http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

PETITIONER: SEVANTILAL MANEKLAL SHETH

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX (CENTRAL),BOMBAY

DATE OF JUDGMENT: 22/11/1967

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C.

CITATION:  1968 AIR  697            1968 SCR  (2) 360

ACT: Income  Tax  Act. 1922,  ss.  12B,  16(3)(a)(iii)--Appellant transferring shares to wife--profit made on sale of   shares by  way  of  capital  gains--if liable  to  be  included  as appellants ’income’.

HEADNOTE: The  appellant made a gift in 1951 of certain  ordinary  and preference shares in a company to. his wife and on the  date of  transfer the value of the shares was Rs. 69,730.   After the  company  had  converted  the  preference  shares   into ordinary shares the appellant’s wife sold most of the shares held  by  her for Pa.  1,54,800,  resulting  in  a   capital gain   of Rs. 70,860 as computed under s. 12B of the  Income Tax  Act.  1922.  She deposited the entire  amount  realised from  the sale of shares with a firm and thereby  earned  an interest  of  Rs.  9,288  per  year.   In  the   appellant’s assessment for 1957-58, the Income Tax Officer included  the amount  of  Rs. 70,860 on the view that the  gain  resulting from  the   sale   of   the shares was  the  income  of  the appellant’s  wife  which arose directly or  indirectly  from assets  transferred  by  him within the  meaning  of  s.  16 (3)(a)(iii) of the Income Tax Act, 1922.  Similarly, in  the appellant’s  assessment for the year 1958-59’ and  19591-60, the  interest   amount  of Rs. 9,288 was  also  included  as income  within  the  meaning of s. 16  (3)  (a)  (iii).   In appeals made against the three assessment orders, while  the Appellate  Assistant  Commissioner dismissed the  appeal  in respect of the assessment year 1957-58 be partly allowed the other two appeals taking the view that only that part of the interest which was attributable to the monetary value of the shares at the time of the gift was liable to be included  in the appellant’s total income under s. 16 (3)(a)(iii);  since the  monetary value of the shares gifted to the wife at  the time  when  the  gift was made was.  only  Rs.  69,730.  the interest  attributable  to it worked, out at Rs.  4,138  and only  this  amount  could be  included  in  the  appellant’s income.   The Appellate. Tribunal dismissed the  appellant’s further  appeal and also allowed cross appeals filed by  the Department.  The High Court. upon a reference. held that the sum  of Rs. 70,860 was properly included in the  appellant’s income, in 1957-58 but that the interest amount in excess of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

Rs.  4.138 was not liable to be included in his  income  for 1958-59 and 1959-60. In   the  appeal  to  this  Court  the  only  question   for consideration  was whether the amount of Rs. 70.860 was  the appellant’s   income  under  s.  16  (3)(a)(iii).   It   was contended on his behalf (i) that what comes within the ambit of  s.  16(3.)(a)(iii) is the income  from  the  transferred assets.which is different from the profits or gains  arising from  the sale of the transferred assets. or in other  words "the  capital gains" from the transferred assets; and   (ii) that  s.  16(3)(a)(iii) was enacted in 1937  when  the  word ’income’ did not include ’capital gains’ and income from the property was understood to be income falling under that head in s. 6 of Act. HELD:   The High Court had rightly decided that the  amount. of Rs. 70,860 was properly included in the assessees  income under s. 16 (3) (a) (iii). 361      (i)  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 gain is made to arise out of the  asset is   the operation  of sale. [364 G--H]      (ii)  Although  at the time when s.  16(3)(a)(iii)  was enacted the definition of ’income’ did not include  ’capital gains’, capital gains having been brought within the meaning of ’income’ in s.  2(6C),  the  expression ’income’ as  used in  s.  16(3)(a)(iii)  must be construed  according  to  the amended  definition  of  the  word  and  would,   therefore, include  capital gains.  There is nothing in the context  or language  of  s. 16(3)(a)(iii) of the Act  to  suggest  that capital  gains are excluded from its scope and there  is  no reason  why a restricted interpretation should be  given  to the provisions of s. 16(3) (a) (iii). [365 C--E]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2454 of 1966. Appeal  from  the Judgment and order dated  February  19/22, 1965 of the Bombay High Court in Income-tax Reference No.  2 of 1962. Sanat P. Mehta, and J.B. Dadachanji, for the appellant. Niren  De,  Solicitor-General,  B.R.L.  lyengar,  and   R.N. Sachthey, for the respondent. The Judgment of the Court was delivered by Ramaswami,  J.  This appeal is brought by  certificate  from the,  judgment  of  the Bombay High  Court  dated  the  22nd February, 1965 in Income-tax Reference No. 2 of 1962. In the year 1951 the assessee Maneklal Ujamshi  (hereinafter referred  to as the assessee) made a gift of 1,184  ordinary and  155 preference shares in Changdeo Sugar Mills  Ltd.  to his wife Bai Laxmibai.  The total value of these transferred shares  on  the  date  of the  transfer  was  Rs.  68,730/-. Subsequent  to  the  transfer  the  company  converted   the preference   shares   into   ordinary   shares  giving   the shareholders  8  ordinary shares for each  preference  share with the result that on December 31, 1954, Bai Laxmibai held in all 2,424 ordinary shares of  the mills.  Out,  of  these 2,424  shares. Bai Laxmibai sold 2,400 shares on  August  1. 1956,  for  the  sum of  Rs.  1,54,800/-   resulting   in  a capital   gain  of Rs. 70,860/- as computed under s. 12B  of the Income-tax Act. The whole amount realised by the sale of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

