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Commissioner of Income-tax Vs. Smt. Pelleti Sridevamma - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberR.C. No. 38 of 1973
Judge
Reported in[1976]105ITR887(AP)
ActsIncome Tax Act, 1961 - Sections 64(1)
AppellantCommissioner of Income-tax
RespondentSmt. Pelleti Sridevamma
Appellant AdvocateP. Rama Rao, Standing Counsel
Respondent AdvocateS. Dasaratharama Reddy and ;S.R. Ashok, Advs.
Excerpt:
direct taxation - capital gain - section 64 (1) of income tax act, 1961 - assessee made cash gift her minor son - amount was utilised to purchase house which was used for business purpose - eight years later said property was sold resulting in profit of rs. 58000 - said amount assessed as capital gain in hands of assessee - whether there is any direct or indirect connection between cash gift and income derived by sale of house - due to time lag there is no such connection - held, capital gain of rs. 58000 was not assessable in hands of assessee. - - , in which her husband as well as her son were partners......is produced while the asset continues to belong to the assessee, while in the operation of a sale, gain is produced, which is still income, but in the process the title to the asset is parted with. although the processes involved in the two cases are different, the gain which has resulted to the owner of the asset, in each case, is the gain, which has sprung up or arisen from the asset.' 3. in that view the learned judges held :'we see no reason why a restricted interpretation should be given to the provisions of section 16(3)(a)(iii) as contended for the appellant. on the contrary, the object of the enactment of the section is to prevent avoidance of tax or reducing the incidence of tax on the part of the assessee by transfer of his assets to his wife or minor child. it is a sound.....
Judgment:

S. Obul Reddy, C.J.

1. The question referred to us is as follows : 'Whether, on the facts and in the circumstances of the case, the capital gain of Rs. 58,000 was assessable in the hands of the assessee in terms of Section 64(1)(iv) of the Income-tax Act, 1961 ?' The assessee is an individual having money-lending business and mica mining business. She submitted a return for the assessment year 1966-67 and claimed that an amount of Rs. 58,000 arising out of sale of house standing in the name of her minor son, Suryanarayana Reddi, is not taxable as a capital gain. In the financial year 1956-57, the assessee made a cash gift of Rs. 90,000 to her minor son. This amount was utilised for purchasing a house property and it was used by the assessee for the purpose of her business. On July 5, 1965, the said property was sold by her to Tirupathi Devastanam for Rs. 1,48,000. The Income-tax Officer assessed the capital gain of Rs. 58,000 derived from the sale of the house in the hands of the assessee, invoking Section 64(1)(iv) of the Income-tax Act. The assessee then preferred an appeal to the Appellate Assistant Commissioner who confirmed the order of the Income-tax Officer. On further appeal, the Appellate Tribunal allowed the appeal on the ground that there is no proximate connection between the cash gift of Rs. 90,000 and the capital gain derived by the sale of the house. Then the Commissioner moved for reference under Section 256(1) of the Act, and as the Tribunal rejected the application, an application was filed in this court for reference of the question involved under Section 256(2) of the Act.

2. Mr. P. Rama Rao, learned counsel for the revenue, contended that the Tribunal erred in holding that there is no proximate connection between the gift made by the assessee and the capital gain derived by the sale of the house. In support of his contention, he sought to place reliance upon the two following decisions of the Supreme Court. In Sevantilal Maneklal Sheth v. Commissioner of Income-tax, : [1968]68ITR503(SC) the Supreme Court observed :

'......there is no logical distinction between income arising from theasset transferred to the wife and arising from the sale of the assets so transferred. The profits or gains which arise from the sale of the asset would arise or spring from the asset, although the operation by which the profits or gains is made to arise out of the asset is the operation of the sale. If the asset is employed, say by way of investment and produces income, the income arises or springs from the asset; the operation, which causes the Income to spring from the asset, is the operation of the investment. In the operation of the investment, income is produced while the asset continues to belong to the assessee, while in the operation of a sale, gain is produced, which is still income, but in the process the title to the asset is parted with. Although the processes involved in the two cases are different, the gain which has resulted to the owner of the asset, in each case, is the gain, which has sprung up or arisen from the asset.'

