Commissioner of Income-Tax, Madras Vs.
C.M. Kothari, Madras  INSC 71 (26 March 1963)
26/03/1963 HIDAYATULLAH, M.
CITATION: 1964 AIR 331 1964 SCR (2) 531
D 1965 SC 866 (10,11)
Income Tax-Income from property in the name
of wife--Money coming into the hands of wife from husband indirectly- --Whether
income of wife to be included into that of husband "Transferred directly
or indirectly to the wife," Meaning of--Indian Income-tax Act, 1922 (11 of
1922), s. 16 (3) (a) (iii).
Messrs Kotbari and Sons is a firm of stock
brokers. The firm consisted of Shri C. M. Kothari and his two sons, Shri D. C.
Kothari and Shri H. C. Kothari. The firm entered into an agreement for the
purchase of a house and the earnest money was paid by it. Later on, the house
was bought in the name of Mrs. C. M. Kothari, Mrs. D. C. Kothari and Shri H. C.
Kotliari. The house was bought for Rs. 90,000/- and both Mrs. C. M Kothari and
Mrs. D. C. Kothari received Rs. 30,000 each from the firm. In the case of Mrs.
C. M. Kothari, she got that amount in the form of birthday gift and Diwali gift
from her son, D. C. Kothari. Mrs. D. C. Kothari also received Rs. 30,000 from
the firm as a gift from Shri C. M. Kothari, her father-in-law. The Income-tax
Officer assessed the income of Mrs. C. M. Kothari and Mrs. 1). C. Kotliari from
the said house as the income of their husbands. The appeals of the assessees
were dismissed by the Appellate Assistant Commissioner and the Tribunal. The
Tribunal confirmed the finding of the Income Tax Officer that the two ladies
had acquired their shares in the house out of the assets of their husbands
indirectly transferred to them.
However, the Tribunal did not hold that the
transaction was benami.
The Tribunal referred the case to the High
Court for opinion whether the income arising to Mrs. C. M. Kotbari and Mrs. D. C.
Kothari from the property arose out of the assets transferred indirectly by
their husbands so as to attract the provisions of s. 16 (3) (a) (iii) of the
Income-tax Act, 1922.The High Court answered the reference in the negative.
The Commissioner of Income-tax, Madras, came
to this Court in appeal.
532 Held that the answer given by the High
Court must be set aside and the reference made by the Tribunal must be answered
in the affirmative. The object of law is to tax the income of the wife in the
hands of the husband if the income of the wife arises to her from assets
transferred to her by her husband. In the present case, the son transferred the
assets to his mother and the father-in-law transferred his assets to his
daughter-in-law. The term "indirectly" is intended to cover such
If two transfers are inter-connected and are
parts of the same transaction in such a way that it can be said that a
circuitous method has been adopted as a device to evade the implications of s.
16 (3) (a) (iii), the case will fall within this section. In the present case,
the device is palpable and the two transferors are so intimately connected that
they cannot but be regarded as a part of a single transaction. It was not
successfully explained why the father-in-law made a big gift to his
daughter-in-law and the son made an equally big gift to his mother.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 34 to 36 of 1962.
Appeals from the judgment and order dated
March 25, 1958, of the Madras High Court in Case Referred No. 12 of 1954.
K. N. Rajagopal Sastri and R. N. Sachthey,
for the appellant.
R. Gopalakrishnan, for the respondent.
1963. March 26. The judgment of the Court was
delivered by HIDAYATULLAH J.- The High Court of Madras in a Reference under
s.66 (1) of the Indian Income Tax Act, answered in the negative the following
question:- "Whether there was material for the Appellate Tribunal to hold
that the income arising to Mrs. C.M. Kothari and Mrs. D. C. Kothari from the
property arose indirectly out of the 533 assests transferred indirectly by
their husbands so as to attract the provisions of s.16 (3)(a)(iii)." In
our opinion, these appeals by the Commissioner of Income- tax., Madras, must be
Messrs Kothari and Sons is a firm of stock
brokers. In 1947, the firm consisted of C.M. Kothari and his two sons, D. C.
Kothari and H. C. Kothari Their respective shares were 6 : 5 : 5. On October 7,
1947, the firm entered into an agreement for the purchase of a house in
Sterling Road, Madras, for Rs.90,000, and the same day paid an advance of
s.5,000. This sum was debited in the books of the firm to the accounts of the
three partners as follows:- C. M. Kothari Rs.1,800 D. C. Kothari Rs.1,600 H. C.
Kothari Rs.1,600 Total. Rs.5,000 The transaction was completed on October 24,
1947. The sale deed, however, was taken in the names of Mrs. C.M. Kothari Mrs.
D.C. Kothari and H.C. Kothari. The balance of the consideration was paid to the
vendors by the firm. Each of the two ladies paid to the firm a cheque of
Mrs. C.M. Kothari further paid a cheque of
Rs. 1,800, and Mrs. D.C. Kothari paid another cheque of Rs. 1600 Thus the two ladies
paid one-third share of Rs.85,000 and the amounts which were respectively paid
by their husbands as part of the earnest money. H.C. Kothari was debited with a
further sum of Rs.28,333.5-4. In this way, Mrs. C. M. Kothari pad Rs.200 more
than the other two, because her husband had previously paid Rs.200 more than
his sons. The share of the three vendees was however, Shown to be one-third
534 The ladies issued the cheques on their
accounts into which were paid by the firm, certain amounts by cheques. Into
Mrs. C.M. Kothari's account was paid an amount of Rs.27,000 which was debited
on October 24, 1947 to D.C. Kothari. It was stated to be a birthday gift by him
to his mother. On November 13, 1947, another amount of Rs. 3,000 was paid into
Mrs. C. M. Kothari's account which was debited to the account of D. C. Kothari
as a gift by him to his mother for Dewali. Similarly, on November 13, 1947 Mrs.
