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income-tax Officer Vs. S. Parthasarathy - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1982)2ITD639(Mad.)
Appellantincome-tax Officer
RespondentS. Parthasarathy
Excerpt:
.....was includible under section 64(1)(iv) as the interest arising directly or indirectly from the asset transferred to the wife and not on the excess amount of rs. 1 lakh which arose to the wife not by way of transfer by him to the wife, i.e., accretion to the capital which could not be said to have been transferred by the assessee to his wife and for this purpose reliance was placed upon the decision of the supreme court in the case of sevantilal maneklal sheth v. cit [1968] 68 itr 503. this argument was not accepted by the revenue on the ground that the entire interest arising out of the investment of rs. 1,60,000 would be assessable in the hands of the assessee by virtue of section 64(1)(iv) as there was no scope for dissecting the amount as between the original value of the gift and.....
Judgment:
1. The assessee is an individual deriving income from salary and other sources. He gifted a house belonging to him situated at No. 12, North Street, Sri Ram Nagar, Madras to his wife on 4-10-1965. The value taken for the purpose of gift-tax was Rs. 60,000. The gift to the wife was accepted and there was no dispute about it. On 17-8-1978, the assessee's wife sold that house property for Rs. 1,60,000. She deposited that amount with the State Bank of India on 18-8-1978, and earned between the period 18-8-1978 till 31-3-1979 Rs. 8,876 by way of interest. The assessee claimed for the assessment year 1979-80 that only 60/160th of Rs. 8,876 was includible in his total income as per the provision of Section 64(1)(iv) of the Income-tax Act, 1961 ('the Act') and accordingly included Rs. 3,328 in his return. The ITO, however, was of the opinion that the entire interest was includible in the hands of the assessee under Section 64(1)(iv). The assessee claimed that to the extent of the gift amount of Rs. 60,000 alone the interest was includible under Section 64(1)(iv) as the interest arising directly or indirectly from the asset transferred to the wife and not on the excess amount of Rs. 1 lakh which arose to the wife not by way of transfer by him to the wife, i.e., accretion to the capital which could not be said to have been transferred by the assessee to his wife and for this purpose reliance was placed upon the decision of the Supreme Court in the case of Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503. This argument was not accepted by the revenue on the ground that the entire interest arising out of the investment of Rs. 1,60,000 would be assessable in the hands of the assessee by virtue of Section 64(1)(iv) as there was no scope for dissecting the amount as between the original value of the gift and excess over as the gifted item of the immovable property was one indivisible whole (sic). It was also held that the proximate connection between the transfer of the asset to the income arising out of investment was also established. The A AC while dealing with the appeal for the assessment year 1979-80, upheld the assessee's claim relying upon the decision of the Supreme Court in the case of Sevantilal (supra). He held that the provisions of Section 64(1)(iv) would apply only to the extent of the amount gifted, namely, Rs. 60,000 and not to the balance of Rs. 1 lakh realised by the assessee's wife on sale of the house property. He was of the opinion that Rs. 1 lakh was not an asset transferred by the assessee within the meaning of Section 64(1)(iv). He, therefore, directed deletion of the interest attributable to the surplus amount of Rs. 1 lakh for the assessment year 1979-80.

2. Again, the assessee claimed that the interest attributable to Rs. 60,000 alone should be included in the assessment of the assessee for the assessment year 1980-81 and the balance should be excluded. Relying upon his own reasonings for the assessment year 1979-80, the ITO included the entire amount of Rs. 20,500 in the hands of the assessee.

When the matter reached the AAC, on appeal, he following his earlier order referred to above excluded the above interest relatable to the surplus amount of Rs. 1 lakh and directed the ITO to modify the assessment accordingly. It was against this order of the AAC that the present appeal has been filed by the revenue.

