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PETITIONER: COMMISSIONER OF INCOME TAX

       Vs.

RESPONDENT: SMT. PELLETI SRIDERAMMA, NELLORE

DATE OF JUDGMENT11/10/1995

BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) MAJMUDAR S.B. (J)

CITATION:  1996 AIR  463            1995 SCC  (6) 315  JT 1995 (7)   225        1995 SCALE  (5)690

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T B.P. JEEVAN REDDY, J.      This 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:      "64(1).   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. Reference to clause (i) of Section 27 is not necessary since it has no relevance to the facts of this case.      The  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

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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]. Thereupon, 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.      Sri J.Ramamurthy,  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. Learned 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 Tax (Central). Calcutta &  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.      Let us 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 property. It was  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.      In  Sevantilal  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

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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). Similarly, 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:      "In 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 whereunder the  major son  became a  partner and  the  three minors son  were a  admitted to the benefits of partnership. It is  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

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assessee to  those minors".  The Court  answered it  in  the negative, in the following words:      "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.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 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 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.      Indeed, 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

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Section 16(3)  of the  Indian Income Tax Act, 1922. Hegde,J. observed, "(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". It was  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 Thapar.      Now, 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. Because 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).      It is  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 lines.      Before 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.      For 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.