the  shares  was deposited’ by Bai Laxmibai with  M/s.  A.H. BhivandiwaIla  & Co., in which Maneklal as well as his  son, Sevantilal, happened to be partners. The amount deposited by Bai  Laxmibai fetched a yearly interest of Rs.  9,288/-.  In the  assessment of Maneklal for the assessment year  1957-58 the Income Tax Officer included the  amount  of Rs. 70,860/- which was the profit made by Bai Laxmibai on the 362 sale  of  the  shares,  as  income  of  Maneklal  under   s. 16(3)(a)(iii)  of the Indian Income Tax Act.  Similarly,  in the assessment  of Maneklal for the assessment years 1958-59 and  1959-60,  the Income Tax Officer included in each  year the amount of Rs. 9,288 which was the interest earned by Bai Laxmibai  on  the  deposit of the sale  proceeds  with  M/s. Bhivandiwalla  and  Co. as the income of Maneklal  under  s. 16(3)(a)(iii).  According to the Income Tax Officer the gain which  had  resulted  from the sale of the  shares  was  the income  of the wife of the assessee which arose directly  or indirectly  from the assets transferred by the  assessee  to his   wife  otherwise than for  adequate  consideration  and therefore was required to be included in the computation  of the  total income of Maneklal. The Income Tax  Officer  also took the view that the amount of interest which Bai Laxmibai had  received from the sale proceeds deposited by  her  with M/s.  Bhivandiwalla  & Co. was also income of  the  wife  of Maneklal which arose directly or indirectly from the  assets transferred  by  Maneklal  to  her.   Accordingly,  in   the assessment order for the first year, the Income Tax  Officer included  the amount of Rs. 70,860/- and in  the  assessment orders  for the next two  years,  he  included  the   amount of  Rs.  9,288/- in the total taxable  income  of  Maneklal. Appeals  against  all  these three  assessment  orders  were filed  before the Appellate Assistant Commissioner.  In  the appeal against the first assessment order for the assessment year  1957-58  the  Appellate Assistant Commissioner  agreed with   the   view   taken  by the  Income  Tax  Officer  and dismissed  the appeal.  In the other two appeals, he  partly allowed the appeals taking the view  that only that part  of the  interest   which  was  attributable  to   the  monetary value of the shares covered by the shares at the time of the gift  was  liable  to be included in  the  total  income  of Maneklal   in   accordance  with  the  provisions   o.f   s. 16(3)(a)(iii)  and  the balance  could  not be included under  the  said  provision. Since  the  monetary  value  of the  shares  gifted  to  Bai Laxmibai  at  the time when the gift was made was  only  Rs. 69,730/-, the interest attributable to it worked out at  Rs. 4,l  38/-.  Out of the total interest of Rs.  9,288/-  which was  received  by Bai Laxmibai in each of  those  years,  he directed  that  only  an amount of  Rs.  4,183/-  should  be included  in the total income of Maneklal in each  of  those two years and the balance of Rs. 5,105/- should be  deleted. Against the orders of the Appellate  Assistant  Commissioner on  these  appeals the assessee appealed to  the   Appellate Tribunal.   The  Department,  on the  other  hand,  appealed against  the orders of the Appellate Assistant  Commissioner for the years 1958-59  and 1959-60 insofar as  they  allowed exemption   in   respect  of Rs. 4,183/- out  of  the  total amount of Rs. 9,288/- for each year. The Appellate  Tribunal dismissed  the  appeal of the assessee with  regard  to  the assessment year 1957-58.  For the assessment years 363 1958-59  and/959-60,  the  Appellate  Tribunal  allowed  the appeals  of the Department and dismissed the appeal  of  the assessee  for  the assessment. year 1959-60.   According  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

