Commissioner of Income-Tax, West
Bengal, Calcutta Vs. Shri Prem Bhai Parekh & Ors  INSC 98 (20 April
20/04/1970 HEGDE, K.S.
CITATION: 1970 AIR 1518 1971 SCR (1) 308 1970
SCC (3) 784
RF 1972 SC 7 (16) R 1990 SC 270 (8)
Indian Income-tax Act (11 of 1922), s. 16(3)
(a) (iv) Income art as a, result of transfer-What is.
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
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.
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 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.