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PETITIONER: COMMISSIONER OF INCOME-TAX, WEST BENGAL,CALCUTTA

       Vs.

RESPONDENT: SHRI PREM BHAI PAREKH AND ORS.

DATE OF JUDGMENT: 20/04/1970

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. SHAH, J.C. GROVER, A.N.

CITATION:  1970 AIR 1518            1971 SCR  (1) 308  1970 SCC  (3) 784  CITATOR INFO :  RF         1972 SC   7  (16)  R          1990 SC 270  (8)

ACT: Indian Income-tax Act (11 of 1922), s. 16(3) (a) (iv) Income art as a, result of transfer-What is.

HEADNOTE: The  assessee was a partner in a firm.  On the last  day  of the  accounting year of the firm, namely, 1st July  1954  he retired  from the firm and gifted ’to each of his four  sons Rs.  75,000.  The firm was reconstituted and the first  son, who  was a major, became a partner in the firm.   The  other sons who were minors, became entitled to the benefits of the partnership  because, they invested in the firm the  amounts received  by  them  as  gifts from  their  father.   In  the assessment year 1956-57 the Income-tax Officer held that the income arising to the minors by virtue of their admission to the benefits of the partnership, came within the purview  of s. 16(3) (a) (iv) of the Income-tax Act, 1922, and  included that income in the total income of the assessee.  The  order was  confirmed by the Appellate Assistant  Commissioner  and the  Tribunal,  but the High Court on a reference,  held  in favour of the assessee. In appeal to this Court, HELD : The section creates an artificial income and must  be construed strictly, that is. before an income can be held to come within the ambit of s. 16(3) it must be proved to  have arisen-directly or indirectly-from a transfer of assets made by  the  assessee  in favour of  the  minor  children.   The connection  between  the  transfer and the  income  must  be proximate.   It must arise as a result of the  transfer  and not in some manner connected with it. [310 H; 311 A-E] In  the present case, the income of the minors arose  as  a result  of their admission to the benefits, of  partnershiip and there is no proximate nexus between the transfer and the income. [310 G] C.I.T., Gujarat v. Keshavlal Lallubhai Patel, 55 I.T.R. 637, (S.C.) followed.

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JUDGMENT: CIVIL APPELLATE        JURISDICTION: Civil, Appeal No.  2272 of 1966, Appeal from the judgment and order dated January 6, 1966  of Calcutta High Court in Income-tax Reference No. 211 of 1961. S.   Mitra, A. S. Nambiar, R. N. Sachthey and B. D.  Sharma, for the  appellant. M. C. Chagla and P. K. Chatterjee, for the respondents- 309 The Judgment of the Court was delivered by Hegde, J. This is, an appeal by certificate, granted by  the High Court of Calcutta under s. 66A(2) of the Indian  Income Tax  Act,  1922 (to be hereinafter referred to as  the  Act) against  the decision of that Court in a reference under  s. 66 (1) of that Act. The  two questions of law referred to the High Court by  the tribunal  are  : (1) Whether s. 16(3) of the Act  was  ultra vires  the Central Legislature and (2) Whether on the  facts and in the circumstances of the case, the income arising  to the  three  minor sons of the assessee by  virtue  of  their admission  to  the benefits of the  partnership  of  Messrs. Ajitmal Kanhaiyalal was rightly included in the total income of the assessee under s. 16 (3) (a) (iv) of the Act. The assessee at whose instance those question were  referred did  not press for an answer in respect of question  No.  1. Therefore  that  question  was not dealt with  by  the  High Court.   Hence we need not go into that question.  The  High Court  answered  the  second  question  in  favour  of   the assessee. The facts necessary for the purpose of deciding the point in dispute as set out in the statement of the case submitted by the tribunal are as follows : The assessee Shri Ajitmal Parekh was a partner of the  firma M/s.   Ajitmal Kanhaiyalal having annas share  therein.   He continued  to  be a partner of that firm till July  1,  1954 which was the last date of the accounting year of the  firm, relevant for the, assessment year 1955-56.  On July 1, 1954, the assessee retired from the firm.  Thereafter he gifted to each of his four sons Rs., 75,000/-.  Out of his four  sons, three were minors at that time.  There was a  reconstitution of  the firm with effect from July 2, 19.54 as evidenced  by the  partnership deed dated July 5, 1954.  The major son  of the assessee became a partner of the reconstituted firm  and his  minor  sons  were  admitted to  the  benefits  of  that partnership in the reconstituted firm.  The major son had  2 annas share.  His three minor brothers were admitted to  the benefits of the partnership, each one of them having 2 annas share.   In  the  assessment year  1956-57,  the  Income-tax Officer held that the income arising to the minors by virtue of  their admission to the benefits of the partnership  came within  the  purview of s. 16(3) (a) (iv) of  the  Act.   He included that income in the total income of the assessee for that  year.  In appeal the Appellate Assistant  Commissioner substantially  upheld  the order of assessment made  by  the Income-tax Officer but he held that the 2Supe Cl/7C-6 310 minors  were  entitled to only 1-9 pies share in  the  firm. The assessee took up the matter in appeal to the  Income-tax Appellate  ’Tribunal.  The tribunal upheld the  decision  of the Appellate Assistant Commissioner. On  the facts found by the tribunal, the High Court came  to the  conclusion that answer to question No. 2 should  be  in

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the negative and in favour of the assessee. The  tribunal found that the capital invested by the  minors in the firm came from the gift made in their favour by their father, the assessee.  That finding was not open to question before  the  High Court nor did the High Court  depart  from that finding.  But on an interpretation of S. 16(3) (a) (iv) the  High Court opined that the answer to the question  must be in favour of the assessee.  Section 16(3) (a) (iv) reads               "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." Before any income of a minor child can be brought within the scope of s. 16(3) (iv), it must be established that the said income arose directly or indirectly from assets  transferred directly  or indirectly by its 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 benefits of the partnership because of he 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, Gujarat v.  Keshavlal  Lallubhai Patel(1).  In our (1)  55, I.T.R. 637. 311 judgment  before  an income can be held to come  within  the ambit of s. 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. V.P.S.                            Appeal dismissed. 312