAo BE WT Yo To stax) gfvera gran da Daz, 1922 (1922 Ft 11)—eTe 16(3).ot(8) Ee (iv) eae — Sa ITT & H afeoraeaer rata Fae ag art ara aT aT Ta aHFaFHT UT KF;meer at amar we a faaifedt ara waka at ag afer a& saya ge d—ara site anferat F waren F aMlaea Aray faaifedt wa Ga X anfere at we Farad F afar fiaa ag wa & aar-frae a war ate sak aaa at ga Aa TAH aT75,000 Baa art ¥ faery wt ay garifen frat wat att watGa TT fHaaep ar ot H arirare aa maT) Aer ga a fe qaaeH & anitard Fraat & aware a ae waif sega Ga A aaa feara ara F TTTsitet a 1S cat fafafea ae at1 Frater ad 1956-57 % fae arTHTafaart & ag afafraifer Pear fie anitare & raat F afeafera fqara & qftrmecet aamesl at at art ara efteaa gray caedaz, 1922 at arer 16(3)() (iv) ¥ aeata areal Fat Gar sa aTal fraifedt at aa ara AH afeaferr Ht frat 1 SeaTee at aes ATTA(adr) att afer are gfe at at agfg Fea ATATAT FT seaae raratera fara ofsrat fade fre one oe wat fratfedd Bre 8 Praifer Pro fred feegeaan aaraa Y ater at vs| atta ares wT ge, afatratfta— cfreaq genq dqq tae,1922 at are. 16(3)afan oa afar sete at gafae gear aaiart aA aes afrat oat arfac|Pret rrr at are; 16 (3) atafefs Bata& ya ag afaa fear sre afar fae ae rated aren aoe cert aTaque aeatal Be get Faw at anfeaatF arawy F gaat aT aTeq a germ e821 alfa & ara ate ora A artoes ara AATafer att 7g aaa 3 fe ag ara wae F gfeorqeaET TIT FEata fe ae arafera fret Ofa & tage ef aafe feet ara Fqarenl Bl Ala ATMA F Haat A saw afeafaa faa area H HTTHeya ge al TT ea ae Saat aT A HY aaTeT Ara aRl ETATate qaqa tet ara al fraifedt at ga are8 afeafea agfeat TT AHAT1 (Fz 8)| faface favta 55 H1f0 EtoAIXo 637: AST AIT,YAMAFATA BAAATTMS Tet| (TheCommissionerofIncome-tax,_ Gujarat Vs. Keshavlal Lallubhai Patel). fate aritet aftranfcat: 1966 at fafaet suitor deat 2272. 1961 ® mant fre sear211 F saws Saas Fearate6 waatl,1966, va fig a meaB® fees st TEmale|| Mia BY AT A gasverofiat, To Wao afeaaiy, «AItoUto AMAlealoslorataaaAt UT Mo BIAAT Att Yo Foaes|| gafant aaa marae ar foie earafirafa Fo Ueto Bus F fea|rarattarata gts— ae aie efisrt ena eq tac,1922 (fat cae aa TAIafrfrarm Har Tat gf) BY ae 66-C(2) F aealla, HaTHAT For yrareacrater afafara at qr 66(1) & aeitt feu qe fade A. sa sara> fafriaa faeg far ae sara ForexTa Tee 2. afeacy % sea rararera at fate araedt at gan fafase fre The assessee Shri Ajitmal Parekh was a partner of the finn M/s. Ajitmal Kanhaiyalal having 7 annas share therein.' He con-tmuedto 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 F 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 i'he firm with effect from July 2, 1954 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 bene-fits of that partnership in the _reconstituted finn. 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 yea~ 1956-57. the Income-tax Officer held that the in~ome arising to the minors by virtue of their admis-sion 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 Appel-late Assistant Commissioner substantially upheld the order of assessment made by the Income-tax Officer but he held that the· Ll2Surc CI/7C -6 There was a reconstitution of i'he firm with effect from . 11 minors were entitled to only l-9 pies share in the firm. The assessee took up the matter in appeal to the Income-tax Appelhtte 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 the negative and in favour of the assessee. The tribunal found that the capital invested by the minors in the tirm came from the gift made in their favour by their fath\!r, 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." oT fe ga sate Y—(1) war afafara st are 16(3) Hexta faara-qusea h afsanrerdta &; wre (2) sar ara F geal ate ofeferfaat& aqare fratfedt F cha wares gal wl Aas ast Aa Hegaratetat artard & qraat F afeataa fer art Harare ge Slt ately ATafar at are16(3)(¢) (iv) % aeta fretted at ga araa afeataa frat arat StH ar|' 43g, fratfedt A, frat storage A get fates feu aa, cet der wp at aaa sat & fag ate aval fearwa: ga we Te Teaagra & ane fears val fear wari safe at alsa wet Te frar<HU at aaa Tet Fi Gea aaa F faite cet BT Tat ftatheat% qat A fear|.4. frarareca saat an fafaeaa attFH wasaTst aragay Tea,aa fa facafercr are sega fee ae aaa e waa A sqafoa fer are sega fee ae aaa e waa A sqafoa fer sega fee ae aaa e waa A sqafoa fer fee ae aaa e waa A sqafoa fer ae aaa e waa A sqafoa fer aaa e waa A sqafoa fer e waa A sqafoa fer waa A sqafoa fer A sqafoa fer sqafoa fer fer TTa, fatafafad g—| aa fa facafercr are sega fee ae aaa e waa A sqafoa fer are sega fee ae aaa e waa A