3. The learned departmental representative, Shri J.G. Gopinath, argued that the AAC has misapplied the principle laid down by the Supreme Court in the case of Sevantilal (supra). There the Supreme Court was dealing with a question whether income on capital gains arising on the sale of assets transferred by the husband to the wife would also be included under Section 16 of the 1922 Act (analogous to Section 64 of the 1961 Act). The Supreme Court held that since capital gains is included in the definition of 'income', the expression 'income', as used in Section 16, must be construed as including capital gains and that there was nothing in the context or language of Section 16 to suggest that capital gains were excluded from its scope. The observations made by the Supreme Court and relied upon by the AAC in his order to support his conclusion, are, therefore, clearly misplaced.

Here, the assessee's wife, by the sale of the house, realised Rs. 1,60,000 as against the value of Rs. 60,000 for which the property was gifted. Since the property has been exchanged for money, the entire money must be deemed to be the property transferred by the assessee either directly or indirectly and the income resulting from the entire property must be included in the hands of the assessee. To treat the surplus of Rs. 1 lakh as different from Rs. 60,000 is to give to the surplus of Rs. 1 lakh, the character of 'income'. The surplus of Rs. 1 lakh did not bear the character of income. It is only an accretion to the capital. The income resulting out of income of transferred asset may be treated as asset not transferred by the husband to the wife so that such income is not within the reach of Section 64. The position of the sum of Rs. 1 lakh in this case was not in the nature of such an income derived out of income earned out of the asset transferred by the individual. Therefore, there is misapplication of the principle laid down by the Supreme Court and for this reason, he suggested that the view taken by the AAC must be reversed.

4. On the other hand, the learned counsel for the assessee, Shri Philip George, by taking us through the decision of the Bombay High Court in the case of Sevantilal Maneklal Sheth v. CIT [1965] 57 ITR 45, which was later approved by the Supreme Court and now relied upon by the AAC, pointed out that two of the four questions referred to the High Court concerned with the question whether the interest from the entire proceeds from the sale of the transferred asset which was obtained by the wife for subsequent years was liable to be included in the total income of the husband for those years or only such of it as was attributable to the value of the transferred asset on the date of transfer by the husband to the wife. The High Court answered this question in favour of the assessee and against the revenue, by approving the Tribunal's decision that the interest includible under Section 16 was only such portion as was attributable to the value of the transferred asset on the date of the transfer, by the husband to the wife and not in respect of the entire proceeds. When the department took the matter on appeal to the Supreme Court this aspect of the matter has not been doubted or questioned. The department has accepted this decision of the Bombay High Court. Having thus accepted the decision of the Bombay High Court, it became now a direct decision on the point that in respect of the inclusion of interest, it must be the interest attributable to the value of the transferred assets on the date of the transfer by the husband to the wife and it cannot be with regard to the interest realised on the entire proceeds from the sale of the transferred assets. He, therefore, urged that even though it could be argued that the AAC wrongly understood the principle of law laid down by the Supreme Court, the principle of law as laid down by the Bombay High Court in the very same case, which was approved by the Supreme Court, supports the assessee's case and as a consequence the order of the AAC must be upheld.5. We have carefully gone through the submission and we are inclined to agree with the submissions made on behalf of the assessee. The decision rendered by the Supreme Court was on an appeal arising from the decision of the Bombay High Court in the case of Sevantilal (supra).

The facts in the case were : a person made a gift to his wife, of shares in a limited company, which were worth Rs. 69,730 at the time of the gift. The wife sold the shares subsequently for Rs. 1,54,800 making a capital gain of Rs. 70,860. The whole sale proceeds were invested and fetched an interest of Rs. 9,288 annually. The question was whether the capital gain of Rs. 70,860 realised on the sale of the shares, was includible in the hands of the assessee, i.e., the husband, and the second and related question was whether the interest of Rs. 9,288 received annually was income arising from the assets transferred to the wife could be included in the income of the husband under Section 16(3)(a)(iii) of the 1922 Act (analogous to Section 64(1)(iv) of the 1961 Act).

