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PETITIONER: COMMISSIONER OF INCOME-TAX, MADRAS

       Vs.

RESPONDENT: C.M.  KOTHARI,  MADRAS  (DEAD),  AND  AFTER  HIM  HIS  LEGAL

DATE OF JUDGMENT: 26/03/1963

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. DAS, S.K. SARKAR, A.K.

CITATION:  1964 AIR  331            1964 SCR  (2) 531  CITATOR INFO :  D          1965 SC 866  (10,11)

ACT: Income  Tax-Income from property in the name of  wife--Money coming  into  the  hands of wife  from  husband  indirectly- --Whether income of wife to be included into that of husband "Transferred  directly or indirectly to the  wife,"  Meaning of--Indian Income-tax Act, 1922 (11 of 1922), s. 16 (3)  (a) (iii).

HEADNOTE: Messrs  Kotbari  and Sons is a firm of stock  brokers.   The firm consisted of Shri C. M. Kothari and his two sons,  Shri D. C. Kothari and Shri H. C. Kothari.  The firm entered into an  agreement  for the purchase of a house and  the  earnest money was paid by it.  Later on, the house was bought in the name  of Mrs. C. M. Kothari, Mrs. D. C. Kothari and Shri  H. C. Kotliari.  The house was bought for Rs. 90,000/- and both Mrs. C. M Kothari and Mrs. D. C. Kothari received Rs. 30,000 each from the firm.  In the case of Mrs. C. M. Kothari,  she got that amount in the form of birthday gift and Diwali gift from  her  son,  D. C. Kothari.  Mrs.  D.  C.  Kothari  also received Rs. 30,000 from the firm as a gift from Shri C.  M. Kothari, her father-in-law.  The Income-tax Officer assessed the  income of Mrs. C. M. Kothari and Mrs. 1).  C.  Kotliari from  the said house as the income of their  husbands.   The appeals  of  the assessees were dismissed by  the  Appellate Assistant  Commissioner  and  the  Tribunal.   The  Tribunal confirmed the finding of the Income Tax Officer that the two ladies  had  acquired their shares in the house out  of  the assets  of  their husbands indirectly transferred  to  them. However, the Tribunal did not hold that the transaction  was benami. The Tribunal referred the case to the High Court for opinion whether the income arising to Mrs. C. M. Kotbari and Mrs. D. C.  Kothari  from  the  property arose  out  of  the  assets transferred  indirectly by their husbands so as  to  attract the provisions of s. 16 (3) (a) (iii) of the Income-tax Act, 1922.The High Court answered the reference in the  negative. The  Commissioner of Income-tax, Madras, came to this  Court in appeal.

