1. This is a reference at the instance of the assessee under s. 66(2) of the Indian I.T. Act, 1922, and the following question has been referred to us :
'Whether, on the facts and in the circumstances of the case, the gifts of shares made by the petitioner were hit by the provisions of section 16(3)(a)(iii) and (iv) of the Indian Income-tax Act, 1922 ?'
2. We are concerned in this reference with the assessment years 1957-58, 1958-59, 1959-60, 1960-61 and 1961-62, for which the corresponding accounting years are the calendar years 1956, 1957, 1958, 1959 and 1960. The questions in all these years are identical. The assessee is one, U. S. Patel, an individual. He is the brother of one, C. S. Patel. These two brothers had two business associates, K. H. Patel and R. H. Patel, who were also brothers. The four persons were concerned with two private limited companies called Ashok Construction Company Private Ltd., (hereinafter referred to as 'Ashok') and Modern Construction Company Private Ltd., (hereinafter referred to as 'Modern'). In para. 3 of the statement of case, the Tribunal has given the shareholdings in Ashok at the relevant period and has concluded that the assessee had a controlling interest in the said concern. Similarly, in para. 4 of the statement of case, the Tribunal has extracted the shareholdings in Modern and has concluded that the assessee's brother C. S. Patel and K. H. Patel and R. H. Patel together held a controlling interest in the said concern.
3. On September 21, 1955, a series of gifts of the shares of Modern were made as under :
Donor Donee No. of Amountshares Rs.C. S. Patel A. U. Patel (Major son Rs. 750 paid up 60,000of U. S. Patel) 40 per shareVikram U. Patel (minorson of U. S. Patel) 40----80----K. H. Patel Mrs. D. U Patel (wife 33 Rs. 1,000 paid 33,000of U. S. Patel) up per shareR. H. Patel A. U. Patel 10 Rs. 750 paid up 50,250Vikram U. Patel 10 per shareMrs. D. U. Patel 7Miss K. U. Patel (Minor 25daughter of U. S. Patel)Miss Veysha U. Patel) 15 ---------(minor daughter of Total 1,43,250U. S. Patel) ---------
4. Four or five months later, i.e., on February 11, 1956, another set of gifts but of the shares of Ashok were made as follows :
Donor Donee No.of Amountshares Rs. U. S. Patel A. C. Patel (minor son Rs. 1,000 paid 90,000of C. S. Patel) 30 up per shareC. C. Patel (minor son ofC. S. Patel) 30Mrs. Sushilaben C. Patel(wife of C. S. Patel) 30-----90-----U. S. Patel Mrs. M. Kamlaben Rs. 1,000 paid 75,000K. Patel (wife ofup per share K. H. Patel) 50Miss B. K. Patel (daughterof K. H. Patel) 25----75----U. S. Patel S. K. Patel (sister's son Rs. 1,000 paid 10,000of K. H. & R. H. Patel) 10 up per share--------1,75,000--------
5. It will be seen from what has been stated above that although on September 21, 1955, i.e., the date on which gifts of the shares of Modern were made to the assessee's wife and children by C. S. Patel, K. H. Patel and R. H. Patel, these persons, i.e., the donors did not make any gift to their own respective wives and children or to their brother's or sister's son. Similarly, on the February 11, 1956, when the shares of Ashok were gifted by the assessee, the assessee made gifts to the wife and minor sons of C. S. Patel s also to the wife and daughter of K. H. Patel and to the sister's son of K. H. Patel and R. H. Patel but not to his own wife or children. The Tribunal has noted that the transfer of the shares of the respective companies by way of these gifts as noted did not materially affect the controlling interest of the assessee in Ashok and of C. S. Patel, K. H. Patel and R. H. Patel in Modern.
6. In the course of the assessment for the year 1957-58, the ITO found that although the assessee had previously shown dividend income in respect of 282 shares of Ashok, the dividend income disclosed by him in the year under consideration was only for 107 shares of the said company. The difference came to 175 shares. On inquiry, it was learnt that the assessee had gifted 175 shares of the said company to various persons on February 11, 1956. The ITO pursued the matter further and then found that a little earlier, i.e., on September 21, 1955, there had been gifts of shares of the other company, viz., Modern by C. S. Patel, K. H. Patel and R. H. Patel and that the donees were the assessee's wife and children. The ITO asked the assessee to explain the circumstances under which such gifts had been made by the respective donors; the assessee was further asked as to why, in the circumstances, the gifts should not be considered as mutual, thereby attracting the provisions of s. 16(3)(a)(iii) and (iv) of the Indian I.T. Act, 1922. The assessee came forward with the following explanation : (1) All the gifts had been made out of natural love and affection and there was no other consideration for the transfer of the shares at any time. (2) The two sets of gifts were independent transactions, neither simultaneous nor equal in value and, therefore, they did not constitute one single or mutual transaction by way of cross gifts. (3) The shares of Ashok Construction Co. P. Ltd., were not giving any yield by way of dividend, whereas the shares of the Modern Construction Co. P. Ltd., were indeed yielding dividend which also showed that there was no mutuality of transactions.
