K.K. Desai, J.
1. In this reference under section 66 (10 of the Indian Income-tax Act, 1922, two questions arising under section 16(3)(a)(iii) and one question arising under section 16 (3)(a)(iv) are referred to us for decision
2. The facts appear in the statement of the case. The facts which require to be noticed are as follows :
The assessee is a member of the former ruling family of Miraj. The assessment years in question are the years 1957-58 to 1960-61, both inclusive. In 1947, the assessee acquired by way of gift an immovable property from his father. The value of the property then was Rs. 15,000. The assessee expended Rs. 1,40,000 for development of the property in 1952 or thereabouts. By a deed of sale dated August 31, 1956, the assessee sold this immovable property to his wife in consideration of the price of Rs. 1,00,000 paid to him. In connection with the return for wealth-tax, the assessee's consulting engineer valued the property at Rs. 1,50,000 as on April 1, 1957.
3. On February 8, 1957, the assessee gave 55 shares of Miraj State Bank Ltd. to his sister, Smt. Mangalaraje, and 60 shares of the same bank to his maternal uncle, R. K. Apte. These two donees gifted the same 55 and 60 shares on June 22, 1957, i.e., about 4 months and 14 days after the first gifts to two minor sons of the assessee.
4. In the assessment year 1957-58, relying upon the provisions of section 16(3)(a)(iii), the income from the above immovable property and the dividends earned from these shares were included in the income of the assessee. This was continued to be done for the assessment years 1958-59-1960-61. Appeals filed by the assessee were dismissed by the Appellate Assistant Commissioner. In the appeal before the Appellate Tribunal, it was held in favour of the assessee that he was entitled to the exclusion of the 2/3rds of the income from the immovable property transferred to his wife, in view of the fact that he had received adequate consideration for 2/3rds of the property transferred by him to his wife. It was, however held against him that 1/3rd of the income was liable to be included in the assessee's income.
5. In connection with the income from the shares of the Miraj State Bank, it was held in favour of the assessee that, though there was complete identity of the assets transferred in both the gifts, 'there is a time lag of four months between the first transfer and the second transfer and there is nothing whatsoever on record to suggest that there was any diabolical scheme of which both the transfers were inseparable parts'. Following the decision of this court in the case of Commissioner of Income-tax v. Wadilal Chunilal : 47ITR305(Bom) , the Tribunal held that the dividend income from the above shares could not be justifiably included in the income of the assessee.
6. On behalf of the assessee, it is once again contended that the Kolhapur property was sold to his wife for adequate consideration within the meaning of section 16(3)(a)(iii) and the inclusion of 1/3rd of the income of that property as his income for the assessment years 1957-58 to 1960-61 was not justified. Conversely, on behalf of the revenue, Mr. Joshi has contended that the consideration having been held to be inadequate, under the above section, it was not permissible for the Tribunal to separate 2/3rd of the income of immovable property as not being part of the income of the assessee. His submission was that as the consideration was inadequate, the whole of the income should have been held to be a part of the income of the assessee. These two rival contentions arise on the questions Nos. 1 and 2 referred to us.
7. On behalf of the revenue, the further contention by Mr. Joshi is that on the facts proved the Tribunal should have held that the gifts of the shares of the Miraj Bank on February 8, 1957, by the assessee, respectively, to his sister and his maternal uncle and the subsequent gift thereof by each of these donees on June 22, 1957, to the two minor sons of the assessee was a part and parcel of a single transaction made with a view to avoid the consequences of section 16(3)(a)(iv) and it should, therefore, be held that the dividend income of the assessee.
8. This contention relates to the question No. 3 referred to us.
9. In connection with these rival contentions, it is first necessary to refer to the relevant parts of the sub-sections (3)(a) (iii) and (iv) of section 16 which run 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 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 in connection with an agreement to live apart; or
(iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration'.
10. The contention of Mr. Palkhivala for the assessee was that, in connection with the true construction and effect of the provisions in section 16(3)(a)(iii) and (iv), it requires to be first noticed that by the provision in section income from properties not of the ownership of an assessee being husband and/or a father is directed to be deemed to be income of the husband and/or father. This is an artificial liability imposed by the Act in respect of income of properties belonging to third parties. His submission, therefore, is that, as far as possible, these provisions should be construed liberally and in favour of an assessee. This first submission has not been denied on behalf of the revenue with any emphasis and we have no reason to reject the submission as not being correct.
