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Income-tax Reference No. 10 of 1962, decided on 23rd September 1963.
Share held by member of Hindu undivided family as individual-Declaration to treat share as property of Hindu undivided family and transfer of share to Hindu undivided family-Fresh partnership as karta-Validity of transfer---Applicability of section 16(3)(6) or (c)--Indian Income-tax Act, 1922, S. 16(3)(6) & (c).
The assesse had a five annas share in a partnership which he held held as an individual and up to and including the assessment year 1956-57, the assessee was assessed as an individual in respect of this five annas share. On 1st April 1956, the assessee got the partnership to transfer Rs. 25,U00 from the account of the assessee to the account of the Hindu undivided family of the assessee. Entries in connection with the transfer were made in the books of account of the partnership on 1st April 1956 and corresponding entries were also similarly made in the books of account of the assessee as an individual and the books of account of the Hindu undivided family of the assessee. The assessee also at the same time threw his five annas share in the partnership into the common hotchpot of the Hindu undivided family and impressed the same with the character of joint family property. On 7th April 1956, a new deed of partnership was made between the assessee and his other partner in which it was made clear that the assessee held his five annas share in the partnership as representing the Hindu undivided family as from 1st April 1956, and that as from that date he was a partner in the partnership as representing the Hindu undivided family. The assessee also made a declaration on 2nd July 1956, affirming that as from 1st April 1956, the Hindu undivided family was the absolute owner of the five annas share held by the assessee as also of the amount of Rs. 25,000 transferred from the account of the assessee to the account of the Hindu undivided family in the books of account of the partnership.
The Income-tax Officer took the view that the transfer of the five annas share by the assessee to the Hindu undivided family was hit by section 16(3) (b) and that the income arising from that share was, therefore, liable to be included in the individual assessment of the assessee. The Income-tax Officer was also of the view that in any event section 16(1)(c) applied.
The Tribunal took the view that, as the assessee was admittedly a partner in the partnership in his individual capacity on 1st April 1956, which was the commencement of the year of account, the income arising from the five annas share was liable to be regarded as the individual income of the assessee and could not be treated as the income of the Hindu undivided family:
Held, (i) that under the Hindu law it is clear that a person can impress his self-acquired or separate property in whole or in part with joint family character. He can throw it into the hotchpot or blend it with joint family property, or, by a declaration of clear intention, convert it into joint family property.
(ii) It was evident from the deed of partnership dated 7th April 1956, and the declaration dated 2nd July 1956, that such unequivocal declaration of intention was made by the assessee and the five annas share held by the assessee in the partnership was converted into joint family property from 1st April 1956.
(iii) The five annas share in the partnership, which stood in the name of the assessee, acquired the character of joint family property from 1st April 1956, and the income arising from the individual.
(iv) Even if the five annas share in the partnership standing in the name of the assessee was regarded as impressed with the character of joint family property only from 7th April 1956, or even from 2nd July 1956, the position would be no different, for the income in respect of the said five annas share for the accounting year 1st April 1956 to 31st March 1957, accrued only at the close of the year, that is, on 31st March 1957, and on that date the said five annas share belonged to the Hindu undivided family and the income arising from it was, therefore, the income of the Hindu undivided family and not the personal income of the assessee.
(v) There was a transfer of the five annas share in the partnership by the assessee to the Hindu undivided family when he impressed it with the character of joint family property, but such transfer cannot be said to be a transfer for the benefit of the wife or minor child of the assessee merely because they happened to be members of the Hindu undivided family. Neither section 16(3)(6) nor section 16(3)(c) applied to the case and the income in question was not includible in the income of the assessee as an individual.
[Case-law referred to.]
By this application, the assessee requires the Appellate Tribunal to refer to the High Court a question of law which is said to arise out of the order of the Tribunal in I. T. A. No. 6002 of 1959-60. Inasmuch as, in our opinion, a question, of law does arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of the case agreed to by the parties and refer it to the High Court of Gujarat at Ahmedabad under section 66(1) of the Indian Incometax Act, 1922.