sqafoa fer sega fee ae aaa e waa A sqafoa fer fee ae aaa e waa A sqafoa fer ae aaa e waa A sqafoa fer aaa e waa A sqafoa fer e waa A sqafoa fer waa A sqafoa fer A sqafoa fer sqafoa fer fer TT +5. fraifedtoft asitara cfve aad asfiaar aeararar atSH Bl ware at ale sad Gast ara ara aa (Aart) A1 aes1 qarg,1954 aH sa HT at wnitarcagar wer ot fe Fraterat 1955-56 & Gard Sa GAH Bar ay at afar ade sh1 1 Tare;1954 a fratfedt GH A Aarfraat A war1 aaa GAT ATT AIKgal H & wea FY 75,000 VIF IA H far sae ae gat # avaana att ga caren T| are 2 Tare,1954 & wy ar gata fearnat, datfe arta 5 sare, 1954 are anqard fare F ere’ |faalfedt ar agen ga gatied wa ar artlart aa war ate sas AAI gat at gaifod wat gaat wierd & prrat AH afeafea fear warqmrea ga ar A art wa (Nat) aT Gad att AareH areal Btaiitara & Bradt t afeafera fear var frat & cet aT et aay WaTatt fraizr ae 1956-57 F araat afar a ag afafratfer frafe aritard & araret F afeafad fee mH mare at HaTEaTl FYOF arett are afrfrere YT are 16(3) (&) (iv) a anf F seats* at mat 21 gar ga arr a sa ay & fae frsifedt at gar ara Aafeafaa axe fear attr fer aay ot aen agaa (att) 7armat afsard ere Pau ae frat aaa at gfe wz ay, Freq eAng afafaatfeafrat fe aaaen oa Tae cH sat at TS,gat & anart &) fraifed a ce aaa a oreax acta afar FTatte ati afro a agra argat(adie) & fafrera at gfeHL at| 6. arene gtr Te aU aeSTITT IL: TSA ATA AF AZfarsa fara fis gat Hert A aT sax sare ate fratfedt Fgat a far stat area1|| 7. afrnen tag frond fanart fe aaaeat are oa A fatetedqoft gad far, frsifedd art sah get H faq wy ara & sewer geft1 ca fread ox gee earoray & area adt feat at ana ar ale 7| A yea amare FX va faowg a aa & | fe ara 16(3) () (iv)& fdaB® ara ge sea ara 8 ag wr aa AY PNTTTsat freaifedt & cer # fear sar arf 1 arer 16(3) (@) (iv) =Tat ai ePrgtcor & garaard Great afte at ET aT BT AATATBa IATFa| — agtastt Fae sa TATE e— “In computing the total income of any individual forthe purpose of assessment, there shall be included— MIAT MAR To TA ATE ATA [FATo ETT] .(m) de cafer at gett aT waren araHT eet ATAafenfarerat Treat SY fae TART AT AMT BT Aeee eeexxxxx (iv) saaeR aeart wt, TT fe Ue eater a faarfetgata ay, water sfrnt & aera sere aT areBTA aa aT7é arferat & seret at”’ l:sefore any income of a minor child can be brought ·.v.ithin th~ scope of s. 16(3)(iv), it must be established that the said in.:ome 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 <1S their shar~ in the firm came from those amounts. But the ques-tion 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 betwee~ 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 js 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 Commi.~sioner of Income Tax, Gujarat. v. Keshavlal Lallubhai Patel(~). In our (1) 55. l.T.R. 637. r. F CI.T .. W. BENGAL 'v. P. B. PAREKH (Hegd'!; J.) ~)I 1 ...... 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 indir~ct­ly-from a tran~fer of assets made by the assessee in favour of his wife or minor children. The connection between the transfer of assets alid the income must be proximate. The income in ques-tion must arise as a result of the transfer and not in some manner .B connectd with it. V.P.S. Appeal dismissed. 8. fat ramen aart Ht air at are 16(3) (z) (iv) F faea ateare ara 8 od ae fee Heat di fe sae aT oa AaaBT TAFfaat gr cereal at arene STA aeafea a 7E anfeaat F Taq aTamet STF seatgE Ai sa TITA Brg frase aeals fH fratfat+ aot aTeE gat FS vetH BT 75,000 vad at Ts aeafer.at atag wt al amar 2 fe we Haat aaETF gat gaaeal ara aaaWHH Gat THAT a far wealTBAae a fH ae set fac7_aat teat & fe sar ag Har oT aKa gfe ag ary, farae sega aaa% gare arag 2, weaxat at arma wT a fraifedl are aT aaTETowed a mater anferdl & qq ge1 gaat sfeafad erat wTgataam ® sq seq ara81 gamaBt ary anitardtFgral H sae afafaa fer ora F afeormeaet gered ge ahWeaa & fe sed wetted % oraelF sah aver faqae afaaa >oferrmeaed at afeafera fran aa ar) fag aifeaat FH aeaTT ategaara ara & sta are ara adl fae adl wer at aaa fe aga year at aeaet wT A gdat fafase aifeaat F aa A TIAgf afafere[at][ ara][ 16(3)][ afar][ aa][ afar][ wat][ 81]qe ar FAMaTgas aateaaa feat sar afer, tar fe eA ~TATTT+ MRT MIgAA, FATA TAT Hae wes we F arma F ~(a) so much of the income of a wife or minor childof such individual as arises directly or indirectly..........0. xxxxx(iv) from assets transferred directly or indirectlyto the minor child, not being a married daughter_byconsideration.” suchindividualotherwise,°than for adequate 1944 Sea eater fot afret = [1974] 3 TAO Ro Go