1. This is a departmental appeal in the case of Mr. Bishamber Lal pertaining to the assessment year 1973-74 for which the relevant previous year ended on 31-3-1973. The sum and substance of all the grounds is that the share income of Shakuntla Devi, assessee's wife and those of two minor sons, Mr. Sanjay Kumar and Mr. Ajay Kumar, from Amar Lal Bishamber Lal should have been added in the hands of the assessee under Section 64 of the Income-tax Act, 1961 ('the Act'), as the said income to the assessee's wife and his minor sons arose out of collusive gifts of share in the partnership firm between Mr. Bishamber Lal and his brother Mr. Amar Lal. In order to appreciate the issue, it is very essential to narrate the facts in brief.
2. There was a firm styled as Amar Lal Bishamber Lal constituted of Mr.
Amar Lal and Mr. Bishamber Lal, two real brothers, having 50 per cent share each, which continued up to 31-3-1972. Out of the accounts of the said firm, both Mr. Bishamber Lal and Mr. Amar Lal from 1-4-1970 to 31-3-1972 gifted Rs. 20,000 to their respective wives, i.e., Mr.
Bishamber Lal gifted the said sum to his wife Shakuntla Devi whereas Mr. Amar Lal gifted the very said sum of Rs. 20,000 to his wife Bhagwan Devi. Both Mr. Bishamber Lal and Mr. Amar Lal also gifted Rs. 2,000 each to four minor sons, i.e., Mr. Bishamber Lal to Mr. Sanjay Kumar and Mr. Ajay Kumar, whereas Mr. Amar Lal to Mr. Ravinder Kumar and Vinod Kumar, which would be clear from the following chart : 3. With effect from 1-4-1972, Mr. Bishamber Lal got out of the said firm of Amar Lal Bishamber Lal and Shakuntla Devi, wife of Mr.
Bishamber Lal, joined Mr. Amar Lal as his partner and Mr. Sanjay Kumar and Mr. Ajay Kumar, minors, were admitted to the benefits of the partnership. On the other hand, another firm styled as Bhajrang Bali Rice Mills, Pipli, was floated as a partnership concern by Mr.
Bishamber Lal who was joined by Bhagwan Devi as partner in which Mr.
Ravinder Kumar and Mr. Vinod Kumar, minors, were admitted to the benefits of the partnership. In both the firms, following were the profit-sharing ratio as per two different deeds executed for the respective firms on 17-4-1972 : The revenue accorded registration to both the abovesaid firms separately and assessments in the cases of Mr. Bishamber Lal and Mr.
Amar Lal and their respective wives Shakuntla Devi and Bhagwan Devi were also framed under Section 143(1) in respect of their individual shares.
4. Subsequently, the revenue required both Mr. Bishamber Lal and Mr.
Amar Lal to file their returns under Section 148 and in the course of said assessments the ITO added the share income of Shakuntla Devi, Mr.
Sanjay Kumar and Mr. Ajay Kumar earned from Amar Lal Bishamber Lal in the hands of Mr. Bishamber Lal and similarly in the hands of Mr. Amar Lal the ITO subjected to tax the share income belonging to his wife Bhagwan Devi and minor sons, Mr. Ravinder Kumar and Mr. Vinod Kumar, from Bhajrang Bali Rice Mills.
5. When Mr. Bishamber Lal, the assessee, felt aggrieved by the inclusion of his wife's share and those of his minor sons in his hands under Section 64, he carried the matter before the AAC, who accepting the contentions of the assessee, held that the assessee's case was not hit by Section 64 and placing her reliance on the cases of CIT v. Prem Bhai Parekh [1970] 77 ITR 27 (SC), G. Ethirajulu v. CIT [1972] 85 ITR 16 (AP) and Prahladrai Agarwala v. CIT [1973] 92 ITR 130 (Cal.), she reversed the action of the ITO. It will not be out of place to mention that issue regarding initiation of proceedings under Section 148 was not raised either before the ITO or before the AAC by the assessee.