D. C. Kothari's account with the bank was credited with a sum of Rs.30,000 by a
cheque issued by the firm. This was debited to the account of C, M. Kothari and
was shown as a gift by him to his daughter-in-law. In this way both the ladies
received from the firm Rs. 30,000 which was the exact one- third share of the
consideration of Rs.90,000, but the amount was not paid by their respective
husbands, but by the son in one case, and the father-in-law,, in the other.
In the assessment years 1948-49, 1950-51 and
1951-1952, the Income Tax Officer assessed the income from the one-third share
of the house received by Mrs. C.M.Kothari as the income of her husband. Similarly
in the four assessment years 1948-49 to 1951-52, the income of Mrs. D. C.
Kothari from this house was assessed as the income of her husband.
This was on the ground that because of the
interchange of the money in the family, either the purchases were made by the
donors benami in the names of the donees, or alternatively, from assets
transferred indirectly by the husband to the wife in each case. The Income Tax
Officer pointed out that the birthday of Mrs. C. M. Kothari had taken place
earlier in the year and there was no occasion to give a birthday present to her
several months later and on a date coinciding with the purchase of this
property. The Income Tax Officer also found that in the past, the father-in-law
bad never given 535 such a big present to his daughter-in-law on Dewali and
this time there was no special circumstance to justify it. The appeals of the
assessee to the appellate Assistant Commissioner failed as also those filed
before the Tribunal.
The Tribunal, however, did not hold that the
transaction was benami, but confirmed the other finding that the two ladies bad
acquired their share in the house out of assets of the husbands indirectly
transferred to them. The Tribunal, how- ever, stated a case for the opinion of
the High Court, and the High Court answered the question in the negative.
As the question whether the two transactions
were benami does not fall to be considered, the only question that survives is
whether this case is covered Sy s.16 (3) (a) (iii). This section reads as
follows:- "16(3). 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;" The section takes into account not only transference of assets
made directly but also made indirectly. It is impossible to state here what
sorts are covered by the word indirectly', because such transfers may, be made
in different ways.
It is argued that the first requisite of the
section is that the assets must be those of the husband and 536 that is not the
case here. It is true that the section says that the assets must be those of
the husband, but it does not mean that the same assets should reach the wife.
It may be that the assets in the course of being transferred, may be changed
deliberately into assets of a like value of another person, as has happened in
the present case. A chain of transfers, if not comprehended by the word
"Indirectly' would easily defeat the object of the law which is to tax the
income of the wife in the hands of the husband, if the income of the wife
arises to her from assets transferred by the husband. The present case is an
admirable instance of how indirect transfers can be made by substituting the
assets of another person who has benefited to the same or nearly the same
extent from assets transferred to him by the husband.
It is next contended that even if chain
transactions be included, then, unless there is consideration for the transfer
by the husband, each transfer must be regarded as independent, and in the
present case, the Department has not proved that the transfers by the son to
the mother and by the father-in law to his daughter-in-law were made as
consideration for each other. We do not agree. It is not necessary that there
should be consideration in the technical sense. If the two transfers are
inter-connected and are parts of the same transaction in such a way that it can
be said that the circuitous method has been adopted as a device to evade
implications of this section, the case will fall within the section. In this
case, the device is palpable and the two transfers are so intimately connected
that they cannot but be regarded as parts of single transaction. It has not
been successfully explained why the father-in law made such a big, gift to his
daughter-in-law on the occasion of Diwali and why the son made a belated gift,
equally big, to his mother on the occasion of her birthday which took place
several months before. These two gifts match each other as regards the amount,
The 537 High Court overlooked the clear implication of these fact as also the
Implication of the fact that though the three purchasers were to get one-third
share each, Mrs. C. M. Kothari paid Rs. 200 more than the other two and that
each of the ladies re-paid the share of earnest money borne by their respective
husbands. An intimate connection between the two transactions, which were
primafacie separate, is thus clearly established and they attract the words of
the section, namely, "transferred directly or indirectly to the
In our opinion, the High Court was in error
in ignoring these pertinent matters. The High Court also overlooked the fact
that the purchase of the house at first was intended to be in the names of
three partners of the firm. No evidence was tendered why there was a sudden
change. It is difficult to see why the ladies were named as the vendees if they
did not have sufficient funds of their own. They could only buy- the property
if someone gave them the money. It is reasonable to infer from the facts that
before the respective husbands paid the amounts, they looked up the law and
found that the income of the property would still be regarded as their own
income if they transferred any assets to their wives. They hit upon the
expedient that the son should transfer the assets to his mother, and the
father-in law, to the daughter in-law, obviously failing to appreciate that the
word "indirectly' is meant to cover such tricks.
The appeals must, therefore, succeed. The
answer of the High Court is vacated, and the question, answered in the
affirmative. The respondent shall bear the costs of these appeals as also the
costs in the High Court. One hearing fee.