# SHAH AND v. RAMASWAMI, JJ.J

- **Citation:** [1968] 2 S.C.R. 360
- **Court:** Supreme Court of India
- **Decided:** 1968
- **Case number:** Civil Appeal No. 2454 of 1966
- **Bench:** J.C. Shah, V. Ramaswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/shah-and-v-ramaswami-jj-j-4210
- **Pages:** 6

## Headnote

Income Tax Act, 1922, "'" 128, 16(3) (a)(iii)-Appellant transferrinR
shares /() wife-profit made 011 sale of shares by way of capital goiru--
if liable to be included as appellan(s 'income.
The appellant made a gift in 1951 of certain ordinary and preference
shares in a company to his wife and on fhe date of uansfer the value of
the shares was Rs. 69,730. After the <ompany had convened the preference shares into ordinary shares the appellant's wife sold most of the
shares held by her for Rs.
1,54,800, resulting in a
capital
~ain of
Rs. 70,860 as ccmputed under s. 12B of the Income Tax Act. 1922. She
deposited the entire amount realised from the sale of shares with a firm
and fhereby earned an interest of Rs. 9,288 per year. Jn the appellant'•
assessment for 1957-58, the Income Tax Officer included the amount of
Rs. 70,860 on the view that the gain resulting from the sale of tbc
shares was the income of the appellant's wife which arose directly or
indirectly from assets transferred by him within the meaning of s. 16
(3)(a)(iii) of the Income Tax Act, 1922.
Similarly, in the appellant's
assessment for the year )958-59 and 1959-60, the interest
amount
of
Rs. 9.288 was also included as income '-"'ithin the mcaninj! of "· 16 (3)
(a)(iii).
In appeals made against the three a~scssmcnt orders, v..·hilc the
Appellate Assistant Com.1 •• is.sioner dismissed the appeal in respect of the
as<essment year 1957-58. he p~rtly allowed the other two appeah takin~
the ,·iew that only that part of the interest which was atlributahle to the
monetary value of 1h~ sharec; ;.it 1hc lime of rhc eift \1.·ac; li:ihlc to he included in the appellant's total income under s. 16 (3)(a)(iiil; since thr
monetary value of the shares gifted to the wife at the time when the gift
was made w:is on1v Re;. 6?.730, the interest attributable to it v.·orkcd out at
Rs. 4, I 3R and onlv this amount could be included in the appellant's income.
The Appellate Tribunal dismissed the appellant's further appeal
and also allowed cross appeals filed by the Depanment. · The High Court.
upon a reference. held that the sum of Rs. 70.860 was prope·lv included
in the apne11ant's income. in t 957-58 but that the interCSt amount in
excess of Rs. 4.138 was not liahlc to be included in his income for 195859 and 1959·60.
In the appeal to this Court the onlv question for c.onsideration was
whether the amount of Rs. 70,860 was the aopellant's inccmc under s. 16
(3) (a)(iii). It was contended on his behalf (i) that what come< within
the ambit of s, 16(3)(a) (iii) is the income from the transferred assel8.
which is different from the profits or Jr.tins arising from the sale of the
transferred assets. or in other words "the capital gains" from the transferred asset<; and
(ii) thats. 16(3)(a)(iii) was enacted in 1937 when
the word 'income' did not include 'capital gains' and income from the
property w"5 understood to be income falling under that head in s. 6 of
the Act.
HELD :
The Hioh Court had ri•htlv decided that the amount 1'f
R<. 70.860 was properly included in the as.essee's income under s. 16
0) (a) (iii).
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MANEKLAL v. c.J.T. (Ramaswami, J.)
361
(i) There is no logical distinction between income arising from the
asset transferred to the wife and arising from the sale of the asset~ so
transferred. The profits or gains which arise from the sale of the asset
would arise or spring from the asset, although the operation by which the
profits or gain is made to arise out of the asset is
the operation of
"1le. [364 G-H]
(ii) Although at the time whens. 16(3)(a)(iii) was enacted the definition of 'income' did not include 'capital gains', capital gains having been
brought within the meaning of 'income' in s.