6. It is this action of the AAC deleting the share income of the assessee's wife and minor children which is disputed by the revenue before us. The learned departmental representative, Mr. M.P. Singh, vehemently argued that the origin of income of the assessee's wife and two minor sons like the income of Mr. Amar Lal's wife and his minor sons is resulting out of collusive gifts. He relied upon the Bombay High Court decision in the case of U.S. Patel v. CIT[1980] 123 ITR 257 and argued at length making his submission that the main point to be seen is, is it as a departure from the normal course that the assessee's wife and two minor sons came to earn profit from the said firm. He submitted that it was on the basis of contribution of capital that the assessee's wife and two minor sons came to have profit from the said firm as it was on that basis that they became partners. He submitted that the nexus is more than apparent with the capital transferred than with the gift made by the assessee to his wife and minor sons and it is nothing but a case of manoeuvring out of collusive gifts and in support of his contention he relied on the case of Jose v.CIT [1961] 64 ITR 29 (Ker.). He also drew our attention to the relevant Clause 4 regarding capital contribution in the two partnership deeds-those written in the case of Amar Lal Bishamber Lal and Bhajrang Bali Rice Mills. He also submitted that in the earlier years the interest earned by the wife and minor sons of the assessee were added back in the course of assessment proceedings of the firm of Amar Lal Bishamber Lal and the assessee accepted the same. He submitted that the reliance of the AAC on the case of Prem Bhai Parekh (supra) on the basis of facts of the instant case is misplaced.
7. The learned counsel for the assessee, Mr. P.K. Sachdeva, on the other hand, beside relying on the order of the AAC, submitted that the gifts were made by Mr. Bishamber Lal and Mr. Amar Lal to their respective wives and minor sons before 31-3-1972 and it was with effect from 1-4-1972 that the two firms were started. He submitted that it is an uncontroverted fact that the assessments in the cases of the partners were framed under Section 143(1). He submitted that even proceedings under Section 148 were contrary to law but in the course of arguments he did not seem to be very serious about the legal objection attempted to be taken in that regard before us, when it was pointed out to him that it was not his case before the two lower authorities. He submitted that it is neither a case of collusive gifts nor cross gifts.
Regarding addition of interest on account of the assessee's wife and minor sons in the relevant assessment of the firm styled as Amar Lal Bishamber Lal he submitted the same was accepted by the assessee to avoid litigation and in order to buy peace of mind. In addition to the case of Prem Bhai Parekh (supra) he placed his reliance on the case of K.D. Kamath & Co. v. CIT [1971] 82 ITR 680 (SC) and Prahladrai Agarwala (supra).
8. After taking into consideration the rival submissions and careful perusal of facts, we are unable to interfere in the finding of the AAC.The assessment year involved is 1973-74. During the year under consideration, under Section 64(1)(i) and (iii) only the income earned by spouse and minor child respectively could be added which was from assets transferred directly or indirectly to the spouse or minor child by such individual otherwise than for adequate consideration. When above is the position of law to be applied, which is not controverted by any of the two parties before us, all that we have to see is whether the said share income of the assessee's wife and those of his minor sons was arising out of the gifts made by the assessee, as above detailed, directly or indirectly. Since the origin of the said income is out of a partnership and, if we look to the definition of 'partnership', we find that in the Indian Contract Act, 1872, it was contained in Section 239 (now repealed by the Indian Partnership Act, 1932) which was founded upon Kant's definition who defined 'partnership': As a contract of two or more competent persons to place their money, effect, labour and skill or some or all of them in lawful commerce or business and to share the profit and bear the loss in certain proportions." This definition was condensed in Section 239 of the Indian Contract Act in the following words : Partnership is the relation which subsists between persons who have agreed to combine their property, labour or skill in some business and to share the profits thereof between them.
