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Petitioner: SEVANTILAL MANEKLAL SHETH VS Respondent: COMMISSIONER OF INCOME-TAX (CENTRAL), BOMBAYHonorable Justice V. S. DESAIS. P. Mehta with Y. P. Trivedi,S. P. Mehta with Y. P. Trivedi
1965 P T D 832
1965 P T D 832
[Bombay (India)]
Before Y. S. Tambe and V. S. Desai, JJ
SEVANTILAL MANEKLAL SHETH
Versus
COMMISSIONER OF INCOME-TAX (CENTRAL), BOMBAY
Income-tax Reference No. 2 of 1962, decided on 19th February 1965.
Transfer of assets-Gift of shares to wife-Shares sold by wife at profit-Capital gains arising on sale-Whether "income arising from assets transferred" and includible in husband's income-Interest received on proceeds of sale-Portion attributable to capital gains, whether includible in husband's income-Indian Income-tax Act, 1922, S. 1C(3)(a)(iii).
Capital gains arising to the wife on the sale of assets transferred to her by her husband without consideration are also "income arising to her from the assets transferred", and can properly be included in the income of the husband under section 16(3)(a)(iii) of the Income-tax Act, 1922. Such gains are income arising from the asset, though they arise from the sale of the asset and the asset itself is extinguished by the sale.
A person made a gift to his wife of shares in a limited company which were worth Rs. 69,730 at the time of the gift.
The wife sold the shares subsequently for Rs. 1,54,800 making a capital gain of Rs. 70,860. The whole-sale proceeds were invested and fetched an interest of Rs. 9,288 annually. The question was whether the capital gains of Rs. 70,860 realised on the sale of the shares and the interest of Rs. 9,288 received annually were income arising from assets transferred to the wife and could be included in the income of the husband under section 16(3)(a)(iii) of the Income-tax Act:
Held, (i) that though the sum of Rs. 70,860 was capital gains arising from sale of the shares, it was still income arising from the assets transferred within the meaning of section 16(3)(a)(iii) and was properly included in the husband's income;
(ii) as the Department had acted on the basis that out of the sum of Rs. 1,54,800 received by the wife, Rs. 69,730 represented the value of the assets transferred and the balance of Rs. 70,860 was income, and had assessed the later sum as income, such portion of interest as was attributable to Rs. 69,730 (viz., Rs. 4,184) could alone be treated as income arising from the assets transferred to the wife and the balance of the annual interest (viz., Rs. 5,104) was not liable to be included in the total income of the husband.
Commissioner of Income-tax v. Sodra Devi and Damayanti Sahni v. Commissioner of Income-tax (1957) 32 I T R 615 and Navinchandra Mafatlal v. Commissioner of Income-tax (1954) 26 I T R 758 ref.
STATEMENT OF CASE
By these four applications (which can be conveniently consolidated together), Shri Sevantilal Maneklal Sheth, legal representative of the deceased assessee, Maneklal Ujamshi, requires the Appellate Tribunal to refer to the High Court some questions said to be of law and which are said to arise out of its orders under section 33(4), to be presently detailed. Inasmuch as, in our opinion, a question of law does arise out of each of the aforesaid orders, we hereby draw up an agreed statement of the case and refer it to the High Court of Judicature at Bombay under section 66 (1) of the Indian Income-tax Act, 1922.
2. These reference applications arise out of the assessments upon the deceased assessee, Maneklal Ujamshi, for the assessment years 1957-58, 1958-59 and 1959-60. For the purposes of these reference applications, the relevant previous years are the corresponding financial years. Maneklal died on April 22, 1959, and thereafter proceedings under the Income-tax Act were continued and prosecuted by his son and legal representative, Sevantilal Maneklal. These reference applications arise out of the following orders made under section 33(4) by the Tribunal:
Distinctive numbers.
Appellant.
Assessment year.
Date of order.