6. It was held by the Bombay High Court that though the sum of Rs. 70,860 was capital gains arising from sale of the shares, it was still income arising from the assets transferred within the meaning of Section 16(3)(a)(iii), and was properly included in the husband's income. In regard to the interest, the Bombay High Court held that the interest was to be divided into two parts, one part relating to the interest attributable to the monetary value of the assets transferred on the date of transfer, namely, Rs. 69,730, and the other part, namely, the interest attributable to the capital gains arising on the sale of the asset. That part of the interest attributable to the value of the transferred asset alone was held includible in the hands of the husband and not other part attributable to the income arising out of the income, namely, capital gains. This portion of the judgment of the Bombay High Court does not seem to have appealed against by the revenue. The question before the Supreme Court was only whether in computing the total income of the assessee, capital gains had been properly included under the provisions of Section 16(3)(a)(iii).

Answering this question, the Supreme Court held that since 'capital gains' also is included in the definition of 'income', that amount was includible under Section 16(3)(a)(iii). In arriving at this conclusion, the Supreme Court made the observation that there is no reason why a restricted interpretation should be placed on the provisions of Section 16(3)(a)(iii), particularly when the object of the section was 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. At the end of the judgment, i.e., in the last paragraph, the Supreme Court observed : For the reasons given, we hold that the High Court has rightly answered the first question against the assessee and this appeal is accordingly dismissed with costs. (p. 508) From this paragraph and also from the body of the judgment, it is very clear that the other questions raised before the High Court and answered in favour of the assessee, were not at all agitated before the Supreme Court, i.e., the decision of the High Court given in favour of the assessee that interest attributable to the value of the assessee that on the date of the transfer alone should be included and not the interest from the entire proceeds on the sale of the transferred assets, had become final. No other decision taking a contrary decision has been brought to our notice. On the contrary, it appears to be a trite law now that income arising out of a transferred asset cannot be treated as income arising from the transferred asset, since the essential requisite of the existence of the proximate connection between the income arising out of the income of the transferred asset and the income arising from the transferred asset is either nil or very remote. This being the position in law, it must be held that the interest attributable to the capital gains of Rs. 1 lakh or as the AAC put it as surplus, is not available for inclusion under the provisions of Section 64(1)(iv).

7. A question may arise at this stage whether the surplus of Rs. 1 lakh has been treated as income either by the assessee or by the department and whether that issue had become final, in order that the rule as propounded by the Bombay High Court and as applied by several other High Courts is held applicable in this case. At the relevant time there was a provision in the Act which stated that if the sale proceeds to the extent of capital gains is invested in fixed deposits, the capital gains to that extent would be exempt from tax. Taking advantage of this provision, we are told, the surplus amount was invested in fixed deposit by the wife of the assessee. By the investment of the surplus amount in fixed deposits, the capital gains arising on the sale of the house though assessable in the hands of the assessee as income by reason of the provisions of Section 64, has earned exemption from the levy of capital gains tax. By reason of this exemption though tax was not levied on it by invoking the provisions of Section 64 in the hands of the assessee or in the hands of the assessee's wife, still the character of the sum remained as income and it did not change. It, therefore, follows that the surplus having retained its character as income arising on the sale of the transferred asset, namely, the house, the income arising from the investment of that surplus income cannot be said to be the income arising to the assessee on the transfer of any asset to the wife or connectable in any manner to the asset transferred. Therefore, the view taken by the AAC does appeal to us to be correct even though the principle of law laid down by the Supreme Court appears to have been misquoted by him.

8. In this connection, reference may also be made to the decision of the Supreme Court in the case of CIT v. Prem Bhai Parekh [1970] 77 ITR 27 where their Lordships of the Supreme Court laid down the rule for the application of Section 64 of the 1961 Act or Section 16(3) of the 1922 Act that the connection between the transfer of assets and the income must be proximate and that the income in question must arise as a result of the transfer and not in some manner connected with it.

This, to our mind, appears to be a case where the income did not arise as a result of the transfer of the house to the assessee's wife but in some manner connected with it which means the prohibition laid down by the Supreme Court clearly applies here.


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