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Commissioner of Income-tax and Commissioner of Wealth-tax Vs. Motilal Ramswaroop - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Civil Income-tax Reference No. 66 of 1966 and D.B. Civil Wealth-tax Reference No. 36 of 1966
Judge
Reported in[1970]76ITR43(Raj)
ActsIncome Tax Act, 1922 - Sections 2(6C) and 3; Wealth Tax Act, 1957 - Sections 2 and 4(1)
AppellantCommissioner of Income-tax and Commissioner of Wealth-tax
RespondentMotilal Ramswaroop
Appellant Advocate S.C. Bhandari, Adv.
Respondent Advocate S.S. Didwania, Adv.
Cases ReferredChamberlain v. Commissioners of Inland Revenue
Excerpt:
- - no person who is a stranger to the family and does not possess a right to have the transaction defeated on other grounds (e......in a court of law to seek an appropriate relief by declaring the act void or voidable. under a void gift there is no passing of title from the donor to the donee, while under a voidable gift, there is such passing of title, but that title is defeasible under certain circumstances under appropriate proceedings brought in by the person interested in the property which has been gifted. in the instant case, there is no question that the amount of rs. 4,00,000 which was gifted has gone into the hands of the strangers and they had earned some income out of that amount of rs. 4,00,000. even if the gifts are treated as void, it is not the assessee who has earned any income out of the amount of rs. 4,00,000. under the income-tax act, tax is leviable under section 3 on the total income of the.....
Judgment:

Bhandari, C.J.

1. As D. B. Civil Income-tax Reference No. 66/66 and D. B. Civil Wealth-tax Reference No. 36/66 arise out of the same facts, they are disposed of by this single judgment.

2. We first take up D. B. Civil Income-tax Reference No. 66/66. The Income-tax Appellate Tribunal, Delhi Bench 'C' (hereinafter called 'the Tribunal'), has referred the following question for the opinion of this court under Section 66(1) of the Income-tax Act, 1922 (hereinafter called 'the Act'):--

'Whether, on the facts and in the circumstances of the case, the gift of Rs. 4 lakhs was voidable and as such the interest accruing on the aforesaid gifted amount did not accrue to the assessee family for income-tax purposes?'

3. The statement of the case submitted by the Tribunal shows that the assessee is a Hindu undivided family whose karta is Shri Ramswaroop. By a deed dated 25th February, 1956, Shri Ramswaroop gifted to the undermentioned persons the amounts noted against their names:

Rs.

1.

Shri Shankerlal (brother of Ramswaroop)

80,000

2.

ShriPrem Narain (son of Shankerlal)

40,000

3.

ShriSurajnarain (son of Shankerlal)

40,000

4.

ShriRameshchand (son of Shankerlal)

40,000

5.

ShriKishanswaroop (son of Motilal)

1,00,000

6.

Shri Ashok Kumar (son of Kishanswaroop)

50,000

7.

Shri Surendra Kumar (son of Kishanswaroop)

50,000

4,00,000

4. All these persons were members of another family which was at one time joint with the family of Ramswaroop. The assessee family was having transactions with the Bombay branch of the Hindu undivided family, Hazarimal Chhogalal, which was carrying on its business at Bombay. The credit balance of the assessee family in the books of account of the aforesaid Bombay branch was Rs. 5,59,251 on Diwali day of 1955. Shri Ramswaroop drew seven hundis in all amounting to Rs. 4,00,000 on Messrs. Hazarimal Chhogalal, Bombay in favour of the donees. On 23rd February, 1956, a sum of 4,00,000 was debited to the account of the assessee family and credited to the accounts of the donees in the account books of Messrs. Hazarimal Chhogalal, Bombay. The assessee was assessed as a Hindu undivided family for the assessment years 1957-58, 1958-59, 1959-60 and 1960-61. The Income-tax Officer concerned did not accept the aforesaid gift amounting to Rs. 4,00,000 on the ground that the karta of the assessee-family was not competent to make gifts of a substantially large amount to the donees. He therefore assessed the total income of the assessee after including the aforesaid sum of Rs. 4,00,000 and estimated amount of interest thereon of each of the above years. Appeals were preferred to the Appellate Assistant Commissioner, Udaipur, and the said officer called for a report from the Income-tax Officer as to the circumstances under which the gift had been made and also as to the real motive behind the gifts. After receiving the report, the Appellate Assistant Commissioner, Udaipur, decided the appeals in favour of the assessee. Appeals against the orders of the Appellate Assistant Commissioner were filed before the Tribunal by the department and the Tribunal directed that the aforesaid amount together with interest thereon for each of the above years be deleted from the respective assessments oh the ground that the Rajasthan High Court, in the case of Commissioner of Income-tax v. Brahamdutt Bhargava, [1962] 46 I.T.R. 387, has taken the view that the gifts made by the karta of an undivided Hindu family were not void. On the applications made by the Commissioner of Income-tax, the aforesaid question has been referred to this court for its opinion.