I. T. A. No. 9343/59-60
Sevantilal Maneklal
1957-58
20-12-1960
I. T. A. No. 7559, /59-60
Addl. I. T. O., Sec. II (Central), Bombay
1958-59
13-10-1960
I. T. A. No. 11335/59-60
Sevantilal Maneklal
1959-60
9-2-1961
I. T. A. No. 390/60-61
Addl. I. T. O., Sec. II (Central), Bombay
1959-60
9-2-1961
??????????? ??????????????????????? 3. The material facts having bearing on the questions now sought to be referred to the High Court are only a few and not in dispute. Maneklal, who was being assessed in the status of "individual", held some ordinary and preference shares of Changdeo Sugar Mills Ltd. In the year 1951 (occasionally wrongly stated as 1950), he made a gift of 1955 preference shares and 1,184 ordinary shares to his wife, Bai Laxmibai. Subsequently the said company converted the said preference shares into ordinary shares and on December 31, 1954, she held in all 2,424 ordinary shares. It was common ground before the Tribunal that the transfer of these shares by way of gift by Maneklal to his wife, Laxmibai, fell within the ambit of section 16 (3)(a)(iii). The material portion of that section is this:
"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."
Out of these 2,424 shares held by Bai Laxmibai on December 31, 1954, she sold 2,400 shares on August 1, 1956, for a sum of Rs. 1,54,800. The said sale produced some "capital gains" taxable under section 12B of the Income-tax Act in the hands of the wife and there was no dispute in regard to this. The dispute was in regard to the quantum of the said "capital gains" and the Tribunal finally determined it at Rs. 70,860. Relying upon the provisions of section 16(3)(a)(iii), the Income-tax Officer included the said sum of capital gains in the computation of the total income of Maneklal for the assessment year 1957-58. The contention before the Tribunal was that Bai Laxmibai was liable to pay tax on the said capital gains she made on the sale of the said 2,400 ordinary shares but the said capital gains could not be included in the computation of the total income of her husband, Maneklal, inasmuch as the provisions of section 16(3)(a)(iii) were not applicable to the facts of the case. It was urged that the application of section 16(3)(a)(iii) contemplates inclusion of income that arises from the transferred assets while the transferred assets continued to remain with the wife, The Tribunal rejected this contention for reasons given by it in its order in I. T. A. No. 9343 of 1959-60, a copy of which is marked Annexure "A" and forms part of the case. ??????
4. On these facts, the applicant now requires the Tribunal to refer the following question to the High Court:
"Whether on a proper construction of section 16(3) of the `capital gains' earned by Bai Laxmibai could be included in the total income of the applicant?"
In our opinion, on the facts of the case, the following question of law arises:
"Whether, in computing the total income of Maneklal for the assessment year 1957-58, the sum of Rs. 70,860 has been properly included therein in accordance with the provisions of section 16(3)(a)(iii) of the income-tax Act, 1922?"
5. Having realised a sum of Rs. 1,54,800 by sale of 2,400 shares on August 1, 1956, Bai Laxmibai deposited the said sum with Messrs A. H. Bhivandiwalla & Co. in which Maneklal as well as his son, Sevantilal, happened to be partners. In the material account year, the said deposit fetched interest of Rs. 9,288. The Income-tax Officer brought the said sum to tax in the hands of Maneklal by relying upon the provisions of section 16(3)(a)(iii). The assessee's contention before him was that no part of it could be so included inasmuch as the original shares, i.e., the assets transferred by the husband to the wife, ceased to exist in the hands of the wife long before. Being aggrieved by the said inclusion, the matter was taken in appeal by the assessee to the Appellate Assistant Commissioner. He directed that interest attributable to "the monetary value of the shares covered by the sale at the time of their gift" should be included in the total income of Maneklal in accordance with the provisions of section 16(3)(a)(iii) and the balance was to be excluded. The said monetary value of the gifted shares, at the time when the gift was made, was found to be Rs. 69,730 and the interest attributable to it was worked out at Rs. 4,184. The result of the Appellate Assistant Commissioner's order, therefore, was that the addition of Rs.9,288 made by the Income-tax Officer stood reduced to Rs. 4,184. A copy of the said order dated August 12, 1959, (C. A. P. No. 177 of 1958-59) of the Appellate Assistant Commissioner is marked Annexure "B" and forms part of the case. Being aggrieved by the said decision of the Appellate Assistant Commissioner, the Department brought the matter in appeal to the Tribunal and for reasons given by it in its order in I. T. A. No. 7559 of 1959-60, the Tribunal restored the inclusion to Rs. 9,288. A copy of the said order is marked Annexure "C" and forms part of the case.
It is necessary to point out that the assessee did not take any appeal against the sum of Rs. 4,184 that was retained by the Appellate Assistant. Commissioner and it was only the Department that came in appeal to the Tribunal against the reduction of Rs. 5,104 (i.e., Rs. 9,288 minus Rs. 4,184) granted by the Appellate Assistant Commissioner.
