1. This group of cases has to be considered, in our judgment, in the gross and in a groupal sense.
2. There was a partnership concern called 'Lakshmi Finance Corporation', Vellore, in which there are as many as nine partners by the names of (1) Ranganathan, (2) Manner, (3) Balaraman, (4) Radhakrishnan, (5) Padmakumar, (6) Govardhan Chetty, (7) Venugopal Chetty, (8) Parankusan, and (9) Sripathi. Some of them are partners in their own right; some of them, for instance, Govardhan Chetty, Venugopal Chetty and Sripathi, are said to represent their respective joint family interests. All of them are married and have children, including minor children. All the partners have capital accounts in the partnership in which amounts stand to their respective credit. Early in January, 1970, within a duration of less than a week, some events happened in this partnership firm, the tax implications of which are the main concern of this group of income-tax references. Between January 1 and January 5 of that year, a number of entries were passed in the capital accounts of the partners, apparently on the joint instructions of the partners. It would be difficult to explain those entries otherwise than as the product of a consensual decision-making by the partners sitting together, having regard to the nature of the entries made in the books, the proximity of the entries to each other and the precise amount involved under each of the entries. The upshot of all these account entries was that the minor children of seven partners and the respective wives of two other partners obtained gratuitously sums of Rs. 10,000 each, which were immediately credited in their respective names in the books of the partnership. On the basis of these credits, which were regarded as deposits effected by the transferees concerned, the partnership firm paid interest to the minor children and the wives, respectively, which accrued on the principal sums of Rs. 10,000 each.
3. How these transfer entries look from an overall perspective would be clear from the following chart which we draw up to delineate graphically the facts found in the Tribunal's statement of the case :
C. R. Ranganathan (individual) - to Chandrakumari, wife of M. Padmakumar (individual).
Chandrakumari, wife of M. Padmakumar (individual) - to C. P. Govardhan Chetty, son of Prasad (HUF).
C. P. Govardhan Chetty, son of Prasad (HUF) - to Padmavathi, wife of S. Mannar (individual).
Padmavathi, wife of S. Mannar (individual) - to K. V. Balaraman, son of Chakrapani (individual).
K. V. Balaraman, son of Chakrapani (individual) - to C. V. Govindarajulu, son of C. Venugopala Chetty (HUF).
C. V. Govindarajulu, son of C. Venugopala Chetty (HUF) - to V. R. Radhakrishnan, son of Nandakumar (individual).
V. R. Radhakrishnan, son of Nandakumar (individual) - to Pratap, son of C. P. Parankusan (individual).
Pratap. son of C. P. Parankusan (individual) - to Sripathi, son of Sridhar (HUF).
Sripathi, son of Sridhar (HUF) - to Bhaskaran, son of C. R. Ranganathan.
4. The transfer of Rs. 10,000 by each of the partners concerned was claimed by him to be a genuine transfer intended for the benefit of the transferee concerned. It was accordingly urged that the interest credited by the partnership firm to each of the transferees must be separately assessed as the individual income of the transferee concerned. The ITO, however, took a global view of the transfer entries as a whole. Indeed, it was perhaps not possible for him to take any other view, considering that all the transfers, by means of account entries, were made in the books of the partnership firm between January 1, 1970, and January 5, 1970, and with the further striking feature that the subject-matter of transfer in every case was the precise amount of Rs. 10,000. The ITO studied not only each and every one of the transfers as respects their individual thrust, but also the other characteristics of the entries looked at as a whole, including the relationship of the transferors, on the one side, and the transferees, on the other. The ITO found that irrespective of the formal positioning of parties under each of the transfers, the ultimate destination of the amount of Rs. 10,000 each clearly was either the minor child of a partner or the wife of a partner, as the case may be. As a result of the study of the entries, the ITO observed, generally, that the gifts in each case were found to have been made only to facilitate the father or the husband of the recipient, as the case may be, to make a similar gift to the minor child or the wife of another partner.
5. On these findings and observations, the ITO applied the provisions of s. 64 of the I.T. Act, 1961, holding that the interest income derived from the deposit of Rs. 10,000 in the case of each minor child of a partner or in the case of the wife of a partner has got to be clubbed in the total income of the respective partner concerned, being the parent, or the husband, as the case may be.