2. This is the assessment of an individual. The assessment year is 1957-58 and the corresponding accounting period for the share of income from the partnership firm of Messrs Yogendra (P.) & Co. is from April 1, 1956 to March 31, 1957. Prior to the assessment year 1957-58 and up to the assessment year 1956-57 the assessee, Ratilal Khushaldas Patel, was assessed in his individual capacity on income from various sources, one of which was his share of 5 annas from a firm known as Messrs Yogendra (P.) & Co. The assessee has a minor son, named Yogendra and this Yogendra was also admitted to the benefits of the aforesaid partnership. The following entries were made in the books of this firm on April 1, 1956:
|
| Rs. | Rs. |
| Ratilal Khushaldas account-debit | 25,000 |
|
| To Ratilal Khushaldas H. U. F. (being the amount paid to H. U. F.) |
| 25,000 |
Simultaneously the following corresponding entries were made in the books of Shri Ratilal K. Patel as an individual and R. K. Patel, Hindu undivided family:
(A) Extract from the cash book of Ratilal Khushaldas Patel.
|
| Rs. | Rs. |
| Capital Account-debit
| 25,000 |
|
| To M/s. Yogendra (P.) & Co. being the amount paid to H. U. F. of Ratilal Khushaldas |
| 25,000 |
(B) Extract from the cash book of Ratilal Khushaldas Patel.
|
| Rs. | Rs. |
| 1-4-56 Yogendra (P.) & Co.-debit | 25,000 |
|
| To capital account (being the amount given to H. U. F. by Ratilal Khushaldas Patel |
| 25,000 |
3. By virtue of the provisions of section 16(3)(a)(ii) of the Act, Yogendra's share was included in assessment of the assessee, up to the assessment year 1956-57.
4. The assessee on July 2, 1956, made a declaration as follows:
"I was a partner in the firm of Messrs Yogendra (P.) & Co., in my individual capacity. Out of the amount standing to my credit in the books of the said firm, from 1st April 1956, I have decided to transfer Rs. 25,000 to the Hindu undivided family of Shri Ratilal Khushaldas Patel and I have further decided to be a partner in the said firm on behalf of the Hindu undivided family of Shri Ratilal Khushaldas Patel. Accordingly, I hereby declare that the said sum of Rs. 25,000 shall belong to my Hindu undivided family and that i shall be a partner having 5 annas share in the said firm as karta of my Hindu undivided family from April 1, 1956. My Hindu undivided family shall be the absolute owner of the said sum of Rs. 25,000 and of the said 5 annas share in the partnership in the said firm from 1st April 1956."
Hereto annexed and marked Annexure "A" is a copy of the said declaration dated July 2, 1956, which forms part of the case.
5. The assessee claimed in his assessment proceedings for 1957-58 in the first instance that as he represented his Hindu undivided family in the firm as and from April 1, 1956, having 5 annas share, the income representing the 5 annas share in the said firm should be assessed as the income of the Hindu undivided family and not in his individual assessment; and, secondly, the share income of the minor son, Yogendra, who also continued to be admitted to the benefits of partnership under the new deed, to which we shall presently refer, should not be assessed in the hands of the assessee under the provisions of section 16(3)(a)(ii) of the Act. Both these claims were rejected by the Income-tax Officer and by the Appellate Assistant Commissioner on appeal.
6. When the matter came before the Tribunal, it dismissed the appeal for the following, among other, reasons:
(1) The declaration being only on July 2, 1956, had no retrospective effect, the assessee was the partner at the beginning of the accounting year, i e., on April 1, 1956, and had a 5 annas share therein in his individual capacity.
(2) The declaration made no difference to the application of section 16(3) as the assessee was still a partner though in the capacity of karta.
A copy of the order of the Tribunal is annexed hereto and marked Annexure "B" and forms part of the case.
7. It appears that the Tribunal in its order has not gone into the fresh deed of partnership referred to by the assessee. The Tribunal in referring to the fresh partnership deed has observed that it was "drawn up much later". There is, however, a deed of partnership on record which is executed on April 7, 1956. Both the parties before us agree that the reference here is to the same deed of partnership dated April 7, 1956, a copy of which is marked Annexure "C" and forms part of the case.
8. The assessee in this application accepted the decision of the Tribunal in paragraph 6(2) above and seeks a reference only on the decision in paragraph 6(1) above. The question of law that would, therefore, arise is:
"Whether the assessment of 5 annas share in the firm of Yogendra (P.) & Co. in the hands of the assessee, individual, for the previous year ended March 31, 1957, is valid
