Dr. B.P. Saraf J.
1. By this reference made by the Income-tax Appellate Tribunal at the direction of the High Court of Judicature at Bombay under section 256(2) of the Income-tax Act, 1961, the Tribunal has referred the following question of law for opinion :
'Whether, on the facts and in the circumstances of the case, the interest arising to the assessee's wife and minor child is assessable in the hands of the assessee under section 64(iii) and 64(iv) of the Income-tax Act, 1961?'
2. This reference relates to ten assessment years and arises from two common orders of the Tribunal disposing of ten appeals of the assessee relating to his assessments for the years 1959-60 to 1969-70 excluding, however, assessment year 1962-63. One of the common orders relates to five assessment years from 1959-60 to 1964-65 and it is dated September 25, 1970. The other common order dated September 29, 1970, relates to five assessment years, viz., 1965-66 to 1969-70.
3. The assessee is Shri Kanchanlal Vadilal, son of Shri Vadilal Chunilal. He is a partner along with his father and others in the firm of Messrs. Kanchanlal Vadilal and Co. Shri Vadilal had a wife Vasantibai by whom he had no issue. She had, however, a step-son, Kanchanlal, Kanchanlal had a wife, Padma, and a minor son, Pradeep. On October 26, 1954, Shri Vadilal made a gift of Rs. 1 lakh to his daughter-in-law Padma, wife of the assessee. On the same day, he also made a gift of Rs. 50,000 to his minor grandson, Pradeep, son of the assessee. Thus, on the said date, Shri Vadilal made gifts aggregating to Rs. 1,50,000 to the wife and minor child of the assessee. Nearly five months later on March 25, 1955, the assessee made a gift of Rs. 1,50,000 to Vasantibai, wife of Shri Vadilal, who, as stated above, had made gifts to his wife and son. The gifts were effected by passing necessary transfer entries in the books of the firm of Messrs. Kanchanlal Vadilal and Co., in which the assessee and his father were both partners.
4. In the assessments of the income of the assessee for the assessment years 1959-60 to 1969-70, the Income-tax Officer took the view that the gift of Rs. 1,50,000 made by the assessee amounted to an indirect transfer of his assets to his own wife and minor son within the meaning of section 16(3)(a)(iii) of the Indian Income-tax Act, 1922, and section 64(iii) and (iv) of the Income-tax Act, 1961. He, therefore, included the interest earned by the assessee's wife and minor son on the above amounts in the income of the assessee. The particulars of such interest income treated as income of the assessee are as under :
---------------------------------------------------------------------Assessment year Wife Minor son Total---------------------------------------------------------------------Rs. Rs.1959-60 6,000 3,000 9,0001960-61 6,000 3,000 9,0001961-62 6,000 3,000 9,0001963-64 9,000 4,500 13,5001964-65 9,000 4,500 13,5001965-66 9,000 4,500 13,5001966-67 9,000 4,500 13,5001967-68 9,000 4,500 13,5001968-69 9,000 4,500 13,5001969-70 9,000 4,45743* 13,500------------------------------------------------------------------(* This difference of Rs. 43 remains unexplained).
5. The assessee filed appeal before the Appellate Assistant Commissioner of Income-tax which were dismissed. The assessee filed further appeals to the Income-tax Appellate Tribunal (for short, 'the Tribunal'). The Tribunal allowed the appeal following the decisions of the Bombay High Court in CIT v. Wadilal Chunilal : [1963]47ITR305(Bom) and H. N. Patwardhan v. CIT : [1970]76ITR279(Bom) .
6. The Revenue sought for a reference under section 256(1) of the Income-tax Act, 1961, which was rejected by the Tribunal. However, the reference was made by the Tribunal under section 256(2) of the Act under the direction of the High Court and the above question was referred for opinion.
7. Learned counsel for the Revenue pointed out to us that the decision of this court in Wadilal Chunilal's case : [1963]47ITR305(Bom) was rendered following the decision of the Madras High Court in C. M. Kothari v. CIT : [1958]34ITR317(Mad) , which was reversed by the Supreme Court in CIT v. C. M. Kothari : [1963]49ITR107(SC) . In that view of the matter, it was submitted that the decision of the Supreme Court in C. M. Kothari's case : [1963]49ITR107(SC) , will prevail over the decision of this court. So far as the later decision of this Court in H. N. Patwardhan's case : [1970]76ITR279(Bom) is concerned, it was pointed out that this decision was rendered on the facts of that case and it does not in any event apply to the facts of the present case which are squarely covered by the decision of the Supreme Court in C. M. Kothari's case : [1963]49ITR107(SC) .