2( 6C),
the
expression
'income' as used in s. 16(3) (a)(iii) must be construed according to the
amended definition of the word and would, therefore,
include
capital
gains.
There is nothing in the context or language of s. 16(3) (a) (iii)
of the Act to suggest that

## Text

SEVANTILAL MANEKLAL SHETH
\',
COMMISSIONER OF l!'iCOME-TAX (CENTRAL),
BOMBAY
NO\·ember 22, 1967
(J.C. SHAH AND V. RAMASWAMI, JJ.J
Income Tax Act, 1922, "'" 128, 16(3) (a)(iii)-Appellant transferrinR
shares /() wife-profit made 011 sale of shares by way of capital goiru--
if liable to be included as appellan(s 'income.
The appellant made a gift in 1951 of certain ordinary and preference
shares in a company to his wife and on fhe date of uansfer the value of
the shares was Rs. 69,730. After the <ompany had convened the preference shares into ordinary shares the appellant's wife sold most of the
shares held by her for Rs.
1,54,800, resulting in a
capital
~ain of
Rs. 70,860 as ccmputed under s. 12B of the Income Tax Act. 1922. She
deposited the entire amount realised from the sale of shares with a firm
and fhereby earned an interest of Rs. 9,288 per year. Jn the appellant'•
assessment for 1957-58, the Income Tax Officer included the amount of
Rs. 70,860 on the view that the gain resulting from the sale of tbc
shares was the income of the appellant's wife which arose directly or
indirectly from assets transferred by him within the meaning of s. 16
(3)(a)(iii) of the Income Tax Act, 1922.
Similarly, in the appellant's
assessment for the year )958-59 and 1959-60, the interest
amount
of
Rs. 9.288 was also included as income '-"'ithin the mcaninj! of "· 16 (3)
(a)(iii).
In appeals made against the three a~scssmcnt orders, v..·hilc the
Appellate Assistant Com.1 •• is.sioner dismissed the appeal in respect of the
as<essment year 1957-58. he p~rtly allowed the other two appeah takin~
the ,·iew that only that part of the interest which was atlributahle to the
monetary value of 1h~ sharec; ;.it 1hc lime of rhc eift \1.·ac; li:ihlc to he included in the appellant's total income under s. 16 (3)(a)(iiil; since thr
monetary value of the shares gifted to the wife at the time when the gift
was made w:is on1v Re;. 6?.730, the interest attributable to it v.·orkcd out at
Rs. 4, I 3R and onlv this amount could be included in the appellant's income.
The Appellate Tribunal dismissed the appellant's further appeal
and also allowed cross appeals filed by the Depanment. · The High Court.
upon a reference. held that the sum of Rs. 70.860 was prope·lv included
in the apne11ant's income. in t 957-58 but that the interCSt amount in
excess of Rs. 4.138 was not liahlc to be included in his income for 195859 and 1959·60.
In the appeal to this Court the onlv question for c.onsideration was
whether the amount of Rs. 70,860 was the aopellant's inccmc under s. 16
(3) (a)(iii). It was contended on his behalf (i) that what come< within
the ambit of s, 16(3)(a) (iii) is the income from the transferred assel8.
which is different from the profits or Jr.tins arising from the sale of the
transferred assets. or in other words "the capital gains" from the transferred asset<; and
(ii) thats. 16(3)(a)(iii) was enacted in 1937 when
the word 'income' did not include 'capital gains' and income from the
property w"5 understood to be income falling under that head in s. 6 of
the Act.
HELD :
The Hioh Court had ri•htlv decided that the amount 1'f
R<. 70.860 was properly included in the as.essee's income under s. 16
0) (a) (iii).
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MANEKLAL v. c.J.T. (Ramaswami, J.)