S. P. Melita with K. H. Kaji for the Assessee.
J. M. Thakore (Advocate-General) for the Commissioner.
This is a reference under section 66(1) of the Income-tax Act at the instance of the assessee. The assessee is one Ratilal Khushaldas Patel, who has been assessed as an individual. The assessment year with which we are concerned is the assessment year 1957-58 for which the corresponding previous year is the financial year ending 31st March 1957. Prior to the 1st April 1958, the assessee was a partner in the firm of Messrs Yogendra (P.) & Co. The partnership consisted of the assessee and one other person with three minors admitted to the benefits of the partnership and it was constituted under a deed of partnership dated 8th April 1954. The assessee had a five annas share in the partnership. This share was held by him as an individual, and up to and including the assessment year 1956-57, the assessee was assessed as an individual in respect of this five annas share. On 1st April 1956, the assessee got the partnership to transfer a sum of Rs. 25,000 from the account of the assessee to the account of the Hindu undivided family of the assessee. Entries in connection with the transfer were made in the books of account of tile partnership on 1st April 1956, and corresponding entries were also similarly made in the books of account of the assessee as an individual and in the books of account of the Hindu undivided family of the assessee. The assessee also at the same time threw his five annas share in the partnership into the common hotchpot of the Hindu undivided family and impressed the same with the character of joint family property. On 7th April 1956, a new deed of partnership was made between the assessee and his other partner in which it was made clear that the assessee held his five annas share in the partnership as representing the Hindu undivided family as from 1st April 1956, and that as from that date he was a partner in the partnership as representing the Hindu undivided family. The assessee also made a declaration on 2nd July 1956, affirming that as from 1st April 1956, the Hindu undivided family was the absolute owner of the five annas share held by the assessee in the partnership as also of the amount of Rs. 25,000 transferred from the account of the assessee to the account of the Hindu undivided family in the books of account of the partnership. In the course of the assessment of the assessee for the assessment year 1957-58, the Income-tax Officer sought to include the five annas share standing in the name of the assessee in the partnership in his individual assessment. The assessee contended that the five annas share was held by him as representing the Hindu undivided family as from 1st April 1956, and that the income from the partnership in respect of the five annas share was, therefore, not liable to be included in his individual assessment but could be included only in the assessment of the Hindu undivided family. The Income-tax Officer took the view that the transfer of the five annas share by the assessee to the Hindu undivided family was hit by section 16(3)(b) and that the income arising from that share was, therefore, liable to be included in the individual assessment of the assessee. The Income-tax Officer was also of the view that, in any event, section 16(1)(c) applied, since the partnership was a partnership at will and the assessee had, therefore, a right to reassume power directly or indirectly over the income of the partnership and that the income arising from the five annas share was, therefore, includible in the individual assessment of the assessee under section 16(1)(c). The Income-tax Officer accordingly included the income arising from the five annas share in the partnership in the individual assessment of the assessee. The assessee, being aggrieved by the order of the Income-tax Officer, carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took an entirely erroneous view of the case and held that the assessee had ceased to be a partner and in his place introduced the Hindu undivided family as a partner in the partnership for the purpose of diverting the legitimate income belonging to him and that the said alleged change of partner was a sham transaction and that the assessee had, therefore, in his view not ceased to be a partner in the partnership. The Appellate Assistant Commissioner thought that there was a change so far as the partner was concerned, namely, that the assessee had ceased to be a partner and that the Hindu undivided family had become a partner in the place of the assessee, and this, in the opinion of the Appellate Assistant Commissioner, was a sham transaction which he was entitled to ignore and, in this view of the matter, he treated the income arising from the five annas share in the partnership as income belonging to the assessee as an individual. The Appellate Assistant Commissioner accordingly held that this income was rightly included in the assessable income of the assessee. The assessee thereupon preferred an appeal before the Tribunal. The Tribunal, it appears, completely overlooked the deed of partnership dated 7th April 1956, and thought that the first declaration of the intention of the assessee to convert his five annas share in the partnership into joint family property was made on 2nd July 1956, when he made the declaration of that date and that such declaration of intention could not be given a retrospective effect so as to convert the five annas share from his separate and self-acquired property into joint family property with effect from 1st April 1956, and that consequently he was a partner in his individual capacity on 1st April 1956. The Tribunal took the view that if the assessee was a partner in the partnership in the individual capacity on 1st April 1956, which was the commencement of the year of account, the income arising from the five annas share was liable to be regarded as the individual income of the assessee and could not be treated as the income of the Hindu undivided family. The Tribunal accordingly confirmed, though on different grounds, the inclusion of the income arising from the five annas share in the partnership in the individual assessment of the assessee. The assessee thereupon applied to the Tribunal under section 66(1) for referring to this Court the question of law arising out of the order of the Tribunal and, on such application, the Tribunal referred to us for our opinion the following question of law:
"Whether the assessment of five annas share in the firm of Yogendra (P.) & Co., in the hands of the assessee, individual, for the previous year ended March 31, 1957, is valid "
We may point out that the Tribunal in the statement of case submitted to this Court fairly admitted that there was the deed of partnership dated 7th April 1956, and that the reference made to the deed of partnership in its order was to that deed of partnership, though it was observed by it in the order that it was "drawn up much later" which was obviously incorrect.
