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MOHINI THAPAR (DEAD) BY L.RS. V. C.I.T. (CENTRAL) CALCUTTA (1972) 4 SCC 493

MOHINI THAPAR (DEAD) BY L.RS. V. C.I.T. (CENTRAL) CALCUTTA (1972) 4 SCC 493

FACTS

  • Late Karam Chand Thapar, the assessee, made cash gifts to his wife, Mohini Thapar, who then invested the amount in shares and other investments. 
  • The dividends from shares and interest from investments were included in the income of Karam Chand Thapar for the relevant assessment years. 
  • The assessee contested the inclusion of this income in his assessment.
  • The Income-tax Officer held that they were liable to be included in the income of the assessee. That decision was upheld by the Appellate Assistant Commissioner. 
  • On a further appeal, taken by the assessee to the Tribunal the Tribunal upheld the order of the Assistant Commissioner.
  • High court also ruled in favour of revenue.
  • Hence present appeal before supreme court.

ISSUE

  • Whether the dividends and interest earned from investments made with cash gifts given by the assessee to his wife are liable to be included in the assessee's taxable income under Section 16(3)(a)(iii) of the Income-tax Act, 1922.

RULE

  • Section 16(3)(a)(iii) of the Act includes in the assessee's taxable income any income arising directly or indirectly from assets transferred by the assessee to his wife, without adequate consideration.

HELD

  • In I.T. v. Prem Bhat Parakh [(1970) 1 SCC 784], The court observed that the capital invested by the minors in the firm came from the gift made in their favour by their father, the assessee. The connection between the gifts made by the assessee and the income in question (arising from the minors' admission to the benefits of partnership in the firm) was remote. There was no direct or indirect nexus between the transfer of assets and the income generated.
  • The court held that the dividends and interest earned from investments made with cash gifts given by the assessee to his wife constitute income indirectly received in respect of the transfer of cash directly made.
  • The provision under Section 16(3)(a)(iii) encompasses not only income directly arising from the transferred assets but also income indirectly related to them. The connection between the transfer of assets and the income need not be direct but must be proximate.
  • The court dismissed the appeals, upholding the decision that the dividends and interest income earned from investments made with cash gifts given by the assessee to his wife are liable to be included in the assessee's taxable income under Section 16(3)(a)(iii) of the Income-tax Act, 1922.
  • The case of I.T. v. Prem Bhat Parakh was distinguished as its ratio was found inapplicable to the facts of the present case.

COMMENTARIES RATIO/NOTE

  • Conditions Section 64(1)(iv) is applicable if the following conditions are satisfied-
  • 2 Condition one - Asset is transferred by an individual - The above noted rule of clubbing is applicable if the transferor is an individual (I.e., husband or wife). If the t transferor is a person other than an individual than the above provisions are not applicable.
  • 3 Condition two -Asset other than house property should be transferred- If a house property is transferred and the above noted conditions are satisfied, then the transferor deemed" as owner of the property under section 27.
  • 4 Condition three- -Relationship of husband and wife- The relationship of husband and wife should subsist both at the time of the transfer of asset and at the time when income is accrued-Philp John Plasket Thomas v. CIT [1963] 49 ITR 97 (SC). It means that transfer of assets before marriage is outside the scope of this section. Similarly, if the transferor-spouse dies, the income, though continued to be enjoyed by the transferee, cannot be included in the income of deceased transferor, Heir, administrator or executor, as a widow or widower is not a spouse- Vinodkumar Ratilal v.CIT 1975 100 ITR 564 (Guj.). The word "spouse" does not include illegal wife-Executors of the Will of T.V. Krishna lyer v. CIT[1966] 38 ITR 144 (Ker.).
  • 5 Condition four - Transfer - In section 63(b), the Legislature uses the words "any disposition, trust, covenant, agreement or arrangement". If the Legislature were minded to include an arrangement or agreement, not amounting to transfer, in section 64, it could have used these words. Therefore, the word "transfer" in section 64 must be treated as having been used in the strict sense not in the sense of "including every means by which the property may be passed from one to another". Even if there is an indirect transfer, there must still be transfer of assets. The word “indirectly" does not destroy the significance of the word "transfer"-CIT v. Keshavlal Bullubhai Patel [1965] 55 ITR 637, CIT v. M. K. Stremann [1965] 56 ITR 62 (SC).
  • 6 Condition five - Consideration - Natural love and affection may be good consideration that would not be adequate consideration for the purpose of section 64(1)-Tulsidas Kilachand v CIT [1961142 ITR 1 (SC). Moreover, the Andhra Pradesh High Court in Potti Veerayya Sresty v. CIT [1972] 85 ITR 194 made the following observation in this context :

"Good consideration to support a contract under provisions of the Indian Contract Act is one thing and 'adequate consideration' to avoid tax under the Income-tax Act is quite a different thing. Since the law insists that the consideration for transfer must be adequate, there must be some means to measure the adequacy of the consideration. That is to say, the consideration that supports the transfer should be one, the value of which can be measured in terms of money or money's worth."

Therefore, religious or spiritual benefits are not consideration which can be measured in terms of money or money's worth.

  • 7 Condition six - There may be change in the identity of transferred asset - if gifted money is invested by wife in house property, rental income is taxable under section 64. R Ganesan v. CIT [1975] 58 ITR 411 (Mad.).