Patna High Court
Rai Bahadur H. P. Banerjee vs Commissioner Of Income-Tax, Bhiar & ... on 20 November, 1940
Equivalent citations: [1941]9ITR137(PATNA), AIR 1941 PATNA 59
JUDGMENT
HARRIES, C.J. The facts giving rise to this reference can be shortly stated as follows :
The assessee, Rai Bahadur H. P. Banerjee, is an owner of an a partner in certain collieries in Jharia and also carries on the business of a coal-raising contractor. His wife had from time to time received certain assets from her husband and up to the financial year ending March 31, 1937, the Rai Bahadur and his wife had been assessed separately to income-tax. For the assessment year 1937-38, however, the Rai Bahadur was assessed to tax under Section 16(3), Indian Income-tax Act, not only on his own income but also on a sum of Rs. 15,622, which represented the income arising from the assets which, as I have already stated, had been previously transferred by him to his wife and which had hereto been assessed separately in the hands of the wife. The assessee objected to this mode of assessment on various grounds. He contended that his status was not that of an individual but the Karta of a joint Hindu family and, therefore, he could not be assessed as an individual under the said Section 16(3) of the Act as had been done in this case. The Income-tax authorities, however, found as a fact that the assessee was not the Karta of a joint Hindu family and was properly assessable as an individual, and that finding has been accepted and need not be further referred to.
The assessee further contended that the income of his wife had been improperly included in computing his total income of the ground that Section 16(3) could have no application to transfers made to a wife before the terms of that sub-section were enacted in the year 1937. In any event, the assessee claimed that the transfers in favour of his wife were made for adequate consideration and, therefore, the provisions of the said section had no application to the case.
On appeal the Assistant Commissioner of Income-tax eventually rejected these contentions, and his decision was upheld by the Commissioner. The latter was asked to state a case upon the question, "Whether the income of Rs. 15,622 has been rightly included by the Income-tax Officer in computing the total income of the petitioner within the meaning of Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922, and also whether the provision is retrospective." The Commissioner declined to state a case on this question; but by an order of this Court dated December 14, 1939, he was directed to state a case upon the question. The Commissioner accordingly stated a case under Section 66(3), Indian Income-tax Act, 1922, and in it he has expressed the view that the provisions of Section 16(3)(a) (iii) of the Indian Income-tax Act apply to transfers made in favour of a wife before the passing of the Amending Act of 1937 and that the wifes income of Rs. 15,622 had been rightly included by the Income-tax Officer in computing the total income of the assessee.
Two points have been taken before this Court on behalf of the assessee. In the first place, it was urged that Section 16(3)(a)(iii) of the Income-tax Act cannot apply to the transfers made before that sub-section came into force, and, secondly, that even if the sub-section did apply to such transfers, the transfers in this case in favour of the wife did not fall within the terms of that sub-section.
It will be convenient to deal first with the question whether or not Section 16(3) applies to transfers made in favour of a wife before that provision came into force.
Section 16, sub-section (3), was added to the Indian Income-tax Act, 1922, by Act IV of 1937, and the added sub-section is in these terms :-
"(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 -
(i) from the membership of the wife in a firm of which her husband is a partner;
(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner;
(iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart; or
(iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual; and
(b) So much of the income of any association of individuals consisting of such individuals and his wife as arises from assets transferred to the association by such individual."
Section 5 of this amending Act expressly provides that this addition of sub-section (3) to Section 16 of the Indian Income-tax Act "shall not have effect in respect of any income chargeable to income-tax for any year ending before the 1st day of April, 1937". In other words, the method of computing the total income of any individual as laid down in the new sub-section (3) to Section 16 of the Act, shall not be applied to the computation of any income chargeable to income-tax for any year ending before the April 1, 1937. It is to be observed that in the present case the method of computation was applied to income chargeable to income-tax for the assessment year 1937-38, that is for the year ending the April 1, 1938.
It was strenuously argued by Mr. P. R. Das on behalf of the assessee that sub-section (3) of Section 16, Indian Income-tax Act, is directed at transactions and that it, in effect, renders transfers made otherwise than for adequate consideration by a husband to his wife invalid for the purpose of Income-tax law. As the sub-section was directed against transactions, he urged that it could not be held to invalidate what had been done before the passing of the Act. It is a well-established rule of construction of statutes that no provision should be held to be retrospective unless the words of the statute compel the court so to hold. The statute can only be held to have retrospective effect if it is expressly stated that it is to have such effect or it by necessary implication such effect must be give to it.
In my view, however, this added sub-section is not directed towards transactions between husband and wife and in no say invalidates such transactions. From the very words of the sub-section it is assumed that the transactions are valid ones and that the income arising from the transferred assets is the income not of the husband who transferred but of the wife who received the assets. What is to be included in computing the total income of the husband is "so much of the income of a wife............ of such individual as arises directly or indirectly................. from assets transferred directly or indirectly to the wife by the husband......................". In short, the wifes income is still to be treated as the income of the wife, but in certain circumstances it has to be added to the husbands income in computing the total income of the latter. The section in no way affects the validity of the transfers but only provides a method by which such income is to be taxed. For the years after April 1, 1937, the sub-section provides that income from certain assets transfered by the husband to the wife will be included in the husband to the wife will be included in the husbands income for the purposes of taxation and will not be taxed separately as hitherto. That being so, there is no reason why the sub-section should not be held to apply to a wifes income arising from assets transferred before the Amending Act came into force. Further, the wording of section 5 of the Amending Act IV of 1937, suggests that sub-section (3) of section 16 should have such effect, because it states that the amendment "shall not have effect in respect of any income chargeable to income-tax for any year ending before April 1, 1937." In other words, it is to have effect in respect of any income chargeable to income-tax for any year subsequent to that date.
