# 30$ COMMISSIONER OF INCOME·TAX, WEST BENGAL, CALCUITA v. SHRI PREM BHAI PAREKH AND ORS

- **Citation:** [1971] 1 S.C.R. 308
- **Court:** Supreme Court of India
- **Decided:** 1970-04-20
- **Bench:** J. c. SHAH; K. s. HBGDE, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/30-commissioner-of-income-tax-west-bengal-calcuita-v-shri-prem-bhai-parekh-and-5028
- **Pages:** 4

## Headnote

Indian Income-tax Act ( lJ of 1922), s. 16(3 )(a)(iv)-Lncome arising
as a result of transfer-What is.
The assessee was a partner in a firm.
On the last day of the accountB
ing year of the ftrin, namely, lst July 1954 he retired 'from the firm and
C
gifted to each of his four so~1s Rs. 75,000. The firm was reconstituted
and the first son, who was a major, became a partner in the firm.
The
other sons who were minors,
became entitled to the benefits of the
partnership, because, they invested in the firm the amounts received by
them as gifts from their father.
In the assessment year
1956-57 the
Income-tax Officer held that the income arising to the minors by virtue
of their admission to the benefits of the partnership came within the pu.rD
view of s. 16 ( 3 )(a)( iv) of the Income-tax Act, 1922, and included that.
income in the total income of the assessee.
The order was confirmed by
the Appellate Assistant Commissioner and
the Tribunal, but the High
Court on a reference, held in favour of the assessee.
In appeal to this Court,
f
HELD : Tile section
creates an artificial income- and must be consE
trued strictly, that is. before an income can 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 ifa.vour of the minor
children. The connection between the transfer and the income must be
proximate. It must arise as a result of the transfer and not in some manner
connected with it. (31~ H; 311 A-B]
In the present case, the income of the minors arose as a result of their
F
admission to the benefits of partnership, and there is no proximate ne:tus
between the transfer and 1he income. [31 0 G J
C.I.T., Gujarat v. Keshavlal LallubluJi Patel, 55 I.T.R. 637,
(S.C.)
1ollowed.
CtVIL APPELLATE JURISDICTION: Civil Appeal No. 2272 of
G
1966.
Appeal from the judgment and order dated January 6. 1966 of
Calcutta High Court in Income-tax Reference No. 211 c.f 1961.
S. Mitra, A. S. Nambiar, R. N. Sachthey and B. D. Sharma,
H
for the appellant.
M. C. Chagla and P. K. Chatterjee1 for the respondents.
A
B
c
E
C.L.T .• W, BENGAL v. P. &. PAREKH (Hegde, J.)
:109