7. The ITO rejected the explanation and concluded that the two sets of gifts constituted a single transaction. In his view this was a case of cross gifts which would attract the provisions of s. 16(3)(a)(iii) and (iv) of the Act. Accordingly, he included the dividend income in respect of Modern shares transferred to the assessee's wife and minor children in the assessee's total income for the assessment year 1957-58.
8. The assessee carried the matter in appeal to the AAC, who fully agreed with the view of the ITO and dismissed all the appeals of the assessee. The assessee went in further appeal to the Tribunal. The points made on behalf of the assessee before the Tribunal were : (1) that the two sets on gifts were independent of each other, separated by an interval of some months, (2) that the total value of gifts made on September 21, 1955, was Rs. 143,250, whereas the total volume of gifts made on February 11, 1956 was Rs. 1,75,000, and (3) that the amounts and the donees under the respective gifts were not identical, and this would be apparent by referring to the table earlier set out. The Tribunal, however, did not accept any of the contentions of the assessee. The Tribunal accepted that there was an interval of a few months and that total identity of the donees and amounts did not exist. Even then the Tribunal posed a question, viz., why should these gifts have been made in the manner in which they were made According to the Tribunal, the peculiar circumstances in which the two sets of gifts were made were sufficient to suggest that the two sets of gifts were mutually inter-connected and so constituted a single transaction. An argument was raised on behalf of the assessee that the shares gifted by the assessee and the shares gifted to the assessee's wife and children were not identical and, therefore, the provisions of s. 16(3)(a)(iii) or (iv) could not be applied. This argument was also rejected by the Tribunal.
9. The learned counsel, on behalf of the assessee, referred us to the provisions of s. 16(3)(a)(iii) and (iv) and drew our attention to certain authorities of the Supreme Court and of this High Court in which the statutory provisions had come up for consideration. The first of these decisions is CIT v. C. M. Kothari : 49ITR107(SC) . In that case, the facts were as follows : C and his two sons, D and H, were the three partners of a firm. In October, 1947, the firm entered into an agreement for the purchase of a house and paid an advance of Rs. 5,000. This sum was debited in its books to the personal accounts of the partners. The transaction was completed in that very month and the sale deed was taken in the names of Mrs. C and Mrs. D and H. The balance of the consideration, viz., Rs. 85,000 was also paid to the vendors by the firm. To make up this amount, H was debited with a sum of Rs. 28-333-5-4 in the firm's books, and Mrs. C and Mrs. D each paid to the firm, by cheque, an identical sum. Mrs. C, further paid a cheque for Rs. 1,800 and Mrs. D, another cheque for Rs. 1,600 to the firm which were the amounts debited by the firm to the accounts of C and D being part of the advance of Rs. 5,000. The firm paid into Mrs. C's bank account two cheques, one for Rs. 27,000 which was stated to be a birthday gift by D to his mother (although the birthday had taken place several months earlier) and another for a smaller amount being a gift by D to his mother for diwali. Both these sums were debited in the firm's accounts to D. Similarly, a few days later Mrs. D's bank account was credited with the sum of Rs. 30,000 by a cheque issued by the firm. The amount was debited to C in the firm's account and was shown as a gift by him to his daughter-in-law. The question being considered by the court was whether the income arising to Mrs. C and Mrs. D, from the house, arose out of assets transferred indirectly to them by C and D respectively. The court answered the question in favour of the revenue; it extracted the relevant statutory provisions and observed as under (pp. 110-111) :
'The section takes into account not only transference of assets made directly but also made indirectly. It is impossible to state here what sorts (of transfers or transactions ?) are covered by the word 'indirectly', because such transfers may be made in different ways.
It is argued that the requisite of the section is that the assets must be those of the husband and 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 assets 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 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 bit, 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 High Court overlooked the clear implication of these facts as also the implication of the fact that though the three purchasers were to get on-third 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, namely, 'transferred directly or indirectly to the wife'.'