11. Now, it is also correct that the object of the provisions in the section is to defeat attempts made by a husband and/or father to escape from the tax liability by merely making transactions in favour of his wife and/or childern. The submission of Mr. Palkhivala accordingly was that, in so far as transactions in this case cannot be found to have been made with such an object, the provisions of the section should be held to be not applicable. On this very basis, the argument was that the phrase 'adequate consideration' as contained in sub-clause (iii) had not the meaning of 'the market price'. If that was the intention, the phrase 'market price' would have been mentioned in the sub-clause. The further submission was that in connection with the meaning of the phrase 'adequate consideration', reliance could be placed on the provisions of section 25 of the Indian Contract Act particularly the Explanation thereto. It was pointed out that under that section agreements made without consideration are void; but it also explained that inadequacy of consideration does not avoid contracts unless one of the parties to the contract proves that his consent was not given freely. - In that connection, reliance was placed on the illustration F-2 to the section, where a transaction of sale of a house worth Rs. 1,000 when made for Rs. 10 is stated to have been made for consideration. The further argument was that adequacy of consideration could not be ascertained by any precision at all. The valuation of Rs. 1,50,000 of the Kolhapur property was merely an estimate. Whether this value was available in the market had not been ascertained and there was no evidence on the record in that connection. The submission was that, on the basis of mere estimated value, artificial liability to pay income-tax should not be imposed unless it could be definitely held that the consideration was entirely inadequate. The submission was that as the transaction could not be held to made for the purpose of avoiding income-tax and was a genuine transasction of sale for the large price of Rs. 1,00,000, a finding should be made that the consideration was adequate.
12. Now, it appears to us that the question of the consideration being adequate or otherwise must largely depend on the opinion to be formulated by the authority concerned on facts proved before it. Apparently, the intent of the provision in sub-clause (iii) is that the income from assets transferred to his wife by the husband otherwise than for adequate consideration must be in the income of the assessee. It is clear that to the extent that the consideration is adequate the income from the transferred assets could not be made part of the income of the assessee. The provision in sub-clause (iii) has not the effect of making the transfers in favour of the wife altogether void. In ordinary law, therefore, the income from the transferred assets would belong to the wife. In so far as the consideration is held to be not adequate, under the provisions in sub-clause (iii), the income of the property must be included in the income of the husband.
13. As regards the question whether the consideration was adequate, the relevant facts that the value of the Kolhapur property was admittedly assessed by the consulting engineer of the assessee himself as on April 1, 1957, at Rs. 1,50,000. The fact that the assessee expended Rs. 1,40,000 in 1952 for development of the property was not in dispute. In connection with the situation of the property, certain facts which are relevant are pointed out in the order of the Appellate Assistant Commissioner. The value of the property received by the assessee in 1947 by way of gift, admittedly, was Rs. 15,000. Having regard to these facts and accepting all that is submitted by Mr. Palkhivala to be correct, it is not possible to hold in favour of the assessee that at the date of the deed of sale dated August 31, 1956, the value of the Kolhapur property was not Rs. 1,50,000 or thereabouts. The Tribunal observed that the minimum value of that property at the time of the transfer was Rs. 1,50,000. It is difficult to set aside that finding of the Tribunal. The question is whether sale of a property of the value of Rs. 1,50,000 for the price of Rs. 1,00,000 can be held to be sale for adequate consideration. Having regard to the facts about the value of the property as mentioned above, we are unable to accept Mr. Palkhivala's submission that it should have been held that the consideration of Rs. 1,00,000 for the sale deed was adequate consideration.
14. Mr. Joshi, for the revenue, has submitted that the direct consequence of the finding that the consideration was not adequate must in all cases be that the total income of the assets transferred to wife and/or minor children would be liable to be included in computing the total income of the husband and/or the father. This construction of the sub-clause (iii) does not take cognizance of the fact that the property would be in law of the ownership of the wife and/or the minor children wholly. The fruits of the property would be enjoyed by these parties as owners. 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. The purpose of the sub-clause would be satisfied totally by including in the income of the husband and/or the father the income from the transferred assets to the extent only that the consideration is found to be inadequate. For this reason, as already discussed in the foregoing part of this judgment, we are of the opinion that the income from the transferred assets which can be included in the income of the husband and/or the father would only be to the extent and/or in the proportion that the consideration is found to be inadequate. We are, therefore, unable to accept Mr. Joshi's submission that the Tribunal was wrong in holding that 1/3rd of the income from the Kolhapur property was includible in the income of the assessee and further holding that 2/3rds of the income could not be included in the income of the assessee for the assessment year mentioned in the two questions which are being decided by these observations. That contention of Mr. Joshi, therefore, fails.
15. As regards the question of the question of the dividend income of the 55 and 60 shares transferred by gifts by the asessee, in the first instance, to his sister and to his maternal uncle and thereafter by these two donees to two minor sons of the asseessee, reliance has been placed on the observations of the Supreme Court in the case of Commissioner of Income-tax v. Abhijit Sen : 68ITR23(Cal) . On behalf of of the assessee, strong reliance has been placed on te case of Commissioner of Income-tax v. Wadilal Chunilal : 47ITR305(Bom) . There is no dispute on the facts in respect of these gifts and on behalf of te assessee strong reliance has been placed between the gifts made by the assessee in the first instance and subsequent gifts made by his sister and his maternal uncle to the minor sons of the assessee. It has been rightly emphasised that there is nothing on the record to suggest that at the date of the first gift made to his sister and maternal uncle by the assessee on February 8, 1957, an agreement and/or a scheme was arrived at between the assessee and these donees that at a later date these donees must again give gifts of the shares gifted to the minor sons of the assessee. The contention of Mr. Palkhivala was that the mere circumstance that there was identity of the shares could not justify an inference that the assessee had arrived at an agreement with these two donees whilst making gifts to them in February, 1957, to make a gift of the shares at a later date to the minor sons of the assessee.