5. There is no dispute before us that the gifts were in fact made. But the question is whether the gifts were void in the eye of law and the interest accruing on the aforesaid gifted amount did not accrue to the assessee for income-tax purposes.

6. It has been laid down by their Lordships of the Privy Council in Hanuman Kamat v. Hanuman Mandur, [1891] I.L.R. 19 Cal. 123 that the alienation by a manager of a joint Hindu family was not necessarily void but was only voidable if objections were taken to it by the other members of the joint Hindu family. The Division Bench of the Lahore High Court in Imperial Bank of India, Jullundur v. Mt. Maya Devi, A.I.R. 1935 Lah. 867 has pointed out that on this point there is no distinction between sales and mortgages on the one hand and gifts on the other. We may in this connection refer to the following observations:

'Where however the gift is not for religious purposes, or consists of the whole or large portion of the joint family property, the transaction is voidable, but only at the instance of the other coparceners. No person who is a stranger to the family and does not possess a right to have the transaction defeated on other grounds (e.g., under Section 53, T.P. Act), has a locus standi to intervene and impugn it merely because it was in excess of the authority which the karta possessed to deal with it for family purposes.'

7. This case has been relied on in Brahamdutt Bhargava's case, [1962] 46 I.T.R. 387. Learned counsel for the department has relied on A. Basaviah Gowder v. Commissioner of Gift-tax, [1963] 49 I.T.R. 817 and Smt. Valluri Janakamma v. Commissioner of Gift-tax, [1967] 66 I.T.R 255. Brahamdutt Bhargava's case is binding on us and we do not feel any necessity for referring the case to a larger Bench, specially for the reason that in our view whether the gifts are void or voidable, the interest accruing on the gifted amounts did not accrue to the assessee for the purpose of income-tax. We may, however, point out that the terms 'void' and 'voidable' are often confused, and distinction between these two is not properly recognised. In Pollock on Contracts, page 6 (twelfth edition), this distinction has been truly and correctly pointed out as follows :

'The distinction between void and voidable transactions is a fundamental one, though it is often obscured by carelessness of language. An agreement or other act which is void has from the beginning no legal effect at all, save in so far as any party to it incurs penal consequences, as may happen where a special prohibitive law both makes the act void and imposesa penalty. Otherwise no person's rights, whether he be a party or a stranger, are affected. A voidable act, on the contrary, takes its full and proper legal effect unless and until it is disputed and set aside by some person entitled so to do.'

8. It must also be kept in mind that whether the act is void or voidable, it is only persons having some rights in the property affected by that act who can come in a court of law to seek an appropriate relief by declaring the act void or voidable. Under a void gift there is no passing of title from the donor to the donee, while under a voidable gift, there is such passing of title, but that title is defeasible under certain circumstances under appropriate proceedings brought in by the person interested in the property which has been gifted. In the instant case, there is no question that the amount of Rs. 4,00,000 which was gifted has gone into the hands of the strangers and they had earned some income out of that amount of Rs. 4,00,000. Even if the gifts are treated as void, it is not the assessee who has earned any income out of the amount of Rs. 4,00,000. Under the Income-tax Act, tax is leviable under Section 3 on the total income of the previous year of every individual, Hindu undivided family, company and local authority and of every firm or other association of persons or the partners of the firm or the members of the association individually. Inclusive definition of 'income' has been given in Section 2(6C) of the Act. The case before us does not fall within the inclusive definition of income. In the instant case, the entire sum of Rs. 4,00,000 had passed into the hands of other persons and they were earning income from that amount and not the assessee. It cannot be contended that the other persons who had earned the income from the amount of Rs. 4,00,000 were not liable to income-tax and the assessee who had not earned that income was liable to income-tax. The argument addressed to us is that if the gifts are void, then title to the amount of Rs. 4,00,000 remained vested in the assessee and, therefore, it was liable to pay income-tax. The Income-tax Act taxes the person whose income it is and not the person who may per chance have title to the property through which the income has been earned. If such an argument is accepted, a thief who had stolen an amount of rupees one lakh from a bank and had earned income therefrom would not be liable to pay income-tax on the income but the bank which had lost the amount of rupees one lakh would be liable to pay tax simply on the ground that the bank had title to the amount of rupees one lakh. Such are not the provisions of the Indian Income-tax Act. Learned counsel for the department has pointed out Section 16(3)(c) of the Act, but that section applies to altogether different situations. Lord Macmillan in Chamberlain v. Commissioners of Inland Revenue, [1943] 25 T.C. 317, 329 (H.L.), has clarified this position in the following observation :

