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Tax Case No. 125 of 1960 (Reference No. 43 of 1960), decided on 14th August 1962.
‑Transfer to minor divided son‑Applicability of S. 16(3)(a)(iv) Provision whether unconstitutional ‑ Con stitution of India, Art. 14.
Section 16(3)(a)(iv) of the Income‑tax Act, 1922, which provides that where any assets have been transferred directly or indirectly to a minor child, not being a married daughter, other wise than for adequate consideration, the income of that minor child is liable to be included in the total income of the individual for purposes of his assessment, does not contravene Article 14 of the Constitution which guarantees equality before the law, either because it permits the inclusion of income from assets transferred to minor sons who have separated from the father by partition, in the income of the father, or because it makes a distinction between a minor son and a minor married daughter. The principle applied by the Supreme Court with regard to section 16(3)(a)(i) and (it) applies to section 16(3)(a)(iv) also.
Since the father ceases to be the guardian of a minor daughter and her husband becomes her guardian on marriage, there is very good reason for making a distinction between a minor son and a minor married daughter for the purposes of section 16(3)(a)(iv).
Balaji v. Income‑tax Officer, Akola (1961) 43 I T R 393 and Sardar Baldev Singh v. Commissioner of Income‑tax (1960) 40 I T R 605 ref.
By this application, the assessee requires the Appellate Tribunal to refer to the High Court certain questions of law, which are said to arise out of the order of the Tribunal, dated 31st August 1959, in I. T. No. 766 of 195960. Inasmuch as, in our opinion, certain questions of law do arise out of the aforesaid order, we hereby draw up a statement of the case, agreed to by the parties, and refer it to the High Court of Judicature at Madras under section 66 (1) of the Indian Income‑tax Act.
2. The assessee and his minor son, Jayavardhan, remained joint up to the assessment year 1952‑53. On 23rd July 1952, they became divided under a registered deed of partition of that date. Thereafter, the assessee was assessed as an "individual".
3. On 4th July 1956, the assessee transferred to his afore said minor son certain shares in certain mills. These shares were yielding dividends.
4. During the year ended 31st March 1957, being the previous year for the assessment year 1957‑58, a sum of Rs. 18,16 (net) was received as dividends from the aforesaid shares, which the Income‑tax Officer included in the total income of the assessee duly grossed up pursuant to the provisions of section 16 (3) (a) (iv) of the Act, which reads as under;
"16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included :‑
(a) So much of the income of a wife or minor child of such individual as arises directly or indirectly . . . .
(iv) From assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration."
5. The assessee applied to the Appellate Assistant Commis sioner against the aforesaid assessment contending that the provision of law invoked was not applicable as the minor son had become divided from the assessee and was not dependent on him. The contention, arguments and the decision of the Appellate Assistant Commissioner are contained in the full extract from his order
" . . . Before me the learned representative urged that the motive behind the enactment of section 16 (3) should be taken into account and that the benefit of exclusion of income front assets transferred to a minor married daughter should be extended to income flowing from such assets transferred to other minors if' in their cases also the considerations which applied in the case of a married minor daughter were also present. Where the wordings of a statute are clear and unambiguous, it is not necessary to go into the motives which brought about the statute on the statute book. I agree with the Income‑tax Officer that the wordings of section 16 (3) are very clear on this point. Section 16 (3) (a) (iv) authorises the inclusion in the hands of an individual of the income arising directly or indirectly to the minor child from assets transferred directly or indirectly to the minor child other wise than for adequate consideration. An exception is, however, made in the case of income arising out of assets transferred to a minor married daughter. Such income cannot be assessed in the hands of the transferor. Barring this specific exemption, the income flowing to a minor child from assets transferred to such a child by an individual is liable to be included in the transferors assessment without regard to any other consideration. I am, therefore, unable to agree with the learned representative's submission that the income in question should be excluded from the hands of the appellant on the mere, ground that the minor son is a divided son and not dependent upon his father. I, therefore, confirm the: action of the Income‑tax Officer in subjecting the dividend income to the tax in the appellant's hands."
6. The assessee appealed to the Tribunal against the aforesaid decision of the Appellate Assistant Commissioner and contended that the divided minor stood on the same footing as a minor married daughter and was, therefore, outside the purview of section 16(3) of the Act. It was also urged at the time of the hearing before the Tribunal that the provisions of section 16(3)(a)(iv) of the Act are ultra vires the Constitution of India as offending Article 14 thereof.