361
(i) There is no logical distinction between income arising from the
asset transferred to the wife and arising from the sale of the asset~ so
transferred. The profits or gains which arise from the sale of the asset
would arise or spring from the asset, although the operation by which the
profits or gain is made to arise out of the asset is
the operation of
"1le. [364 G-H]
(ii) Although at the time whens. 16(3)(a)(iii) was enacted the definition of 'income' did not include 'capital gains', capital gains having been
brought within the meaning of 'income' in s.
2( 6C),
the
expression
'income' as used in s. 16(3) (a)(iii) must be construed according to the
amended definition of the word and would, therefore,
include
capital
gains.
There is nothing in the context or language of s. 16(3) (a) (iii)
of the Act to suggest that capital gains ·are. excluded from its scope and
there is no reason why a restricted interpretation should be giYen to the
provision' of s. 16(3) (a) (iii). [365 C-E]
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2454 of
1966.
Appeal from the judgment and order dated February 19..-22,
1965 of the Bombay High Court in Income-tax Reference No. 2
of 1962.
Sa11ar P. Mehta, and J. HI. Dadacha11ii, for th:! appellant.
Niren De, Solicitor-General, B. R. L. Iyengar, and R. N. Sachthey, for the respondent.
The Judgment of the Court was. delivered by
Ramaswami, J.. This appeal is brought by certific.ate from the
judgment of the Bombay High Court dated .the 22nd Febnia1y,
1965 in Income-tax Reference No. 2 of 1962.
Jn the year 1951 the assessee ManeJ>lal Ujamshi (hereinafter
referred to as the assessee J made a gift of 1.184 ordinary and 155
preferncc shares in Changdeo Sugar Mills Ltd. to his wifo B:ii
Laxmibai. The total value of these transferred stiare.s on the date.
of the iransfer was Rs. 68,730/ ~· Subsequent to the transfex the
company converted the prefer.ence shares into ordinary . shares
giving the shareholders 8 ordinary shares for each preference share
with the result that on December 31, .. 1954, Bai Laxmibii held in
all 2.424 ordinary shares of the mills.
Ou• of these • 2.424
shares, Bai Laxmibai sold 2.400 shares on August 1. 1956. for
the sum of Rs.
1,54,800/-
resulting. in a capital gain of
Rs.- 70,860/- as computed under s. 12B of the Income-tax Act.
The whol.e amount realised by·the sale of the· shares was deposited
by Ba; Laxmibai with M.!s. A. H. Bhivandiwalla & Co., in which
Maneklal as well as his son, Sevantilal, happened to be partne.rs.
The amoun·: deposited by Bai Laxmibai fetched a yeady 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. 7().860/· which was the profit made by Bai Umnibai on the
362
SUPREME COURT REPORTS
(1968] 2 S.C.R.
sale of the shares, as income of Maneldal under 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, the
Income Tax Officer included in each year the amount of Rs. 9,288
which was the interest earned by._Bai Laxm;bai on the deposit of
the sale proceeds with M/s. Bhiv~~diwalla and Co. as the income
of Maneklal under s. 16(3) (a) (iiif.
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 h;s wile
oti.J~rwise than for adequate consider.1tion and therefore was required to be included in the computation of the total income of
Maneklal. The Income Tax Officer also took the view that the
amount of interest which Bai Laxmibai had received from the
sale proceedt deposited by her with M. ·s. Bhivandiwalla & Co. was
also income of the wife of Maneklal which arose directly or indir.:ctly from the assets transferred by Maneklal to her.
Accordingly, in the assessment order for the first year, the Income Tax
Officer included t!:ie amount uf Rs. 70.860i- and in the assessment
orders for the next two
years, . h.z
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 Assistant Commissioner. In the appeal against the first
assessment order for the assessment year
I 957-58
the
Appellate Assistant Commissioner agreed with
the view
taken
by
the Income Tax Officer and dismissed th.z appeal.
