Smt. V. Amirtham Ammal vs Commissioner of Income Tax

Sethuraman, J.—This reference is under the Income Tax Act. The following question oi law has been referred by the Appellate Tribunal:

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 12,650 or any part

thereof is liable to be included in the total income of the assessee by the operation of Section 64(iv) of the Income Tax Act, 1961 ?.

L. G. Balakrishan, L.G. Varadarajulu and L. G. Ramamurthi are three brothers. Their respective wives are B. Sarojini, V. Amirtham Ammal

and R. Sarojini. On March 31, 1963, each of the three ladies mentioned above transferred certain shares held by each of them in Messrs. Rayala-

seema Passenger and Goods Transports (Private) Ltd., as follows :

Tansferor Transferee Date of No. of shares Sale price (face value Market

transfer transferred of the shares) value

Rs. Rs.

Smt. B. Sarojini R. Sumanth (Minor son of Smt. R. 31-3-63 115 11,500 46,000

Sarojini)

Smt. V. B. Vijayakumar(Minor sou of Smt. 31-3-63 110 11,000 44,000

Amirtham B. Sarojini)

Ammal

Smt. R Sarojini V. Sudarsan (Minor son of Smt. V. 31-3-63 110 11,000 44,000

Amirtham Ammal).

We are concerned in this reference with party No. 2, Amirtham Animal, who has a minor son by name Sudarsan.

On a scrutiny of these transactions, the Income Tax Officer took the view that the transfers referred to above were cross-transfers hit by the

provisions of Section 64(iv) of the Income Tax Act. In his view the transfers were not for adequate consideration and he, therefore, included the

entire dividend income of Rs. 12,650 in respect of the shares transferred by the assessee, Amirtham Animal, as income derived by her minor son

from out of the shares transferred indirectly by her to him. The Appellate Assistant Commissioner, on appeal, confirmed the assessment and the

matter thereafter went before the Tribunal.

Before the Tribunal the contention was that the minor had paid full consideration for the 110 shares which had been transferred to him and that,

therefore, Section 64(iv) was not applicable. The Tribunal rejected the contention and dismissed the appeal. It is against this order of the Tribunal

that the present reference has arisen.

The first contention taken on behalf of the assessee before us was that the shares having been transferred at their face value, there was no

transfer otherwise than for adequate consideration on the facts here. This contention has absolutely no force, as it is evident from the records that

on the basis that the shares transferred were of the market value of Rs. 44,000, the assessee herself filed a gift-tax return with reference to the

extent of the difference between Rs. 44,000 and Rs. 11,000 and was assessed thereon. It is also evident from the records that by applying Section

52 of the Income Tax Act, the capital gains tax was levied on the footing that the full value for the consideration of the transfer was Rs. 44,000 and

not Rs. 11,000 which was actually received. These facts, therefore, establish that the transfer of the 110 shares for a sum of Rs. 11,000 was not

for adequate consideration. It is now well-established that ""adequate consideration"" contemplated by Section 64 is ""consideration equal or nearly

equal to the value of the assets transferred and that natural love and affection cannot constitute adequate consideration."" Tulsidas Kilachand Vs.

The Commissioner of Income Tax, Bombay City I, . This is just the case where the consideration is not adequate in part.

The point sought to be raised by the assessee is that in a case where the consideration has been paid at least in part, there is no question of

application of Section 64(iv). The relevant provision may be extracted as follows:

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, to a minor child, not being a married daughter of such individual, from assets trans ferred

directly or indirectly to the minor child by such individual, otherwise than for adequate consideration.

So long as the transaction is not for adequate consideration, that is, consideration equal or nearly equal to the value of the assets transferred, it

would come within the scope of Section 64(iv).

Another aspect of the question is whether these three transactions by the three ladies could be considered to be hit by Section 64(iv). On this

aspect there is a decision of this court in L. G. Balakrishnan Vs. Commissioner of Income Tax, Madras, . In that case, L. G. Balakrishnan, one of

the brothers of the family of the assessee, was assessed on a transfer of Rs. 50,000 made by him in favour of his niece in February, 1958. At or

about the same date there was also a transfer of Rs. 50,000 in favour of his son. The income earned by the said sum of Rs. 50,000 transferred by

Balakrishnan was assessed u/s 16(3)(a)(iv) of the Act of 1922 which corresponds to Section 64(iv) of the present Act. When the matter came on

reference to this court, it was held:

The finding of the department as well as of the Tribunal is that there was an indirect transfer of assets by L. G. Balakrishnan to his minor son,

Vijayakumar. This is certainly based on the evidence on record and it seems to us that this finding is fully justified and warranted......In our opinion,

the gifts of Rs. 50,000 in favour of minor, Vijayakumar, was in fact and in truth a gift by Balakrishnan to his son, and that Section 16(3)(a)(iii) of

the Act is plainly applicable.

In the present case also there is a finding of the Tribunal that the transfers in the present case came under the category of cross-gifts, as the

transfers have taken place on the same day, viz., March 31, 1963. We are satisfied that on the facts in the present case the conclusion of the

Tribunal about these cross-gifts is not open to challenge.

