Mohini Thapar (Dead) by L. Rs. Vs.
C.I.T. (Central) Calcutta & Ors  INSC 260 (23 September 1971)
Income-tax Act, 1922, s. 16(3)(a)(iii)-Scope
The assessee made certain gifts to his wife
out of those gifts she purchased shares and made investments. On the question
whether the dividends earned and the interests realised were income "from
assets transfer-red directly or indirectly" by the assessee to his wife
within the meaning of s. 16(3) (a) (iii) of the Income-tax Act, 1922,
HELD : Section 16(3) (a) (iii) includes not
merely the income that :arises directly from the assets transferred but also
the income that arises indirectly 'from. Those assets.
In the present case the income has a nexus
with the assets transferred and they are income indirectly received in respect
of the transfer of cash directly made. Therefore the department is entitled to
include the dividends and interest in question in computing the taxable income
of the assessee. [885 C-D] C.I.T. West Bengal III v. Prem Bhai Parakh &
Ors.,  77 I.T.R. 27, held inapplicable.
CIVIL APPELLATE JURISDICTION Civil Appeals
Nos. 1374 and 2146 to 2149 of 1970.
Appeals from the judgments and order dated
July 30, 1963 and February 11, 1965 of the Calcutta High Court in Income-tax Reference
No. 48 of 1959, and 69 of 1961 respectively.
D.Pal, T. A. Ramachandran and D. N. Gupta,
for the appellants and respondents Nos. 2 to 4 (in all the appeals).
S.C. Manchanda, P. L. Juneja, R. N. Sachthey
and B. D. Sharma, for respondent No. 1 (in all the appeals).
The Judgment of the Court was delivered by
Hegde, J. All these appeals by certificate are filed by the legal
representatives of Late Karam Chand Thapar who was the assessee in this case.
He died after the assessments were made. The assessment years with which we are
concerned in these appeals are 1949-50, 1950-51, 1951-52, 1952-53 and 1953-54.
The facts of the case lie within a narrow compass.
Late Karam Chand Thapar made certain cash
gifts to his wife Smt. Mohini Thapar. From out of those gifts, she purchased
certain shares and the balance amount she invested. The shares earned dividends
and the investments yielded interest. The interest realised and the dividends
earned were included in the income of Karam Chand Thapar for the purpose of assessment
in 884 the assessment years mentioned earlier. The assessee objected to the
inclusion of that amount in his income. The question is whether the department
was entitled to include the dividends and interest in question in computing the
taxable income. of the assessee. The Income-tax Officer held that they were
liable to be included in the income of the assessee. That decision was upheld
bythe Appellate Assistant Commissioner. On a further appeal, taken by the
assessee to the Tribunal the Tribunal upheld the order of the Assistant
Commissioner. Thereafter at the instance of the assessee, the question set out
below was submitted to the High Court under section 66(1) of the Indian
Income-tax Act, 1922, in respect of the assessment year 1949-50 :
"(1) 'Whether on the facts and on the
circumstances of the case, the income of Rs. 21,225 derived from deposits and
shares held by the assessee's wife, Smt. Mohini Devi Thapar was income from
assets directly or indirectly transferred by the assessee to his wife within
the meaning of Section 16(3) of the Income-tax Act." Similar questions
were referred in respect of other assessment year. The High Court answered
these questions in favour of the revenue. Hence these appeals.
Section 16(3)(a)(iii) of the Act-the
provision relevant for the purpose of these appeals reads thus:
(2) "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
(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 assets transferred
in this case is the gift of 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 885 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
It was urged by Dr. Pal, learned counsel for
the assessee that there is no nexus between the income earned and the transfer
of the assets. According to him before an income can come within section 16(3)
(a) (iii) it must be an income directly arising from the assets transferred. In
other words, he urged that only such income which can be said to have directly
sprung from the assets transferred "Can come within the scope of section
16 (3) (a) (iii). We are unable to accept this contention as sound. Otherwise
the expression 'as arises directly or indirectly' in section 16(3)(a) would
become redundant. The net cast by section 16(3)(a) (iii) includes not merely
the income that arises directly from the assets transferred but also that
arises indirectly from the assets transferred. We are in agreement with the
contention of Dr. Pal that the income that can be brought to tax under section
16 (3) (a) (iii) must have a nexus with the assets transferred directly or
But in this case the income with which we are
concerned has a nexus with the assets transferred.
In support of his contention Dr. Pal relied
on the decision of this Court in Commissioner of Income-Tax, West Bengal III v.
Prem Bhai Parakh and others(1). The facts of that case are as follows : The
assessee, who was a partner in a firm having 7 annas share therein, retired
from the firm on July 1, 1954. Thereafter, he gifted Rs. 75,000 to each of his
four sons, three of whom were minors. There was a reconstitution of the firm
with effect from July 2, 1954, whereby the major son became a partner and the
minor sons were admitted to the benefits of partnership in the firm.
The question was whether the income arising
to the minors by virtue of their admission to the benefits of partnership in
the firm could be included in the total income of the assessee under section 16
(3) (a) (iv) a provision similar to section 1 6 (3) (a) (iii) The Tribunal
found that the capital invested by the minors in the firm came from thegift
made in their favour by their father, the assessee.
This Court overruling the contention of the
revenue came to the conclusion that the connection between the gifts made by
the assessee and the income of the minors from the firm was a remote one and it
could not be said that income arose directly or indirectly from the asses
transferred. Hence I income arising to the three minor sons of the assessee by
virtue of their admission to the benefits of partnership in the firm could not
(1)  77 I.T.R. p. 27.
886 be included in the total income of the
assessee. The ratio of the decision is found at page 30 of the report. This is
what the Court observed in that case :
"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. p. 637. 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 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." The ratio of that decision is inapplicable to the
facts of the present case.
Here we are dealing with an income which has
proximate connection with the transfer of the assets made by the assessee.
In the result, these appeals fail and they
are dismissed with costs. Costs one set.
K.B.N. Appeals dismissed.