The short question which, therefore, arises for consideration in this reference is whether the income arising from the five annas share standing in the name of the assessee in the partnership is the income of the assessee as an individual or the income of the Hindu undivided family of the assessee. Now it is clear that a person can impress his self-acquired or separate property in whole or in part with joint family character. He can throw it into the hotchpot or blend it with joint family property or by a declaration of clear intention convert it into joint family property. By a clear expression of intention he can alter the character of self-acquired or separate property into joint family property. This proposition is well-established and it is not necessary to cite any authority in support of it but if authority were needed, it is to be found in Duggirala Sadasiva vittal v. Bolla Rattaih (A I R 1958 A P 145), a case which was accepted as laying down the correct law on this point by this Court in Keshavlal Lallubhai Patel v. Commissioner of Income-tax ((1962) 44 I T R 266). This being the position, what we have to consider is whether the five annas share which until 31st March 1956, the assessee held as his separate property was impressed with the character of joint family property by any unequivocal declaration of intention on the part of the assessee. It is evident from the deed of partnership dated 7th April 1956, and the declaration dated 2nd July 1956, that such unequivocal declaration of intention was made by the assessee and the five annas share held by the assessee in the partnership was converted into joint family property from 1st April 1956. It is no doubt true that even after 1st April 1956, it was the assessee who continued to be a partner in the partnership so far as his other partner was concerned but the five annas share which he held thereafter was held by him as representing the Hindu undivided family and the income arising from that share was the income of the Hindu undivided family. The Tribunal was clearly in error in taking the view that the declaration dated 2nd July 1956. was the first declaration of the intention on the part of the assessee to impress his five annas share with the character of joint family property and that it could not have retrospective effect so as to attribute the character of joint family property to the five annas share from 1st April 1956. The Tribunal, as we have pointed out above completely overlooked the deed of partnership dated 7th April 1956, which clearly contained an unequivocal declaration of intention on the part of the assessee to treat the five annas share as joint family property from 1st April 1956. We are, therefore, of the view that the five annas share in the partnership standing in the name of the assessee acquired the character of joint family property from 1st April 1956 and that the income arising from the said five annas share was the income of the Hindu undivided family and not the income of the assessee as an individual. We may also point out that even if the five annas share in the partnership standing in the name of the assessee were regarded as impressed with the character of joint family property from 7th April 1956, or even from 2nd July 1956, the position would be no different, for the income in respect of the said five annas share for the accounting year 1st April 1956 to 31st March 1957, accrued at the close of the year, that is, on 31st March 1957 and on that date the said five annas share belonged to the Hindu undivided family and the income arising from it was, therefore, the income of the Hindu undivided family and not the personal income of the assessee (vide Bhogilal Laherchand v. Commissioner of Income-tax ((1955) 28 I T R 919) and Ashokbhai Chimanbhai v. Commissioner of Income-tax ((1962) 44 I T R 41).
But the learned Advocate-General contended that, even if the five annas share in the partnership was impressed by the assessee with the character of joint family property, it was still hit by section 16(3)(6) and the income arising from the said five annas share was liable to be included in the individual assessment of the assessee. Section 16(3)(6) is in the following terms:
"16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included . . . . .
(b) so much of the income of any person or association of persons as arises from assets transferred otherwise than for adequate consideration to the person or association by such individual for the benefit of his wife or a minor child or both."
Founded on this section, the contention of the learned Advocate-General was that when the five annas share in the partnership was impressed by the assessee with the character of joint family property, there was a transfer of the said five annas share by the assessee to the Hindu undivided family otherwise than for adequate consideration and that, since the assessee's wife and minor son were members of the Hindu undivided family, such transfer was for the benefit of the assessee's wife and minor child and the income arising from the said five annas share was, therefore, liable to be treated as the income of the assessee as an individual. This argument, as we have set out, rested on two limbs. The first limb was that when the character of the five annas share was altered by the assessee from separate property into joint family property, there was a transfer of the said five annas share from the assessee to the Hindu undivided family and the second limb was that such transfer was for the benefit of the assessee's wife and minor child within the meaning of section 16(3)(6). We shall examine both these limbs of the argument of the learned Advocate-General.
