1. Two questions have been referred for our decision as under :
'1. Whether in accordance with the provisions of section 16 (3) (a) (iv) the sums of Rs. 13,918 and Rs. 14,586 can be properly included in the computation of the assessee's total income of the previous years ended March 31, 1958, and March 31, 1959, relevant to the assessment years 1958-59 and 1959-60 respectively
2. Whether in accordance with the provisions of section 16(3)(a)(iii) the sum of Rs. 13,918 and Rs. 14,586 can be properly included in the computation of the assessee's total income of the previous years ended March 31, 1958, and March 31, 1959, relevant to the assessment years 1958-59 and 1959-60 respectively ?'
2. These questions arise upon the following facts : K. K. Porbunderwalla, the assessee, has been assessed for the two years in question in the status of an individual. He owned four immovable properties. In September, 1947, he gifted these four properties to his wife, Khatijabai. From that time Khatijabai became the absolute owner of these properties, but the income from these properties was being assessed in the hands of the assessee by the application of the provisions of section 16 (3) (a) (iii) of the Indian Income-tax Act, 1922. On 30th March, 1957, Khatijabai made a gift of two out of those four properties, described as the Colaba property and the Jail Road property, to her six sons by the assessee. Three of these sons were at that time minors and it is in connection with their share of the income from the properties that the two questions arise. Their share of the income from the two properties amounted to Rs. 13,918 for the year ended 31st March, 1958, relevant to the assessment year 1958-59 and 14,586 for the year ended 31st March, 1959, relevant to the assessment year 1959-60. The department claimed that this income should be held to be the income of the assessee because these were the assets transferred directly or indirectly to his minor children by the assessee having regard to the provisions of section 16 (3).
3. The Income-tax Officer held that the assets had been transferred indirectly to his minor sons by Porbunderwalla, the assessee, otherwise than for adequate consideration and therefore could be his income under section 16 (3) (a) (iv). The Appellate Assistant Commissioner reversed the decision of the Income-tax Officer and held that the subsequent gift made by Khatijabai in 1957 would not amount to a transfer of assets even indirectly by her husband to his three minor sons. He held that the transfer in 1957 was not by the husband but was by the wife and would not fall within the mischief of section 16 (3) at all. The Tribunal has reversed the decision of the Appellate Assistant Commissioner and allowed the departmental appeal. According to the Tribunal the question was 'whether there did take place a transfer 'indirectly' when the wife made a gift of some properties in 1957 to her six sons, the properties themselves having been gifted to her by her husband as early as 1947. They held that the fact that the gifts were genuine or the fact that there had been a considerable lapse of time between the two gifts, namely, by the husband to the wife and by the wife to the children, were entirely irrelevant in deciding whether there was an indirect transfer by the father to the minor sons. Arising from this decision the present reference has been made under section 66 (1) by the Tribunal.
The provision of section 16 (3) relevant for the purposes of the points arising in this reference are as follows :
'16. (3) In computing the total income of any individual for the purposes 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 - ....
(iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration....; or
(iv) from assets transferred directly or indirectly to the minor child.... by such individual otherwise than for adequate consideration.....'
4. These provisions are made with the object of prevention attempts by a person to escape liability to income-tax by transferring properties in favour of his wife or minor children. The tribunal has emphasised the words 'transferred directly or indirectly' in both the clauses of the sub-section and appears to have taken the view that the moment there is a transfer by the husband or father at one end and the property is transferred to the wife or minor child at the other end, there would arise an indirect transfer. In order words, the moment the property belonging to the husband or the father is found to belong to the wife or the minor child at any time and though it may have come to them after any length of time and through any number of intermediary transfers, still the case would be covered by the word 'indirectly'. On the other hand, it has been contended on behalf of the assessee that the connection between the transfer by the father and the ultimate transfer to the children as in the present case must be established in order to hold that the father transferred to the minor children even indirectly. This is a section which creates a legal fiction and by means of a legal fiction attributes the income of the wife or the minor child to the husband or the father, as the case may be, because assets are transferred directly or indirectly otherwise than for adequate consideration. Leaving apart cases of direct transfers where no difficulty would normally arise the section regards the income arising from assets transferred 'indirectly' to a minor child as the income of the father. In the present case the father transferred to his wife in 1947 and the wife held the property for ten years as her absolute property and it was only in March, 1957, that she transferred the property and it minor sons. The question is whether in consequence of his transfer by the wife to their minor children it can be held that it was the father who had transferred the assets indirectly to the minor children.