these  decisions of  the Appellate Tribunal the  result  was that  for   the  assessment year 1957-58 the  order  of  the Income Tax Officer that the amount of Rs, 70,860/- which was the  profit  or  gain on the  sale  of  the  shares  by  Bai Laxmibai was liable to be included  in  the total income  of Maneklal was upheld and for the later two, years the  entire amount  of interest viz., Rs. 9,288/- was held to be  liable to  be included in the total income of Maneklal in  each  of those  two  years.   Thereafter,  at  the  instance  of  the assessee,  the Appellate Tribunal stated a case to the  High Court on the following questions of law:                     "1.  Whether  in  computing  the   total               income   of Maneklal for the  assessment  year               1957-58,  the  sum of Rs.  70,860/-  has  been               properly  included therein in accordance  with               the  provisions  of s.  16(3)(a)(iii)  of  the               Income-tax Act, 1922 ?                     2. Whether in computing the total income               of  Maneklal for the assessment  year  1958-59               the   sum   of Rs. 5,104/- has  been  properly               included therein in accordance with provisions               of  s. 16(3)(a)(iii)  of  the Income-tax  Act,               1922?                     3.  Whether  in  computing   the   total               income   of  Maneklal for the assessment  year               1959-60,  the  sum of  Rs.  4,183/-  has  been               properly   included  therein  in    accordance               with  the provisions of s.  16(3)(a)(iii)   of               the Income-tax Act, 1922 ?                     4. Whether in computing the total income               of  Maneklal for the assessment year  1959-60,               the   sum   of Rs. 5,105/- has  been  properly               included   therein  in  accordance  with   the               provisions of s. 16(3)(a)(iii) of the  Income-               tax Act,1922 ?" By  its  judgment  dated February 19, 1965  the  High  Court answered  the first question in the affirmative and  against the assessee. It answered questions Nos. 2 & 4 in favour  of the  assessee  and  against  the  Department.   As   regards question  No.  3,  the   High   Court  answered  it  in  the affirmative and in favour of the Department. The reason  was that Counsel for the assessee did not press it or  challenge the  correctness  of  the view  taken   by   the   Appellate Tribunal  and  accepted  as correct the  conclusion  of  the Tribunal with regard to the point involved in that question.     Section  16(3)(a)(iii)  of  the  Income  Tax  Act,  1922 provides as follows: 364 "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 of such  individual  as arises directly or indirectly  .......... (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". Section 2(6C) of the Income-tax Act, 1922 states: "Income’  includes  ............ (vi) ’any capital gain chargeable under section 12B; Section 12B of the Income Tax Act enacts: (1)  The tax shah be payable by an assesee under   the  head ’capital  gains’ in respect of any profits or gains  arising from the sale,  exchange,  relinquishment  or  transfer of a capital  asset effected after the 31st day of  March,  1956, and  such profits and gains shall be deemed to be income  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

the   previous   year   in   which   the   sale.   exchange, relinquishment or transfer took place;......"     With regard to the first question Mr. Mehta put  forward the  argument  that  what  comes  within  the  ambit  of  s. 16(3)(a)(iii)  is  the income from the  transferred  assets, which is different from the profit or gain arising from  the sale  of  the transferred assets, or in  other  words,  "the capital gains" from the transferred assets. It was argued in the  first place that what comes within the ambit of  s.  16 (3)  (a)  (iii) was ’the income from the assets’  i.e.,  the income which the asset produces while it continues to remain in  the hands of the assessee and does not include the  gain which  the assessee makes by selling the asset  and  parting with  possession  of it.  We see no justification  for  this argument.   In  our opinion there is no logical  distinction between  income  arising from the asset transferred  to  the wife  and  income  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.  If the asset employed, say by way of investment and produces income,  the income  arises  or springs from the  asset;  the  operation, which  causes  the income to spring from the asset,  is  the operation  of  the  investment.  In  the  operation  of  the investment,  income is  produced, 365 while  the asset continues to belong to the assessee,  while in the operation of a sale, gain is produced, which is still income  but in the process the title to the asset is  parted with.  Although the processes involved in the two cases  are different,  the gain which has resulted to the owner of  the asset, in each case, is  the  gain, which has sprung up.  or arisen  from the asset.  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.  It was argued  in the  second place that s. 16(3)(a)(iii) was enacted in  1937 when the word ’income’ did not include ’capital gains’   and income  from  property was understood to be  income  falling under   that  head  in s. 6 of the Act.   The  inclusion  of ’capital  gains’ in the definition of ’income’ was  for  the first  time  enacted in 1947.  It is true that at  the  time when  s.  16(3)(a)(iii)  was  enacted,  the  definition  of’ ’income’  did not include ’capital gains’ but capital  gains having  been brought within the meaning of ’income’   in  s. 2(6C)  the  expression ’income’ as  used in  s.   16(3)  (a) (iii)  must be construed according to the amended definition of  the word and would, therefore,  include  capital  gains. There  is nothing in the context or language of s. 16(3) (a) (iii) of the Act to suggest that capital gains are  excluded from  its  scope.   We  see  no  reason  why  a   restricted interpretation  should  be  given to the  provisions  of  s. 16(3)(a)(iii)  as  contended  for  the  appellant.  On   the contrary,  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 the statute.   We  are, therefore,  unable  to accept Mr. Mehta’s argument  on  this aspect of the case.       For the reasons given we hold that the High Court  has rightly answered the first question against the assessee and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

this appeal is accordingly dismissed with costs. R.K.P.S.                                  Appeal dismissed. L1Sup.CI/68--9 366