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Commissioner of Income-tax, Poona Vs. N.K. Pandya - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 31 of 1973
Judge
Reported in(1982)28CTR(Bom)183; [1982]138ITR360(Bom)
ActsIncome Tax Act, 1961 - Sections 27 and 64
AppellantCommissioner of Income-tax, Poona
RespondentN.K. Pandya
Excerpt:
.....and 64 of income tax act, 1961 - brothers partners in firm - both made cross-gifts to each other's wife - income tax officer (ito) concluded that there was indirectly accrual of income to individual assessee under section 64 - before income can be held to come within ambit of section 64 it must be proved to have arisen directly or indirectly from transfer of assets - connection between transfer of assets and income must be proximate - income must arise as result of transfer and not in some manner connected with it - held, no accrual of income under section 64 as result of transfer of assets. - - cit [1976]102itr385(bom) .there it was held that where a portion of the capital contributed by a lady partner in a firm comes from the money given to her by her husband, the interest paid on..........of m/s nandlal & company. the relevant assessment years are 1967-68 and 1968-69. the assessee' wife leelavati was not a partner in the said firm of m/s nandlal and company, but was a partner in a sister concern known as m/s m. kumar enterprises. in the year of account, relevant to the assessment year 1967-68, the assessee's brother one m. k. pandya, made a gift of rs. 17,000 on january 17, 1966, to leelavati, the wife of the assessee. the assessee had also made a gift of rs. 15,000 on august 12, 1965, to smt. shashikala, the wife of his brother, m. k. pandya. the ito came to the conclusion that the two brothers, namely, the assessee and his brother, m. k. pandya, had made cross-gifts to each other's respective wives, and as such there was directly or indirectly an accrual of income.....
Judgment:

Kania, J.

1. This is a reference under s. 256(1) of the I.T. Act, 1961 (referred to hereinafter as 'the said Act'), made at the instance of the Commissioner of Income-tax.

2. The assessee is a partner in the firm of M/s Nandlal & Company. The relevant assessment years are 1967-68 and 1968-69. The assessee' wife Leelavati was not a partner in the said firm of M/s Nandlal and Company, but was a partner in a sister concern known as M/s M. Kumar Enterprises. In the year of account, relevant to the assessment year 1967-68, the assessee's brother one M. K. Pandya, made a gift of Rs. 17,000 on January 17, 1966, to Leelavati, the wife of the assessee. The assessee had also made a gift of Rs. 15,000 on August 12, 1965, to Smt. Shashikala, the wife of his brother, M. K. Pandya. The ITO came to the conclusion that the two brothers, namely, the assessee and his brother, M. K. Pandya, had made cross-gifts to each other's respective wives, and as such there was directly or indirectly an accrual of income to the individual (assessee) as a result of the transfer of assets to the persons concerned. The ITO, in the two assessment years, included in the total income of the assessee the share of profits which his wife, Leelavati received from the firm of M/s M. Kumar Enterprises, under the provisions of s. 64(iii) of the said Act. The assessee preferred an appeal to the AAC, who reversed the order of the ITO in respect of both the assessment years and the decision of the AAC was upheld by the Tribunal on appeals preferred by the ITO. The two appeals was upheld by the Tribunal on appeals preferred by the ITO. The Two appeals in respect of the two assessment years have been disposed of by the Tribunal by a common judgment and this reference has been made out of the said common judgment. the question referred to us for our determination are as follows :

'(1) Whether, on the facts and in the circumstances of the case, the making of a gift of Rs. 15,000 by Shri N. K. Pandya to his brother's wife, Smt Shasikala M. Pandya on August 12, 1965, which she deposited in the partnership firm, M/s Nandlal & Company, in which her husband Shri M. K Pandya and Shri M. K. Pandya were partners and the making of a gift of Rs. 17,000 by M. K. Pandya to his brothers' wife, Leelavati N. Pandya on January 17, 1966, which she contributed as part of her capital as a partner in the sister partnership firm M/s. M. Kumar Enterprises constituted indirect transfers of assets by M. K. Pandya and his brother M. K. Pandya, to their respective wives, Smt Leelavati N. Pandya and Smt. Shasikala M. Pandya, for the purpose of section 64(iii) of the Income-tax Act, 1961 ?'

(2) Whether, on the facts and in the circumstances of the case, and on a proper construction of section 64(iii) of the Income-tax Act, 1961, the Tribunal ought to have held that the income arising to Leelavati N. Pandya as a partner in the firm, M/s M. Kumar Enterprises, for the assessment years 1967-68 and 1968-69, arose from the assets transferred indirectly to her by her husband, N. K. Pandya, the assessee, and, as such, was includible in the total income of the assessee for the said two assessment years ?'

3. Before considering the arguments advanced in the case, we may usefully refer to s. 64(iii) of the said Act as it read at the relevant time. The material part of the said provision at the relevant time read thus :

'64. In computing the total income of any individual, there shall be included all such income as arises directly or indirectly -

(iii) subject to the provision of clause (i) of section 27 to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.'