The next point that was raised by the learned counsel for the assessee was that even assuming Section 64(iv) was applicable, still, so long as

there was adequate consideration in part, the income assessable u/s 64(iv) would only be that part of it which was not covered by what the

revenue treats as inadequate consideration. The objection of the counsel for the revenue was that this point did not obviously arise from the order

of the Tribunal as this contention in the present form had not been taken before it. It was urged that though the question, as referred, would take in

this contention, still so long as the matter did not arise out of the Tribunal''s order, it should not be the subject of consideration by us. In view of this

objection, we called for the grounds of appeal filed before the Tribunal and we find that ground No. 8 specifically took this point., There is nothing

to show in the order of the Tribunal that this point was abandoned. This would, therefore, be a point, which though not decided by the Tribunal ex

facie can be taken to have been decided against the assessee by it. We would, therefore, proceed to consider this part of the question.

On this point there is a direct decision of the Bombay High Court in H.N. Patwardhan Vs. Commissioner of Income Tax, Poona, . In that case

the assessee sold immovable property to his wife on August 31, 1956, for a sum of Rs. 1,00,000. In connection with the return for wealth-tax, the

assessee''s consulting engineer valued the property at Rs. 1,50,000. The Income Tax Officer included the income from the said immovable

property and also the dividend income from certain shares which had been similarly transferred for a smaller consideration, in the income of the

assessee u/s 16(3)(a)(iii) and (iv) of the Act of 1922. The Appellate Tribunal held that the assessee was entitled to the exclusion of two-thirds of

the income from the immovable property transferred to his wife in view of the fact that he had received adequate consideration for two-thirds of

the property. It, therefore, upheld the assessment only to the extent of one-third by the application of Section 16(3)(a)(iii) and (iv) of the Act of

1922. On a reference, the Bombay High Court held that one-third of the income was includible in the income of the assessee and that two-thirds

could be excluded from his total income. The following passage at pages 287 and 288 gives the reason for the conclusion of the Bombay High

Court:

In other words, the purpose of the Sub-clause (iii) was to include the income of the transferred assets in the computation of the total income of the

husband and/or father only to the extent that the consideration was found inadequate. The purpose of the sub-clause would be satisfied totally by

including in the income of the husband and/or the father the income from the transferred assets to the extent only that the consideration is found to

be inadequate.

Mr. Balasubrahmanyan, learned counsel for the revenue, submitted that the object of any provision has to be ascertained only from its language

and that the learned judges of the Bombay High Court had not properly construed the relevant provision. We are unable to agree with him. Section

16(3) of the Act of 1922 was couched in substantially the same language. In construing the said provision, the Supreme Court observed in The

Commissioner of Income Tax Bombay Vs. Manilal Dhanji, Bombay, , as follows:

Then we come to Sub-section (3). This sub-section aims at foiling an individual''s attempt to avoid or reduce the incidence of tax by transferring

his assets to his wife or minor child or admitting his wife as a partner or admitting his minor child to the benefits of a partnership in a firm in which

such an individual is a partner.

The sub-section creates an artificial liability to tax and must be strictly construed.

Therefore, the object of this provision is merely to foil an individual''s attempt to avoid or reduce the incidence of tax by transferring the assets

to a minor child. It is to counteract that object that the provision has been designed. The construction of the provision should, therefore, be

consistent with this object. As the provision has to be strictly construed, as laid down by the Supreme Court, it would, in our opinion, be proper to

construe the provision in such a manner as to effectuate the object for which it is designed. This object could be achieved by treating only that part

of the income referable to the transfer for inadequate consideration as assessable u/s 64(iv). In our opinion, therefore, the contention of the learned

counsel for the assessee deserves acceptance.

There is a slight difference in the language between Section 16(3) of the Act of 1922 and Section 64(iv) of the present Act. The words used in

Section 16(3) are.""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 or minor child of such individual as arises directly or indirectly"". The words ""so much of the income"" have now been substituted by the

expression ""all such income"". This difference in language was only a drafting change adopted in accordance with the recommendation of the Law

Commission, which in its 12th report, at pages 144 and 145, observed:

The existing Sections 16(3)(a) and 16(3Xb) both begin with the words ''so much of the income''. This is provided in the draft clause opening

remarks by the words ''all such income'' and repetition in the item corresponding to Section 16(3)(b) has been avoided.

It is, therefore, clear that the object was not to make any alteration in the sense as such. The Supreme Court had occasion to construe a similar

expression in Section 16(1)(c) in Hrishikesh Ganguly (decd. by his legal representatives) Vs. Commissioner of Income Tax, Calcutta, . In that case

an assessee transferred two of the houses belonging to him to a trust providing that the trustees shall pay a sum of Rs. 200 per month to him for life

for his own absolute use and benefit out of the income from the trust properties. The total annual income of the trust properties came to over Rs.

19,000. The question was whether the entire income from two houses was assessable in the hands of the assessee on the ground that the trust was

revocable within the meaning of Section 16(1)(c) of the Income Tax Act, 1922. The Supreme Court held that the trust as a whole did not come

within the mischief of Section 16(1)(c) and revocability related only to a part of the income. It was only ihat part of the income which accrued to or

was received by the assessee under the trust that was held to be assessable as his income. The language of Section 16(1 )(c) contained the words

all income arising to any person"". Even when such an expression had been used, the Supreme Court held that only a part of the income was liable

to be taken as covered by Section 16(1)(c). Similarly, in the present provision it is only a part of the income that was liable to be included. We,

accordingly, direct the Tribunal to go into the apportionment of the income assessable u/s 64(iv) in the light of what we have expressed above. The

question is answered as follows : Only that part of the income of Rs. 12,650 that can be included in the total income of the assessee by the

operation of Section 64(iv) of the Income Tax Act which, as found above, is without adequate consideration.

As neither party has succeeded in the reference, there will be no order as to costs.