6. On these facts, the assessee now requires the following questions to be referred to the High Court:
"(1) Whether in the circumstances and facts of the case the Tribunal was justified in upholding the inclusion of Rs. 9,288 earned by the wife of the deceased in the assessment of the applicant by virtue of section 16(3)(a)(iii) of the Act?
(2) Whether the Tribunal had rightly held that the change of investment by the. wife of the original shares gifted by the husband would still attract the provisions of section 16(3)(a)(iii) of the Act to the extent of the whole amount realised on change of investment?
(3) Whether on the facts and circumstances of the case the interest of Rs. 9,288 earned by the wife of the deceased on the sum realised by the sale of shares gifted by the deceased and deposited with Messrs A. H: Bhivandiwalla & Cc. was rightly included in the assessment of the applicant?
(4) Whether the Tribunal rightly rejected the alternative claim of the applicant, viz., that only a proportionate part of the interest attributable to the value of the share on the date of the gift only, if at all, be included in the total income of the deceased ?"
In our opinion, the reference made to the figure of Rs. 9,288 in the above questions is wrong; for, as already stated, the assessee had accepted the decision of the Appellate Assistant Commissioner so far as it related to the inclusion of Rs. 4,184 and did not appeal against it from the Appellate Assistant Commissioner's order. Hence the assessee's grievance that may arise out of the Tribunal's order (Annexure "C") in I. T. A. No. 7559 of 1959-60 can only- be in regard to the sum of Rs. 5,104. Hence, in our opinion, on the facts of the present case, the following question of law arises out of the Tribunal's finding:
"Whether in computing the total income of Maneklal for the assessment year 1958-59, the sum of Rs. 5,104 has been properly included therein in accordance with the provisions of section 16 (3) (a) (iii) of the Income-tax Act, 1922?"
7. The remaining two applications relating to the assessment year 1959-60, can now be taken up together. During the material account year, the said deposited sum of Rs. 1,54,800 once more produced interest income of Rs. 9,288. The Income-tax Officer included the said sum in the computation of the total income of Maneklal for the assessment year 1959-60 by relying upon the provisions of section 16 (3) (a) (iii). In appeal, the Appellate Assistant Commissioner once more directed that the sum of Rs. 4,183 shall be retained and the balance of Rs. 5,105 shall be excluded. On this occasion, the assessee as well as the Department brought the matter in appeal to the Tribunal by their respective Appeals Nos. I. T. A. No. 11335 of 1959-60 and I. T. A. No. 390 of 1960-61. The Tribunal disposed of both .the appeals by its consolidated order made on February 9, 1961, a copy of which is marked Annexure "T)" and forms part of the case. For the reasons given therein, it rejected the assessee's contention to exclude the sum of Rs. 4,183 and accepted the Department's contention for including the sum of Rs. 5,105. On these facts, the assessee now requires the Appellate Tribunal to refer to the High Court the following four questions for the assessment year 1959-60:
"(1) Whether in the circumstances and facts of the case the Tribunal was justified in upholding the inclusion of Rs. 9,288 earned by the wife of the deceased in the assessment of the applicant by virtue of section 16 (3) (a) (iii) of the Act?
(2) Whether the Tribunal had rightly held that the change of investment by the wife of the original shares gifted by the husband would still attract the provisions of section 16(3)(a)(iii) of the Act to the extent of the whole amount realised on change of investment?
(3) Whether on the facts and circumstances of the case the interest of Rs. 9,288 earned by the wife of the deceased on the sum realised by the sale of shares gifted by the deceased and deposited with Messrs. A. H. Bhivandiwalla & Co. was rightly included in the assessment of the applicant?
(4) Whether the Tribunal rightly rejected the alternative claim of the applicant, viz., that only a proportionate part of the interest attributable to the value of the shares on the date of the gift only, if at all, be included in the total income of the deceased?
In our opinion, the following two questions of law arise:
(i) Whether in computing the total income of Maneklal for the assessment year 1959-60, the sum of Rs. 4,183 has been properly included therein in accordance with the provisions of section 16 (3) (a) (iii) of the Income-tax Act, 1922?
(ii) Whether in computing the total income of Maneklal for the assessment year 1959-60, the sum of Rs. 5,105 has been properly included therein in accordance with the provisions of section 16 (3) (a) (iii) of the Income-tax Act,
1922?"
8. We, therefore, refer the following questions to the High.
"(i) Whether in computing the total income of Maneklal for the assessment year 1957-58, the sum of Rs. 70,860 has been properly included therein in accordance with the provisions of section 16 (3) (a) (iii) of the Income-tax Act, 1922?
