VARADARAJA AYYANGAR, J. - These are references made by the Income-tax Appellate Tribunal, Madras 'A' Bench, under clauses (2) and (1) respectively of section 66 of the Indian Income-tax Act. They arise out of the assessments to income-tax of the same individual, M. K. Makkar Pillai, Alwaye, for the assessment years 1123 and 1124 M. E. As the question referred is more or less the same, they were heard together and are being disposed of by this single order.
2. The assessee by his first wife, deceased, had 8 children who were all adults. By second wife he had 3 daughters who are all minors. In October, 1941, he floated a private limited company to take over his lucrative business in cashewnuts, lemon-grass oil etc. Out of the 300 shares, the assessee retained for himself 180 shares and caused the allotment of 10 shares each to his 2nd wife and 11 children. We are concerned with the dividends which accrued on the 40 shares appertaining to the 2nd wife and her 3 minor children. The Income-tax Officer in the first instance and later the Appellate Assistant Commissioner and the Appellate Tribunal in successive appeals, held that these dividends should be included in the income of the assessee for the assessment years 1123 and 1124, by virtue of the operation of section 20(3)(a) clauses (iii) and (iv) of the Travancore Income-tax Act XXIII of 1121 corresponding to the similar sub-clauses in section 16 of the Indian Act. It was contended on behalf of the assessee that the clauses (iii) and (iv) above will not hit the transfers in favour of the second wife and the minor children effected long previously, particularly in view of section 37 of the Travancore Act, to which there is no corresponding section in the Indian Act, which specially provided against evasion of liability to assessment as a result of settlement etc., but effected only after the 1st January, 1945. The question was, therefore, formulated in the Reference Case No. 6 of 1955 herei :
'The concerned transfers being admittedly before January, 1945, whether it is saved from the operation of section 20 of the Act on account of the 37th section.'
And similarly in Reference Case No. :
'Whether on account of the operation of 37th section, transfers by the assessee in favour of wife and minor children before January, 1945, are saved by the operation of the Act.'
3. Before the proceeding to discuss the question, it will be useful to extract the relevant provisions of the Act. Section 20(3) runs as follow :
'(3) In computing 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 arises directly or indirectly -
(iii) From assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart; or
(iv) From assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration.'
Section 37 to which there is no corresponding section in the Indian Act say :
'Whether any settlement, partition, sale, gift or other transaction which has been effected after the 1st day of January, 1945, in respect of all or any of the properties belonging to, or in the possession, whether jointly or in common, of any individual, family or association has, in the opinion of the Income-tax officer, been effected for the purpose of evading liability to assessment, he may assess the income from all such properties to income-tax as if no such settlement, partition, sale, gift or other transaction had taken place in respect thereof.
Provided that no such order shall be made until notice has been given to the individual, or the members of the family or association concerned, and an opportunity given to them to be heard in support of their contention.'
4. Mr. T. N. Subramonia Iyer, learned counsel for the assessee, urged before us that the settlement of the shares in the instant case being in October, 1941, was long previous to the enactment of the Travancore Income-tax Act XXIII of 1121 on 9th July, 1946, and that during all this interval the departmental authorities had accepted the settlement as genuine and assessed the donees themselves direct on the dividends arising from the shares. Even now it was not contended that the settlement regarding the corpus of the shares was to any extent void. If so, it was not open to the Department to treat the dividend which was only an incident, as having affinity different from the corpus itself. Clauses (iii) and (iv) of section 20(3)(a) cannot therefore be so interpreted as not to rope in the income of the wife or minor child arising from the past settlement. That is to say, the sub-clauses should not be given any retrospective effect at any rate beyond 1st January, 1945, and this according to learned counsel, was made specifically clear by the provision in section 37 for such limited retrospectivity only.
5. The argument of learned counsel as above assumes, to begin with, that the sub-clauses (iii) and (iv) of section 20(3)(a) are intended to subserve the same purpose as section, 37. But is the assumption well-founde Section 37 deals with settlement etc., which, in the opinion of the Income-tax Officer, have been effected for the purpose of evading liability to assessment. Sub-clauses (iii) and (iv) on the other hand deal with the transfer of assets otherwise than for adequate consideration. As observed in Sampath Iyengars Commentaries, 4th Edition, Volume 2, page 631, with reference to section 16 of the Indian Act corresponding to section 20 her :
'It is not correct to represent sub-section (1)(c) and sub-section (3) as intended to prevent evasion of tax. On the contrary, they are intended to widen the area of taxable income by including in that category certain forms of income, which but for the said provisions would not have been taxable at all', and reference is made to Gillies v. Commissioners of Inland Revenue At page 660 of the same volume, the learned author observes furthe :
'The raison detre of this fasciculus of clauses is that the husband or the parent is bound to maintain his wife or child, and any settlement that he makes upon them would be to provide maintenance for them which in any case he is bound to do. The transfer of assets is at best only an arrangement for providing maintenance to these dependent relations. If expenditure is incurred directly be the assessee for such purpose out of his income, he could not claim any allowance. The same should be the result, even if, instead of the assessee incurring the expenditure recurrently for such purpose, he should transfer his assets to the wife or child.'
The legislative history of these provisions is also instructive. Section 37 of the Act XXIII of 1121 corresponds to section 24A of the Agricultural Income-tax Act 1 of 1119 enacted on 17th August, 1943. This section 24A was itself inserted on 10th July, 1945, by the Amendment Act XXVII of 1120, with a view to provide against the tendency which was manifested by agricultural in Travancore to alienate agricultural lands with intent to evade liability to agricultural income-tax. When the Income-tax Act XXIII of 1121 was enacted, section 24A was reproduced as section 37 of the Act. Section 20(3) had no parallel in the previous Travancore Act VIII of 1096 and was modelled on the lines of section 16(3) of the Indian Act which itself had been inserted there by way of amendment in 1937. It is difficult, in the context, to view section 20(3) and section 37 as intended to fulfil the same function.
6. Nor is the argument based on the retrospectivity of the provision section 20(3) any more sustainable. For, the transactions themselves between the husband and wife or parent and child are in no way invalidated. The transfers are assumed to be valid but in certain circumstances the income of the wife or child has to be added to the husbands income in computing the income of the latter. As observed by Braund, J., in Pandit Gaya Prasad Tewari v. Commissioner of Income-ta :
'It is true that the transfer which entitled the wife to receive this income took place long ago, but that, to my mind, is wholly immaterial. I am inclined to think that the argument is based upon the material misconception that there is some sort of common law right that, if at any time the ownership of property bearing income does not attract income-tax, it is for ever entitled to be immune from tax. That, of course, is wholly untrue.' [See also H. P. Banerji v. Commissioner of Income-tax].
7. Our answer to the question referred is, therefore, as fallow :
'The transfers by the assessee in favour of the wife and minor children before January, 1945, are not sayed from the operation of the Act on account of the 37th section.'
8. The assessee will pay the costs of these references, including counsels fee Rs. 150 (one set only).
Reference answered accordingly.