Commissioner
of Income Tax, Calcutta Vs. Prahaladrai Agarwala [1989] INSC
139 (26 April 1989)
Pathak,
R.S. (Cj) Pathak, R.S. (Cj) Kania, M.H.
CITATION:
1990 AIR 270 1989 SCR (2) 737 1989 SCC Supl. (2) 279 JT 1989 Supl. 139
ACT:
Income
Tax Act, 1961: Section 64(1)(iii)--Wife partner in firm along with
husband--Capital contributed by wife out of amount gifted by the husband--Share
of profit of assessee's wife--Whether includible in total income of the
husband--There must be proximate connection between the accrual of income and
assets transferred.
HEAD NOTE:
The
respondent-assessee was one of the partners In a firm in which the five other
partners were his wife, mother, grand-father, brother, and a stranger. His wife
had contributed Rs.51,000 as capital in the firm, which amount came out of two
gifts made to her by the assessee. in the course of assessment proceedings for
the assessment year 1962-63 in respect of the assessee, the Income Tax Officer
included the profits of the assessee's wife from the firm, under s.
64(1)(iii)
of the Income Tax Act, 1961. The. assessee's appeal was dismissed by the
Appellate Assistant Commissioner who observed that the wife would not have
become a partner of the firm unless he had contributed capital which was
provided by the husband. The Appellate Tribunal, while dismissing the second
appeal of the assessee, found that the admission of the assessee's wife as a
partner in the firm was solely on account of her contribution of capital to the
firm. It was conceded by the assessee before the Tribunal that the interest
received by the assessee's wife on her capital contribution to the firm was
includible in the total income of the assessee.
The
High Court, while answering the question referred to it in favour of the assessee,
took the view that the income arose from the share of profits only because the
other partners agreed to take the assessee's wife as partner and she was
allowed to contribute to the partnership firm, and that the admission of the assessee's
wife to the partnership was not in consequence of the gift.
Dismissing
the Revenue's appeal, it was
HELD:
(1) The income may arise directly or indirectly, but for application of the
provisions of section 64(1)(iii) of the Income Tax Act, 738 1961 there must be
a proximate connection between the accrual of the income and the assets
transferred by the assessee.
[741D]
Commissioner of Income-tax, West Bengal 111
v. Prem Bhai Parekh, [1970] 77 ITR 27 followed.
(2)
The mere contribution of the capital by the wife into the firm would not
automatically have entitled her to partnership in the firm. The partnership was
based on agreement, and it is the event of agreement between the partners that
brought the assessee's wife into the firm as partner.
[742E]
Commissioner of Income-tax, Bangalore v. J.H. Gotla, [1985] 156 ITR 323;
Commissioner of Income-tax, Assam, Tripura and Manipur v. Jwalaprasad Agarwala,
[1967] 66 ITR 154; V.D. Dhanwatey v. Commissioner of Income-tax, Madhya
Pradesh, Nagpur and Bhandara, [1968] 68 ITR 365; Smt. Mohini Thapar v.
Commissioner of Income-tax (Central), Calcutta, [1972] 83 ITR 208; Potti Veerayya
Sresty v. Commissioner of Income-tax, A.P., [1972] 85 ITR I94 distinguished.
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 575 (NT) of 1975.
From
the Judgment and Order dated the 24.4.1973 of the Calcutta High Court in Income
Tax Reference No. 202 of 1969.
B. Ahuja
and Ms. A. Subhashini for the Appellant.
K.P. Bhatnagar,
S.P. Mittal and B.P. Maheshwari for the Respondent.
The
Judgment of the Court was delivered by PATHAK, CJ. This appeal by special leave
is directed against the judgment of the High Court at Calcutta answering the following question in
favour of the assessee and against the Revenue:
"Whether,
on the facts and in the circumstances of the case, the share of profit of the assessee's
wife was includable in the total income of the assessee under section 64(1)(iii)
of the Income Tax Act, 1961?" 739 The assessee was assessed in the status
of an individual for the assessement year 1962-63 corresponding to the previous
year 26 March, 1961 to 13 April, 1962. At the material time the assessee was a partner in a firm,
Messrs Ramesh and Co., with a share of eight annas therein. The balance was
shared by three other partners, the assessee's father, Kunjilal Agarwala, the assessee's
brother, Hariram Agarwala and a stranger, Jagdish Prasad. On 10 November, 1960 and on 28 November, 1960 the assessee made two gifts of Rs.21,000 and Rs.30,000
respectively to his wife, Kaushalya Devi, from his account in the firm. On 28 November, 1960 he made another gift of Rs. 11,000
to his mother Chili Bai from that account. It may be observed that Chili Bai
received another gift of Rs.20,000 from her husband, Kunjilal, effected by
similarly drawing from his account with the firm.
The assessee's
wife, Kaushalya Devi, as well as his mother Chili Bai became partners with
three other persons in a newly constituted firm, Messrs Kunjilal Hariram &
Co. The three other partners were the assessee's grand father, Moharilal Agarwala,
the assessee's brother, Hariram Agarwala and the stranger, Jagdish Prasad Gup. ta.