(ii) Whether in computing the total income of Maneklal for the assessment year 1958-59 the sum of Rs. 5,104 has been properly included therein in accordance with the provisions of section 16 (3) (a) (iii) of the Income-tax Act, 1922?
(iii) Whether in computing the total income of Maneklal for the assessment year 1959-60, the sum of Rs. 4,183 has been properly included therein in accordance with the provisions of section 16 (3) (a) (iii) of the Income-tax Act, 1922?
(iv) Whether in computing the total income of Maneklal for the assessment year 1959-60, the sum of Rs. 5,105 has been properly included therein in accordance with the provisions of section 16 (3) (a) (iii) of the Income-tax Act, 1922?"
S. P. Mehta with Y. P. Trivedi for the Assessee.
G. N. Joshi with R. J. Joshi for the Commissioner.
JUDGMENT
V. S. DESAI, J.-The assessee is one Maneklal Sheth, who having died on 22nd April 1959, has been , represented in the present assessment proceedings, which relate to the assessment years 1957-58, 1958-59 and 1959-60, by his son, the present applicant before us. In the year 1951, the assessee Maneklal had made a gift of 1,184 ordinary and 155 preference shares of Changdeo Sugar Mills Ltd. to his wife, Bai Laxmibai. The total value of these transferred shares on the date of the transfer was Rs. 69,730. Subsequent to the transfer of these shares by Maneklal to his wife, the preference shares were converted by the company into ordinary shares giving the shareholders 8 ordinary shares for one preference share, with the result that by the end of the year 1954 Bai Laxmibai possessed 2,424 ordinary shares of the mills. On the 1st of August 1956, Bai Laxmibai sold 2,400 out of the said shares possessed by her for a total price of Rs. 1,54,800 resulting in a capital gain of Rs. 70,860 as computed under section 12-B of the Income-tax Act. The whole amount realised by the sale of the shares was deposited by Bai Laxmibai with M/s. A. H. Bhivandiwalla & Co., in which Maneklal as well as his son, the present applicant, happened to be partners. The amount deposited by Bai Laxmibai fetched a yearly interest of Rs. 9,288. In the assessment of Maneklal for the assessment year 1957-58 the Income-tax Officer included the amount of Rs. 70,860, which was, the profit made by Bai Laxmibai on the sale of the shares, as income of Maneklal under section 16 (3) (a) (iii) of the Indian Income-tax Act. Similarly, in the assessment of Maneklal for the assessment years 1958-59 and 1959-60 he included in each year the amount of Rs. 9,288 which was the interest earned by Bai Laxmibai on the deposit of the sale proceeds with M/s. Bhivandiwalla & Co. as the income of Maneklal under section 16 (3) (a) (iii). According to the Income-tax Officer the gain, which had resulted from the sale of the shares was the income of the wife of the assessee, which arose directly or indirectly from the assets , transferred by the assessee to his wife otherwise than for adequate consideration or in connection with an agreement to live apart and, therefore, was required to be included in the computation of the total income of Maneklal. He was also of the view that the amount of interest, which Bai Laxmibai had received from the sale proceeds deposited by her with M/s. Bhivandiwalla & Co., was also income of the wife of Maneklal, which arose directly or indirectly from the assets transferred by Maneklal to her and was, therefore, liable to be included in the computation of the total income of Maneklal. Accordingly, in the assessment order for the first year, he included the amount of Rs: 70,860 and in the assessment orders for the next two years, he included the amount of. Rs. 9,288 in the total taxable income of Maneklal. Appeals against all these three assessment orders were filed before the Appellate Assistant Commissioner. In the appeal against the first assessment order for the assessment year 1957-58, the Appellate Assistant Commissioner agreed with the view taken by the Income-tax Officer and dismissed the appeals. In the other two appeals he partly allowed the appeals taking the view that only that part of the interest, which was attributable to the monetary value of the shares covered by the shares at the time of the gift was liable to be included in the total income of Maneklal in accordance with the provisions of section 16 (3) (a) (iii) and the balance could not be included under the said provision. Since the monetary value of the shares gifted to Bai Laxmibai at the time when the gift was made- was only Rs. 69,730, the interest attributable to it worked out at Rs. 4,183. Out of the total interest of Rs. 9,288, which was received by Bai Laxmibai in each of these years, he directed that only an amount of Rs. 4,183 should be included in the total income of Maneklal in each of these two years and the balance of Rs. 5,106 should be deleted. As against the decision and orders of the Appellate Assistant Commissioner in these appeals the assessee appealed to the Income-tax Appellate Tribunal against the decision and order in respect of the assessment year 