The above said definition raised some criticism in the case of Polley v. Driver [1976] 5 Ch. D. 458 at the hands of Mr. M.R. Jessel who came forward with a ground that there may be a dormant partner such as the widow or relative of some former partner who contributes nothing at all- neither capital nor skill nor anything else. It was in order to meet the above said criticism that Sir Frederick Pollock defined 'partnership' as: ...the relation which subsists between persons who have agreed to share the profits of a business carried on by all or any of them on behalf of all of them.
It will be clear from reading the definition of 'partnership' as per Partnership Act with its definition given by Sir Frederick Pollock that the only difference is that the words 'on behalf of in the latter have been substituted for the words 'acting for' in the former. This would be clear from the definition of 'partnership' given in Section 4 of the Partnership Act, which is as below : 4. 'Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
9. It was on the basis of above definition that their Lordships of the Supreme Court in the case of K.D. Kamath & Co. (supra) observed that : The legal requirements under Section 4 of the Partnership Act to constitute a partnership in law are : (i) there must be an agreement to share the profits or losses of the business ; and (ii) the business must be carried on by all the partners or any of them acting for all." (p. 680) Beside the above definition, there can be terms and conditions entered into by the partners while executing the partnership deed.
From perusal of partnership deeds, 'it will be clear that the relevant clause in two partnership deeds of Amar Lal Bishamber Lal and Bhajrang Bali Rice Mills regarding contribution of capital are identical with a slight difference of few words, which may be extracted and placed below ; which is Clause 4 in the case of Bhajrang Bali Rice Mills and Clause 7 in the case of Amar Lal Bishamber Lal : Capital shall be invested as per books and as the partners think proper from time to time. The interest shall be charged as and if the partners so agree.
The capital shall be invested as per books and as the partners deem fit according to the conditions of the business. The interest shall be paid as and if the partners so agree.
Beside these two clause, there is no obligation cast on the wife or minor sons to contribute any capital to qualify them to become partner on their admission to the benefits of partnership.
10. Regarding addition of interest in the course of assessments of Amar Lal Bishamber Lal for the assessment years 1971-72 and 1972-73, which was accepted by the assessee, could not be fatal to his cLalm as the interest received by the wife and minor sons on amounts of gifts received from the assessee could not be equated with the shares of profit of the assessee's wife and two minor sons because the said interest was directly on the amounts of gifts given by the assessee to his spouse and minor sons without consideration. From perusal of assessment orders in the case of Amar Lal Bishamber Lal for earlier years or those of the ITO for the year under consideration, we are unable to lay hands on any finding that the gifts were cross-gifts and the same could not be so because they are to the assessee's wife and two minor sons. Regarding the fact that the gifts from Mr. Bishamber Lal and his brother Mr. Amar Lal are collusive, again the same cannot be said to be so because if Mr. Bishamber Lal gifts to his wife and sons and Mr. Amar Lal gifts to his wife and sons, we are unable to understand as to how the same would become collusive. The same at the most can be termed as a result of planning or tax avoidance.
Tax avoidance thrives on loopholes in the tax statute. Tax planning is nothing but skilful tax avoidance and in this regard Mr. Gerald Carson has made the following observation : Tax avoidance is mainly a high-bracket game, based on diligent study and familiarity with the rules. The opportunities for minimising income-taxes come alive when the taxpayer's financial assets are substantial and his affairs complicated-the. more complex the better. So as long as there is no finding of fraud or 'cooking the books'the prevailing judicial view of an avoidance plan that fails is generally that it was legitimate though futile ; call it a good try. Cheating, on the other hand, is not the exclusive preserve of the elite. It is practised up and down the economic scale, signified by misrepresentation, trickery, concealment and 'a patently lame and untenable excuse'.
It is trite law now that legitimate attempt to reduce one's tax liability within four corners of law is not frowned upon or disapproved.
