Commissioner of Wealth-tax vs T. Saraswathi Achi

Sethuraman, J.—These are references u/s 27(1) of the W.T. Act, 1957. The following questions have been referred :

Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the bonus shares in the hands of the minor

daughter of the assessee cannot be considered as assets transferred by the assessee either directly or indirectly u/s 4(1)(a)(ii) of the Wealth-tax

Act, 1957 ?

Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in holding that the value of the bonus shares issued to

the minor daughter of the assessee should be excluded in computing the net wealth of the assessee ?

The assessee gifted to her minor daughter 10,000 shares in M/s. Rajendra Mills Ltd. on September 22, 1960. During the course of the year

ending March 31, 1969, M/s. Rajendra Mills Ltd. issued bonus shares as a result of which the minor daughter came to own another 10,000

shares. The value of the entire 20,000 shares was included in the total wealth of the assessee by invoking Section 4(1)(a)(ii) of the W.T. Act. The

AAC, on appeal, following the judgment of the Bombay High Court in Popatlal Bhikamchand Vs. Commissioner of Income Tax, Bombay City, ,

held that the value of the bonus shares cannot be included in the chargeable wealth of the assessee. The WTO took the matter on further appeal to

the Tribunal and the Tribunal held that the bonus shares in the hands of the minor daughter could not be regarded as assets transferred by the

assessee either directly or indirectly so as to fall within the ambit of Section 4(1)(a)(ii) of the W.T. Act and that the AAC was, therefore, justified in

excluding the value of the bonus shares issued to the minor daughter. The questions extracted already have been referred as arising out of this

order of the Tribunal.

Section 4(1)(a)(ii) of the W.T. Act, runs as follows :

(1) In computing the net wealth of an individual there shall be included, as belonging to that individual-

(a) the value of assets which on the valuation date are held--......

(ii) by a minor child, not being a married daughter of such individual, to whom such assets have been transferred by the individual, directly or

indirectly, otherwise than for adequate consideration.

In order to come within the scope of this provision, there must be a transfer by the assessee to the minor child otherwise than for adequate

consideration. There is no dispute that, in the present case, the original transfer of 10,000 shares on September 22, 1960, was a gift, in the sense,

that the transfer was without consideration. There is no dispute also about the assessability of the value of those shares in the hands of the assessee.

The question before us relates to the bonus shares issued during the year ended March 31, 1969. The language of the provision is not at all

satisfied in the present case with reference to the bonus shares. Though the original shareholding is the basis or gives a right to the shareholder to

get the bonus shares, still what is received by the shareholder as bonus share is not by transfer from the original transferor of the gifted shares but

by allotment by the company itself. As a result of the shareholding in the company, the minor child had acquired a right to the allotment of further

shares in accordance with the resolution of the company. The very concept of transfer implies that the transferor was in a position to transfer the

said shares. In the present case the transferor, according to the department, is the assessee. These shares were never allotted to her and, therefore,

she was never in a position to transfer the shares in favour of her minor child.

The point which arises in this case is to some extent covered by a decision of the Bombay High Court in Popatlal Bhikamchand Vs.

Commissioner of Income Tax, Bombay City, . That case arose u/s 16(3)(a)(iv) of the Indian I.T. Act, 1922. The assessee in that case held 350

shares in a company. He transferred those shares to his minor son by way of gift on December 28, 1946. The transferor was a director of that

company. On August 9, 1947, the directors passed a resolution as a result of which the minor son came to be allotted 744 bonus shares based on

the original holding of 350 shares. The question was whether the dividend income from the 744 bonus shares allotted to the minor son could bs

included in the total income of the father u/s 16(3)(a)(iv) of the Indian I.T. Act, 1922. Shah J., then a judge of the Bombay High Court, in

delivering the judgment of the court, observed at page 579 as follows :

