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PETITIONER: MOHINI THAPAR (DEAD) BY L. RS.

       Vs.

RESPONDENT: C.I.T. (CENTRAL) CALCUTTA & ORS.

DATE OF JUDGMENT23/09/1971

BENCH:

ACT: Income-tax Act, 1922, s. 16(3)(a)(iii)-Scope of.

HEADNOTE: The  assessee  made certain gifts to his wife out  of  those gifts  she  purchased shares and made investments.   On  the question  whether  the dividends earned  and  the  interests realised  were income "from assets transfer-red directly  or indirectly"  by the assessee to his wife within the  meaning of s. 16(3) (a) (iii) of the Income-tax Act, 1922, HELD  :  Section  16(3) (a) (iii) includes  not  merely  the income that :arises directly from the assets transferred but also the income that arises indirectly ’from. those  assets. In  the present case the income has a nexus with the  assets transferred  and  they  are income  indirectly  received  in respect  of the transfer of cash directly  made.   Therefore the  department  is entitled to include  the  dividends  and interest in question in computing the taxable income of  the assessee. [885 C-D] C.I.T. West Bengal III v. Prem Bhai Parakh & Ors., [1970] 77 I.T.R. 27, held inapplicable.

JUDGMENT: CIVIL APPELLATE JURISDICTION             Civil Appeals  Nos. 1374 and 2146 to 2149 of 1970. Appeals from the judgments and order dated July 30, 1963 and February  11, 1965 of the Calcutta High Court in  Income-tax Reference No. 48 of 1959, and 69 of 1961 respectively. D.Pal, T. A. Ramachandran and D. N. Gupta, for the appel- lants and respondents Nos. 2 to 4 (in all the appeals). S.C.  Manchanda, P. L. Juneja, R. N. Sachthey and  B.  D. Sharma, for respondent No. 1 (in all the appeals). The Judgment of the Court was delivered by Hegde, J. All these appeals by certificate are filed by  the legal representatives of Late Karam Chand Thapar who was the assessee  in this case.  He died after the assessments  were made.   The assessment years with which we are concerned  in these  appeals  are 1949-50, 1950-51, 1951-52,  1952-53  and 1953-54.  The facts of the case lie within a narrow compass. Late Karam Chand Thapar made certain cash gifts to his  wife Smt.  Mohini Thapar.  From out of those gifts, she purchased certain  shares  and the balance amount she  invested.   The shares   earned  dividends  and  the   investments   yielded interest.   The interest realised and the  dividends  earned were  included in the income of Karam Chand Thapar  for  the purpose of assessment in 884 the  assessment  years  mentioned  earlier.   The   assessee

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objected to the inclusion of that amount in his income.  The question  is whether the department was entitled to  include the  dividends  and interest in question  in  computing  the taxable  income.  of the assessee.  The  Income-tax  Officer held  that they were liable to be included in the income  of the  assessee.  That decision was upheld by-  the  Appellate Assistant  Commissioner.  On a further appeal, taken by  the assessee  to the Tribunal the Tribunal upheld the  order  of the  Assistant Commissioner.  Thereafter at the instance  of the  assessee, the question set out below was  submitted  to the High Court under section 66(1) of the Indian  Income-tax Act, 1922, in respect of the assessment year 1949-50 :               "(1) ’Whether on the facts and on the circums-               tances  of the case, the income of Rs.  21,225               derived  from deposits and shares held by  the               assessee’s wife, Smt.  Mohini Devi Thapar  was               income  from  assets  directly  or  indirectly               transferred by the assessee to his wife within               the meaning of Section 16(3) of the Income-tax               Act." Similar   questions  were  referred  in  respect  of   other assessment year.  The High Court answered these questions in favour of the revenue.  Hence these appeals. Section 16(3)(a)(iii) of the Act-the provision relevant  for the purpose of these appeals reads thus:               (2)   "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-               (i).................               (ii).................               (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;" The  assets  transferred in this case is the  gift  of  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 885 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. It  was urged by Dr. Pal, learned counsel for  the  assessee that  there  is no nexus between the income earned  and  the transfer  of the assets.  According to him before an  income can come within section 16(3) (a) (iii) it must be an income directly  arising  from the assets  transferred.   In  other words,  he urged that only such income which can be said  to have  directly sprung from the assets transferred "Can  come within the scope of section 16 (3) (a) (iii).  We are unable to   accept  this  contention  as  sound.    Otherwise   the expression  ’as  arises directly or indirectly’  in  section 16(3)(a)  would become redundant.  The net cast  by  section 16(3)(a)  (iii) includes not merely the income  that  arises directly  from the assets transferred but also  that  arises indirectly from the assets transferred.  We are in agreement with  the contention of Dr. Pal that the income that can  be

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brought  to tax under section 16 (3) (a) (iii) must  have  a nexus  with the assets transferred directly  or  indirectly. But in this case the income with which we are concerned  has a nexus with the assets transferred. In support of his contention Dr. Pal relied on the  decision of this Court in Commissioner of Income-Tax, West Bengal III v.  Prem Bhai Parakh and others(1).  The facts of that  case are  as follows : The assessee, who was a partner in a  firm having 7 annas share therein, retired from the firm on  July 1,  1954.  Thereafter, he gifted Rs. 75,000 to each  of  his four  sons,  three  of  whom  were  minors.   There  was   a reconstitution  of the firm with effect from July  2,  1954, whereby  the major son became a partner and the  minor  sons were  admitted to the benefits of partnership in  the  firm. The question was whether the income arising to the minors by virtue of their admission to the benefits of partnership  in the  firm  could  be included in the  total  income  of  the assessee  under section 16 (3) (a) (iv) a provision  similar to  section 1 6 (3) (a) (iii) 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. This Court overruling the contention of the revenue came  to the conclusion that the connection between the gifts made by the assessee and the income of the minors from the firm  was a  remote  one and it could not be said  that  income  arose directly or indirectly from the asses transferred.  Hence  I income  arising to the three minor sons of the  assessee  by virtue of their admission to the benefits of partnership  in the firm could not (1)  [1970] 77 I.T.R. p. 27. 886 be included in the total income of the assessee.  The  ratio of the decision is found at page 30 of the report.  This  is what the Court observed in that case :               "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.  p.               637.  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." The  ratio of that decision is inapplicable to the facts  of the present case. Here we are dealing with an income which has proximate  con- nection  with  the  transfer  of  the  assets  made  by  the assessee.

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In  the  result, these appeals fail and they  are  dismissed with costs.  Costs one set. K.B.N.                        Appeals dismissed. 887