In, the other
two appeals, he partly allowed the appeals taking the view
that
only that part of the interest which
was
attributable
to the
monetary value of the shares covered by the shares at th" time of
the gift was liable to be included in the total income of Maneklal
in accordance wi!h the provisiom of s. 1613)(a)(iii)
and the
balance could not be included under the said provisiqn. Since the
monetary value of the shares gifted to Bai Laxmibai at the time
when the ~ift was mad.~ was only Rs. 69,730/-. the intere.-t at!ributable to it worked out at Rs. 4, I 38/-. Out of the total interest
of Rs. 9,288/- which was received by Bai Laxmibai in each of
those years, he directed that only an amount of Rs. 4,183/- should
be included in the total income of Maneklal in each of those two
years and the balance of Rs. 5,105/- should be deleted. Against
the ord~rs of the Appellate Assistant Commissioner on these
appeals the assessec appealed to the
Appellate Tribunal. The
Department, on the other hand, appealed against the orders of the
Appellate Assistant Commissioner for the years 1958-59
and
1959-60 insofar as
they allowed exemption
in
respect of
Rs. 4,183/- out of the total amount of Rs. 9,288/- for each yeJr.
The Appellate Tribunal dismissed the appeal of !he assessce with
regard to the assessment year l 95'7-58.
For the assessment years
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MANEKLAL v .. C.J.T. (Ramaswami, J.)
363
,
1958-59 and 1959-60, the Appellate Tribunal allowed the appeals
of the Department and dismissed the appeal of the assessee for the
assessment year 1959-60.
According to these decisions of. the
Appellate Tribunal the result was that for the assessment year
1957-58 the order of the Income Tax Officer that the amount of
Rs, 70,860/- which was the profit or gain on the
sale of the
shares by Bai Laxmibai was liab!.~ 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 those two
years.
Thereafter, at the instance of the assessee, the Appella!e
Tribunal stated a case to the High Court on the following questions of iaw :
"I. Whether in computing the
total
income
of
Maneklal for the assessment year 1957-58, the sum of
Rs. 70,860/- has been properly included therein in accordance with the provisions of s. 16 ( 3) (a) (iii) of the
Income-tax Act, 1922 ?
2. Whether in computing the total income of Maneklal for the assessment year 1958-59
the
sum
of
Rs. 5,104/- has been properly included therein in accordance with provisions of s. 16 ( 3) (a)( iii)
of the
Income-tax Act, 1922 ? ·
3. Whether in computing
the
total
income of
Maneklal for the assessment year 1959-60, the sum of
Rs. 4,183/- has been properly
included therein in
accorc\ance with the provisions of s. 16 ( 3 )(a)( iii)
of the Income-tax Act, 1922 ?
4. Whether in computing the total income of Man.-
eklal for the assessment year 1959-60,
the sum of
Rs. 5 ,105 I - has been properly included therein in accordance with the provisions of s. 16(3)(a)(iii) of the
Income-tax Ac!, 1922 ?"
By its judgment dated February 19, 1965 the High Court answered the first question in the affirmative and against the assessee. It
answered questions Nos. 2 & 4 in favour of the assessee and against
the Department.
As regards question No. 3, the High Court
answered· it in the affirmative and in favour of the Department.
The reason was that Counsel for the assessee did noi press it or
challenge the correctness of the view taken by the Appellate
Tribu~al .and accep'.ed as correct the conclusion of the Tribunal
with regard to the point involved iii that question.
Section 16(3)(a)(iii) of the Income Tax Act, 1922 provides
as follows : ·
5UPREME CQ\JKT REPORTS
(1968j 2 S.CR.
"In computing the total income of any
individua!
for the purpose of assessment, there shall be included :-
(a) so much of :he income of a wife ...... of. .. .
. . . . . . . . . . such individual as arises directly or
indirectly ......... .
