of Income Tax Vs. Smt. Pelleti Srideramma, Nellore  INSC 551 (11
Reddy, B.P. (J) Jeevan Reddy, B.P. (J) Majmudar S.B. (J) B.P. Jeevan Reddy, J.
1996 AIR 463 1995 SCC (6) 315 JT 1995 (7) 225 1995 SCALE (5)690
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:
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.
to clause (i) of Section 27 is not necessary since it has no relevance to the
facts of this case.
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 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].
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.
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.
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
& 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.
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
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.
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 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).
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:
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 where under the major son became a
partner and the three minors son were a admitted to the benefits of
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 assessee to those minors". The Court answered it
in the negative, in the following words:
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 
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
connection between the transfer of assets and the income must be proximate.
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.
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
Section 16(3) of the Indian Income Tax Act, 1922. Hegde,J.
"(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".
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
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.
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).
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
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.
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.