B PALANISWAMY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AT the instance of the assessee, the Tribunal referred the following common question, for the assessment years 1976-77 and 1978-79, for the opinion of the court, under section 256(1) of the Income-tax Act, 1961 :"Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in law in holding that the share income which arose to the assessee's daughter-in-law in the two firms, Vijayalakshmi Colour Company and Singarappan Palayakat Company, were includible and assessable in the hands of the assessee under section 64(1)(vi) of the Income-tax Act, 1961 ?"The assessee is an individual and derives share income from two firms called Singarappan Palayakat Co. and Palaniappan Palayakat Co., both at Pudupet, in which he is a partner. During the previous year relevant for the assessment year 1977-78 (sic), the assessee made two gifts to his daughter-in-law, Smt. P Vijalakshmi, totaling Rs. 12, 000 of which Rs. 6, 000 each was invested on April 14, 1974, as her capital in the two firms, Vijayalakshmi Colour Company and Singarappan Palayakat Co.

(2.) THE Income-tax Officer was of the view that but for the capital contribution by her father-in-law, Smt. Vijayalakshmi could not have contributed capital in the abovesaid two firms and derived the share income therefrom. Hence, he treated the share income earned by he daughter-in-law applying the provisions of section 64(1)(vi) of the Income-tax Act, 1961, and clubbed the same with the income of the assessee. Thus, in the assessment years 1976-77 and 1978-79, the share income derived by the daughter-in-law from the abovesaid two firms was clubbed with the income of the assessee in his assessment.On appeal, the Appellate Assistant Commissioner was of the view that there is no nexus between the share income earned by the daughter-in-law and the gifts made by the father-in-law to the daughter-in-law. According to the Appellate Assistant Commissioner, the share income arose out of the capital contributed by the daughter-in-law, who is a partner in the abovesaid firms. Hence, the Appellate Assistant Commissioner came to the conclusion that the share income earned by the daughter-in-law in the abovesaid two firms in the assessment years under consideration cannot be included in the income of the assessee.Aggrieved, the Department filed appeals before the Appellate Tribunal. On appraising the facts arising in the case, the Tribunal came to the conclusion that there was nexus between the gift made by the father-in-law and the share income earned by the daughter-in-law out of her capital contribution made in the abovesaid two firms.