8. Learned counsel for the assessee placed heavy reliance on the decision of this Court in Wadilal Chunilal's case : [1963]47ITR305(Bom) . The contention of learned counsel was that the law laid down by this court in the above case was not affected in any way by the decision of the Supreme Court as is evident from the subsequent decision in H. N. Patwardhan's case : [1970]76ITR279(Bom) . Learned counsel relied on the following observations of this court in Wadilal Chunilal's case : [1963]47ITR305(Bom) :
'In the case before us the transfers are not simultaneous. The gift by the son in favour of the step-mother is nearly five months after the gifts by the father in favour of the son's wife and child. There is no evidence whatsoever on the record to show that the later gift by the son was in consideration of the earlier gifts by the father. These is also nothing to show that these gifts were effected as a result of a part of one single arrangement thus constituting a single disposition. The mere circumstance that there is the identity of the amount of the gifts will, in our opinion, not be sufficient to constitute the cross-gifts as amounting to a single disposition, thus resulting in an indirect gift by the husband in favour of his wife.'
9. It was submitted by learned counsel that this proposition laid down by this court has not been reversed by the Supreme Court in C. M. Kothari's case : [1963]49ITR107(SC) . We have carefully considered the submission.
10. We do not find that the submission is correct. The Supreme Court in the above case clearly observed that section 16(3) corresponding to section 64 of the Income-tax Act, 1961, takes into account not only transference of asset made directly but also made indirectly. The Supreme Court also pointed out that it was impossible to state what sorts were covered by the word 'indirectly', because such transfers might be made in different ways. The court, however, gave a clear note of caution in the following words (at page 110) :
'A chain of transfers, if not comprehended by the word 'indirectly', would easily defeat the object of the law which is to tax the income of the wife in the hands of the husband, if the income of the wife arises to her from assets transferred by the husband.'
11. Referring to the facts of the case before it, the Supreme Court observed (at page 110) :
'The present case is an admirable instance of how indirect transfers can be made by substituting the assets of another person who has benefited to the same or nearly the same extent from assets transferred to him by the husband.'
12. The Supreme Court also considered the contention of the assessee in that case that even if chain transactions are included, then also unless there is consideration for the transfer by the husband, each transfer must be regarded as independent, and as in the case before it the Department had not proved that the transfers by the son to the mother and by the father-in-law to his daughter-in-law were made as consideration for each other, it cannot be held to be indirect transfer. The Supreme Court rejected this contention in clear terms. It was observed (at page 111) :
'It is not necessary that there should be consideration in the technical sense. If the two transfers are inter-connected and are parts of the same transaction in such a way that it can be said that the circuitous method has been adopted as a device to evade the implications of this section, the case will fall within the section. In this case, the device is palpable and the two transfers are so intimately connected that they cannot but be regarded as parts of a single transaction. It has not been successfully explained why the father-in-law made such a big gift to his daughter-in-law on the occasion of Diwali and why the son made a belated gift, equally big, to his mother on the occasion of her birthday which took place several months before. These two gifts match each other as regards the amount. The High Court overlooked the clear implication of these facts as also the implication of the fact that though the three purchasers were to get one-third share each, Mrs. C. M. Kothari paid Rs. 200 more than the other two and that each of the ladies repaid the share of earnest money borne by their respective husbands. An intimate connection between the two transactions, which were prima facie separate, is thus clearly established and they attract the words of the section, namely, 'transferred directly or indirectly to the wife'.'
13. In view of the above observations, the Supreme Court held that the High Court was in error in ignoring the above pertinent matters. The Supreme Court observed (at page 111) :
'It is reasonable to infer from the facts that before the respective husbands paid the amounts, they looked up the law and found that the income of the property would still be regarded as their own income if they transferred any assets to their wives. They hit upon the expedient that the son should transfer the assets to his mother, and the father-in-law, to the daughter-in-law, obviously failing to appreciate that the word 'indirectly' is meant to cover such tricks.'
14. The Supreme Court held the transfers to be indirect transfers by the husband to the wife failing under section 16(3) of the 1922 Act. The above observations leave no scope for doubt that it is not necessary that there should be consideration in the technical sense. If the two transfers are inter-connected and are parts of the same transaction in such a way that it can be said that the circuitous method has been adopted as a device to evade the implications of this section, the case will fall within the section.
15. Looking to the facts of the present case, the device is palpable. The two transfers are so intimately connected that they cannot but be regarded as parts of a single transaction. It may be pertinent to refer to a subsequent decision of the Supreme Court in CIT v. Keshavji Morarji : [1967]66ITR142(SC) , wherein also the Supreme Court applied its earlier decision in C. M. Kothari's case : [1963]49ITR107(SC) . It was reiterated by the Supreme Court that if the two transfers are inter-connected and are parts of the same transaction that it can be said that the circuitous method was adopted as a device to evade the implications of section 16(3)(a)(iii) or (iv) of the Indian Income-tax Act, 1922, the case will fall within the section.
16. In the light of the above decisions of the Supreme Court, we are of the clear opinion that under the facts and circumstances of the case the interest arising to the assessee's wife and minor child is assessable in the hands of the assessee under section 64(iii) and 64(iv) of the Income-tax Act, 1961.
17. Accordingly, the question referred to us is answered in the affirmative, that is in favour of the Revenue and against the assessee.
18. No order as to costs.