## Text

30$
COMMISSIONER
OF INCOME·TAX,
WEST BENGAL,
CALCUITA
v.
SHRI PREM BHAI PAREKH AND ORS.
April 20, 1970
[J. c. SHAH; K. s. HBGDE AND A. N. GROVER, JJ.]
Indian Income-tax Act ( lJ of 1922), s. 16(3 )(a)(iv)-Lncome arising
as a result of transfer-What is.
The assessee was a partner in a firm.
On the last day of the accountB
ing year of the ftrin, namely, lst July 1954 he retired 'from the firm and
C
gifted to each of his four so~1s Rs. 75,000. The firm was reconstituted
and the first son, who was a major, became a partner in the firm.
The
other sons who were minors,
became entitled to the benefits of the
partnership, because, they invested in the firm the amounts received by
them as gifts from their father.
In the assessment year
1956-57 the
Income-tax Officer held that the income arising to the minors by virtue
of their admission to the benefits of the partnership came within the pu.rD
view of s. 16 ( 3 )(a)( iv) of the Income-tax Act, 1922, and included that.
income in the total income of the assessee.
The order was confirmed by
the Appellate Assistant Commissioner and
the Tribunal, but the High
Court on a reference, held in favour of the assessee.
In appeal to this Court,
f
HELD : Tile section
creates an artificial income- and must be consE
trued strictly, that is. before an income can 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 ifa.vour of the minor
children. The connection between the transfer and the income must be
proximate. It must arise as a result of the transfer and not in some manner
connected with it. (31~ H; 311 A-B]
In the present case, the income of the minors arose as a result of their
F
admission to the benefits of partnership, and there is no proximate ne:tus
between the transfer and 1he income. [31 0 G J
C.I.T., Gujarat v. Keshavlal LallubluJi Patel, 55 I.T.R. 637,
(S.C.)
1ollowed.
CtVIL APPELLATE JURISDICTION: Civil Appeal No. 2272 of
G
1966.
Appeal from the judgment and order dated January 6. 1966 of
Calcutta High Court in Income-tax Reference No. 211 c.f 1961.
S. Mitra, A. S. Nambiar, R. N. Sachthey and B. D. Sharma,
H
for the appellant.
M. C. Chagla and P. K. Chatterjee1 for the respondents.
A
B
c
E
C.L.T .• W, BENGAL v. P. &. PAREKH (Hegde, J.)
:109
The Judgment of the Court was delivered by
Hegde, J. This is an appeal by certificate, granted by the
High Court of Calcutta under s. 66A(2) of the Indian Inc<Jme
Tax Act, 1922 (to be hereinafter referred to as the Act) against
the decision of that Court in a reference under s. 66 ( 1 ) of that
Act.
The two questions of law referred to the High Court by the ·
tribunal are : ( I ) Whether s. 16 ( 3) of the Act was ultra vires the
Central Legislature and (2) Whether on the. facts and in the cir·
cumstances of the case, the income arisin~ to the three minor
sons of the assessee by virtue of their adm1ssion to the benefits of
lhe partnership of Messrs. Ajitmal Kanhaiy~lal was
rightly
in·
eluded in the total income of the assessee under ~o. J6 ( 3) (a) ( iv)
of the Act.
The assessee at whose instance those ql!.'!stiom were referred
did not press for an answer in respect of question No. I. Therefore lhat question was not dealt with by the High Court. Hence
we need not go into that question.
The High Court
~mc;wered
the second question in favour of the assessee.
.
The facts necessary for the purpose of deciding the point in .
dispute as set out in the statement of the case submitted by the
tribunal are as follows :
The assessee Shri Ajitmal Parekh was a partner of the finn
M/s. Ajitmal Kanhaiyalal having 7 annas share therein.' He contmuedto be a partner of that firm till July 1, 1954 which was the
last date of the accounting year of- the firm, relevant for the
F
assessment year 1955·56. On July 1, 1954, the assessee retired
from the firm.
Thereafter he gifted to each of his four sons
Rs. 75,000/ •.
Out of his four sons, three were minors at that
time.
There was a reconstitution of i'he firm with effect from .
July 2, 1954 as evidenced by the partnership deed dated July 5,
1954. The major son of the assessee became a partner of the·
reconstituted firm and his minor sons were admitted to the beneG
fits of that partnership in the _reconstituted finn.
The major son
had 2 annas share. His three minor brothers were admitted to
the benefits of the partnership, each one of them having 2 annas
share.
In the assessment yea~ 1956-57. the Income-tax Officer
held that the in~ome arising to the minors by virtue of their admission to the benefits of the partnership came within the purview of
11
s. 16(3)(a)(iv) of the Act.
He included that income in the
total income of the assessee for that year. In appeal the Appellate Assistant Commissioner substantially upheld the
order of
assessment made by the Income-tax Officer but he held that the·
Ll2Surc CI/7C -6
310
SUPREME COURT REPORTS
(1971) l S.C.R.
minors were entitled to only l-9 pies share in
the firm.
The
assessee took up the matter in appeal to the Income-tax Appelhtte
Tribunal. · The tribunal upheld the decision of the Appellate
Assistant Commissioner.
·
On the facts found by the tribunal, the High Court came to
the conclusion that answer to question No. 2 should be in
the
negative and in favour of the assessee.
The tribunal found that the capital invested by the minors in
the tirm came from the gift made in their favour by their fath\!r,
the assessee.
That finding was not open to question before the
High Court nor did the High Court depart from that finding. But
on an interpretation of s. 16 ( 3) (a)( iv) the High Court opined
that the answer to the question must be in favour of the assessee.
Section 16(3) (a) (iv) reads:
"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."
l:sefore any income of a minor child can be brought ·.v.ithin th~
scope of s. 16(3)(iv), it must be established that the said in.:ome
arose directly or indirectly from assets transferred directly or
indirectly by its father.
There is no dispute that the assessee had
transferred to each of his minor sons, a sum of Rs. 75,000/ -.
It may also be that the amount contributed by those minors
<1S
their shar~ in the firm came from those amounts.
But the question still remains whether it can be said that the income with
-which we are concerned in this case arises directly or indirectly
from the. assets transferred by the assessee to those minors.
The
connection betwee~ the gifts mentioned earlier and the income in
question is a remote one.
The income of the minors arose as a
result of their admission to the benefits of the partnership. It js
true that they were admitted to the benefits of the partnership
because of he contribution made by them.
But there is no nexus
between the transfer of the assets and the income in question.
It
cannot be said that that income arose directly or indirectly from
the transfer of the assets referred to earlier. . Section 16 ( 3) of
the Act created an artificial income. That section must receive
'strict construction as observed by this Court in Commi.~sioner of
Income Tax, Gujarat. v. Keshavlal Lallubhai Patel(~). In our
(1) 55. l.T.R. 637.
u
c
D
r.
F
H
.B
CI.T .. W. BENGAL 'v. P. B. PAREKH (Hegd'!; J.)
~)I 1
......
judgment before an income can be held to come within the ambit
of s. 16 ( 3), it must be proved to have arisen-~directly or indir~ct
ly-from a tran~fer of assets made by the assessee in favour of his
wife or minor children.
The connection between the transfer of
assets alid the income must be proximate.
The income in question must arise as a result of the transfer and not in some manner
connectd with it.
V.P.S.
Appeal dismissed.