6. We may observe that, while in the case of all but two partners, this was the general pattern of the assessments pursued by the ITO for applying the provisions of s. 64 of the Act, an exception was made in the case of two partners, viz., Govardhan Chetty and Venugopal Chetty. These two partners claimed to represent their respective joint families in the partnership and hence their share of profits from the partnership was being assessed every year as the income of their respective joint families. In the context of these facts and the mode of treatment of the share income of these two partners, the ITO was disposed to hold that the transfer of Rs. 10,000 by each of them must be regarded as void transfers, considering that the fund from out of which these transfer entries were made, namely, the credit balance in the capital account of the firm, was admittedly part of the joint family estate of the respective partners. The officer proceeded on the footing that the gifts of Rs. 10,000 each from the joint family funds to strangers of the family, without any apparent justification therefor, and without regard either for the size of the family estate of for the reasonableness of the gifts, must be regarded as void gifts. Given the position that the gifts of Rs. 10,000 each in these cases were void, as gifts effect out of joint family funds, the logical conclusion for the ITO to take was to tax the interest on the gifted amounts in the hands of the transferor family. In this way, no necessity arose for the officer to invoke s. 64 of the Act in the case of these two partners in question as respects their respective transfers of Rs. 10,000 to the minor children or wives of other partners. The effect was the same in these two cases in terms of tax liability as it was in the case of the other individual partners who had made similar transfers of Rs. 10,000 each to the minor children or the wives of the other partners.
7. All the partners whose assessments were completed by the ITO in the manner aforesaid by invoking the provisions of s. 64 of the Act for clubbing the interest on Rs. 10,000 along with their own other income appealed against their respective assessments. They objected to the inclusion in the assessments of each of them of the income of the other partner's minor children and their wives on the score that there was no transfer by them either directly or even indirectly of the sum of Rs. 10,000 in favour of those persons. The AAC, however, dismissed the appeals and confirmed the assessments. On further appeal by the partners concerned, the Tribunal reversed the decision of the ITO as confirmed in appeal.
8. In the course of their consolidated order in all these cases, the Tribunal recorded a finding that the transfers effected by each of the partners of Rs. 10,000 in January, 1970, were genuine transfers. Besides, in the case of transfers by partners, who did not represent their respective joint families in the partnership, the Tribunal further held that the amounts gifted were valid gifts. The Tribunal, however, observed that in regard to the gifts of Rs. 10,000 each by the two partners, viz., Govardhan and Venugopal, the gifts should be regarded as invalid considering that they owned their position as partners in the firm by virtue of their being members of the joint families and by virtue of bringing into the partnership the funds of their respective families. The Tribunal held that the gift by Govardhan to the wife of another partner, and also the gift by Venugopal to the minor son of another partner must be held to be void gifts since the funds gifted in either case must be regarded as gifts of joint family funds. Having found that these two gifts of Rs. 10,000 each were void gifts, amidst the rest of the gifts, the Tribunal held that the provisions of s. 64 of the Act cannot be pressed into service, for the purpose of clubbing in the hands of transferor partners, the income derived by their respective minor children and wives. The Tribunal apparently accepted the position that the transfer entries made in the partnership accounts at the instance of the partners represented cross-gifts, if considered from the point of view of their inter-relationship. However, the Tribunal expressed the view that since two of these gifts, being gifts of joint family funds, were invalid, the entire gamut of the transactions put through by the medium of the account entries cannot be regarded as falling within the mischief of s. 64 of the Act. The cross-gifts according to the Tribunal were not exhaustive, but left gaps. In this view, the Tribunal set aside such of the assessments as were made by the ITO by applying the provisions of s. 64.
9. Aggrieved by the order of the Tribunal, the Department have come on reference before this court obtaining a stated case from the Tribunal and raising the following question if law :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the interest income assessed under section 64 of the Income-tax Act, 1961, in the hands of the assessee for the assessment year 1971-72
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that there was no indirect transfer of Rs. 10,000 by the assessee to his minor son or the wife, as the case may be, within the meaning of section 64 of the Income-tax Act, 1961 ?'
10. Although, as a matter of composition, there are two questions of law before us, the one and only issue for our decision is whether there had been indirect transfers by each of the partners concerned of Rs. 10,000 each to his minor son or wife, as the case may be, within the meaning of s. 64 of the Act. To this question, the answer is fairly obvious. There can be no controversy either about the identical quantum of the transfers, or about the proximity of the transfers in point of time to each other, or about the absence of consideration for the transfers, or about the relationship of the transferors and the transferees. Nor is there any about the general pattern or scheme and direction of all these transactions inter se. Indeed, as we earlier indicated, there is not much of a controversy on the point that the transactions are all cross-transfers or, rather, a series of inter-related transfers so devised that not one of them is a direct transfer by a partner to his minor child or wife but the net result of all these transfers is that the minor child or wife of each partner, as the case may be, is the recipient of a sum of Rs. 10,000 without consideration.
