1. The High Court of Madras in a Reference under s. 66(1) of the IndianIncome Tax Act, answered in the negative the following question :-
2. In our opinion, these appeals by the Commissioner of Income-tax, Madras,must be allowed.
3. Messrs Kothari and Sons is a firm of stock brokers. In 1947, the firmconsisted of C. M. Kothari and his two sons, D. C. Kothari and H. C. Kothari.Their respective shares were 6 : 5 : 5. On October 7, 1947, the firm enteredinto an agreement for the purchase of a house in Sterling Road, Madras, for Rs.90,000, and the same day paid an advance of Rs. 5,000. This sum was debited inthe books of the firm to the accounts of the three partners as follows :-
C. M. Kothari Rs. 1,800
D. C. Kothari Rs. 1,600
H. C. Kothari Rs. 1,600
Total. Rs. 5,000
4. The transaction was completed on October 24, 1947. The sale deed,however, was taken in the names of Mrs. C. M. Kothari Mrs. D. C. Kothari and H.C. Kothari. The balance of the consideration was paid to the vendors by thefirm. Each of the two ladies paid to the firm a cheque of Rs. 28,333-5-4. Mrs.C. M. Kothari further paid a cheque of Rs. 1,800, and Mrs. D. C. Kothari paid anothercheque of Rs. 1600. Thus the two ladies paid one-third share of Rs. 85,000 andthe amounts which were respectively paid by their husbands as part of theearnest money. H. C. Kothari was debited with a further sum of Rs. 28,333-5-4.In this way, Mrs. C. M. Kothari paid Rs. 200 more than the other two, becauseher husband had previously paid Rs. 200 more than his sons. The share of thethree vendees was however, shown to be one-third each.
5. The ladies issued the cheques on their accounts into which were paid bythe firm certain amounts by cheques. Into Mrs. C. M. Kothari's account was paidan amount of Rs. 27,000 which was debited on October 24, 1947 to D. C. Kothari.It was stated to be a birthday gift by him to his mother. On November 13, 1947,another amount of Rs. 3,000 was paid into Mrs. C. M. Kothari's account whichwas debited to the account of D. C. Kothari as a gift by him to his mother forDewali. Similarly, on November 13, 1947 Mrs. D. C. Kothari's account with thebank was credited with a sum of Rs. 30,000 by a cheque issued by the firm. Thiswas debited to the account of C. M. Kothari and was shown as a gift by him tohis daughter-in-law. In this way both the ladies received from the firm Rs.30,000 which was the exact one-third share of the consideration of Rs. 90,000,but the amount was not paid by their respective husbands, but by the son in onecase, and the father-in-law, in the other.
6. In the assessment years 1948-49, 1950-51 and 1951-52, the Income TaxOfficer assessed the income from the one-third share of the house received byMrs. C. M. Kothari as the income of her husband. Similarly, in the fourassessment years 1948-49 to 1951-52, the income of Mrs. D. C. Kothari from thishouse was assessed as the income of her husband. This was on the ground thatbecause of the interchange of the money in the family, either the purchaseswere made by the donors benami in the names of the donees, to alternatively,from assets transferred indirectly by the husband to the wife in each case. TheIncome Tax Officer pointed out that the birthday of Mrs. C. M. Kothari hadtaken place earlier in the year and there was no occasion to give a birthdaypresent to her several months later and on a date coinciding with the purchaseof this property. The Income Tax Officer also found that in the past, thefather-in-law had never given such a big present to his daughter-in-law inDewali and this time there was no special circumstance to justify it. Theappeals of the assessee to the appellate Assistant Commissioner failed as alsothose filed before the Tribunal. The Tribunal, however, did not hold that thetransaction was benami but confirmed the other finding that the two ladies hadacquired their share in the house out of assets of the husbands indirectly transferredto them. The Tribunal, however, stated a case for the opinion of the HighCourt, and the High Court answered the question in the negative.
7. As the question whether the two transactions were benami does not fall tobe considered, the only question that survives is whether this case is coveredby s. 16(3)(a)(iii). This section reads as follows :-
(a) So much of the income of awife........ of such individual as arises directly or indirectly -
(iii) From assets transferreddirectly or indirectly to the wife by the husband otherwise than for adequateconsideration or in connection with an agreement to live apart;'
8. The section takes into account not only transference of assets madedirectly but also made indirectly. It is impossible to state here what sortsare covered by the word 'indirectly', because such transfers may be made indifferent ways.
9. It is argued that the first requisite of the section is that the assetsmust be those of the husband and that is not the case here. It is true that thesection says that the assets must be those of the husband, but it does not meanthat the same assets should reach the wife. It may be that the assets in thecourse of being transferred, may be changed deliberately into assets of a likevalue of another person, as has happened in the present case. A chain oftransfers, if not comprehended by the word 'indirectly' would easily defeat theobject of the law which is to tax the income of the wife in the hands of thehusband, if the income of the wife arises to her from assets transferred by thehusband. The present case is an admirable instance of how indirect transferscan be made by substituting the assets of another person who has benefited tothe same or nearly the same extent from assets transferred to him by thehusband.
10. It is next contended that even if chain transactions be included, then,unless there is consideration for the transfer by the husband, each transfermust be regarded as independent, and in the present case, the Department hasnot proved that the transfers by the son to the mother and by the father-in lawto his daughter-in-law were made as consideration for each other. We do notagree. It is not necessary that there should be consideration in the technicalsense. If the two transfers are inter-connected and are parts of the sametransaction in such a way that it can be said that the circuitous method hasbeen adopted as a device to evade implications of this section, the case willfall within the section. In this case, the device is palpable and the twotransfers are so intimately connected that they cannot but be regarded as partsof single transaction. It has not been successfully explained why the father-inlaw made such a big, gift to his daughter-in-law on the occasion of Diwali andwhy the son made a belated gift, equally big, to his mother on the occasion ofher birthday which took place several months before. These two gifts match eachother as regards the amount. The High Court overlooked the clear implication ofthese fact as also the implication of the fact that though the three purchaserswere to get one-third share each, Mrs. C. M. Kothari paid Rs. 200 more than theother two and that each of the ladies re-paid the share of earnest money borneby their respective husbands. An intimate connection between the twotransactions, which were prima facie separate, is thus clearly established andthey attract the words of the section, namely, 'transferred directly ofindirectly to the wife'.
11. In our opinion, the High Court was in error in ignoring these pertinentmatters. The High Court also overlooked the fact that the purchase of the houseat first was intended to be in the names of three partners of the firm. Noevidence was tendered why there was a sudden change. It is difficult to see whythe ladies were named as the vendees if they did not have sufficient funds oftheir own. They could only buy the property if some one gave them the money. Itis reasonable to infer from the facts that before the respective husbands paidthe amounts, they looked up the law and found that the income of the propertywould still be regarded as their own income if they transferred any assets totheir wives. They hit upon the expedient that the son should transfer theassets to his mother, and the father-in-law, to the daughter-in-law, obviouslyfalling to appreciate that the word 'indirectly' is meant to cover such tricks.
12. The appeals must, therefore, succeed. The answer of the High Court isvacated, and the question, answered in the affirmative. The respondent shallbear the costs of these appeals as also the costs in the High Court. One hearingfee.
13. Appeals allowed.