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532 Held  that  the answer given by the High Court must  be  set aside  and  the  reference  made by  the  Tribunal  must  be answered  in the affirmative.  The object of law is  to  tax the  income of the wife in the hands of the husband  if  the income of the wife arises to her from assets transferred  to her   by  her  husband.   In  the  present  case,  the   son transferred  the assets to his mother and the  father-in-law transferred  his  assets to his daughter-in-law.   The  term "indirectly" is intended to cover such tricks. If  two transfers are inter-connected and are parts  of  the same  transaction in such a way that it can be said  that  a circuitous method has been adopted as a device to evade  the implications  of  s. 16 (3) (a) (iii), the  case  will  fall within  this  section.  In the present case, the  device  is palpable   and  the  two  transferrers  are  so   intimately connected  that they cannot but be regarded as a part  of  a single  transaction.  It was not successfully explained  why the father-in-law made a big gift to his daughter-in-law and the son made an equally big gift to his mother.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 34 to 36 of 1962. Appeals from the judgment and order dated March 25, 1958, of the Madras High Court in Case Referred No. 12 of 1954. K.   N.  Rajagopal  Sastri  and  R.  N.  Sachthey,  for  the appellant. R. Gopalakrishnan, for the respondent. 1963.  March 26.  The judgment of the Court was delivered by HIDAYATULLAH   J.- The High Court of Madras  in  a Reference under s.66 (1) of the Indian Income Tax Act, answered in the negative the following question:-               "Whether there was material for the  Appellate               Tribunal  to hold that the income  arising  to               Mrs. C.M. Kothari and Mrs. D. C. Kothari  from               the property arose indirectly out of the                533               assests   transferred  indirectly   by   their               husbands  so as to attract the  provisions  of               s.16 (3)(a)(iii)." In our opinion, these appeals by the Commissioner of Income- tax., Madras, must be allowed. Messrs  Kothari  and Sons is a firm of  stock  brokers.   In 1947,  the firm consisted of C.M. Kothari and his two  sons, D. C. Kothari and H. C. Kothari Their respective shares were 6  :  5 : 5. On October 7, 1947, the firm  entered  into  an agreement  for  the purchase of a house  in  Sterling  Road, Madras,  for Rs.90,000, and the same day paid an advance  of s.5,000.  This sum was debited in the books of the  firm  to the accountsof the three partners as follows:-      C. M. Kothari    Rs.1,800      D. C. Kothari    Rs.1,600      H. C. Kothari    Rs.1,600       Total.          Rs.5,000 The transaction was completed on October 24, 1947.  The sale deed,  however, was taken in the names of Mrs. C.M.  Kothari Mrs.  D.C.  Kothari and H.C. Kothari.  The  balance  of  the consideration was paid to the vendors by the firm.  Each  of the  two ladies paid to the firm a cheque of  Rs.28,333-5-4. Mrs.  C.M. Kothari further paid a cheque of Rs.  1,800,  and Mrs.  D.C. Kothari paid another cheque of Rs. 1600 Thus  the two ladies paid one-third share of Rs.85,000 and the amounts

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which  were respectively paid by their husbands as  part  of the earnest money.  H.C. Kothari was debited with a  further sum  of Rs.28,333.5-4. In this way, Mrs. C. M.  Kothari  pad Rs.200  more  than the other two, because  her  husband  had previously paid Rs.200 more than his sons.  The share of the three vendees was however, Shown to be one-third each. 534 The  ladies issued the cheques on their accounts into  which were  paid  by the firm, certain amounts by  cheques.   Into Mrs. C.M. Kothari’s account was paid an amount of  Rs.27,000 which  was debited on October 24, 1947 to D.C. Kothari.   It was  stated to be a birthday gift by him to his mother.   On November 13, 1947, another amount of Rs. 3,000 was paid into Mrs.  C.  M.  Kothari’s account which  was  debited  to  the account of D. C. Kothari as a gift by him to his mother  for Dewali.   Similarly,  on  November  13,  1947  Mrs.  D.   C. Kothari’s  account with the bank was credited with a sum  of Rs.30,000 by a cheque issued by the firm.  This was  debited to  the account of C, M. Kothari and was shown as a gift  by him  to  his daughter-in-law.  In this way both  the  ladies received  from the firm Rs. 30,000 which was the exact  one- third  share  of  the consideration of  Rs.90,000,  but  the amount was not paid by their respective husbands, but by the son in one case, and the father-in-law,, in the other. In the assessment years 1948-49, 1950-51 and 1951-1952,  the Income Tax Officer assessed the incomefrom  the  one-third share of the house received by     Mrs.  C.M.Kothari as  the income of her husband.Similarlyin  the  four  assessment years  1948-49 to 1951-52, the income of Mrs. D. C.  Kothari from  this house was assessed as the income of her  husband. This  was on the ground that because of the  interchange  of the  money in the family, either the purchases were made  by the   donors  benami  in  the  names  of  the   donees,   or alternatively,  from  assets transferred indirectly  by  the husband  to the wife in each case.  The Income  Tax  Officer pointed  out  that the birthday of Mrs. C.  M.  Kothari  had taken place earlier in the year and there was no occasion to give a birthday present to her several months later  and on a date coinciding   with   the  purchase   of   this property.   The  Income Tax Officer also found that  in  the past,  the father-in-law bad never given  535 such a big present to his daughter-in-law on Dewali and this time  there was no special circumstance to justify it.   The appeals   of  the  assessee  to  the   appellate   Assistant Commissioner failed as also those filed before the Tribunal. The Tribunal, however, did not hold that the transaction was benami, but confirmed the other finding that the two  ladies bad  acquired their share in the house out of assets of  the husbands indirectly transferred to them.  The Tribunal, how- ever,  stated a case for the opinion of the High Court,  and the High Court answered the question in the negative. As  the  question whether the two transactions  were  benami does  not  fall  to be considered, the  only  question  that survives  is  whether this case is covered Sy s.16  (3)  (a) (iii).  This section reads as follows:-               "16(3).  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