11. At the most, the conduct of the assessee can cause some suspicion but suspicion has no place to be made a basis for assessment by the revenue. Reliance of the learned departmental representative on the case of Jose (supra) is misplaced because in that case their Lordships of the Kerala High Court while bringing that case under the mischief of Section 16(3) made the following observation : [In this case, as no other element operated, it was held that the wife's share of profits arose wholly and exclusively from the sum which the assessee had given to his wife and her share of the profits could be included in the assessee's income.]" (p. 29) Another case on which the learned departmental representative placed his reliance was that of U.S. Patel (supra) which also cannot be of any assistance to the contention of the revenue because in that case there were cross-gifts of the shares held by the assessee, U.S. Patel and it was on that basis that their Lordships of the Bombay High Court came to the following finding : Held, that even after conceding the time interval and discrepancies both in the matter of amounts' and the donees, the conclusion was inescapable that the consideration for the gift of the shares in company A was the earlier gift of the shares in company M. In other words, these were cross-transfers, each one being made in consideration or expectation of the other set of gifts. It was not necessary that the revenue should prove affirmative evidence suggestive of an agreement or a scheme of cross-transfers. The statutory provisions of Section 16(3)(a)(iii) and (iv) were, therefore, applicable to the gift of shares made to the assessee's wife and minor children and the income from those shares was to be included in the assessee's total income." (p. 258) As a matter of fact, on the issue, it is the Supreme Court decision in the case of Prem Bhai Parekh (supra) which holds the field at the moment and following is what has been held in the said case : Before an income can be held to come within the ambit of Section 16(3)(a)(iii) or (iv), it must be proved to have arisen directly or indirectly from a transfer of assets made by the assessee in favour of his wife or minor children. The connection between the transfer of assets and the income must be proximate. The income in question must arise as a result of the transfer and not in some manner connected with it.
...that the connection between the gifts made by the assessee and the income of the minors from the firm was a remote one and it could not be said that that income arose directly or indirectly from the transfer of the assets. The income arising to the three minor sons of the assessee by virtue of their admission to the benefits of partnership in the firm could not be included in the total income of the assessee." (pp. 27-28) The above said case, which was under the Indian Income-tax Act, 1922, came to be followed by the Calcutta High Court in the case of Prahladrai Agarwala (supra) and their Lordships made the following observations : Section 64 of the Income-tax Act, 1961, which deals with transfer of assets, speaks of income arising both directly and indirectly from such transfer. The expression 'indirectly' should not be construed to include consequences or income arising which has too remote a connection with the assets transferred. The connection between the transfer of assets and income arising from it should be proximate.
The income must arise as a result of the transfer and not in some manner connected with it.
Section 64(iii) of the Act of 1961 is in pari materia with Section 16(3)(a)(iii) of the Act of 1922.
Where an individual gifts a sum of money to his wife and the wife invests the sum in a firm and becomes a partner and receives a share of the profits of the firm, such share of profits arises primarily because the partnership makes a profit. Though that has a connection with the gift it does not arise as a result of the gift. Secondly, the income arises only because the other partners had agreed to take the individual's wife as a partner and had allowed her to contribute to the capital of the firm. This is also not a result of the gift. The income from share of profits in the firm arising to the individual's wife cannot, therefore, be included in the total income of the individual under the provisions of Section 64077)." (pp. 130-131) The Supreme Court decision in the case of Prem Bhai Parekh (supra) has also been followed by the Andhra Pradesh High Court in the case of G.Ethirajulu (supra). The facts of that case are also similar to those of the assessee where gifts were made by the assessee to his minor son who was admitted to the benefits of the partnership in which the said gifts were invested and in that case their Lordships held : ...that the share income of the assessee's minor sons from Ranganatha Silk House did not arise as a result of the transfer by the assessee but arose as a result of the admission to the benefits of partnership and as such it was not liable to be included in the total income of the assessee under Section 64(iv) of the Act." (p.
61) 12. For the reasons given by the AAC in her order and on the basis of facts of the instant case and in the light of the discussion above, we hereby confirm the order of the AAC.