10. It is clear, therefore, that according to the Supreme Court, a chain of transfers is comprehended by the word 'indirectly', and the reason for such wider comprehension is to make the statutory provisions effective and any other narrower meaning given to the provisions has to be rejected as such construction would defeat the object of the law. It may be mentioned that in this very volume is reported the decision of the Madras High Court, which has been referred to by the Tribunal, viz., L. G. Balakrishnan v. CIT : 49ITR102(Mad) . We were, however, informed that in the decision of the Supreme Court, the narrower construction put by the Madras High Court in this case, has been expressly disapproved, and accordingly, it becomes unnecessary to refer to the decision of the Madras High Court. Accordingly, we may now refer to the said decision of the Supreme Court, viz., CIT v. Keshavji Morarji : 66ITR142(SC) . In the said case, it was observed as under :
'If 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 was adopted as a device to evade the implications of section 16(3)(a)(iii) or (iv) of the Indian Income-tax Act, 1922, the case will fall within the section. The same considerations that are relevant in the application of clause (iii) of section 16(3)(a) are relevant in the application of clause (iv).'
11. In the above case the court expressly disapproved of the observations of the Madras High Court in L. G. Balakrishnan v. CIT : 49ITR102(Mad) , which were to the effect that if the cores transactions were independent of each other, the section cannot have any application. What the Supreme Court emphasised was that the reality or unreality of the transaction was immaterial but what was material was whether the transfers were part of the same transaction, adopted with a view to avoid the application of the section. The earlier decision of the court in C. M. Kothari's case : 34ITR317(Mad) was referred to.
12. It may be mentioned, at this juncture, that the wider interpretation put by the Supreme Court in the above decisions, in our opinion, brings the facts of the case before us entirely within the principles indicated and the question would be required to be answered in favour of the revenue. We were, however, referred to two decisions of our High Court, which, according to the learned counsel for the assessee, have laid down principles in favour of the assessee and which if applied, would require the question to be answered in favour of the assessee. We may now refer to these decisions.
13. The first of these decisions and one on which very strong reliance was placed on behalf of the assessee was H. N. Patwardhan v. CIT : 76ITR279(Bom) . The facts before the Division Bench of this court were : On February, 1957, the assessee gave 55 shares of M Bank to his sister and 60 shares of the same bank to his maternal uncle. These two donees gifted these very 55 and 60 shares on June 22, 1957, that is, about four months and fourteen days later, to the two minor sons of the assessee. The ITO, relying upon s. 16(3)(a)(iii) and (iv), included the dividend earned from the shares in the income of the assessee. The Appellate Tribunal held that the dividend income from the shares transferred could not be included in the income of the assessee as there was nothing on record to suggest that there was any scheme of which both the transfers were inseparable parts. The matter was then carried to the High Court. The observations from the above decision, to be found at pages 288 and 289 of the report, were strongly relied upon by the assessee and they are in the following terms (pp. 288, 289) :
'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 assessee 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 inter-connection 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 inter-connected 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 inter-connected 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).
The question of inter-connection 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.'
