N. Kumara Rao vs Commissioner of Income Tax

K. Ramaswamy, J.—The two questions referred are as follows :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that there was transfer of funds by the assessee to his wife for the construction of house property as contemplated by section 64 of the Income Tax Act, 1961, or not ?

(2) If the answer to the above is affirmative, whether the Tribunal was justified in apportioning the income arising out of the said property in the ration of 1 : 3 ?"

The admitted facts are as follows : Smt. Indira, wife of the assessee, purchased a plot of land at Himayat Nagar and constructed the house bearing No. 3-6-723. The cost of the site is Rs. 10,000. The expenditure incurred for the construction is Rs. 86,502. In total, Rs. 96,502 was spent for the construction of the house. Out of this, it is found by the Tribunal that the assessee contributed a sum of Rs. 34,500. The income derived from the house was determined by the Income Tax Officer at Rs. 9,548. In view of the contribution made by the assessee, by exercise of the power u/s 64(1)(iv) of the Income Tax Act, 1961 (43 of 1961) (for short "the Act"), the income was apportioned in the ratio of 1 : 3 and 3/4ths of the income in the hands of the assessee was assessed. On that basis, at the instance of the Revenue, the Tribunal has referred the above two questions.

The first question, therefore, is, what is the amount which the assessee contributed in the construction of the house ? The Tribunal, as a fact-finding authority, has recorded a finding that the assessee contributed Rs. 34,500. Though Sri Firdos, learned counsel for the assessee, seeks to contend that only a sum of Rs. 20,000 was contributed by the assessee and the rest of the amount was spent either from the Hindu undivided family or from the borrowings, we decline to go into the question for the reason that we cannot investigate in this reference questions of fact. The assessee did not seek any reference, nor did it file any application for calling upon the Tribunal to refer that question to this court. Section 64(1)(iv) of the Act postulates thus :

"In computing the total income of any individual, there shall be included all such income as arises directly or indirectly - ...

(iv) subject to the provisions of clause (i) of section 27, in a case not falling under clause (i) of this sub-section, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart."

A reading of the above provision would indicate that in computing the total income of the individual, there shall be included all such income as arises directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart. In view of the finding given by the Tribunal that the assessee contributed Rs. 34,500 in the construction of the house, it must be held that the transfer of the assets is otherwise than for consideration, and the income arising from such contribution is includible in the income derived by the assessee in the relevant assessment year. Therefore, the first question is answered affirmatively, in favour of the Revenue and against the assessee.

The next question is whether the Tribunal is justified in arriving at the ratio of 1 : 3. As stated earlier, the total amount invested for constructing the house is Rs. 96,502, out of which Rs. 10,000 was the amount invested by the wife of the assessee to purchase the plot, Rs. 34,500 was transferred by the assessee to his wife in the construction of the house and Rs. 52,000 was the amount which went into the construction from borrowings made in that regard. Section 64 of the Act has no application to outside borrowings. Therefore, the proportion in which the income derived from the property is to be apportioned is 10 : 34.5 : 52. Therefore, that part of the income attributable to 34.5 alone is taxable u/s 64(1)(iv) of the Act. Instead, the Appellate Assistant Commissioner and the Tribunal wrongly apportioned the income in the ration of 1 : 3 and assessed 3/4ths of the income derived from the property in the hands of the assessee. That computation is clearly illegal. Therefore, the authorities are directed to compute the income in the above mentioned ratio and determine the taxable income of the assessee accordingly. The second question is answered accordingly. No costs.