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             in  connection  with  an  agreement  to   live               apart;" The  section  takes into account not  only  transference  of assets  made  directly  but also  made  indirectly.   It  is impossible to state here what sorts are covered by the  word indirectly’,   because  such  transfers  may,  be  made   in different ways. It is argued that the first requisite of the section is that the assets must be those of the husband and 536 that is not the case here.  It is true that the section says that  the assets must be those of the husband, but  it  does not mean that the same assets should reach the wife.  It may be  that the assets in the course of being transferred,  may be  changed  deliberately  into assets of a  like  value  of another  person,  as has happened in the  present  case.   A chain  of  transfers,  if  not  comprehended  by  the   word "Indirectly’ would easily defeat the object of the law which is  to  tax  the  income of the wife in  the  hands  of  the husband, if the income of the wife arises to her from assets transferred  by  the  husband.   The  present  case  is   an admirable instance of how indirect transfers can be made  by substituting the assets of another person who has  benefited to  the  same  or  nearly  the  same  extent  from   assests transferred to him by the husband. It  is  next contended that even if  chain  transactions  be included,  then,  unless  there  is  consideration  for  the transfer  by the husband, each transfer must be regarded  as independent, and in the present case, the Department has not proved  that the transfers by the son to the mother  and  by the  father-in  law  to his  daughter-in-law  were  made  as consideration  for each other.  We do not agree.  It is  not necessary   that  there  should  be  consideration  in   the technical  sense.  If the two transfers are  inter-connected and are parts of the same transaction in such a way that  it can be said that the circuitous method has been adopted as a device to evade implications of this section, the case  will fall  within  the  section.  In this  case,  the  device  is palpable  and the two transfers are so intimately  connected that  they  cannot  but  be  regarded  as  parts  of  single transaction.  It has not been successfully explained why the father-in  law made such a big, gift to his  daughter-in-law on  the  occasion of Diwali and why the son made  a  belated gift,  equally  big, to his mother on the  occasion  of  her birthday which took place several months before.  These  two gifts match each other as regards the amount, The  537 High Court overlooked the clear implication of these fact as also  the  Implication  of the fact that  though  the  three purchasers  were  to get one-third share each,  Mrs.  C.  M. Kothari  paid Rs. 200 more than the other two and that  each of  the ladies re-paid the share of earnest money  borne  by their  respective husbands.  An intimate connection  between the  two  transactions, which were primafacie  separate,  is thus  clearly established and they attract the words of  the section, namely, "transferred directly or indirectly to  the wife". In  our  opinion, the High Court was in  error  in  ignoring these pertinent matters.  The High Court also overlooked the fact that the purchase of the house at first was intended to be in the names of three partners of the firm.  No  evidence was tendered why there was a sudden change.  It is difficult to see why the ladies were named as the vendees if they  did not  have  sufficient funds of their own.  They  could  only buy-  the property if some one gave them the money.   It  is

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reasonable   to  infer  from  the  facts  that  before   the respective husbands paid the amounts, they looked up the law and  found  that the income of the property would  still  be regarded as their own income if they transferred any  assets to  their wives.  They hit upon the expedient that  the  son should transfer the assets to his mother, and the  father-in law, to the daughterin-law, obviously failing to  appreciate that the word "indirectly’ is meant to cover such tricks. The  appeals  must, therefore, succeed.  The answer  of  the High  Court  is vacated, and the question, answered  in  the affirmative.   The respondent shall bear the costs of  these appeals  as also the costs in the High Court.   One  hearing fee.                            Appeals allowed, 538