Hardayal Hardy, J.
(1) This case relates to several years of assessment. It also relates to two brothers namely Shri R. N. Gupta and Shri Krishan Mohan who will hereafter be called 'assesseds'. Several applications for referring the questions of law arising out of the judgments of the Income Tax Appellate Tribunal (Delhi Bench 'A') were filed by the assesseds.
(2) In the case of Shri R. N. Gupta the relevanyears of assessment are 1959-60, 1960-61 and 1961-62, the accounting periods being the calendar years 1957, 1958, 1959, 1960 and 1961 respectively. Some of the reference applications which were filed before the Tribunal arose under Section 66(1) of the Indian Income Tax Act, 1922 while others arose under Section 254 of the Income Tax Act, 1961. Since the facts involved in the appeals of both the assesseds were similar and the same questions of law arose out of the orders of the Tribunal, a common statement of case was drawn up by the Tribunal and referred, originally to the High Court of Judicature at Chandigarh. After the' coming into force of the Delhi High Court Act, 1966, the statement of case is now before us. The questions of law are as follows :-
'(1)Whether on facts and in the circumstances of the case, renunciation of the 'right' to apply for shares amounted to transfer of an asset (2) If the answer to the above question is in the affirmative, whether on facts and in the circumstances of the case 75% of the dividend Income could be ineluded in the total income of the aforementioned assesseds under Section 16(3)(a)(iv) of the Indian Income-tax Act, 1922 and Section 64 of the Income Tax Act, 1961?'
(3) The assesseds in this case are shareholders in a company known by the name of Motor & General Finance Limited. The said Company resolved to issue equity shares of Rs. 10.00 each at par to the existing equity shareholders who were entitled to exercise the 'right' to renounce the shares offered to them or any portion of the same in favor of any other persons in the prescribed form. The person in whose favor the equity shareholder renounced the shares offered to him, was to apply in the prescribed form with the said sum of Rs. 10 per share before a particular date. On the payment being made the said person became entitled to the share or shares so applied for.
(4) In the present case the assesseds were in a position to acquire such shares but instead of getting the same themselves, they renounced the said 'right' in favor of their minor daughters-Meera and Sujata respectively. Meera and Sujata paid Rs. 10.00 per share out of their own funds and got the new shares allotted to them in their favor.
(5) In respect of such share-holding, Meera got by way of dividends in the three accounting years the following amounts:-
'Assessment Year Amount 1959-60 Rs. 2,336 1960-61 Rs. 2,580 1961-62 Rs. 2,400
Sujata got in the various years by way of dividends, the following amounts:-
'Assessment year Amount 1958-59 .. Rs. 2,740 1959-60 .. Rs. 2,396 1960-61 .. Rs. 4,896 1961-62 .. Rs. 4,556 1962-63 .. Rs. 4,556
(6) The Income-tax Officer concerned with the assessments of the assesseds, finding that the market value of each share which the said minors had acquired on payment of Rs. 10 per share was worth Rs. 40 per share and holding in consequence of the said prices that the 'right' transferred by the assesseds to their said minor daughters was worth Rs. 30.00 per share. He, thereforee, brought to tax in the assesseds' hands 75% of the dividend income mentioned above acting under the provisions of Section 16(3) (a) (iv) of the Indian Income Tax Act, 1922 and Section 64 of the Income Tax Act, 1961 in the respective years.
(7) On appeals before the Appellate Assistant Commissioner, it was contended by the assesseds that the 'right' which was renounced in favor of the minor daughters concerned was not an asset and that the income received by the assesseds minor daughters was from dividends whose source was the shares held in the Company for which they had paid Rs. 10 per share which belonged to them absolutely. In these circumstances, it was pleaded that there was no justification for the Revenue to bring to tax 75% of the dividends in question in the hands of, the assesseds under Section 16(3) (a) (iv). 'The contention was rejected and the decision of the Income Tax Officer was upheld.
(8) The assessed then took up the matter in appeals to the Incometax Appellate Tribunal. The original argument about the 'right' not being an asset, was given up and it was contended on their behalf that it was only a case of renunciation and not transfer and that it was in the case of transfer only that the provisions of Section 16(3) (a) (iv) of the Indian Income Tax Act, 1922 and Section 64 of the Income-tax Act, 1961 applied. It was next contended that the dividends in question were earned on account of the investment made by the said minor daughters and not by virtue of the renunciation. The Tribunal held that the renunciation amounted to a transfer. The Tribunal also held against the assesseds on the second contention and said that since the minor daughters got the dividends in question on account of shares whose market value stood at Rs. 40 per share for a consideration of Rs. 10 only per share it could be said that the renunciation of the assesseds' 'right' mentioned above was responsible for the said minor daughters to earn the dividends in question. In these circumstances, the Tribunal held that the Revenue was perfectly justified in bringing to tax 75% of the dividend income in the hands of the assesseds under the provisions of Section 16(3)(a)(iv) of the Indian Income Tax Act, 1922 and Section 64 of the Income Tax Act, 1961.
