SEVANTILAL MANEKLAL SHETH Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The assessee is one Maneklal Sheth, who having died on 22nd April, 1959, has been represented in the present assessment proceedings, which relate to the assessment years 1957-58, 1958-59 and 1959-60, by his son, the present applicant before us. In the year 1951, the assessee Maneklal had made a gift of 1,184 ordinary and 155 preference shares of Changdeo Sugar Mills Ltd., to his wife, Bai Laxmibai. The total value of these transfer shares on the date of the transfer was Rs. 69,730. Subsequent to the transfer of these shares by Maneklal to his wife, the preference shares were converted by the company into ordinary shares giving the shareholders 8 ordinary shares for one preference share, with the result that by the end of the year 1954 Bai Laxmibai possessed 2,424 ordinary shares of the mills. On the 1st of August, 1956, Bai Laxmibai sold 2,400 out of the said shares possessed by her for a total price of Rs. 1,54,800 resulting in a capital gain of Rs. 70,860 as computed u/s. 12B of the Income-tax Act. The whole amount realised by the sale of the shares was deposited by Bai Laxmibai with M/s. A. H. Bhivandiwalla & Co., in which Maneklal as well as his son, the present applicant, happened to be partners. The amount deposited by Bai Laxmbai fetched a yearly interest of Rs. 9,288. In the assessment of Maneklal for the assessment year 1957-58 the Income-tax Officer included the amount of Rs. 70,860, which was the profit made by Bai Laxmibai on the sale of the shares. as income of Maneklal u/s. 16(3)(a)(iii) of the Indian Income-tax Act. Similarly, in the assessment of Maneklal for the assessment years 1958-59 and 1959-60 he included in each year the amount of Rs. 9,288 which was the interest earned by Bai Laxmibai on the deposit of the sale proceeds with M/s. Bhivandiwalla & Co., as the income of Maneklal under section 16(3)(a)(iii). According to the Income-tax Officer the gain, which had resulted from the sale of the shares was the income of the wife of the assessee, which arose directly or indirectly from the assets transferred by the assessee to his wife otherwise than for adequate consideration or in connection with an agreement to live apart and, therefore, was required to be included in the computation of the total income of Maneklal. He was also of the view that the amount of interest, which Bai Laxmibai had received from the sale proceeds deposited by her with M/s. Bhivandiwalla & Co., was also income of the wife of Maneklal to her and was, therefore, liable to be included in the computation of the total income of Maneklal. Accordingly, in the assessment order for the first year, he included the amount of Rs. 70,860 and in the assessment orders for the next two years, he included the amount of Rs. 9,288 in the total taxable income of Maneklal. Appeals against all these three assessment orders were filed before the Appellate Assistance Commissioner. In the appeal against the first assessment order for the assessment year 1957-58, the Appellate Assistance Commissioner agreed with the view taken by the Income-tax Officer and dismissed the appeals. In the other two appeals he partly allowed the appeals taking the view that only that part of the interest, which is attributable to the monetary value of the shares covered by the shares at the time of the gifts was liable to be included in the total income of Maneklal in accordance with the provisions of sec. 16(3)(a)(iii) and the balance could not be included in the total income of Maneklal in accordance with the provisions of sec. 16(3)(a)(iii) and the balance could not be included under the said provision. Since the monetary value of the shares gifted to Bai Laxmibai at the time when the gifts was made was only Rs. 69,730, the interest attributable to it worked out at Rs. 4,183. Out of the total interest of Rs. 9,288 which was received by Bai Laxmibai in each of these years, he directed that only an amount of Rs. 4,183 should be included in the total income of Maneklal in each of these two years and the balance of Rs. 5,106 should be deleted. As against the decision and order in respect of the assessment year 1959-60 in so far as it had disallowed exemption in respect of the amount of Rs. 5,106 out of the total amount of Rs. 9,288. The department, on the other hand, appealed against the orders of the Appellate Assistant Commissioner for the years 1958-59 and 1959-60 in so far as they allowed exemption in respect of Rs. 4,183 out of the total amount of Rs. 9,288 for each year. The Income-tax Appellate Tribunal dismissed the assessee's appeal against the order of assessment passed by the Income-tax Officer for the assessment year 1957-58 and confirmed in appeal by the Appellate Assistant Commissioner. The departments appeals arising out of the assessment orders for the assessment years 1958-59 and 1959-60 were allowed by the Tribunal and the assessee's appeal arising out of the assessment order for the assessment year 1959-60 was dismissed. According to these decisions of the Appellate Tribunal the result was that for the assessment year 1957-58 the decision of the departmental authorities that the amount of Rs. 70,860, which was the profit or gain on the sale of the shares by Bai Laxmibai was liable to be included in the total income of Maneklal was upheld and for the later two years the entire amount of interest, viz., Rs. 9,288, was held to be liable to be included in the total income of Maneklal in each of of those two years. Thereafter at the instance of the assessee, the Tribunal has drawn up a consolidated statement of the case and referred to this court the following questions of law, which arise out of its order passed in respect of the aforesaid three assessment years :

(2.) It will be seen that the first question arises out of the assessment order for the assessment year 1957-58; the second relates to the assessment order for the assessment year 1958-59 and the last two questions are concerned with the assessment order for the assessment year 1959-60. It will also be seen that question No. 2 and question No. 4 are the same, with the only difference that question No. 2 is for the assessment year 1958-59, while question No. 4 is for the subsequent assessment year. Question No. 3, which is one of the question relating to the assessment order for the year 1959-60, has not been pressed by Mr. Metha learned counsel for the assessee. The conclusion of the Tribunal so far as that question is concerned is accepted as correct by Mr. Metha and he has advanced no arguments challenging that conclusion. That question, therefore, will be answered in the affirmative.

(3.) The amount of Rs. 70,860, which is involved in the first question, is the surplus obtained on the sale of the shares, which were transferred by Maneklal to his wife and the question that has to be considered is whether the said surplus constitutes the income of the wife of Maneklal, which has arisen directly or indirectly from the assets transferred by Maneklal to his wife otherwise than for adequate consideration or in connection with an agreement to live apart. The share, on the sale of which this surplus has arisen, were admittedly assets transferred by Maneklal to his wife otherwise than for adequate consideration or in connection is whether the surplus is income of the wife which has arisen directly or indirectly from the transferred assets.