'This legislation forms part of a code of increasing complexity beginning with the Finance Act, 1922, Section 20, designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce tax liability by means of settlements. Stated quite generally, the method consisted in the disposal by the taxpayer of part of his property in such a way that the income should no longer be receivable by him, while at the same time he retained certain powers over, or interests in, the property or its income. The Legislature's counter was to declare that the income of which the taxpayer had thus sought to disembarrass himself should, notwithstanding, be treated as still his income and taxed in his hands accordingly.'

9. This is not the case here. There is no doubt that in this case Shri Ramswaroop when he made the gift had transferred the amount of Rs. 4,00,000 to the donees without reserving any right in that amount of rupees four lakhs to the assessee or to himself. This being the situation, in our opinion, our answer to the question is that the interest accruing on the gifted amounts did not accrue to the assessee family for income-tax purposes on either view whether the gift of Rs. 4,00,000 was void or voidable.

10. The second reference No. 36/66 is by the same Tribunal under Section 27(1) of the Wealth-tax Act (hereinafter called 'the Act') and the question referred is as follows :

'Whether, on the facts and in the circumstances of the case, the gifts amounting to Rs. 4 lakhs effected by the karta of the assessee family in favour of separated members of the family were only voidable and as such the said amount together with the estimated interest thereon, ceased to be an asset of the assessee family for wealth-tax purposes ?'

11. For the reasons which we have given already, in our opinion, for purposes of wealth-tax, the amount of rupees four lakhs had ceased to be an asset of the assessee-family. Under Section 3 of the Wealth-tax Act, tax is chargeable on the net wealth mentioned therein. Net wealth has been defined in Section 2(m) as follows :

''net wealth' means the amount by which the aggregate value computed in accordance with the provisions, of this Act of all the assets, wherever located, belonging to the assessee on the valuation, date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than......'

12. In our opinion, in the instant case; the amount of rupees four lakhs which had been gifted by Shri Ramswaroop to the various donees referred to above did not remain in the hands of the assessee inasmuch as this entire amount of four lakhs had passed into the hands of the donees. It may be that the members of the assessee family may have a right to recover back those amounts under certain circumstances; but merely because of this, that sum cannot be treated as their asset of such tangible value as may attract the provisions of Section 3 of the Act for the purpose of assessment of wealth-tax. Learned counsel for the department has relied on Section 4(1)(a)(iv) of the Act. The relevant provision is as follows:

'In computing the net wealth of an individual, there shall be included, as belonging to that individual the value of assets which on the valuation date are held by a person or association of persons to whom such assets have been transferred by the individual otherwise than under an irrevocable transfer......'

13. In the instant case, it cannot be said that Shri Ramswaroop had not transferred the various amounts under an irrevocable transfer. It may be a different thing that such transfer was liable to be questioned by the members of the assessee family, but that would not make such transfer as a revocable transfer or not an irrevocable transfer. In our opinion, Section 4(1)(a)(iv) of the Act has no application to the instant case.

14. Our answer to the question, therefore, is that the amount of rupees four lakhs together with the estimated interest thereon ceased to be an asset of the assessee for wealth-tax purposes whether the gifts were void or voidable and that amount could not be taxed under the Wealth-tax Act.

15. Both the references are answered accordingly. We pass no order as to costs in both the references.


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