(9) The assesseds being dis-satisfied with the orders of the Tribunal sought a reference which is now before us.
(10) In order to appreciate the arguments that have been placed before us it is necessary to set out Section 16(3) (a) (iv) of the Act of 1922, The said section reads :-
16(3)-'INcomputing the total income of any individual for the purpose of assessment, there shall be included- (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly- ....................... ....................... ....................... (iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual (otherwise than for adequate consideration).'
It is argued that the right to apply for a share is different from the share itself. The right which the assesseds had to acquire the new issue of shares was admitted by the learned counsel to be an asset. It was also admitted that the market value of the shares on the date in question was Rs. 40 each. But it was contended that it was a case of 'renunciation' and not 'transfer' and that the provisions of Section 16(3) (a) (iv) only applied to transfers. It was urged that there should be two parties whenever there is a case of transfer of an asset, but in the present case it was renunciation as there was only one party to the act of renunciation viz. the assessed. There was, thereforee, no question of any transfer of any asset.
(11) The argument is not well founded. There were two parties in each case viz. the assessed and his minor daughter. The assessed renounced his claim to acquire the new shares in favor of his minor daughter and the minor daughter in pursuit of the renunciation in question applied for the shares and got them allotted in her favor. It cannot, thereforee, be said that it was a case of one party only. By the act of renunciation the assessed transferred his right to acquire the new shares to his minor daughter. In these circumstances, it cannot be said that in the present case, it was a case of renuciation and not of transfer.
(12) The provisions relating to further issue of capital are contained in Section 81 of the Companies Act, 1956. Under that section, after the expiry of the period mentioned therein, whenever it is proposed to increase the subscribed capital of the company by allotment of further shares, then such (further) shares are offered to the persons who, at the date of the offer, are holders of the equity shares of the company in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date. The offer aforesaid has to bs made bynotice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined. The section further provides that unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favor of any other person; and the notice referred to in clause, (b) contains the statement of right.
(13) After the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of directors may dispose of them in such manner as they think most beneficial to the company.
(14) Section 82 provides that the shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.
(15) These sections clearly show that the new shares issued by the company were movable property and were transferable in the mannerprovided by the Articles of the Company. They also show that the act of renunciation to which we have already alluded is merely an act of transfer from the person to whom the offer is made. Instead of taking up those shares himself he may specify the name of another person and state that they should be offered to him. The act of renunciation is merely a method by which the new shares which arc offered to the existing share-holder are offered to another person who but for that renunciation will have no right to the same. The original 'right' to acquire the new shares being vested in him, the existing share-holder renounces that right in favor of another person and once that renunciation has been made the other person acquires as good a right to have those shares as the original equity share-holder. Renunciation is. thereforee, a method of effectuating the transfer in favor of another person and has the same effect as an actual transfer. Section 16(3) (a) (iv), thereforee, does apply to such a mode of Transfer.
(16) Learned counsel for the assesseds drew our attention to a decision of the Supreme Court in Commissioner of Income-tax, Gujarat v. Keshctvlal Lalltihhai Patel : [1965]55ITR637(SC) , (1). This case does not appear to us to have any bearing on the present case. The respondent in that case threw his self-acquired property into the common hotchpot of the Hindu undivided family consisting of himself, his wife, a major son and a minor son. Some time later an oral partition was effected whereby the properties were transferred in accordance with the arrangerment to the names of the several members. The question was whether there was any direct transfer of the properties allotted to the wife and minor son to warrant the application of Section 16(3) (a) (iii) and (iv) of the Indian Income Tax Act. 1922. Their Lordships held that there was no transfer of assets, direct or indirect, within the meaning of Section 16(3) (a) (iii) or (iv) to the wife or minor son. The word 'transfer' was used in Section 16(3) (a) (iii) and (iv) in the strict sense and not in the sense of including every means by which property may be passed from one to another. The partion of joint Hindu family property was not a transfer in that strict sense. No suah question arises in the present case. Here the new shares which are admittedly movable property and are also transferable have been transferred by the company to the minor daughters of the assesseds at the instance of the assesseds themselves. The renunciation is the method by which the said transfer has been effectd. Instead of acquiring those shares themselves they have asked the company to transfer those shares in the names of their daughters.
(17) Learned counsel for the Revenue on the other hand drew our attention to,a decision of the Madras High Court in S. R. Chockalingam Chettiar v. Commissioner of Gift Tax : [1968]70ITR397(Mad) The case arose under the Gift Tax Act, 1958. But since it relates to the issue of 'right' shares by a company it has a bearing on the question arising for consideration in the present case. In that case the assessed was entitled to apply for 800 equity shares in a fresh issue of capital by a company with option to renounce the same as provided for in S. 81 of the Companies Act, 1956. The assessed renounced those shares on June 15, 1957 in favor of S. who applied for those shares on the strength of the renunciation. The Gift Tax Officer held that the renunciation involved the gift of a valuable right and evaluating the value of the gift as a difference between the market value of the shares on the date of renunciation and the value at which they were issued to the existing share-holders, levied gift tax on the total amount. On a reference to the High Court, it was held that the right to obtain a specified number of 'right' shares under Section 81 of the Companies Act in a fresh issue of capital is a tangible right and is not interest in future property but is existing property as defined in the Gift' Tax Act.
