COMMISSIONER OF INCOME TAX Vs. L G RAMAMURTHI

JUDGEMENT

(1.) IN T. C. No. 229 of 1972, the INcome tax Appellate Tribunal, Madras Bench, under section 256(1) of the INcome tax Act, 1961, has referred the following question of law for the opinion of this court:"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the amounts represented by cross gifts were not held by the donees as benamidars of the respective donor Hindu undivided families but in their own right and that the income attributable to the cross gifts is not assessable in the hands of the donors ?" *IN the application made to the Tribunal, the Commissioner of INcome tax had requested the Tribunal to refer four questions, of which the question actually referred was question No.1. The Tribunal did not refer the other three questions and referred the only question which we have extracted above.

(2.) THEREUPON, the Commissioner of Income tax approached this court in T.C.Ps. Nos. 16 to 18 of 1973 and by an order dated February 18, 1974, this court directed the Tribunal to refer the following question also for the opinion of this court:"Whether the Tribunal was right in refusing to entertain and adjudicate upon the contention of the department that the alleged gifts were void in law ?" *T.C. No. 64 of 1975 covers the above question.Both the questions referred to above relate to the same assessment year, namely, 1963-64.The short facts are: There were four brothers by name L. G. Balakrishnan, L. G. Varadarajulu, L. G. Ramamurthy and L. G. Nityanand and they constituted a partnership with the firm name of L. G. Balakrishnan and Brothers. In the accounting year ending 31st March, 1958, relevant to the assessment year 1958-59, the Income tax Officer found the following deposits in the books of the firm called L. G. Balakrishnan and Brothers and the said deposits were made by debiting the capital account of the partners and crediting the account of the minor children as shown below:The firm paid interest on these credits to the respective persons referred to above. In the assessment proceedings for 1958-59, the Income tax Officer considered these gifts to be really in the nature of cross gifts and he was of the opinion that though there were no direct transfers of assets by the fathers to the minor children these transactions amounted to indirect transfers within the meaning of the said expression in section 16(3)(a)(iv) of the Indian Income tax Act, 1922. He, therefore, included the interest on the sum of Rs. 50, 000 in the respective assessments of the three persons who figured as donors. We may mention in this context that all the four were partners of the firm as karta of their respective joint families.As far as the assessment year 1958-59 is concerned, of the three persons in whose total income, interest on Rs. 50, 000 is included, L.G. Balakrishnan alone pursued the matter all through up to the High Court.

(3.) THAT apart, all concerned having come to the conclusion that the gifts are, as a matter of fact, made by the respective Hindu undivided families, to the members of their own family, the case will have to be examined not from the point of view whether a karta of a Hindu undivided family could out of his joint family funds make gifts to his nephews or nieces but from the point of view whether he could make gifts to his own sons and daughters. In this connection it may not be out of place to mention here that the department's stand is contradictory. If that is the stand of the department, the gifts would be bad in entirety and would not be subjected to gift tax at all. Moreover, it is here that the department's conduct in the past and in the subsequent income tax and wealth tax proceedings assumes importance. The department cannot blow hot and cold at the same time. Both the contentions of the departmental representative are, therefore, liable to be rejected." *We shall first deal with the question raised in T.C. No. 229 of 1972, before we refer to the question covered by T.C. No. 64 of 1975. We have already extracted the question covered by T.C. No. 229 of 1972, and it relates to the correctness of the conclusion of the Tribunal with regard to the nature of the gifts involved in these cases. Before we deal with this question, it is desirable to refer to certain things which had happened previously.We have already referred to the assessment in regard to 1958-59, having been brought up to this court by L. G. Balakrishnan. Similarly, when the Tribunal held in respect of the assessment years 1961-62 and 1962-63, that the gifts were sham and not real, the matter was brought up to this court in the form of a reference in L. G. Ramamurthi v. Commissioner of Income tax [1970] 1 ITJ 740 (Mad). In that case, the question actually referred to this court was:"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the income derived by the minor children from gifts made to them by their uncles is includible in the total income of the assessee Hindu undivided family?" *In view of the general terms in which the question was couched, a vast line of argument was sought to be advanced before this court on behalf of the assessee. As a matter of fact, as we have pointed out already, with reference to these years, the finding of the Tribunal was that the gifts were sham. If so, the gifts were never made and had no existence in law and, consequently, it would immediately follow that the income referable to those amounts was liable to be assessed only in the hands of the donors.