Commissioner of Income-Tax, Madras v. C. M. Kothari, Madras (Dead), and After Him His Legal Representative

Judgment

2 s.c.R. · sui>R:E~E cbu1tr REPo:Rts COMMISSIONER OF INCOME-TAX, MADRAS C. M. KOTHARI, MADRAS (DEAD), AND AFTER HIM HIS LEGAL REPRESENT A TI VE (S. K. DAS, A. K. SARKAR and M. HIDAYATULLAH JJ.) Income '!'ax-Income from property in the name of wife-,- Money coming into the haw• of wife from husband iwirectlylVhether income of wife to be included into that of husband- "Transf<rred directly or indirectly to the wife," Meaning oflndiJn Income-tax Act, 1922 (11of1922), •· 16 (3) (a) (iii).· Messrs Kothari and Sons is a firm of stock brokers. The firm consisted of Shri C. M. Kothari and his two sons, Shri D. C. Kothari and Shri H. C. Kothari. The firm entered into an agreement for the purchase of a house and the earnest money was paid by it. Later on, the house was bought in the name of Mrs. C. M. Kothari, Mrs. D. C. Kothari and Shri H. C. Kothari. The house was bought for Rs. 90,000/- and both Mrs. C. M. Kothari and Mrs. D. C. Kothari received Rs. 30,000 each from the firm.

In the case of Mrs. C. M. Kothari, she got that amount in the form of birthday gift and Diwali gift from her son, D. C. Kothari. Mrs. D. C. Kothari also received Rs. 30,000 from the firm as a gift from Shri C. M. Kothari, h.er father-in-law. The Income-tax Officer assessed the income of Mrs. C. M. Kothari and Mrs. D. C. Kothari from the said house as the income of their husbands. The appeals of the assessees were dismissed by the Appellate Assistant Commissioner and the Tribunal. The Tribunal confirmed the finding of the Income Tax Officer that the two ladies had acquired their shares in the huuse out of the assets of their husbands indirectly transferred to them. Boweyer, the Tribunal did not hold that the transaction was benami. · The Tribunal referred the case to the High Court for opinion whether the income arising to Mrs. C. M. Kothari and Mrs. D. C, Kothari from the property arose out of the assets transferred indirectly by their husbands ·so as to attract the provisions of s.

16 (3) (a) (iii) of the Income-tax Act, 1922. The High Court answered .. the reference in. the negative, The Conunissioner of Income-tax, Madras, can1e to this·Court in appeal. )963 ·~:Mar-eh 2r;· ··1.:· r JJfJ c ..... iui..,,.J lnenu•ta, MUr&J C. M. K11U.i 532 SUPREME cotJRT REi>ORtS [1064] Vot. Held that the answer given by the High Court must be set uide and the reference made by the Tribunal must be answered in the affirmative. The object of law is to tax the income of the wife in the hands of the husband if the income of the wife arises to her from assets transferred to her by her husband. In the present ease, the son transferred the assets to hil mother and the father-in-law transferred his assets to his daughter-in·law. The term "indirectly" is intended to cover such tricks. If two transfers al"<' inter-connected and arc parts of the aame transaction in such a way that it can be said that a circuitous method has been adopted as a device to evade the implications of s. !6 (3) (a)

(iii), the case will fall within this section. In the present ease, the device is palpable and the two transferrers are so intimately connected that they cannot but be regarded as a part of a single transaction. ft was not successfully explained why the father-in-law made a big gift to his daughter-in-law and the son made an equally big gift to his mother. CIVIL APPELLATE JnusuICTION : Civil Appeals Nos. 34 to 36 of 1962. Appeals from the judgment and order dated March 25, 1958, of the Madras High Court in Case Referred No. 12 of 1954. K. N. Rajagopal Sa8tri and R. N. Sachthey, for the appellant. R. Gopa/,akrishnan, for the respondent. 1963. March 26. The Judgment of the Court was delivered by HIDAYAl'ULLAH J.- The High Court of Madras in a Reference under s.66 (1) of the Indian Income Tax Act, answered in the negative the following question:- "Whethcr there was material for the Appellate Tribunal to hold that the income arismg to Mrs. C.M. Kothari and Mrs. D. C. Kothari from the property arose indirectly out of the 2 S.C.R. assests transferred indirectly by their husbands so as to attract the provisions of s.16 (3)(a)(iii)."

In our opm10n, these appeals by the Commissioner of Income-tax, Madras, must be allowed. Messrs Kothari and Sons is a firm of stock brokers. In 194 7, the firm consisted 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, 194 7, the firm entered into 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 in the books of the firm to the accounts of the three partners as follows:- C. M. Kothari D. C. Kothari H. C. Kothari Rs.1,800 Rs.1,600 Rs.I,600 Total. Rs.5,000 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 the firm. Each of the two ladies paid to the firm a cheque of Rs.28,333-5-4. Mrs. C.1\1:. Kothari further paid a cheque of Rs.l,800, and Mrs. D.C. Kothari paid another cheque of Rs. 1600 Thus the two ladies paid one-third share of Rs.85,000 and the amounts which were respectively paid by their husbands as part of the earnest 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, because her h\isband had previously paid Rs.200 more than his sons. The share of the three vendees was however, shown to be one-third e<1ch, CommissitJIH• ef lncom1•lu, Madru C. M. Kolh11tl, Hii•J•tullah J, CQnitnisJiQntr of /n,ornt·l4'!, .ft}~IJ C. M. Kothari, l/id•Jai1dla~. J. The ladies issued the cheques on their accounts into which were paid by the firm certain amounts by cheques. Into Mrs. C.M. Kothari's account was paid an amount of Rs.2i,OOO which was debited on October 24, UH 7 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. :~,0()() was paid into 1\Irs. C. :VI. Kothari's account which was debited to the account of D. C. Kothari as a gift by him to his mother for Dcwuli. Similarly, on November I 3, I!J47 :\frs. D. C. Kothari's account with the bank was credited with a sum of Rs.:rn,ooo by a cheque issued by the firm.