16. Under Section 16(3)(a)(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 this 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 assessed as is necessary for the application of the provisions in sub-clause (iv). Now, in this connection, it requires to be noticed that it is impossible for Mr. Joshi to argue that any facts regarding an agreement made for transfer by gifts of these very shares by the sister and maternal uncle of the assessee are brought on the record and/or are proved. The whole of the submission by Mr. Joshi is that the facts as stated above prove that there was interconnection between the transactions of these gifts and this was a circuitous method adopted as a device to evade the implications of the provisions in sub-clause (iv). We find it extremely difficult, merely on the basis of the subject-matter of the gifts being the same, to make a finding that the transactions of gifts first made in February, 1957, between the assessee and his sister and maternal uncle and the gifts made by these two parties on June 22, 1957, were interconnected transactions and/or parts of the same transaction. On the contrary, we find it extremely difficult to reject the finding of the Tribunal that there is nothing whatsoever on record to suggest that there was any diabolical scheme of which both the transfers were inseparable parts. It should have been possible for the revenue to make inquiries regarding how the shares in question were dealt with during the interval of 4 months and 14 days whilst the assessee's sister and maternal uncle were the absolute owners of the shares in question. It is clear that these two parties as owners could have disposed of these shares in such manner as they desired during this interval. We cannot avoid noticing this important fact that these two donees were the absolute owners of these shares during the above period. This fact is sufficient to totally destroy the argument of Mr. Joshi that these transfers (gifts) were interconnected and parts of the same transaction or that they were a circuitous method adopted as a device to evade the implications of the provisions of sub-clause (iv).
17. The question of interconnection and/or being parts of the same transaction and being a device to evade the implications of the provisions in sub-clause (iv) will be a question of fact to be decided in each case by looking at the evidence on record. The observations in the authorities cited at the Bar can only serve as mere guidance for appreciation of facts.
18. In the case of Commissioner of Income-tax v.C.M. Kothari ( 49 I.T.R. (S.C.), having regard to admitted facts, the Supreme Court held that it was not necessary under sub-clause (iii) of section 16(3)(a) that the same assets belonging to the husband should have reached his wife. The assets might, in the course of being transferred, be changed deliberately into assets of a like value of another person. The chain of transfers as existed in that case was comprehended by the word 'indirectly' as contained in sub-clause (iii)
19. Having regard to the evidence on record in that case, the Supreme Court was in a position to hold and held that the assets transferred by others were the assets of the husband transferred indirectly to the wife. The Supreme Court negatived the contention that in case where there were claim transactions, it was necessary for attracting the provisions in sub-clause (iii) to prove that in consideration for the transfer by the husband another asset had been transferred by a third party so as to evade the implications of the provisions in sub-clause (iii). The Supreme Court held that if the two transfers are interconnected 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 this section, the case will fall within the section. Having regard to the above observations of the Supreme Court. We have examine the evidence on record to ascertain if the gifts made in February in the first instance and thereafter by the donees in August were inter-connected and parts of the same transaction and formed part of a circuitous method adopted as a device to evade the implications of the section. As already discussed above, for want of sufficient evidence on record, we have not been able to arrive at the above conclusion as submitted on behalf of the revenue. Now, in the case before the Supreme Court, the inference as necessary could be made, because it was found that there was no explanation why the father-in-law had 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 further fact which was relied upon was that that 'though the three purchasers were to get 1/3rd share each, Mrs. C. M. Kothari paid Rs. 200 more than the other two and that each of the ladies repaid the share of earnest money borne by their respective husbands. An intimate connection between the two transactions, which were prima facie separate, is thus clearly established and they attract the words of the section....'
20. It is not necessary to notice in detail the facts in the case of Commissioner of Income-tax v. Wadilal Chunilal : 47ITR305(Bom) having regard to the above findings. In connection with the question which had arisen by reason of the gift amounting to Rs. 1,50,000 made to the wife and minor son of one Kanchanlal by the assessee and the gift of the same amount made by Kanchanlal after 5 months to the assessee's wife who was the step-mother of Kanchanlal, this court held :
'There is also nothing to show that these gifts were called as a result of a part of one single arrangement thus constituting a single disposition. The mere circumstances that there is the identity of the amount of the gifts will, in our opinion, not be sufficient to constitute the cross gifts as a mounting to a single disposition, thus resulting in an indirect gift by the husband in favour of his wife.'
21. The conclusions arrived at by us above are in conformity with the observations of the court in the case of Commissioner of Income-tax v. Wadilal Chunilal : 47ITR305(Bom) .
22. In the result, the answers to the three questions will be :
23. The parties have agreed that there will be no order as to costs.
24. Questions answered accordingly.