5. In order to arrogate to the father an intention indirectly to transfer, it is now settled law that some causal connection must be established between the two transfers. In Commissioner of Income-tax v. Wadilal Chunilal this court had occasion to consider a case of two cross-transfers. The assessee had made gifts amounting to Rs. 1,50,000 to the wife and minor son of his son, K. Five months later, K made a gift of Rs. 1,50,000 to the assessee's wife who was the step-mother of K. The tax authorities held that there was an indirect transfer of a sum of Rs. 1,50,000 by the assessee to his wife and taxed the previous income including the income accrued thereon as if it was income in his hands. This court pointed out that there was nothing to show that the gift made by K to the assessee's wife was made in consideration of the assessee's gifts to K's wife and son, or that the gifts were part of a concerted action on the part of the assessee and his son and so there was no justification for holding that the amount of Rs. 1,50,000 given by K to the assessee's wife was an assets indirectly transferred by the assessee to his wife. At page 309, the Division Bench held :
'There is no finding in the present case that there was any mutuality between the gifts of the father and the son or that they were the parts of one arrangement amounting to one disposition.'
In Commissioner of Income-tax v. C. M. Kothari, the Supreme Court laid down a similar principle at page 111 :
'If the two transfers are interconnected and are parts of the same transaction in such a way that it can be said that the circuitous method had 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 part of a 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 big, to his before. These two gifts match each other as regards the amount..... An intimate connection between the two transaction, which were prima facts separate, is thus clearly established and they attract the words of the section, namely, 'transferred directly or indirectly to the wife'.'
In commissioner of Income-tax v. Keshavji Morarji, the Supreme Court reiterated the principle of Kothari's case, and proceeded to state the law thus :
'Therefore if the transfers are interconnected and are parts of the same transaction in such a way that if can be said that the circuitous method was adopted as device to evade the implications of the section, the case will fall within the section. In C. M. Kothari's case, the court was interpreting section 16 (3) (a) (iii), but the same considerations are relevant in the application of section 16 (3) (a) (iv).... What is material is not the unreality of the cross-transaction, nor whether the appearance of reality is attempted to be maintained, but whether the transfer are part of the same transaction adopted with a view to evade the implications of the section.'
6. A similar view has been taken in a judgment of the Calcutta High Court in Commissioner of Income-tax v. Abhijit Sen, following the decision in Kothari's case.
7. No doubt these are all cases where there were cross-transfers by two parties and it was inferred that the two cross-transfers were in consideration of each other and, therefore, interconnected. We cite these cases, however, to show that the true principle is that there must be established some connection showing an intention to transfer by the husband or the father to the wife or the minor children from the very inception.
8. In a case, where there are no cross-transfers alleged, as in the present case, also the same principle has been applied. A case which is very similar to the one before us arose before a Division Bench of this court recently in H. N. Patwardhan v. Commissioner of Income-tax. In this case the ruler of the erstwhile Miraj State transferred by a deed of sale dated 31st August, 1956, immovable property to his wife in consideration of the price of Rs. 1 lakh. It was found that the property was worth rupees one lakh and a half. There was also another gift made by the assessee on 8th February, 1957, of 55 shares of the Miraj Bank to his sister and 60 shares of the same bank to his maternal uncle. On 22nd June, 1957, these two donees gifted the same 55 and 60 shares to the two minor sons of the assessee. Thus, the latter was a cross-transfer though the former transaction was a simple transfer to the assessee's wife. The departmental authorities had held that the entire income from the immovable property transferred was liable to be taxed as the income of the assessee but the Appellate Tribunal modified that decision and held that the assessee was entitled to the exclusion of two-thirds of the income from the immovable property transferred to his wife in view of the that he had received adequate consideration for two-thirds of the property. They held that only-third of the income was liable to be included in the assessee's income. As regards the dividend income from the shares transferred the Tribunal held that it could not be included in the income of the assessee as there was nothing on record to suggest that there was any scheme by which both the transfers were inseparable parts. These findings of the Tribunal were confirmed by this court. As regards the construction of sub-clause (iii) of sub-section (3) (a) of section 16, this court held (see page 287) :
'Whilst enacting the sub-clause (iii), it was not intended to prevent transfers to wife and/or child for adequate consideration. On the contrary, the intention was that income of properties transferred for adequate consideration should never be computed in the total income of the husband and/or the father. In other words, the purpose of the sub-clause (iii) was to include the income of the transferred assets in the computation of the total income of the husband and/or father only to the extent that the consideration was found inadequate.... Under section 16 (3) (iv), the income from assets transferred even indirectly to the minor child otherwise than for adequate consideration is directed to be included in the income of the father in computing his total income. The burden on the revenue for acting under the provisions of his sub-clause (iv) would be to prove that the assessee transferred his assets to his minor child. Now, in this case, on the facts admitted, it is quite clear that the assessee did never make any direct transfer of these shares to his minor sons. Admittedly, these shares were gifted away in February, 1957, to the sister and the maternal uncle of the assessee. The question is whether the revenue has discharged the burden of proving that the subsequent gifts made by the sister and the maternal uncle of these very shares to the minor sons of the assessee were indirect transfers of assets by the assessee as is necessary for the application of the provision in sub-clause (iv).'