3. In that view the learned judges held :

'We see no reason why a restricted interpretation should be given to the provisions of Section 16(3)(a)(iii) as contended for the appellant. On the contrary, the object of the enactment of the section is to prevent avoidance of tax or reducing the incidence of tax on the part of the assessee by transfer of his assets to his wife or minor child. It is a sound rule of interpretation that a statute should be so construed as to prevent the mischief and to advance the remedy according to the true intention of the makers of the statute.'

4. That was a case where the assessee made a gift of 1,184 ordinary and 155 preference shares in Changdeo Sugar Mills Ltd. to his wife. The total value of the shares at the date of transfer was Rs. 69,730. Subsequent to the transfer of the shares, the company converted the preference shares into ordinary shares giving the shareholders eight ordinary shares for each preference share. That resulted in swelling up the number of ordinary shares held by the wife of the assessee. The wife sold those ordinary shares in August, 1956, which fetched a capital gain of Rs. 70,860. That amount was deposited by the assessee's wife with Messrs. A. H. Bhivandiwalla and Co., in which her husband as well as her son were partners. The amount deposited by her fetched an interest of Rs. 9,288. The Income-tax Officer included the capital gain of Rs. 70,860 which was a profit made by the wife on account of the sale of the shares, as income of the assessee under Section 64(1)(iii) of the Act. It is on these facts the learned judges held that there is no warrant for the argument that the capital gain is not income arising from the asset but income arising from a source which is different from the asset itself. In the other case, i.e., Smt. Mohini Thapar v. Commissioner of Income-tax, : [1972]83ITR208(SC) , the learned judges of the Supreme Court were dealing with a cash gift made by the assessee to his wife. From out of the cash gift, she purchased certain shares and invested the balance in deposits. The question was whether the income derived by the wife from the deposits and shares had to be assessed in the hands of the assessee under Section 64(1)(iii) of the Act. On those facts, it was held by the Supreme Court that the transfers were direct transfers and the income realised by the wife was income indirectly received in respect of the transfer of cash directly made by the assessee. The Supreme Court also found that there was a proximate connection between the income and the transfer of assets made by the assessee. In the view, the Supreme Court answered the question in the affirmative.

5. In the present case, the cash gift of Rs. 90.000 made by the assessee to her minor son was utilised for purposes of purchasing house property at Gudur. It was not purchased for the purpose of resale by the assessee but to use it as her office for carrying on her business. The sale of the house property was eight years later. What we have to see is whether there is any proximate connection between what was derived by way of capital gain and the gift of cash which she made to her son. In other words, whether there is any direct or indirect relationship between the transfer and the income derived by the sale of the house. Section 64(1)(iv) of the Income-tax Act is in these terms :

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

(iv) subject to the provisions of Clause (i) of Section 27, to a minor child, not being a married daughter of such individual, from assets transferred directly or indirectly to the minor child by such individual otherwise than for adequate consideration.'

The Supreme Court had occasion to consider this question in Commissioner of Income-tax v. Prem Bhai Parekh, : [1970]77ITR27(SC) , which is nearer to the facts of the present case than the other two cases of the Supreme Court referred to above. That was a case where the partner of a firm having 7 annas share retired from the firm on July 1, 1954. He then gifted Rs. 75,000 to each of his four sons, three of whom were minors. Subsequently, there was a reconstitution of the firm with effect from July 2, 1954, 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. The Tribunal found against the assessee. The Supreme Court reversed the decision of the Tribunal by holding 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 that income arose directly or indirectly from the transfer of the assets. The learned judges were of the view that there was no nexus between the transfer of the assets and the income in question ; and in that view, it was held that it cannot be said that that income arose directly or indirectly from the transfer of the assets referred to earlier. In view of the time lag between the dates of cash gift of Rs. 90,000, the purchase of the house property and the subsequent sale eight years later to Tirupathi Devasthanam, we are unable to say that there is proximate connection between the income derived by sale of the house and the cash gift made by the assessee. Therefore, having regard to the ratio in Commissioner of Income-tax v. Prem Bhai Parekh, : [1970]77ITR27(SC) we uphold the order of the Tribunal and answer the question in the negative and against the Commissioner of Income-tax, but in the circumstances without costs.


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