1. We are concerned in these appeals with the question whether interest received by a wife on the amount of policy of insurance taken out by the husband on his life can be added to the income of the husband under the Income-tax Act, 1961. This is the only question and it is common in the two appeals. Therefore, they are dealt with by this common order.
2. The assessee had taken out a policy on his life for the benefit of his wife. It stated, in its conditions, that it was issued under the provisions of Married Women's Property Act, 1874. Under that insurance policy, the assessee's wife received certain amount and earned interest of Rs. 2,250 thereon. The ITO added this interest amount to the income of the husband under Section 64 of the Income-tax Act, 1961 ('the Act'). That is how this question arises.
3. The learned Commissioner (Appeals), following his decision for the assessment year 1978-79 and for the reasons stated therein, allowed the assessee's appeal. Shortly stated, his reasons are that the insurance policy is a trust in favour of the wife and is not the property of the husband and the premia are paid under an agreement between the husband and the insurer and are, therefore, not transfers of money by the husband to the wife.
4. Before us, the learned departmental representative argued that the Married Women's Property Act was not applicable to this insurance policy because of the following provision in Section 2 of the Married Women's Property Act thereof : But nothing herein contained applies to any married woman, who at the time of her marriage professed the Hindu, Mohammadan, Buddhist, Sikh or Jain religion, or whose husband, at the time of such marriage, professed any of those religions.
He relied upon the decision of the Delhi High Court in the cases of A.C. Khanna v. CIT  68 ITR 159, D.M. Netarwala v. CIT  120 ITR 848 (Bom.) and R. Dalmia v. CIT  133 ITR 169 (Delhi) in support of the proposition that even if an asset transferred by the husband was converted into another form, the income thereon could be added to the income of the husband.
5. The learned Counsel for the assessee, in reply, contended that Section 6 of the Married Women's Property Act was fully applicable to this case, relying upon Sub-section (2) thereof and upon the decision of the Madras High Court in the case of Pokkunuri Balamba v.Kakaraparti Krishnayya AIR 1914 Mad. 595 (FB). He contended that under Section 6, since the assessee was a trustee of the policy in favour of his wife from the very beginning, he himself had no interest in it and that, therefore, the question of transfer of the amount under a policy from the husband to the wife, did not arise. His second contention was that under Section 64(1)(iv), there were two requirements : (1) that there should be transfer ; and (2) that the transfer should be without consideration. He submitted that in this case there was a transfer with consideration, relying upon the decision of the Madras High Court in the case of CGT v. R.R. Sarma  111 ITR 70. He further submitted that there was not even an indirect transfer of assets from the husband to the wife in this case, relying upon the decision of the Supreme Court in the case of CIT v. Keshavlal Lallubhai Patel  55 ITR 637. He distinguished the decisions in the cases of A.C. Khanna (supra), D.M. Netarwala (supra) and R. Dalmia (supra) that in those cases, there was, admittedly, transfer of the assets, whereas in this case there was no transfer of the assets from which the income had arisen to the wife.
6. The learned departmental representative rejoined that the decision in the case of Keshavlal Lallubhai Patel (supra) was not relevant because there was merely a question of unequal partition. He argued that even if the word 'transfer' was construed strictly, it would apply in this case because the assessee had a right in the policy by virtue of his paying the premia. According to him, the decision in the case of R.R. Sarma (supra) was not applicable because in that case the Court was concerned with the 'immediate' transfer of the property under the Gift-tax Act, 1958. He also argued that although the wife had received benefit, there was no consideration from her. He also illustrated his above argument with the case of a husband paying monthly amount of Rs. 100 to a bank and the wife received an amount or the benefit thereon from the bank.
7. To our mind, the issues in this case are whether there was any transfer of assets and if so, of what assets from the husband to the wife and whether there was any consideration for the same.
8. Therefore, first of all, we have to consider the applicability of the Married Women's Property Act and the provisions thereof. Section 6(1) provides as follows : A policy of insurance effected by any married man on his own behalf and independently of her husband ; and the same and all benefit thereof, if expressed on the face of it to be so effected, shall ensure as her separate property, and the contract evidenced by such policy shall be as valid as if made with an unmarried woman.
From this, it is seen that the husband has no interest in the policy from the very beginning because he is merely a trustee thereof. We now come to the applicability of the said provisions. The learned departmental representative has relied upon Section 2, which has been quoted above. In that connection, Sub-section (2) of Section 6 provides as follows : (2) Notwithstanding anything contained in Section 2, the provisions of Sub-section (1) shall apply in the case of any policy of insurance such as is referred to therein which is effected by any Hindu, Mohammadan, Sikh or Jain, in Madras after the thirty-first day of December, 1913, or in any other part of British India after the first day of April, 1923 : Further, in the case of Pokkunuri Balamba (supra), it has been held that Section 6 applies to a policy of insurance effected by a Hindu male for the benefit of his wife or children, or of his wife and children, or any of them. Therefore, we hold that Section 6 is applicable in this case.