1957-58 and also against the order in respect of the assessment year 1959-60 in so far as it had disallowed exemption in respect of the amount of Rs. 5,106 out of the total amount of Rs. 9,288. The Department, on the other hand, appealed against the orders of the Appellate Assistant Commissioner for the years 1958-59 and 1959-60 in so far as they allowed exemption in respect of Rs. 4,183 out of the total amount of Rs. 9,288 for each year. The Income-tax Appellate Tribunal dismissed the assessee's appeal against the order of assessment passed by the Income-tax Officer for the assessment year 1957-58 and confirmed in appeal by the Appellate Assistant Commissioner. The Department's appeals arising out of the assessment orders for the assessment years 1958-59 and 1959-60 were allowed by the Tribunal and the assessee's appeal arising out of the assessment order for the assessment year 1959-60 was dismissed. According to these decisions of the Appellate Tribunal the result was that for the assessment year 1957-58 the decision of the departmental authorities that the amount of Rs. 70,860, which was the profit or gain on the sale of the shares by Bai Laxmibai was liable to be included in the total income of Maneklal was upheld and for the later two years the entire amount of interest, viz., Rs. 9,288, was held to be liable to be included in the total income of Maneklal in each of those two years. Thereafter at the instance of the assessee, the Tribunal has drawn up a consolidated statement of the case and referred to this Court the following questions of law, which arise out of its order passed in the appeals heard and decided by it relating to the assessment orders in respect of the aforesaid three assessment years:
"(1) Whether in computing the total income of Maneklal for the assessment year 1957-58, the sum of Rs. 70,860 has been properly included therein in accordance with the provisions of section 16 (3) (a) (iii) of the Income-tax Act, 1922?
(2) Whether in computing the total income of Maneklal for the assessment year 1958-59 the sum of Rs. 5,104 has been properly. included therein in accordance with the provisions of section 16 (3) (a) (iii) of the Income-tax Act, 1922?
(3) Whether in computing the total income of Maneklal for the assessment year 1959-G0, the sum of Rs. 4,183 has been properly included therein in accordance with the provisions of section 16 (3) (a) (iii) of the Income-tax Act, 1922?
(4) Whether in computing the total income of Maneklal for the assessment year 1959-60, the sum of Rs. 5,105 has been properly included therein in accordance with the provisions of section 16 (3) (a) (iii) of the Income-tax Act, 1922?"
It will be seen that the first question arises out of the assessment order for the assessment year 1957-58; the second relates to the assessment order for the assessment year 1958-59 and the last two questions are concerned with the assessment order for the assessment year 1959-60. It will also be seen that question No. 2 and question No. 4 are the same, with the only difference that question No. 2 is for the assessment year 1958-59, while question No. 4 is for the subsequent assessment year. Question No. 3, which is one of the questions relating to the assessment order for the year 1959-60, has not been pressed by Mr. Mehta learned counsel for the assessee. The conclusion of the Tribunal so far as that question is concerned is accepted as correct by Mr. Mehta and he has advanced no arguments challenging that conclusion. That question, therefore, will be answered in the affirmative.
The amount of Rs. 70,860, which is involved in the first question, is the surplus obtained on the sale of the shares, which were transferred by Maneklal to his wife and the question that has to be considered is whether the said surplus constitutes the income of the wife of Maneklal, which has arisen directly or indirectly from the assets transferred by Maneklal to his wife otherwise than for adequate consideration or in connection with an agreement to live apart. The shares, on the sale of which this surplus has arisen, were admittedly assets transferred by Maneklal to his wife otherwise than for adequate consideration or in connection with an agreement to live apart. What is required to be considered is whether the surplus is income of the wife, which has arisen directly or indirectly from the transferred assets.
The argument of Mr. Mehta, learned counsel for the assessee, is that what comes within the ambit of section 16 (3) (a) (iii) is the income from the transferred assets, which is different from the profit or gain arising from the sale of the transferred assets, or, in other words, the "capital gains" from the transferred assets. "Income" as defined in section 2 (6-C) of the Income-tax Act includes "capital gains" chargeable under section 12-B, and "capital gains" chargeable under section 12-B are profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March 1956. This kind of income, however, is not the income from property such as is…
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