(18) Counsel for the assesseds tried to distinguish this case by staling that Section 2(22) of the Gift Tax Act defines the word 'property' as including any interest in property, movable or immovable. The definition of property as given in the Gift Tax Act is more or less akin to the meaning of the property in common parlance. If renunciation under Section 81 had the effect of transfer of property from the donor to the donee and attracted the gift tax. we see no reason why the same meaning should not be given to the word 'renunciation' in the Income-tax Act.
(19) Counsel for the assesseds next referred us to a decision of the Supreme Court in Commissioner of Income-tax, West Bengal Iii v. Prem Bhai'Parekh & Others : [1970]77ITR27(SC) and submitted that 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 transfer of assets made by the assessed in favor of his wife and minor children. The connection between 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 meaning connected with it. The assessed who was a partner in a firm gifted Rs. 75000.00 to each of his four sons after he retired from the firm Three of the sons were minor. There was a re-constitution of the firm the next day after the assessed retired from the firm. The three minor sons were admitted to the benefits of partnership in the firm while the major son became a partner. The question was whether the income arising to the minors by virtue of their admission to the benefits of partnership in the firm could be included in the total income of the assessed under Section 16(3) (a) (iv). The Tribunal found that the capital invested by the minors in the firm came from the gift made in their favor by their father, the assessed. It was held by the Supreme Court that the connection between the gifts made by the assesses 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.
(20) Relying upon this case, learned counsel for the assesses urged that just as a gift made by the assessed in favor of his minor children could not render the income derived by the minors, as the income of the assessed under Section 16(3) (a) (iv) the renunciation made by the assesseds in the present case could not make the income from the new shares as the income of the assesseds. There is no parallel between the case decided by the Supreme Court and the present case. Here there is a direct connection between the act of renunciation and the transfer of shares in favor of the minors. The connection between the transfer of assets and the income is proximate. The income arose to the minors as a result of the transfer because it was on the strength of the renunciation that the transfer of shares was made in favor of the minor sons.
(21) We were next referred to a decision of the Supreme Court in Mrs. Bacha F. Guzdar v. Commissioner of Income-tax 27 I.T.R. 7.We however fail to sec what bearing the above decision has on the facts of the present case. That case dealt with the income received by the assessed who was a share-holder in certain tea companies. Sixty per cent of the income of those companies was exempt from lax as agricultural income. The assessed claimed that the 60 per cent of the dividend-income received by her on her shares in those companies was also exempt from tax as agricultural income. Her contention was rejected and it was held that the dividend-income received by the assessed was not agricultural income but was income assessable under Section 12.
(22) The next contention urged by the learned counsel for the assesseds was that in any event when the new shares were valued at Rs. 40.00 the issue of the new shares had its effect on the market value of the old shares. It was said that when the new shares were issued the value oi the old shares depreciated. The assets which the company owned at one time were after the issue of the new capital, owned by a larger number of share-holders. As a result of renunciation new share-holders came into the field. In this connection our attention was drawn to a decision of the Supreme Court in Miss Dhun Dadahhoy Kapadia v. Commissioner of Income-tax : [1967]63ITR651(SC) and it was urged that as a result of depreciation in the value of the old shares the assesseds suffered a capital loss in the old shares which they were entitled to set off. The argument does not seem to have any substance. In the case before the Supreme Court the question was about the levy of tax on capital gain. The appellant who was not a dealer in shares held by way of investment 710 ordinary shares in the Tata Iron & Steel Co. Ltd. The company made an offer to her by which she was entitled to apply for 710 new ordinary shares at a premium with an option of either taking the shares or renouncing them wholly or partly in favor of others. The appellant renounced her right to the new shares and realised Rs. 45.262,50. When this amount was sought to be wholly taxed as a capital gain. the appellant claimed that on the issue of new shares the value of her old shares depreciated and that as a result of that depreciation she suffered a capital loss in the old shares to the extent of Rs. 37.630.00 which she was entitled to set off against the capital gain of Rs. 45,262.50. It as hdd that the appellant was entitled to deduct from the sum of Rs. 45.265.50, the loss suffered by way of depreciation in the, old shares.
(23) In the present case no material has been placed on record that there was any loss in the value of the old shares. It was conceded before the Tribunal that the value of the new shares was Rs. 40.00 in the market and they were acquired only for Rs. 10.00. There is also no question of levy of any capital gain in the present case nor did the assessed realise any money from the minors for the transfer of new shares to them.
(24) As seventy-five per cent of the dividend income which arose on account of the shares transferred to the minors was actually the income of the asscssces, it could be included in their total income under S. 16(3)(a)(iv) of the- Indian Income-tax Act, 1922 and Section 64 of the Income-tux Act, 1961. Both the questions are thereforee answered in favor of the Revenue and against the assesseds. The Commissioner will also have his costs which are assessed at Rs. 300.