11. As to how facts of this kind have to be looked at in the context of s. 64 of the Act, we have the leading decision of the Supreme Court in CIT v. Kothari : 49ITR107(SC) . That was a case where two contemporaneous gifts of near equal sums of money were so arranged that one of them was by the son to the mother and the other by the father-in-law to the daughter-in-law. The question before the Supreme Court was whether, in the events that happened, the provisions of s. 16(3)(a)(iii) of the Indian I.T. Act, 1922, can be invoked on the ground that the transfers in question were indirect transfers of assets held by the father and the son, respectively. When the matter was before this court on reference, the learned judges who heard the case considered the transfers to be cross-transfers both by the father and by the son, and on that point, the learned judges had no two opinions. But they took the view that cross-transfers by themselves, with the only additional fact that they were virtually simultaneous, could not mean that each transfer constituted the consideration for the other or that the transactions were mutual transfers in every respect. The learned judges further observed that there must be not only proof of the mutuality of the transactions, but also material to show that one transfer constituted the consideration for the other. The learned judges expressed their unwillingness to regard the cross-transfers per se as constituting, in substance, a single transaction, in the absence of the other indications. The learned judges accordingly ruled out the application of s. 16(3)(a)(iii) of the Act. On appeal by the Department, however, when the matter reached the Supreme Court, they disagreed with the decision of this court. They held most emphatically that these transfers were indirect transfers within the mischief of the section. They observed that, even if the assets, in the course of being transferred, were changed deliberately into assets of a like value of another person, the section would still have application. A chain of transfers, according to the learned judges, must be comprehended by the expression 'indirectly' occurring in the section. Otherwise, they said it would be easy to defeat the object of the law which was to tax the income of the wife in the hands of the husband, where the income of the wife arises from assets transferred by the husband directly or indirectly. The learned judges further held that, for the purpose of rendering a legitimate finding about the transfers of assets in favour of a wife or minor child being indirect transfers, it was not necessary for the Department to prove that the transfer in the one case provided the consideration for the other. The learned judges observed that it was not necessary at all that should be consideration in the technical sense. Having considered the various aspects of indirect transfers in favour of wives and minor children, they laid down the substance of the provision in s. 16(3)(a)(iii) in the following words (p. 111 of 49 ITR (SC)) :
'If the two transfers are inter-connected and are parts of the same transaction in such a way that it can be said that the circuitous method has been adopted as a device to evade implications of this section, the case will fall within the section.'
12. Proceeding to address themselves to the facts of the case before them, the learned judges made the following further observations (p. 110) :
'The present case is an admirable instance of how indirect transfers can be made by substituting the assets of another person who has benefited to the same or nearly the same extent from assets transferred to him by the husband.'
13. In yet another passage, the learned judges observed (p. 111) :
'It is reasonable to infer from the facts that before the respective husbands paid the amounts, they looked up the law and found that the income of the property would still be regarded as their own income if they transferred any assets to their wives. They hit upon the expedient that the son should transfer assets to his mother, and the father-in-law to the daughter-in-law, obviously failing to appreciate that the word 'indirectly' is meant to cover such tricks.'
14. With respect, the Supreme Court's exposition of the law as well as the exposure of the fact-patterns in that case cannot be bettered either in language or in treatment. Making only minimal verbal amendments, the observations in Kothari's case : 49ITR107(SC) , can be adopted as our own and be made to fit in with the facts of the present case to perfection.
15. Mr. Janakiraman, learned counsel who argued the case for the assessee, submitted that the ruling in Kothari's case : 49ITR107(SC) , cannot be applied to the facts of the present case. We do not agree. In Kothari's case : 49ITR107(SC) , the transfers were pithily described as 'cross-gifts', because there were two gifts, one by the father-in-law to the daughter-in-law and the other by the son to the mother. In the present case, the method may be somewhat more circuitous, but that does not make the conclusion any different. The partners who were all seriously concerned both about reducing the tax effect, and the means of avoidance to be adopted therefor, only had to make a wider detour than what the Kothari's did, in order to arrive at the desired end or destination. The difference between the two cases is, therefore, purely one of degree. Instead of two plain cross-gifts, which the Kotharis thought sufficient, what we have in this case are cross-gifts, which might be regarded as a mark of further sophistication on the part of the individuals concerned, or rather, of their tax advisers. That is all. We may perhaps invent a catchphrase for this kind of tax device and say that this is a case of 'criss-cross-gifts', and not merely cross-gifts. For, that is the picture presented by the graphic representation we have rendered of the facts of the case in an earlier paragraph of this judgment.