The assets transferred by the assessee were 350 shares. The bonus shares were in the hands of the assessee''s minor son undoubtedly an

accretion to the assets transferred, but they could not be regarded as '' assets transferred '' by the assessee. Mr. Joshi, who appears on behalf of

the department, contends that the dividend income from the bonus shares in the hands of the minor child is income which arose indirectly from

assets transferred by the assessee and is liable to be included in computing the total income of the assessee for the purpose of assessment. But, in

our judgment, the source of the dividend income from the bonus shares is not the assets transferred but the accretion thereto ; and that income

cannot be regarded as arising even indirectly from the assets transferred by the assessee. The Legislature has not by enacting Section 16(3)(a)(iv)

sought to tax in the hands of the assessee income arising from accretions to the assets transferred by him to his minor children.

Modifying the observations to suit wealth-tax, it can be stated that the Legislature has not, by enacting Section 4(1)(a)(ii), sought to tax in the

hands of the assessee the accretions to the assets transferred by him. The accretions by their nature arise only subsequent to the transfer. In this

case, the transfer took place nine years earlier to the bonus issue, and the accretions by way of bonus shares came to be allotted long after. There

is no question of transfer of such shares either directly or indirectly by the assessee. Even though an indirect transfer is taxable, the existence of a

transfer even in such a case is necessary. That condition is lacking in this case, because the asset was never in the hands of the transferor. The asset

is traceable only to the company. It cannot be a transferor and is not also the assessee here.

The learned standing counsel drew our attention to the decision of this court in J.K. Sayani Vs. Commissioner of Income Tax, Madras, . In that

case, on the dissolution of a partnership, it was agreed that the assessee''s eldest brother should continue to carry on the business with such

partners as he liked. It was also agreed that the sum of Rs. 97,329, which stood to the credit of the assessee, should be retained in the business

and on the retirement of the assessee, this amount should be transferred to the credit of the assessee''s minor son. A new partnership deed was

executed a few days later under which the assessee''s brother admitted the assessee''s minor son to the benefits of the partnership and allotted to

him a 3 annas share which the assessee had in the old partnership. It was conceded by the assessee that there was a transfer of Rs. 97,329 by him

to his son and that the interest paid to his son by the new firm on the amount so transferred could be included in the income of the assessee u/s

16(3)(a)(iv) of the Indian I.T. Act, 1922. But, he contended that the share income of the son in the new firm could not be so included as the share

was not an asset transferred by the assessee to his minor child. It was held that the share interest in the new firm was an asset which was

transferred by the assessee to his minor son though the transfer was effected by indirect means. The wording of Section 16(3)(a)(iv) was found to

be wide enough to cover the operations of this kind.

During the course of arguments in that case, reliance was placed on the decision of the Bombay High Court in Popatlal Bhikamchand Vs.

Commissioner of Income Tax, Bombay City, . After referring to what was decided in that case, the learned judges observed that they doubted the

applicability of this decision to the facts before them. They also added that, without in any way differing from the conclusion reached by the learned

judges of the Bombay High Court, they were not sure whether the expression "" directly or indirectly "" which occurs more than once in the relevant

provision has not the effect of bringing even the income arising from such accretions to the original asset that was transferred within the scope of the

provision. However, they clearly pointed out : ""But that apart, if we hold that the asset, viz., the share of the assessee in the firm, was an asset that

was transferred to the minor, the conclusion must necessarily follow that the income arising from that share is liable to be included in the taxable

income of the assessee "".

This decision turned on the facts of the particular case in which it was found that there was transfer of the asset held by the father to the minor

son. We do not consider that the learned judges either doubted or differed from the decision of the Bombay High Court. As they have themselves

observed, they were not differing from the conclusion reached by the learned judges of the Bombay High Court. To say that the Bombay decision

was doubted or dissented from is contrary to the court''s clear pronouncement. In fact, in the case before this court, the question as to what should

be the tax liability in respect of the accretion had not to be gone into. There is no transfer of the bonus shares by the assessee here.

The result is, the questions referred are answered in the affirmative and in favour of the assessee. The assessee will be entitled to costs.

Counsel''s fee Rs. 500. One set.