14. According to Mr. Munim, in Patwardhan's case : 76ITR279(Bom) , identical shares, which had been initially transferred by the assessee to the two donees, were, after a period of four months and fourteen days, transferred by the two donees to the assessee's minor children. Even then the court held that it was for the revenue to establish by some definite evidence that there was some agreement or a scheme envisaged or conceived at the time of the initial gifts to the two donees for the ultimate transfer to the minor children. As the above passage stands and read apparently the observations to a certain extent do help the assessee. Read fully, however, and bearing in mind particularly the observations to be found in the second of the two paragraphs which we have quoted above, it would appear in the first place that the court felt itself bound by the conclusion which the Tribunal had reached as regards these shares, which conclusion, according to the High Court was a conclusion of fact which could not normally be disregarded. It is somewhat doubtful whether such a conclusion can be regarded as a pure finding of fact or whether it would be more appropriate to characterise it as a proper inference to be deduced from the facts on record which would make the conclusion or finding a mixed question of law and fact which could be gone into by the High Court in its reference jurisdiction. Further, it would appear to us that the approach of the High Court, as indicated in the lengthy paragraph which we have quoted above is not one which would easily commend itself to us principally because it appears to be in conflict with the principles laid down in the Supreme Court decisions which we have earlier referred to. If the passage were to be read in the manner suggested by counsel for the assessee, it would mean that in any case in which there are cross transfers of non-identical assets, the statutory provisions contained in s. 16(3)(a) (iii) and (iv) cannot ordinarily be brought into play and the same result would follow in cases where the very same assets are transferred and subsequently retransferred by the donees to the assessee's wife or children if there is sufficient time interval between the two transfers unless there is some positive proof of agreement or a scheme (what the learned judge calls a 'diabolical scheme') of the nature required by the court. The nature and impact of the transaction or transactions, if there are more than one-and there would be more than one in case of cross transfers-has to be understood and the proper inference is required to be deduced from all the facts on record. The question which a tribunal or a court is required to pose before itself in : whether these are normal transactions made in the ordinary course of behaviour, commercial or personal by the persons concerned, or is the pattern so clear and so illuminating that only one inference is possible, viz., that these were originally conceived with the idea of ultimately conveying, directly or indirectly, certain assets to the assessee's wife or children. It would appear that this would be the real and the proper approach rather than a somewhat artificial approach which seems to be indicated in the passage above extracted from the decision in Patwardhan's case : 76ITR279(Bom) . The passage, if it was required to be applied, would seem to cast an almost impossible burden on the revenue which it can rarely discharge since these would be schemes or arrangements between relatives or friends or close business associates which would rarely be reduced to writing or of which there can seldom be any documentary or other record or such positive proof as would satisfy a court of law. Further, the fact that the original donee dealt with the item of gift as owner for some time would not necessarily tilt the balance against the revenue and the importance of this fact appears to have been over-emphasised. This is not to suggest that this aspect is irrelevant. How the donee dealt with the assets received by him would not necessarily be decisive or conclusive.
15. We were then referred to K. K. Porbunderwalla v. CIT : 85ITR385(Bom) . In that decision, a Division Bench of this court had occasion to consider the scope of s. 16(3) and it was held that s. 16(3) must receive strict construction as it created an artificial income. It was observed (pp. 388, 389) :
'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.'
16. It was further observed, after referring to C. M. Kothari's case : 49ITR107(SC) and Keshavji Morarji's case : 66ITR142(SC) and to a decision of the Calcutta High Court in CIT v. Abhijit Sen : 68ITR23(Cal) , that the provisions of s. 16(3) could be called into play in cases where there were cross-transfers by two parties and it could be inferred that the two cross-transfers were in consideration of each other and, therefore, inter-connected (see page 390). It would appear that the principle laid down in Porbunderwalla's case : 85ITR385(Bom) and the approach indicated in the said decision are unexceptionable. We need not refer further to the said case as it was decided on the facts before the court which were totally different and there was a gap of ten years between the initial gift by the assessee to the wife and the subsequent gift by the wife to the six sons of the assessee. In such a case, it would be difficult to say that there was any direct or indirect transfer by the assessee to the six sons.
17. We have already earlier indicated the correct approach to be adopted by the court in considering the question such as the one which is posed before us in this reference. Even after conceding the time interval and discrepancies both in the matter of amounts and the donees, the conclusion appears to be inescapable that the consideration for the gift of the shares of Ashok was the earlier gift of the shares of Modern. In other words, these were cross-transfers, each one being made in consideration or expectation of the other set of gifts. If that is so, in our opinion, it becomes necessary to apply the provisions of s. 16(3)(a) (iii) and (iv) to the transactions under consideration; if this is not done, the very purpose and the object of the law would be defeated. It appears to us unnecessary that the revenue should prove something more and adduce affirmative evidence, suggestive of an agreement or a scheme of cross transfers. That is not required. If a proper inference can be drawn from the facts found, then the Tribunal and the court would be justified in applying s. 16(3)(a)(iii) and (iv) to the same.
18. In the result, it must be held that the Tribunal was correct in applying these two statutory provisions. The question, however, as framed, does not appear to us to be happily worded bearing in mind the very clear and specific orders passed by the ITO, the AAC and the Tribunal. Accordingly, we reframe the question as under :
'Whether, on the facts and in the circumstances of the case, the gifts of the shares of Modern, transferred to the names of the assessee's wife and his minor children, attract the provisions of section 16(3)(a)(iii) and (iv) of the Indian Income-tax Act, 1922, and were includible in the assessee's total income for the assessment years 1957-58, 1958-59, 1959-60, 1960-61 and 1961-62 ?'
19. The question is answered in the affirmative and in favour of the revenue. The assessee will pay to the Commissioner the costs of the reference.