16. Mr. Janakiraman urged that there was no unbroken pattern, or scheme, of cross-transfers in the present case which would enable the application of s. 64. He said that even though it is not the law that each cross-transfer must act as the consideration for the other, it would yet be necessary for purposes of s. 64 that the chain of transfers must be perfect and there should be no missing link. Learned counsel pointed out that the general result in this case can be accepted as forming a single pattern or a single transaction brought about by all the partners, only if it could be held that all the transfers, without exception, were not only genuine, but valid as well. Learned counsel pointed out that while there were as many as nine transfers by the partners concerned, in the case of three transfers, at least, the Department itself has accepted the position that they were void, involving as they did, gifts made of joint family funds to strangers to the families. According to Mr. Janakiraman, the invalidity of the three cases of joint family funds being regarded as associated operations, as forming a single integrated transaction. Learned counsel stressed in argument the idea that, where a transfer is held to be void or invalid, there is no transfer at all in the eye of the law. If there is no transfer in this sense, learned counsel added, the necessary link is absent in that regard, to bring about a perfect circle of cross-transfers.
17. We have considered the submissions of the assessees' learned counsel, but we do not feel persuaded to hold that the circumstances point out by him in any way call for the application of a principle different from that applied : in Kothari's case : 49ITR107(SC) . The whole approach of the Supreme Court to a provision of this kind shows that the section did not demand that transfers, in order to be indirect, or a chain of transfers in order to fall within the mischief of s. 64, must in every case be a perfect, unbroken, circle of cross-transfurs of identical amounts effected simultaneously. What has been stressed by the Supreme Court is that, if on an overall impression of the facts, it appears that the transfers of assets for inadequate consideration are all inter-connected and serve as a circuitous method, or device, to evade the implications of s. 64 of the Act, then, the requirements of an indirect transfer spoken of by that section are duly fulfilled. We do not, therefore, think it matters much in the assessment of the situation as a whole in this three out of nine transfers might, for some reason or other, be regarded as invalid by Hindu jurists or even courts.
18. We further think that the plea of invalidity of three out of the gamut of nine transfers in this case has been overworked in argument by learned counsel for the assessees. It would appear that this contention has been addressed only for arguments' sake. For, it has never been suggest by the assessees that the transfers, even under the so-called invalid transfers, do not hold, retain, or enjoy, the amount of Rs. 10,000 each standing in their names and to their credit in the books of the firm. On the contrary, each of them is a regular recipient of the interest being credited by the firm on the sum of Rs. 10,000. We are disposed to think that the aspect of invalidity of two or three of the gifts of joint family funds invested in the firm has been put forward only for the limited purpose of making it appear that there are missing links in the chain of cross-transfers effected by the partners. If we follow the approach made by the Supreme Court in Kothari's case : 49ITR107(SC) , we may even legitimately observe that the two or three transfers by the Hindu joint families have interposed or interspersed amongst the various gifts only to give the illusion that the circle is not perfect, and there are no indirect transfers. This does not mean, to use the words of the Supreme Court, that the method is not any the less 'circuitous' or the whole device is not any the less a 'trick' to circumvent the statutory provision.
19. The question of law formulated in these reference begin with the familiar words 'whether, on the facts and in the circumstances of the case...'. The concatenation of circumstances in this case is such that no reasonably minded Tribunal, which has a decent respect for facts, can come to the conclusion that there was no gift at all, even indirectly, by each partner to his wife or minor son, by the simple expedient of each partner giving a gift to the wife or minor son, as the case may be, of some other partner. There is a saying that in whatever manner you throw a cat, it will come down on all fours. Similarly, in this case, whichever way we go about the facts, we land on a number of equivalent gifts of Rs. 10,000, each to the wife or minor child of each partner, and find, at the same time, on the same landing ground, as it were, each partner being out of pocket by Rs. 10,000 without a quid pro quo. What are we to make of these transactions when judged from their total effect The answer is, we only have to ignore the utter unnaturalness of the transactions to arrive at the result. The expression 'directly or indirectly' occurring in the section only emphasise the need to clear our minds of cant and artificialities. Look at the way the gifts were made. Not only were they made to other people's children, but some of them were made to other people's wives. In any place, excepting in a tax court, gifts to other people's wives, even if they are wives of co-partners, would raise a host of questions and not a few eye-brows, excepting when there is an understanding nod, 'Ah, it is all for purposes of income-tax'. The ITO saw the facts with a layman's eyes, which was the correct way to look at them. The Tribunal for their part, however, got involved in the convolution of the Mitakshara law of gifts and brought to bear a dry and unreal legalistic approach to the application of s. 64, which the provision does not call for, if we understand Kothari's case : 49ITR107(SC) aright.
20. The result is, our answer must be in favour of the Revenue on both the questions of law before us. The reference is accordingly answered. The assessee will pay the costs of the Department. Counsel's fee Rs. 500 one set.