7. The Tribunal rejected both these contentions and upheld the decision of the departmental officers in the following words reproduced from its order;
"The assessment was made under section 16 (3) (a) (iv) of the Act. The contention urged on behalf of the appellant is that inasmuch as the minor son of the assessee was not a member of the Hindu undivided family of which the assessee was a member, the income of the said minor son should not have been included in the total income of the assessae. In other words, it is urged that under section 16 (3) (a) (iv) only the income of a minor son who is a member of the family of the assessee can be included in the assessment of the father. It is further urged that the said provision offends Article 14 of the Constitution of India relating to equality before the law and equal protection of the laws inasmuch as section 16 while excluding a minor married daughter includes a minor married son. In our opinion, both these contentions of the assessee are not well founded. Section 16 (3) (a) (iv) of the Act makes no distinction between a divided minor son and an undivided minor son the sub‑clause only refers to a "minor child other than a married daughter." We are further of opinion that the provisions of section 16 do not offend Article 14 of the. Constitution of India. We do not think that section 16 (3) offend,, the constitutional guarantee of equality before the law and equal protection of the laws. We are inclined to the view that the said guarantee does not prevent the State from making a provision such as this which constitutes a reasonable classification. Therefore, a divided minor son is within the ambit of the provision. It follows that, in our view, the departmental officers acted rightly in bringing t3 charge the dividend income in the assessee's hands."
8. From out of the aforesaid facts, the questions of law that arise are;
"(i) Whether the provisions of section 16(3)(a)(iv) arc ultra vires as offending article 14 of the Constitution of India
(ii) Whether the dividend income of his divided minor son is assessable in the hands of the assessee under section 16(3)(a)(iv) of the Income‑tax Act "
K. Srinivason, D. S. Meenakshisundaram and A. Devanathan for the Assessee.
S. Ranganathan for the Commissioner.
.‑The questions referred for our determination are;
"(1) Whether the provisions of section 16(3)(a)(iv) are ultra vires as offending Article 14 of the Constitution of India.
(2) Whether the dividend income of the divided minor son is assessable in the hands of the assessee under section 16(3)(a)(iv) of the Income‑tax Act "
The assessee and his minor son were members of a Hindu undivided family up to the assessment year 1952‑53. There was a division between them effected under a registered deed of parti tion on the 23rd July 1952. Thereafter the assessee was assessed as an individual.
On the 4th July 1956, the assessee transferred certain shares to his minor divided son. During the year ended 31st March 1957, a sum of Rs. 18,165 was received as dividend on the above said shares. The Income‑tax Officer included this amount in the total income of the assessee, the father, applying the provisions of section 16(3)(a)(iv) of the Act. It was contended before the Income‑tax Officer that since the transfer of the shares was in favour of a divided minor son, the above provision would not apply. It is also urged that the case of a divided minor son should be treated on a par with the case of a minor married daughter for the purpose of the application of the relevant provision. These contentions were not accepted by the Income -tax Officer and also by the Appellate Assistant Commissioner. On a further appeal to the Tribunal, the same contentions were reiterated. The assessee sought to impugn the above provisions as offending Article 14 of the Constitution. The Tribunal rejected these contentions and, on an application of the assessee under section 66(1) of the Act, referred the questions set out earlier for the decision of this Court.
The principal point urged before us was that in. so far as the provisions of section 16(3)(a)(iv) make a distinction between a minor son and a minor married daughter with respect to the income derived by either of these persons from assets transferred directly or indirectly to them and makes the income of the minor sots includible in the total income of the father and excluded the other from such includibility, the provision violates that article of the Constitution guaranteeing equality before the law.. It is urged that there is no rational basis for classification contemplated by this provision of the Indian Income‑tax Act and that for that reason the discriminatory effect of the provision must be held to invalidate it.
It seems to us that this contention is wholly without sub stance. In a case decided by the Supreme Court in Balaji v. Income‑tax Officer ((1961) 43 I T R 393 (S C)), the question whether section 16(3)(a)(i) and (ii) infringed the fundamental right of equality before the law arose for decision. These provisions direct the inclusion in the total income of an individual of so much of the income of a wife or of a minor child as arises directly or indirectly from the membership of the wife in a firm of which her husband is a partner and from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner. This was also a case where there had been a partition in that family and the husband and the wife formed a partnership to carry on that business admitting their three divided minor sons to the benefits of that partnership. The income of the wife and of the minor sons from the partnership were included in the total income of the father. The validity of these pro visions was challenged before the Supreme Court. Their Lordships referred to Sardar Baldev Singh's case, which had laid down that Entry 54 in List I of the Seventh Schedule could sustain a law made to prevent evasion of tax. That being the decided position, their Lordships further went into the ques tion whether section 16(3)(a)(i) and (ii) are provisions enacted to prevent evasion of tax. They observe;
"Under the relevant provision of the Income‑tax Act, if a firm is registered, the share of each partner in the profits of the firm would be added to his other income and charged as part of his total income . . . . This provision was intended for the benefit of partners of a business, for it made them liable only to pay tax on their own income. But it gave an effective handle to evade taxation in another direction. A husband or a father could nominally take his wife or his minor sons in partnership with him so that the tax burden might be lightened, for, if the income was divided between a number of people, the income derived by an individual therefrom might fall under the limits of taxable income or under a less onerous slab. This device enables an assessee to secure the entire income of the business but at the same time to evade income‑tax which he would have otherwise been liable to pay. . . Subsection 3(a)(i) and (ii) was, therefore, enacted for preventing evasion of tax and was well within the competence of the Federal Legislature."
