GURU CHARAN SINGH Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) ON an application being filed under S. 256(1) of the IT Act, 1961, the Tribunal has referred the following questions for the opinion of this Court :

(2.) THE assessee, as an individual, has been assessed by the ITO for the asst. year 1982 83 under s. 143(3) of the IT Act. The CIT 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 CIT came to the conclusion that Expln.

(3.) LEARNED standing counsel appearing for the Revenue, on the other hand, contends that in view of Expln. 3 which was inserted by the Taxation Laws (Amendment) Act, 1975, the decision of the Supreme Court in Prem Bhai Parekh's case (supra) is of no assistance to the assessee. In Prem Bhai Parekh's case (supra), their Lordships of the Supreme Court were considering the provisions of S. 16(3) of the Indian IT Act, 1922, which is in pari materia with S. 64 of the IT Act, 1961. Their Lordships of the Supreme Court held that since S. 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 S. 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.