So far as the first limb of the argument is concerned, it is clear that the contention of the learned Advocate-General is correct. It is supported by the decision of this Court in Keshavlal Gallubhai Patel v. Commissioner of Income-tax. In that case it was held by a Division Bench of this Court consisting of K. T. Desai, C. J. (as he then was) and myself that, where an individual voluntarily throws his self-acquired property into the hotchpot of a Hindu undivided family by expressing his clear intention to convert such property into joint family property, there is a transfer of such property by the individual to the Hindu undivided family. In taking that view this Court did not agree with the decision of the Madras High Court in Stremann v. Commissioner of Income-tax ((1961) 41 I T R 297). We find that the view taken by this Court has subsequently been followed by the Bombay High Court in Damodar Krishanji Nirgude v. Commissioner of Incometax ((1962) 46 I T R 1252). Having regard to the aforesaid decision of this Court, it is clear that the Learned Advocate General is right in his contention that there was a transfer of the five annas share in the partnership by the assessee to the Hindu undivided family when he impressed it with the character of joint family property.
That takes us to the second limb of the argument of the learned Advocate-General. The learned Advocate General contended that the transfer of the five annas share in the partnership by the assessee to the Hindu undivided family was for the benefit of the assessee's wife and minor son within the meaning of section 16(3)(6) and the income arising from the said five annas share was, therefore, liable to be included in the individual assessment of the assessee. We cannot agree with this contention of the learned Advocate General. It is obvious that section 16(3)(6) is a counter-part of sub-clauses (iii) and (iv) of section 16(3)(a). Where assets are transferred by an assessee directly or indirectly to his wife otherwise than for adequate consideration or in connection with an agreement to live apart, sub-clause (iii) of section 16(3)(a) applies and the income arising from the assets directly or indirectly is taxed in the hands of the assessee notwithstanding that in law such income is the income of the wife. Similarly, where assets are transferred by an assessee directly or indirectly to his minor child, not being a married daughter, otherwise than for adequate consideration, sub-clause (iv) of section 16(3)(a) is attracted and the income arising directly or indirectly from the assets transferred is brought to tax in the hands of the assessee, notwithstanding that in law such income is the income of the minor child. But an assessee may not transfer assets to his wife or minor child directly or indirectly but may transfer them to some other person for the benefit of his wife or minor child and thus achieve the object by remaining outside the provisions of clauses (iii) and (iv) of section 16(3)(a). Section 16(3)(6), however, says that the assessee shall even then be liable to pay tax on the income arising from such assets and so much of the income as arises from such assets shall be includible in the individual assessment. Section 16(3)(6) is intended to hit the transfer of assets by an assessee to another person with a view to benefiting his wife or minor child as distinguished from such other person. Where a transfer of assets is made by an assessee not for the benefit of the person to whom the assets are transferred but for the benefit of his wife or minor child so that the person to whom the assets are transferred merely remains the legal owner of the assets, the benefit of such transfer being really given to the wife or minor child, section 16(3)(6) is called into play and, in such a case, the income arising from the assets transferred is liable to be included in the individual assessment of the assessee. Where, on the other hand, transfer of assets is made and by the transfer benefit is sought to be conferred on the person to whom the assets are transferred, section 16(3)(b)can have no application. Now under section 2(9) the expression "person", unless there is anything repugnant to the subject or context, includes a Hindu undivided family. If, therefore, any assets are transferred by an assessee to his Hindu undivided family otherwise than for adequate consideration, the first part of section 16(3)(6) would be satisfied but the question would be whether such transfer can be said to be a transfer for the benefit of the wife or minor child of the assessee who happens to be a member of the Hindu undivided family. Having regard to what we have stated above, it is clear that in such a case the transfer of the assets cannot be said to be a transfer made by the assessee for the benefit of his wife or minor child. The transfer would be a transfer for the benefit of the Hindu undivided family which would acquire not only legal ownership over the assets transferred, but also beneficial ownership over the same. It is no doubt true that when assets are transferred to the Hindu undivided family, an interest in the assets so transferred would be created in favour of the wife and minor child of the assessee who happen .to be members of the Hindu undivided family but for that reason alone the transfer cannot be said to be a transfer for the benefit of the wife or minor child of the assessee. The wife and minor child of the assessee would incidentally derive a benefit from the transfer of the assets since they happen to be members of the Hindu undivided family but the person for whose benefit the transfer is made would be the Hindu undivided family and not the wife or minor child. It is significant that the word "directly or indirectly", which occur in section 16(3)(a), do not find a place in section 16(3)(6). It is, therefore, apparent that, merely because some incidental benefit may be derived by the wife or minor child of the assessee by reason of her or its being a member of the Hindu undivided family to whom and for whose benefit the assets are transferred, the transfer cannot be said to be a transfer for the benefit of the wife or minor child. The present contention of the learned Advocate-General must, therefore, fail.
In this view of the matter, our answer to the question referred to us will be in the negative. The Commissioner will pay to the assessee the costs of the reference.
Question answered in the negative.
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