(iii) frori1 assets transkrrcd directly
or
indirect!)
ll
to th.~ wife by the husband otherwise than for
:idcquate consideration or in connection with an
agreement to live apart ...
Section 2(6CJ of the Income-tax Act. 1922 stales:
" 'Income· includes ........... .
(vi) any capital gain chargeable under section I 2B:
Section 128 of the Income Tax Act enact; :
"(I) The tax shail be payable by an a;,cs"·'e under
the head 'capital g .. ins' in respect of any profits or gains
arising from the sale.
exchange.
rdin4uishmcnt
or
transfer of a capital asset effected after the '.l l st day of
March. 1956. and such profi:s and gains shall be deemed
to be income of the previous year in wh,ch !he sale. exchange. relinquishment or transfer took place: ...... ··
With regard to the first question Mr. Mehta put forward the
Jrgument that wha'. comes within the ambit of s. 16 (3) ( :i )(iii)
is the income from the tran<fcrred assets, which is different from
the profit or gain arising from the sale of the transferred assets.
or in other words, "the capital gains" from the transfencd asset~.
It was argued in the first place that what comes within the ambit
of s. 16 ( 3) (a) (iii) was 'the income from the assets' i.e., the
income which the
a~se'. produces while it continues to remain
in the hands of the assessee and does not include the gain which
the assessee makes by selling the asset and parting v.:ith. posse'-
sion of it.
We see no justification for this argument.
In
our
opinion there is no logical distinction between
income
ans1r..e
from the asset transferred to the wife and income arising from
the sale of the assets so transferred.
The profits or )!ains which
arise from the sale of the asset would arise or sprin)! from the
asset, although the operation by which the profits or 11ains is mad~
to arise out of the asset is the operation of the sale. If the asset
;s employed, say by way of investment and produces income, the
income arises or springs from the asset; the operation. which causes
the income to spring from the asset, is the OJ?eration of the investment. In the operation of th~ investment.
mcome is
producal.
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MANEKLAL V. c.r.T. (Ramaswami, J.)
365
while the asset continues to belong to the assessee, while in the
operation of a sale, gain is produced, which is still income but in
the process the title to the asset is parted with. Although the processes involved in the two cases are different, the gain which has
resul'.ed to the owner of the asset, in each case, is
the
gain,
which has sprung up or arisen from the asset. There is hence no
warrant for the argument that the capital gain is
not income
arising from the assets but it is income which arises from a
source which is different from the asset itself. It was argued in
the second place that S; 16(3)(a) (iii) was enacted in 1937 wh.en
the word 'income' did not include 'capital gains'
and income
from property was understood to be income falling under that
head in s. 6 of the Act. The inclusion of 'capital gains' in the
definition of 'income' was for the first time enacted in 194 7. It
is true that at the time when s. 16(3)(a)(iii) was enacted, the
definition of 'income' did not include 'capital gains' but capital
gains having been brought within the meaning of 'income'
in
s. 2(6C) the expression 'income' as used ins. 16(3) (a) (iii)
must be construed according to the amended definition of the
word and would, therefore,. include capital gains.
There is
nothing in the context or language of s. 16(3)(a)(iii) of the Act
to suggest that capital gains are excluded from its scope.
We
see no reason why a restricted interpretaiion should be given to
the provisions of s. 16(3) (a) (iii) as contended for the appellant.
On the contrary, the object of the enactmenl of the section is to
prevent avoidance of tax or reducing the incidence of tax
on
the part of the assess.ee by transfer of his assets to his wife or
minor. child. It is a sound rule of interpretation that a ·statute
should be so construed as to prevent the mischief and to advance
the remedy according to the true intention of the makers of the
statute. . We are, therefore, unable to accept Mr. Mehta's argμment on this asp.o..,ct of the case.
For the reasons given we hold that. the High Court has rightly
answered the first question against the assessee and this appeal is
accordingly dismissed with costs.
·
R.K.P.S.
Appeal dismissed.
:USup.Cl/687 9