9. In Patwardhan's case, the interval of time elapsed between the assessee's transfer to his sister and to his maternal uncle (on 8th February, 1957), and the gift by those donees to two minor sons of the assessee (on 22nd June, 1957), was only four months and fourteen days. Yet the court held that there was no connection established between the two transfer and clause (iv) would not, therefore, be attracted. In the present case the transfer by the wife to her minor son was 10 yeas after the transfer by the assessee to her. The present case, therefore, is much stronger for the assessee than was the case in Patwardhan's case.
10. In a recent decision in Commissioner of Income-tax v. Prem Bhai Parekh, the Supreme Court laid down three propositions with reference to the provision of section 16 (3) of the Income tax Act of 1922. Firstly, that section 16 (3) creates an artificial income and it must receive a strict construction. Secondly, that before any income of a minor child can be brought within the scope of section 16 (3) (a) (iv) it must be established that the said income arose directly or indirectly from assets transferred directly or indirectly by his father. The connection between the transfer of the assets and the income must be proximate. Thirdly, that 'the income of question must arise as a result of the transfer and not in some manner connected with it.' The above case was not a case of any cross-transfer. In that case the father retired from the partnership firm on 1st July, 1954. Thereafter, he gifted Rs. 75,000 to each of his four sons three of whom were minors. From 2nd July, 1954, the firm was reconstituted and the major son became a partner and the minor sons were admitted to the benefits or partnership. The question was whether the income arising to the minor by virtue of their admission to the benefits of the partnership, could be included in the total income of the assessee by virtue of section 16 (3) (a) (iv). A finding had been given in that case by the Tribunal that the capital invested by the minors in the firm came from the gift made in their favour by their father, the assessee. Notwithstanding that finding the Supreme Court held at page 30 :
'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. By, 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 the contribution made by them. But there is no nexus between the transfer of the assets and the income in question.... The connection between the transfer of the assets and the income must be proximate. The income in question must arise as a result of the transfer and do in some manner connected with it.'
11. It seems to us that the present case is directly governed by the principle laid down in Prem Bhai Parekh's case and H. N. Patwardhan's case. We would merely recount the circumstances. No doubt the assessee transferred the four houses to his wife but he transferred the house in September, 1947. Khatijabai, the wife, held the properties as absolute owner thereof for no less than a period of ten years. The Appellate Assistant Commissioner and the Tribunal have both found that at the time of the second gift in 1957 the wife was the real owner of the property and that it was she who had made the transfer to the minor sons. There is no dispute about the genuineness of the transfer from the husband to the wife or from the wife to the sons. During the time that the wife was owing the property it has been found as a fact that she has paying the municipal bills which were made out in her name and that she was collecting all the rents due from the tenants in the buildings. There is absolutely nothing to show that at the time that the assessee transferred the properties to his wife in 1947 either he or his wife intended at any subsequent time that she would transfer one or more of the properties to her minor sons. The vital connection between the two transfers has not been established upon these circumstances. In fact there is no evidence whatsoever to suggest that the two transfers were interconnected as laid down in the Supreme Court and other cases we have referred to. Under these circumstances, it seems to us difficult to hold that when the assessee transferred the property to his wife in 1947 and she later transferred two of the properties to her minor sons, it was the assessee who had directly or indirectly transferred the property to his minor sons.
12. The Tribunal came to a wrong conclusion on this question for two reasons. Firstly, it shut its eyes to two important circumstances and incorrectly ignored them when it said :
'In our opinion the fact that the gifts were real on both the occasions or that there was considerable lapse of time between the two gifts are entirely irrelevant to decide whether there was an indirect transfer by the father to the minor sons.'
