1. This petition under Article 226 of the Constitution is directed against an order dated December 31, 1971, passed under Section 154/155 of the Income-tax Act, 1961.
2. The assessee is a partner in a firm called 'M/s. Rajendra Silica works'. She had also income from royalty, interest on securities, ground rent andproperty. For the past several years the petitioner is being assessed to income-tax in respect of the income arising to her from her share in the partnership firm. The income from other sources is being assessed in the hands of her husband under Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922, and since the coming into force of the Income-tax Act, 1961, is being assessed under Clause (iii) of Section 64 of that Act, presumably because the income from those sources arises to the petitioner from assets transferred to her by her husband. Similar assessments were made in respect of the assessment year 1967-68, when the income arising from the partnership was assessed in the hands of the petitioner, while the income arising from other sources was assessed in the hands of her husband. Later on, the Income-tax Officer appears to have formed the opinion that by virtue of the Explanation attached to Section 64 of the Income-tax Act, 1961, the income from zamindari abolition bonds and royalties, etc., which was previously assessed in the hands of the husband should have been included in the income of the petitioner as her income was greater. He, accordingly, issued a notice under Section 151 with a view to rectify the assessment order. The assessee objected to the proposed rectification. But the Income-tax Officer did not accept her objection and finally passed an order on December 31, 1971. The original assessment order had taken the share income of the assessee from the partnership business proovisionally at Rs. 15,000 subject to rectification on the assessment of the firm. It appears that in the meantime the assessment of the firm had been completed and the share income of the assessee was found to be Rs. 29,270. The Income-tax Officer, accordingly, passed a composite order under Section 154/155 of the Income-tax Act, 1961, computing the total income of the assessee as under:
Interest on securities
Share of profit from the firm,M/s. Rajendra Silica Works
Income from Gauria Bazar
3. This assessment order has been challenged in this petition. It is necessary to quote in full Section 64 along with the Explanation.
'64. Income of individual to include income of spouse, minor child, etc.--In computing the total income of any individual, there shall be included all such income as arises directly or indirectly-
(i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner;
(ii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm in which such individual is a partner ;
(iii) subject to the provisions 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;
(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; and
(v) to any person or association of persons from assets transferred otherwise than for adequate consideration to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minor child (not being a married daughter) or both.
Explanation.--For the purposes of Clause (i) the individual in computing whose total income the income referred to in that clause is to be included shall be the husband or wife whose total income (excluding the income referred to in that clause) is greater; and, for the purpose of Clause (ii), where both the parents are members of the firm in which the minor child is a partner, the income of the minor child from the partnership shall be included in the income of that parent whose total income (excluding the income referred to in that clause) is greater; and where any such income is once included in the total income of either spouse or parent, any such income arising in any succeeding year shall not be included in the total income of the other spouse or parent unless the Income-tax Officer is satisfied, after giving that spouse or parent an opportunity of being heard, that it is necessary so to do.'
4. Clauses (i) and (ii) apply when the spouse or the minor child of an individual is a member of a partnership in which such an individual is also a partner. The remaining clauses apply where assets are transferred to the spouse, the minor child or to any other person without adequate consideration.
5. Admittedly, the instant case falls under Clause (iii) of Section 64. The income arising to the petitioner from sources other than her share in the partnership are included in the assessment of her husband on the finding that such income arises from the assets transferred by the husband to the petitioner without adequate consideration. The Explanation attached toSection 64 provides that the individual to whose income the addition is to be made may be either the husband or the wife depending upon as to whose income is greater. Similarly, the income of a minor child may be added to the income of either the father or the mother where both are members of the firm depending on as to whose income is greater. The Explanation has no application to Clauses (iii), (iv) and (v). In such cases the income arising from the assets transferred without adequate consideration is to be added in the hands of the transferor and not in the hands of the transferee, even if the latter's income happens to be greater. It is thus clear that the Explanation has no application to the petitioner's case. The impugned order, therefore, is manifestly erroneous to that extent. The rectification of the income of the petitioner arising from her membership in the partnership firm is in order and has not been challenged.
6. Accordingly, this petition is allowed in part. The impugned orderdated 31st December, 1971, together with the notice of demand issued inpursuance thereof are quashed so far as they pertain to the addition to thepetitioner's income arising from sources other than her share in thepartnership firm. The Income-tax Officer is permitted to amend theimpugned assessment order accordingly. The petitioner is entitled to thecosts.