Dealing with the constitutional validity of the provision their Lordships of the Supreme Court went on to say;
"But decisions of this Court permitted classification if there was reasonable basis for the differentiation. It was held that what Article 14 prohibited was class legislation and not reason able classification for the purpose of legislation. Two conditions were laid down for passing the test of permissible classification, namely, (r) the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group, and (ii) that the differentia must have a rational relation to the object sought to be achieved by the statute in question. Under the impugned subsection, an individual is taxed on the income of his wife or his minor children, if he carries on business in partnership with his wife or if he admits his minor sons to the benefits of the partnership, whereas an individual, if he carries on business in partnership with a third party, whether a man or a woman, or even with his major children, or if he and his wife or children carry on business separately, will be liable only to pay tax on his share of the partnership income, that is, for the purpose of this subsection; the former is put in a category different from the latter. It cannot be said that there is no differentia between the two groups ; but what is contended is that the said differentia has no rational relation to the object sought to be achieved by the statute in question. It was asked how, from the stand‑point of imposition of tax, the difference between an individual and his wife doing business in partnership, and between an individual and his wife doing business separately, and an individual doing business in partnership with his wife and an individual doing business in partnership with a third party, male or female, and between an individual who had admitted his minor children to the partnership business and an individual who is doing business in partnership with his major children or outsiders, would have any reasonable basis. This argument ignores the object of the legislation. We have held that the object of the legislation was to prevent evasion of tax. A similar device would not ordinarily was to be resorted to by individuals by entering into partnership with persons other than those mentioned in the subsection, as it would involve a risk of the third party turning round and asserting his own rights. The Legislature, therefore, selected for the purpose classification only that group of persons who in fact are used as a cloak to perpetrate fraud on taxation."
On the question whether there was rational relation to the object sought to be achieved by the statute, it was urged before their Lordships that in so far as, at any rate, genuine cases of partnership were concerned, the statute afforded no protection. Dealing with that it was observed;
"In demarcating a group, the net was cast a little wider, but it was necessary, as any further sub‑classification as genuine and non‑genuine partnership might defeat the purpose of the Act."
Accordingly the constitutional validity of that provision was upheld.
It seems to us that precisely the same reasoning would apply to section 16(3)(a)(iv). What this section contemplates is that where any assets have been transferred directly or indirectly to a minor child, not being a married daughter, otherwise than for adequate consideration the income of that minor child is liable to be included in the total income of the individual for purposes of his assessment. Quite obviously, a transfer of the assets, though it may be a genuine transaction, shall leave the income from the properties so transferred as assets available for the disposal of the father and a device of this description clearly can have the effect of evading the proper incidence of tax: The argument that there may be a case of a genuine transfer and that this provision can only have effect so long as the transferee continues to be a minor does not carry us further. Where once a minor child attains majority, he or she becomes capable of dealing with the income of the properties, the ownership of which has been transferred to him or her and there would no longer be any power of disposal over that income in the hands of the father. If the Legislature is competent to enact a law under Entry 54 which has for its purpose the checking of evasion, there is no doubt that in so far as the provision directed the inclusion of the income of the kind referred to in the total income of the father, it was perfectly within its competence.
The further argument that there is an unreasonable distinc tion, a distinction which has no rational relation to the purpose of the statute, on the ground that the section will not have any effect on the income derived from assets transferred to a minor married daughter fails to impress us. It is obvious that in the case of a married daughter, the right of the father to deal with the income from the properties so transferred to her comes to an end and the husband as the proper guardian under the law of his minor wife would be entitled to have control of such income. The Legislature has therefore thought that in the case of a transfer of assets to a married daughter, though a minor, the possibility of evasion of tax on such income was very remote indeed. There was thus a very sound reason why the income of a married minor daughter should be excluded from the mischief of section 16 (3)(a)(iv). We are accordingly of the opinion that the provision cannot be impugned as offending Article 14 of the Constitution of India.
The learned counsel has rightly conceded that if the attack on the validity of the provision fails, the second question has to be answered against the assessee. We answer that question accordingly. The assessee will pay the costs of the Department. Counsel's fee Rs. 250.
Questions answered accordingly.
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