9. That brings us to the argument of the assessee's counsel that the assessee having no interest in the policy, did not transfer his asset to his wife. We have to consider that assets were transferred by the assessee to the insurance company and by the insurance company to the wife. The assessee paid premia to the insurance company, which in turn paid the policy amount to the wife. It is entirely true that the assets transferred by the assessee were not transferred to the wife and what was transferred to the wife were not the assets by the assessee. But the assets transferred by the assessee to the insurance company has been converted into a policy of insurance at the instance of the assessee and the benefit thereunder has in turn been transferred to the wife. Therefore, although according to the said Section 6, the assessee did not have any interest in the insurance policy, the assets which he transferred to the insurance company by the process of conversion have been transferred to the assessee's wife.
10. In this connection, it is apposite to refer to the cases of A.C.Khanna (supra), D.M. Netarwala (supra) and R. Dalmia (supra), relied upon by the learned departmental representative. In the case of A.C.Khanna (supra), the assessee's wife had purchased 52 shares in the A Co. for a sum of Rs. 6,500 provided by the assessee. The A Co. sold its assets to the B Co. and in consideration thereof the B Co. made over to the A Co. 19,779 ordinary shares in the B Co., and the liquidator of the A Co. distributed those shares to its shareholders at the rate of 19 shares of the B Co. for one share of the A Co. In lieu of her 52 shares, the assessee's wife got 988 shares of the B Co. and it was held that the dividend realised from the shares in the B Co. would be included in the total income of the assessee under Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922.
In the case of D.M. Netarwala (supra), the material facts are that the assessee had transferred certain amounts to a trust for the benefit of, inter alia, himself and his wife. The trust was determined after a number of years and the trust funds were divided equally between the assessee and his wife. It was argued that the wife received an amount not by virtue of any transfer made by her husband but the trustees under the trust deed. But this plea was negatived and it was held that the money, which was paid to the wife, was paid in pursuance of the directions given to the trustees and she had received by reason of her right under the trust deed. But Section 16(3)(a)(iii) covered a case of even indirect transfer. In this case the ultimate object was to give effect to the original intention of transferring the funds by the husband to the wife by providing under trust deed such a direction and so it was a case of indirect transfer of the asset from the husband to the wife and transfer to the trust was merely an intervening stage.
In the case of R. Dalmia (supra), the assessee's wife had invested a sum of Rs. 1 lakh in certain debentures and received an income of Rs. 10,104. The said sum of Rs. 1 lakh included Rs. 90,000, being the sale proceeds of a house gifted to her by the assessee and valued at Rs. 88,100. It was held that only that part of the sum of Rs. 10,104 arising out of an investment of Rs. 88,100 could be taxed in the hands of the assessee under Section 16(3).
11. In the light of the above decisions, we have to come to the conclusion that the conversion of assets from one form to another form does not alter the fact of transfer. The learned Counsel for the assessee has relied upon the decision of the Supreme Court in the case of Keshavlal Lallubhai Patel (supra), wherein the significance of the word 'indirectly' in connection with transfer has been examined by the Supreme Court. The Court held that partition was not a case of transfer and the meaning of the word 'transfer' was not destroyed by the use of the word 'indirectly', which means that there has to be a transfer and if there is no transfer, the word 'indirectly' cannot make the transaction a transfer. In the present case, there can be no dispute that there has been a transfer both from the assessee to the insurance company and from the insurance company to the wife. Therefore, it is not a question of whittling down the meaning of the term 'transfer', by the use of the word 'indirectly'. In that case the Court has quoted from its judgment in CIT v. C.M. Kothari  49 ITR 107 (SC) that a chain of transfer is comprehended within the meaning of the term 'indirectly'. In this case there has been a chain of transfers, but this transfer is comprehended within the meaning of the term 'indirectly'. The argument put forward by the assessee's counsel at first appears to be attractive but the learned departmental representative has met it successfully by relying upon the decisions that conversions of assets does not effect the question of transfer.
12. There remains the question of consideration. The Commissioner (Appeals) has observed that since the payments made by the husband were by way of satisfaction of contractual liability with the insurance company, it could not be said that there was a transfer of moneys from the husband to the wife without consideration. In our view, there was consideration from the insurance company to the assessee but there was no consideration from the wife to the assessee which alone is relevant.
In the case of R. Dalmia (supra), the question was whether the insurance premia paid by the assessee amounted to a gift. The Court observed that to constitute a gift, there must be an immediate transfer of property which was the subject-matter of the gift and held that there was no gift. The case, therefore, only decides that the premium amounts in their original form were not gifted to the wife. However, here it is nobody's case that premia amounts have been transferred by the husband to the wife. The case is that the husband had transferred indirectly his assets in another form to the wife. Therefore, the decision in R.R. Sarma's case (supra) is not applicable to the present case.
13. In view of the above, we hold that the interest on the policy amount received by the wife is taxable in the hands of the husband under Section 64. The appeals are allowed.