13. In our opinion, these were relevant consideration which ought to have been taken into account as shown by Patwardhan's case and the other case to which we have referred above, but the more important error in the Tribunal is an error of law apparent from their pronouncement contained in the following passage :
'In our opinion, there would be an indirect transfer of an asset to a minor child if that asset could ultimately be traced to his father. In other words, if father F makes a gift to X (not his wife) and X makes gift to Y (neither wife nor his minor son) and Y makes gift to W (wife of F), there would be an indirect transfer from F to W.'
14. This passage gives the impression that the Tribunal construed the provisions of section 16 (3) (a) (iii) and (iv) to mean that so long as the father is traced as the source of asset in the hands of a minor child, there would in every case result an indirect transfer. That position is incorrect in law and contrary to the very decisions to which we have referred above, particularly to the remarks of the Supreme Court in Prem Bhai Parekh's case that '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 was because of the wrong view in law which the Tribunal took as to the provision of section 16 (3) (a), clauses (iii) and (iv), that it also ignored the crucial facts in this case by saying that they were irrelevant. These facts were that the genuineness of the transfer in the instant case was accepted by the tax authorities as well as the Tribunal and that there was an extraordinary lapse of time between the gift from the husband to the wife and from the wife to their minor children. In the view they have taken that so long as there is found a father at one end of a series of transfers and minor children at the other end, the transfer must always be held to be indirectly made by the father, then obviously these facts do not matter, but, as we have pointed out, that is not a correct view of the provisions of section 16 (3) (a). Interconnection between the two transfers ought to be established and there is absolutely no evidence in the present case to establish such interconnection. In that view, we are unable to accept findings of the Tribunal in paragraph 6 of its judgment. The answer to the first question will therefore be in the negative.
15. As regards the second question, it has been referred to this court at the instance of the Commissioner. A perusal of paragraph 5 of the Tribunal's order shows what the argument was. It was urged that the case would be governed by clause (iii) of section 16 (3) (a). Clause (iii) speaks of 'assets transferred directly or indirectly to the wife by the husband' but the contention was that clause (iii) would apply because the opening words of clause (3) (a) (iii) provide that :
'(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 or minor child of such individual as arises directly or indirectly -
(iii) from assets transferred directly or indirectly to the wife...'
16. In short, the contention is that because the opening words of clause (a) refer in the same breath to the income of a wife or a minor child of the deceased, therefore clauses (i) to (iv) will each be applicable to the cases both of the wife and of the minor child.
17. In our opinion, there is no warrant for his construction of section 16 (3) (a) nor is it justified upon the view taken by the highest authority to which we shall presently refer. In the opening words of clause (a) two cases are contemplated : The case of income of a wife and the case of income of a minor child of the assessee, but sub-clause (iii) speaks of 'from assets transferred directly or indirectly to the wife' and sub-clause (iv) says 'from assets transferred directly or indirectly to the minor child.' Therefore, though two case of a wife and a minor child are contemplated in the opening clause, there is a separate and distinct provision made as regards assets transferred directly or indirectly to the wife and as regards assets transferred indicate that each clause will apply to the respective case of a wife or a minor child and that either clause cannot apply to the other category. This construction of the sub-section is supported by a decision of the Supreme Court in Commissioner of Income-tax v. Sodra Devi. Analysing the provisions of sub-clause (a) of section 16 (3) the Supreme Court interpreted it as follow (vide page 623) :-
'Sub-clause (a) refer to two distinct sets of person bearing a relationship with 'such individual', the assessee. One is a wife and the other is a minor child. The case of the wife is deal with in sub-clauses (i) and (iii) and the case of a minor child is dealt in sub-clauses (ii) and (iv). Sub-clauses (i) and (iii) use the word 'her husband' or 'the husband' in place of the words 'such individual' with reference to the income derived by the wife in the circumstances therein mentioned, through it may be observed that the use of the words 'such individual' would not have made the slightest difference to the position. Sub-clauses (ii) and (iv) which deal with a 'minor child' use the words 'such individual' in relation to the minor child whose income under the circumstances therein mentioned has to be included in computing the total income of 'such individual' for the purpose of assessment.'
18. For these reasons we are in agreement with the finding of the Tribunal in paragraph 5 of its order. Question No. 2 must, therefore, be answered in the negative. We therefore answer both the question Nos. 1 and 2 in the negative. The Commissioner will pay the costs of the assessee.
19. Questions answered in the negative.