4. It is common ground that the provisions of cl. (i) of s. 27 of the said Act do not come into play in this case. We may at this stage also point out that the provisions of the aforesaid cl.(iii) of s. 64 of the said act are in pari materia with the provisions of sub-cl.(iii) of cl. (a) of sub-s. (3) of s. 16 of the Indian I.T. Act, 1922.

5. The submission of Mr. Joshi, the learned counsel for the Commissioner, is that, in the present case, the order of the ITO shows that it was not disputed that the assessee and his brother had made cross-gifts to the respective wives of each other. The assessee's wife had brought in the amount of Rs. 15,000 gifted to her by her husband's brother, M. K. Pandya into the said firm of M/s M. Kumar Enterprises on November 26, 1966. That amount represented her contribution of the capital of the said firm and hence whatever profits she received as her share of profits from the said firm, was liable to be included in the income of the assessee. It was urged by him that the order of the ITO shows that the said Leelavati did not do any work in the said firm of M/s M.Kumar Enterprises save and except the signing of cheques and could not, therefore, be regarded as an active partner of the said concern, with the result that whatever share of profits was received by her, must be regarded as on account of the capital contributed by her to the said firm. It was on the other hand, contended by Mr. Pandit that the share of profits received by Leelavati could not be said to arise directly or indirectly from the transfer of the assets made to Leelavati by the assessee's brother. We find that the aforesaid submission of Mr. Pandit finds complete support from the decision of the Supreme Court in CIT v. Prem Bhai Parekh : [1970]77ITR27(SC) . In that case the assessee, who was a partner in a firm having a 7 anas 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 the partnership in the firm. The question which arose 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 s. 16(3)(a)(iv) of the Indian I.T. Act, 1922. The Tribunal had found that the capital invested by the minors in the firm came from the gift made in the favour by their father, the assessee. It was held 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 the income arose directly or indirectly from the transfer of the assets. The 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 be included in the total income of the assessee. It was held that before an income can be held to come within the ambit of s. 16(3)(a)(iii) or (iv), 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 ins some manner connected with it. It was held by Hegde J., who delivered the judgment, that the connection between the gifts mentioned earlier and the income in question was 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 amounts of contribution made by them. But there is no nexus between the transfer of the assets and the income in question.

6. The aforesaid decision of the Supreme Court has been followed by a Division Bench of this court in Bhaichand Jivraj Muchhala v.CIT : [1976]102ITR385(Bom) . There it was held that where a portion of the capital contributed by a lady partner in a firm comes from the money given to her by her husband, the interest paid on the remaining capital contributed by her as well as her share of the profits from the firm cannot be so included in her husband's income.

7. It is needless to say that the aforesaid decision of the Supreme Court as well as the aforesaid decision of our High Court are binding on this court. In view of the principles laid down in those decisions, it is clear that the share of profits which came to Leelavati, the wife of the assessee, from the partnership firm of M/s M. Kumar Enterprises, cannot be included in the income of the assessee, merely because the amount gifted to her by the assessee's brother was brought by her into the said partnership firm of M/s M. Kumar Enterprises, even though the gifts by assessee and the brother of the assessee were cross-gifts as held by the ITO. As held by the Supreme Court, it cannot be said that there is any nexus between the amount gifted by the assessee's brother to Leelavati and the share of profits which she received from the partnership firm.

8. Mr. Joshi, the learned counsel for the Commissioner, referred us to the decision of the Supreme Court in Smt. Mohini Thapar v. CIT : [1972]83ITR208(SC) . In that case, the assessee made certain cash gifts to his wife. From out of these cash gifts, she purchased certain shares and invested the balance in deposits. The question was whether the income derived by the assessee's wife from the deposits and shares had to be assessed in the hands of the assessee under s. 16(3)(a)(iii) of the Indian I.T. Act, 1922. It was held that the transfers in question were direct transfers and the income realised by the wife was income indirectly received in respect of the transfer of cash delivery made by the assessee. There was a proximate connection between the income and the transfer of assets made by the assessee. We may point out that the ratio of the decision does not apply to the case before us, because in that case, what the wife of the assessee received was the interest earned from the deposits and not the share of profits from a firm as in the present case. Mr. Joshi next referred us to the decision of a Division Bench of the Andhra pradesh High Court, in Potti Veerayya Sresty v. CIT : [1972]85ITR194(AP) , where the decision of the Supreme Court in CIT v. Prem Bhai Parekh : [1970]77ITR27(SC) , has been distinguished. This decision again is of no assistance here because the case before us falls directly within the ratio of the decision of the Supreme Court in Prem Bhai Parekh's case. Moreover, it is significant that the very same Bench of the Andhra Pradesh High Court which decided the case of Potti Veerayya Sresty, followed the decision of the Supreme Court in the case of Prem Bhai Parekh in G. Ethirajulu v. CIT : [1972]85ITR16(AP) .

9. In the result, question No. 2 referred to us must be answered in the negative and in favour of the assessee. In view of this answer to question No. 2, it becomes unnecessary and academic to decide question No. 1 and we decline to answer the same. We may however, make it clear that it was the admitted position before the ITO that the assessee and his brother had made cross-gifts to the respective wives of each other and it cannot, therefore, be doubted that there was an indirect transfer of the assets by the assessee to his wife. The Commissioner, applicant, to pay to the assessee the costs of the reference.


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