Per Shri M. C. Agarwal, Judicial Member - All these are the appeals by the revenue. The respondents in Income-tax Appeal Nos. 884 and 885 are wife and husband, respectively, and the point in issue is the inclusion of income from a house property purchased by Smt. Yeshodabai, the wife, from the funds gifted to her by her husband, Shrihari Tiwari, in the latters income under section 64(1) (iv) of the Income-tax Act, 1961, (the Act). In the assessment of the wife, the income from property for the assessment year 1978-79 was assessed by the ITO on protective basis and that income was assessed in the hands of the husband for the assessment years 1978-79 to 1980-81. Both the assessees appealed to the AAC who held that the amount gifted by the husband to the wife was cash from which the wife purchased a house property and, therefore, the income arising to the wife was not from the assets transferred by the husband and, consequently, section 64(1) (iv) had not application. He, therefore, ordered the exclusion of that income from the assessments of the husbands and in the appeal of the wife directed the ITO to treat the assessment of income from property in her hands as a substantive one. Feeling aggrieved, the revenue is in appeal before us.
2. Since a common issue is involved we dispose of all these four appeal by this common judgment.
3. We have heard the learned departmental representative and the learned counsel for the assessee and have perused the record. The facts are not in dispute. Admittedly the wife acquired this property in the year 1971 exclusively out of the funds provided by her husband by a gift a cash amounting to Rs. 65,000. The property in question was acquired within a few days of the gift. Therefore, the nexus between the transfer of the amount in cash to the wife and the acquisition of the house property by her is direct and proximate. Section 64(1) (iv) reads as under : "(1) 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, in a case not falling under clause (i) of this sub-section to the spouse of individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart;" The learned departmental representative referred to several rulings to show that income arising to a wife from assets acquired by her out of the funds provided by the husband is includible in the income of the assessee. In the Indian Income-tax Act, 1922 (the 1922 Act) section 16(3) corresponded to the present section 64(1) (iv) of the 1961 Act.
In R. Ganesan v. CIT [1965] 58 ITR 411, with reference to section 16(3) of the 1922 Act, the Honble Madras High Court held that where an amount was transferred by the assessee to his wife towards construction of a house otherwise than for adequate consideration or in connection with the agreement to live apart, the income from the house property was includible in the total income of the assessee. In Smt. Mohini Thapar v. CIT [1972] 83 ITR 208, the Honble Supreme Court held that where out of gifts of cash by the husband the wife purchased certain shares and invested the balance in deposits, the income derived by the wife from such deposits and shares, had to be assessed in the hands of the assessee under section 16(3) (a) (iii). The Honble Supreme Court held that in such a case transfer of the asset was direct but the income was indirectly received from the transferred asset. In B. K. Guha v. CIT [1972] 84 ITR 592, the Honble Calcutta High Court held that where a part of the cost of construction of a house by the wife was met by the husband, the income arising directly and indirectly from the asset was liable to be included in the total income of the assessee (the husband) under section 64(iii). It may be mentioned that clause (iii) of section 64(1) was renumbered as clause (iv) by the Taxation Laws (Amendment) Act, 1975, with minor variation in language which admittedly had no effect in the controversy before us. The learned departmental representative also relied upon the case of Addl. CIT v. H. L. Gulati [1982] 138 ITR 648, in which a similar view was taken by the Honble Allahabad High Court.
4. The learned counsel for the assessee has not disputed the ratio of the various judicial pronouncements referred to above but he contended that by the Taxation Laws (Amendment) Act, 1975, Explanation 3 was added to section 64 which reads as under : "Explanation 3 : For the purposes of clauses (iv) and (v), where the assets transferred directly or indirectly by an individual to his spouse or minor child are invested by the spouse or minor child in any business, that part of the income arising out of the business to the spouse or minor child in any previous year, which bears the same proportion to the income of the spouse or minor child from the business as the value of the assets aforesaid as on the first day of the previous year bears to the total investment in the business by the spouse or the minor child as on the said day, shall be included in the total income of the individual in that previous year." According to the learned counsel for the assessee, Explanation 3 deals with a case where the assets transferred to spouse or a minor child are invested in any business and that in case the Legislature intended that assets transferred by a person to his spouse or minor child and converted into any property would be dealt with in the same manner, then this Explanation could be suitably worded by a adding the words or property after the word business in the said Explanation and since the Legislature has not chosen to do so, the intention appears to be that if an asset transferred to a spouse or a minor child is converted into another asset, the income from such converted asset would not be included in the income of the transferor. It is this argument that has prevailed upon the learned AAC. We are of the view that the purpose of adding the Explanation 3 was only a plug a loophole in the law by which tax could be avoided by a person by transferring money to the spouse or the minor child who in turn invests that money in a business and earns income. The need for adding an Explanation appears to have arisen because of a judgment of the Honble Supreme Court in CIT v. Prem Bhai Parekh [1970] 77 ITR 27. In that case the assessee had gifted certain moneys to his minor sons who invested those amounts in a partnership firm to the benefits of which the minors were admitted. The question was weather the income arising to the minors arose from the moneys transferred by the assessee. The Honble Supreme Court held 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 and, therefore, the income arising to the 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.
Prior to the amendment in 1975, only income arising to a minor from admission to the benefits of partnership in a firm in which a parent was a partner could be included in the income of the parent. By the amendment, clause (iii) was added to provide that income arising to a minor from the admission of the minor to the benefits of any partnership firm is includible in the income of the parent. Clause (ii) was also newly added to provide that income arising to the spouse by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual had a substantial interest, was includible in the income of the individual.
A proviso was appended to this clause making an exception in the case of income arising to the spouse because of technical and professional qualification. All these amendments made to section 64 in the year 1975 were intended to plug loopholes and remove lacunae wherever they existed. So far as the income from property acquired by a spouse directly out of funds made available by the other spouse is concerned, there was no doubt or lacuna and the matter had been finally settled by the Honble Supreme Court in the case of Smt. Mohini Thapar (supra).
Therefore, it cannot be said that by wording Explanation 3 in a manner so as to cover a case of conversion of an asset into an investment in business only, the Legislature exempted the conversation of an asset into an asset other than business from the operation of section 64(1) (iv). As is evident, section 64 was amended to plug certain loopholes and it cannot be assumed that in doing so the Legislature created a new loophole which had already been effectively plugged by the Honble Supreme Court in the case of Smt. Mohini Thapar (supra). Such an interpretation of the effect of Explanation 3 would be against all principles of interpretation of statutes. We are, therefore, of the view that the matter is fully covered by the decision of the Honble Supreme Court in the case of Smt. Mohini Thapar (supra) and the income from the property in question, which was admittedly acquired by the wife out of the funds gifted by the husband was taxable in the hands of the husband under section 64(1) (iv). All the appeals by the revenue, therefore, deserve to be allowed.
5. The revenues Appeal No. 884 is allowed and the direction of the learned AAC to the ITO to treat the assessment of property income in the case of Smt. Yeshodabai Tiwari as a substantive one is hereby revoked. Appeal Nos. 885 to 887 are also allowed and the other under appeal passed by the learned AAC directing the exclusion of property income from the income of the assessee, Shrihari Sarju Prasad Tiwari, is set aside and the assessment orders passed by the ITO assessing the said income in the hands of the said assessee under section 64(1) (iv) are restored.