The Partnership Deed dated 10 November, 1960
provided that the business was to commence from 12 November, 1960. The preamble to the deed stated:
"Whereas
the partner of the Fifth Part who has extensive experience and outstanding
talent of organisation in Jagree and Grains Trade but little finance requested
the partners of the First four Parts to enter into co-partnership with him on
contributing the necessary finance to carry on business in Jagree and Grains
and also act as Commission Agents in Jagree Grains and allied commodities to
which request they acceded." Clause 4 of the Partnership Deed stipulated:
"That
the partners of the First Four Parts shall initially contribute Rs.25,000 each
to be put in within six months from the commencement of the partnership. The
said contributions augmented by further deposits and profits or depleted by
withdrawals and tosses shall carry interest at the rate of 6% per annum. The
amount if any, standing to the credit of the partner of the Fifth Part shall
carry interest at the same rate." 740 On 12 November, 1960 Kaushalya Devi contributed Rs.21,000 as capital, which came
out of the gift made by the assessee on 10 November, 1960. She also contributed Rs.30,000 as
capital, which amount came out of the gift made on 28 November, 1960.
In the
course of assessment proceedings for the assessment year 1962-63 in respect of
the assessee the Income Tax Officer included the profits of the assessee's wife
from the firm, Messrs. Kunjilal Hariram & Co., under s. 64(1)(iii) of the
Income Tax Act, 1961.
An
appeal by the assessee was dismissed by the Appellate Assistant Commissioner of
Income Tax, who observed that the wife would not have become a partner of the
firm unless she had contributed capital, and as the capital was provided by the
husband the inclusion of the wife's share of income in the assessment of the assessee
was justified.
In
second appeal, it was conceded by the assessee before the Income Tax Appellate
Tribunal that the interest received by the assessee's wife on her capital
contribution to the firm was includible in the total income of the assessee,
but it was contended that the balance of the share of profit was not so
includable as the assessee's wife had become a partner in the firm in her own
right, and it was immaterial that the capital invested by her had been provided
as a gift by the assessee. The Appellate Tribunal found that the admission of
the assessee's wife as partner in the firm was solely on account of her
contribution of capital to the firm, that the assets in the form of cash were
transferred directly by the assessee to his wife otherwise than for adequate
consideration, and that the income must be said to have arisen indirectly from
the assets transferred. The second appeal was dismissed. At the instance of the
assessee the question of law set forth earlier was referred to the High Court
at Calcutta for its opinion.
The
High Court has taken the view that the share of profits arose to the assessee's
wife primarily because the partnership made a profit and although it had
connection with the gift it did not arise as a result of the gift, that the
income arose from the share of profits only because the other partners agreed
to take the assessee's wife as partner and was allowed to contribute to the
partnership firm, that the admission of the assessee's wife to the partnership
was not in consequence of the gift, and that, therefore, upon all those
circumstances, the connection between the income of the share of profits and
the gifts by the assessee to his wife was too remote to be included within the
provisions of s. 64(1)(iii) of the Income Tax Act.
741 S.64(1)(iii)
of the Income Tax Act, 1961, as it stood at the relevant time, provides:
"64(1)
In computing the total income of any individual, there shall be included all
such income as arises directly or indirectly-(i) xx xx xx (ii) xx xx xx (iii)
subject to the provisions of cl.
(i) of
s. 27, to the spouse of such individual from assets transferred directly or
indirectly to the spouse by such individual otherwise than for adequate
consideration or in connection with an agreement to live apart." The
income may arise directly or indirectly, but there must be a proximate connection
between the accrual of the income and the assets transferred by the assessee.
In Commissioner of Income-tax, West Bengal 111 v. Prem Bhai Parekh and Others,
[1970] 77 ITR 27 this Court held that the income of minor sons, who had
invested capital in the firm out of moneys gifted to them by their father (the assessee)
could not be included in the assessment of the assessee. The Court observed:
"Before
any income of a minor child can be brought within the scope of section 16(3)(a)
(iv), it must be established that the said income arose directly or indirectly
from assets transferred directly or indirectly by his 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 742 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 income arose
directly or indirectly from the transferor 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 ITR 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 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." It seems to us that the observations of this
Court in that case fully cover the case before us. There is no doubt that the wife
became a partner because of the capital contributed by her in the firm, but, as
observed by the High Court, in the judgment under appeal, it was upon agreement
by the remaining partners that she became a member of the partnership. The mere
contribution of the capital by the wife into the firm would not automatically
have entitled her to partnership in the firm. The partnership was based on
agreement, and it is the event of agreement between the partners that brought
the assessee's wife into the firm as partner.
Learned
counsel for the Revenue relies on Commissioner of Income-tax, Bangalore v. J.H. Gotla, [1985] 156 ITR 323;
Commissioner
of Income-tax, Assam Tripurn and Manipur v. Jwalaprasad Agarwala, [1967] 66 ITR
154; V.D. Dhanwatey v. Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara,
[1968] 68 ITR 365 and Smt. Mohini Thapar v. Commissioner of' Income-tax
(Central), Calcutta, and Others, [1972] 83 ITR 208 but
we are not satisfied that those cases are of assistance to the Revenue. Reliance
was placed on Potti Veerayya Sresty v. Commissioner of Income-Tax, A.P., [1972]
85 ITR 194 where the Andhra Pradesh High Court upheld the inclusion of the
wife's income from cloth business carried on by her, into which cloth business
she had invested a portion of the assets transferred by the assessee. It is
sufficient to observe that the cloth business was her own business and, as the
High Court pointed out, there was no necessity to depend upon the agreement of
others. It is on that basis that the High Court distinguished Prem Bhai Parekh's
case (supra).
743 We
are of the view that the High Court is right in answering. the . question
referred to it in the negative, in favour of the assessee and against the
Revenue.
In the
result the appeal fails and is dismissed with costs.
R.S.S.
Appeal dismissed.
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