GURU CHARAN SINGH VS COMMISSIONER OF INCOME-TAX
1997 P T D 1213
[213 ITR 91]
[Orissa High Court (India)]
Before G. B. Patnaik and P. C. Naik, JJ
GURU CHARAN SINGH
Versus
COMMISSIONER OF INCOME-TAX
S.J.C. No. 12 of 1990, decided on 21/12/1994.
Income-tax---
----Total income---Inclusions in total income---Law applicable to assessment---Gift of money to wife in January, 1974---Amount invested in firm---Income from firm earned by wife not includible in total income of assessee---Explanation 3 to S.64(1) inserted w.e.f. 1-4-1967 not applicable-- Indian Income Tax Act, 1961, S. 64.
There is nothing in section 64 of the Income Tax Act, 1961, or the Explanation which was inserted by the Taxation Laws Amendment Act, 1975, to indicate that it was retrospective in nature and, therefore, the said Explanation cannot be considered for deciding the clubbing of income in respect of investment made prior to the coming into force of the amendment
The assessee had made a gift of Rs.5,000 in January, 1974, to his wife without adequate consideration. She had invested it in a firm. The Tribunal held that the income earned by the assessee's wife had to be included in the total income of the assessee. On a reference:
Held, that the transfer in question having been made in January, 1974, the provisions of the amended subsection (1) of section 64 alongwith Explanation 3 which became operative from April 1, 1976, were not applicable. The income of the assessee's wife from the firm was not includible in his total income.
CIT v. Prahladrai Agarwala (1989) 177 ITR 398 (SC) and CIT v. Prem Bhai Parekh (1970) 77 ITR 27 (SC) ref.
S.K. Patnaik for the Assessee.
Standing Counsel for the Commissioner
JUDGMENT
G. B. PATNAIK, J.---On an application being filed under section 256(1) of the Income Tax Act, 1961, the Income-tax Appellate Tribunal has referred the following questions for the opinion of this Court:
"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of clause (iv) of section 64(1) were attracted to the facts of the case by virtue of Explanation 3 to section 64(1) of the Income Tax Act, 1961?
(ii) Whether, on the facts and in the circumstances of the case, the alleged transfer having been made in January, 1974, the provisions of the amended subsection (1) of section 64, operative from April 1, 1976, alongwith Explanation 3 to the said subsection was applicable to the facts of the case?"
The assessee, as an individual, has been assessed by the Income-tax Officer for the assessment year 1982-83 under section 143(3) of the Income tax Act. The Commissioner of Income-tax while examining the records found that the assessee's wife was a partner of the partnership firm and had invested a sum of Rs.5, 000 as her capital, which was a gift to her by her husband, the assessee. Accordingly, the income derived by the assessee's wife from the partnership-firm was to be clubbed with the income of the assessee. After a show-cause notice was issued to the assessee, the assessee appeared and the Commissioner of Income-tax came to the conclusion that Explanation 3 to section 64 was sufficient to hold that the income of the assessee's wife from the partnership-firm had to be included in the income of the assessee. He ultimately directed the Income-tax Officer to redo the assessment after clubbing the proportionate income as envisaged under the law. The assessee then approached the Tribunal and the Tribunal reaffirmed the decision of the Commissioner on a finding that it was the sum of Rs.5,000 which had been gifted to the assessee's wife by the assessee without adequate consideration that had been invested by the wife which generated income and such income had to be included in the total income of the assessee in accordance with Explanation 3 to subsection (1) of section 64. The assessee then moved the Tribunal under section 256(1) and the Tribunal has accordingly formulated two questions.
Learned counsel for the assessee argues with force that the proximate cause of making of profit in the partnership business is not the gift which the assessee had made in favour of his wife and until that is established, the income of the assessee's wife from the partnership-firm cannot be included with the income of the assessee. Learned counsel relies upon the decision of the Supreme Court in Prem Bhai Parekh's case (1970) 77 ITR 27, CIT v. Prem Bhai Parekh as well as the decision of the Supreme Court in CIT v. Prahladrai Agarwala (1989) 177 ITR 398 (SC).