This was debited to the account of C. M. Kothari and was shown as a gift by him to his 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 one case, and the father-in-law, in the other. In the assessment years 1948-49, 19!>0-iil and 1951-1952, the Income Tax Officer assessed the income from the one-third share of the house received by Mrs. C.M. Kothari as the income of her husband. Similarly, in the four assessment years 1948-49 to 1951-52, the income of l\1rs. D. C. Kothari from this house was assessed as the income of her husband. This was on the ground that because of the interchange of the money in the family, either the purchases were made by the donors benumi in the names of the donces, or alternatively, from asset5 transferred indirectly by the husband to the wife in each case.

The Income Tax Oflicer pointed out that the birthday of Mrs. C.M. Kothari had taken place earlier in the year and there was no occasion to give a birthday I?res.e~t to ~er several months later and on a date comc1dmg with the purchase of this proper! y. The Income Tax Officer also found ihat in the pa.st, the father-ip-law had never give!) such a big present to his daughter-in-law on Dewali and this time there was no special circumstance to justify it. The appeals of the assessee to the appellate Assistant Commissioner failed as also those filed before the Tribunal. The Tribunal, however, did not hold that the transaction was benami but confirmed the other finding that the two ladies had acquired their share in the house out of. assets of the husbands indirectly transferred to them. The Tribunal, however, stated a case for the opinion of the High Court, and the High Court answered the question in the negative.

As the question whether the two transactions were benami does not fall to be considered, the only question that survives is whether this case is covered by s.16 (3) (a) (iii). This section reads as follows:- "16(3). In computing the total income of any individual for the purpose of assessment, there shall be included- (a) So much of the income of a wife ...... of such individual as arises directly or indirectly- ( iii) From assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart;" The section takes into account not only transference of assets made directly but also made 111directly. It is impossible to state here what sorts are covered by the word 'indirectly', because such transfers may be made in different ways. It is argued that the first requisite of the section ii that th.e f!SSets rnustbe those of the husbapd anq 196' Commissioner of Income-taxJ Madr1s C. M. Kothari Hi<hy•tullall J. Cornmi.1jiontr af /r,.- 11mt·tax, A1adrar C. Al.

Koll1ari Jlidc1;•atullali J. that is not the case here. It is tiue that the section says that the assets must be those of the husband, but it does not mean that the same assets should reach the wife. It may be that the assets in the course of being transferred, may be changed deliberately into assets of a like value of another person, as bas happened in the present case. A chain of transfers, if not comprehended by the word 'indirectly' would easily defeat the object of the law which is to tax the income of the wife in the hands of the husband, if the income of the wife arises to her from assets transferred by the husband. 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 assrsts transferred to him by the husband.

It is next contended that even if chain transactions be included, then, unless there is consideration for the transfer by the husband, each transfer must be regarded as independent, and in the present case, the Department has not proved that the transfers by the son to the mother and by the father-in law to his <laughter-in-law were made as consideration for each other. We do not agree. It is not necessary that there should be consideration in the technical sense. If the two transfers arc inter-connected and arc parts of the same transaction in such a way that it can be said that the circuitous method bas been adopted as a device to evade implications of this section, the case will fall within the section. In this case, the device is palpable and the two transfers are so intimatelv connected that they cannot but be regarded as pa~ts of single transaction.

It has not been successfully explained why the father-in law made such a big, gift to his daughter-in-law on the .occasion of Diwali an? why the son made a ~lated gift, ~qually big, to Im mother on the occas10n of her birthday which took place several months before. These two gifts match each other as regards the amount. The 2 s.a.R. SUPRENIE COURT REPORTS High Court overlooked the clear implication of these fact as also the implication of the fact that though the three purchasers were to get one-third share each, Mrs. C. M. Kothari paid Rs. 200 more than the other two and that each of the ladies re-paid the share of earnest money borne by their respective husbands. An intimate connection between the two transactions, which were prima f acie separate, is thus clearly established and they attract the words of the section, namely, "transferred directly or indirectly to the wife". In our opinion, the High Court was in error in ignoring these pertinent matters.

The High Court also overlooked the fact that the purchase of the house at first was intended to be in the names of three partners of the firm. No evidence was tendered why there was a sudden change. It is difficult to see why the ladies were named as the vendees if they did not have sufficient funds of their own. They could only buy the property if some one gave them the money. 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 the assets to his mother, and the father-in law, to the daughterin-law, obviously failing to appreciate that the word 'indirectly' is meant to cover such tricks. The appeals must, therefore, succeed. The answer of the High Court is vacated, and the question, answered in . the affirmative.

The respondent shall bear the costs of these appeals as also the costs in the High Court. One hearing fee. Appeals allowed, Commissioner of lncome·tax, Ma1ras C. Af. Kothari. Hidayatullah J.