Learned standing counsel appearing for the Revenue, on the other hand, contends that in view of Explanation 3 which was inserted by the Taxation Laws Amendment Act, 1975, the decision of the Supreme Court in Prem Bhai Parekh's case (1970) 77 ITR 27 is of no assistance to the assessee. In Prem Bhai Parekh's case (1970) 77 ITR 27 (SC), their Lordships of the Supreme Court were considering the provisions of section 16(3) of the Indian Income Tax Act, 1922, which is in pari materia with section 64 of the Income Tax Act, 1961. Their Lordships of the Supreme Court held that since section 16(3) created an artificial income, this section must receive a strict construction. It was further held that before an income could be held to come within the ambit of section 16(3), 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 unconnected with it.
In Prahladrai Agarwala's case (1989) 177 ITR 398 (SC) their Lordships considered section 64(1)(iii) of the Income Tax Act, 1961. In that case also, the assessee had gifted away some money to his wife and the wife invested that amount in a partnership business and the question for consideration was whether the income which the wife got from the partnership business, can be clubbed with the income of the assessee's husband, under section 64(1)(iii) of the Act. Their Lordships of the Supreme Court reiterated the earlier view of the Court in Prem Bhai Parekh's case (1970) 77 ITR 27 (SC) and held.
"There is no doubt that the wife became a partner because of the capital contributed by her in the firm, but, as observed by the High Court, in the judgment under appeal, it was upon agreement by the remaining partners that she became a member of the partnership. The mere contribution of the capital by the wife to the firm would not automatically have entitled her to partnership in the firm. The partnership was based on agreement, and it is the event of agreement between the partners that brought the assessee's wife into the firm as partner."
Ultimately, their Lordships held that the High Court was right in answering the question in favour of the assessee and against the Revenue. It is to be noticed that Explanation 3 to section 64 though it had come into the statute book since April 1, 1976, had not been pressed into service obviously because the investment had been made prior to the Explanation being inserted in the statute book. Mr. Ray, learned standing counsel appearing for the Revenue, however, contended that section 64 of the Income-tax Act, like that of sections 60 to 63, was designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce liability to tax by means of settlements or disposal of property in such a way that, while one income is no longer received by him/her in law, he/she retains certain powers over, or interest in the property or the income. It is aimed at foiling this attempt to reduce the incidence of tax by transferring assets to spouse or minor child or getting the minor child admitted to the benefits of a firm or taking the spouse as a partner. The scope of section 64, as originally introduced in 1961, was wider than section 16(3) of the 1922 Act which was being considered by the Supreme Court in Prem Bhai Parekh's case (1970) 77 ITR 27 and the said scope has been further widened with amendments made subsequently and the Explanation being inserted there into Explanation 3 which was inserted by the Taxation Laws Amendment Act, 1975, and was given effect to with effect from April 1, 1976, was to the following effect:
"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."
The gift of Rs.5,000 by the assessee in favour of his wife was in the year 1974, much prior to the insertion of Explanation 3 which came into force with effect from April 1, 1976. There is nothing in section 64 or the Explanation which was inserted by the Taxation Laws Amendment Act, 1975, to indicate that it was retrospective in nature and, therefore, the said Explanation cannot be considered for deciding the clubbing of income in respect of investment made prior to the amendment coming into force.
In the aforesaid premises, we answer question No. l to the effect that, on the facts and in the circumstances of the case, the Tribunal was not justified in holding that the provisions of clause (iv) of section 64(1) were attracted to the facts of the case by virtue of Explanation 3 to section 64(1) of the Income Tax Act, 1961. We answer the second question by holding that the alleged transfer having been made in January, 1974, the provisions of the amended subsection (1) of section 64 alongwith Explanation 3 which became operative from April 1, 1976, are not applicable to the facts of the case. Both the questions are accordingly answered in favour of the assessee and against the Revenue. The reference application is disposed of accordingly.
P. C. NAIK, J.---I agree.
M. B. A./1124/FC Order accordingly.