Further, the wording of the sub-section is wide enough to cover not only income from assets transferred by a husband to his wife after the passing of the Act but also income arising from such assets transferred before the passing of the Act.
In support of the argument that this sub-section has no application to a wifes income arising from assets transferred before the passing of the Act, reliance was placed upon sub-section (8) of Section 44D, Income-tax Act. Section 44D is the first section in Chapter VB which is entitled "Special provisions relating to avoidance of liability to income-tax and super-tax" and the marginal note to Section 44D is "avoidance of income-tax by transactions resulting in the transfer of income to persons resident or ordinarily resident abroad". This section provides that in certain cases of transfer of assets to persons resident or ordinarily resident abroad, the income therefrom shall be deemed to be the income of the assessee for the purposes of the Act. In short, for the purposes of income-tax, income which is in name the income of a person not assessable is deemed to be the income of the person assessed. In short, the transfers at least for the purposes of income-tax are avoided.
Sub-section (8) to section 44D provides that : "The provisions of this section shall apply for the purposes of assessment to income-tax and super-tax for the year ending on the March 31, 1940, and subsequent years, and shall apply, in relation to transfers of assets and associated operations whether carried out before or after the commencement of the Indian Income-tax (Amendment) Act, 1939." It is pointed out that in the section, which was added in the year 1939, it is expressly provided that its provisions are to have retrospective effect and are to apply to transfers made before the passing of the Amending Act. SImilarly, it is contended that if it was the intention of the Legislature that the provisions of sub-section (3) of Section 16 of the Act were to apply to transfers made in favour of a wife before the passing of the Act, a like provision would have been included. In my judgment there is no real force in this contention. Where an amending section avoids transactions, then it is necessary to have clear words in the statute it transactions entered before the Act are to be affected. Where, however, an emendment does not avoid the transactions in any way, there is no need for such a provision. Section 16, subsection (3), of the Act, so far from avoiding the transfers made by a husband in favour of a wife, assumes that such transactions are valid and that the income arising from the assets transferred is in fact the income of the wife. All that the sub-section provides is that for the purpose of taxation the wifes income will not be assessed in the hands of the wife but will be added to the husbands income for the purpose of ascertaining the total income to be taxed. In my judgment the provisions of sub-section (3) of Section 16, Indian Income-tax Act, apply to all assessments made for the years subsequent to April 1, 1937, and apply to income derived from assets transferred by a husband to the wife whether such transfers were made before or after April 1, 1937.
The second contention urged by Mr. P. R. Das was that, even if the sub-section applied to income from transfers made before the Amending Act came into force, the sub-section had no application to the facts of the present case. The income of the wife is only to be added to the husbands income in computing the total income of the latter where such income arises from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart. Admittedly the assessee and his wife are living together; but it is urged that the transfers in this case were made for adequate consideration, and that being so, the income arising therefrom should not be added to the husbands income in computing the latters total assessable income. The Income-tax authorities have found that the wife gave no monetary consideration for any of these transfers and that they were all made on account of natural love and affection between the parties. Mr. Das admits this but contends that a transfer by a husband to a wife on account of natural love and affection is a transfer for adequate consideration. Further, it was urged that the word "consideration" in this sub-section is not used in its legal sense but means reason or motive. In short, the subsection it is said, has no application in cases where the husband has made a gift to his wife for a good reason or motive such as love or affection.
In my judgment the word "consideration" appearing in this sub-section is used in its legal sense as it is used in connection with the transfer of assets. A transfer of assets may be gratuitous or wholly without consideration or it may be with consideration, that is for some return moving from the transferee to the transferor. The word "consideration" is not defined in the Transfer of Property Act, and in my judgment it must be given a meaning similar to the meaning which it has in the Indian Contract Act. Section 2(b), Indian Contract Act, defines "consideration" in these words" -
"When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise."
In all cases where a transfer is for consideration there must be some such act or abstinence or promise; otherwise the transfer will be without cosnideration.
The expression "natural love and affection" is not regarded as good consideration under the Indian Contract Act, and this is clear from the terms of Section 25 of that Act. A verbal agreement, for example, made on account of natural love and affection between the parties is void as being an agreement without consideration, and such an agreement is only valid and enforceable if it is expressed in writing and registered under the law for the time being in force for the registration of documents. As natural love and affection is no consideration in the eye of the law, a transfer on account of natural love and affection is not, in my view, a transfer for consideration adequate or otherwise but is in effect a gift by one party bearing love and affection to the other. That being so, the transfers in this case made by the assessee to his wife were not transfers for consideration and, therefore, they are transfers such as are contemplated in Section 16(3) of the Act.
Even if it is assumed that "natural love and affection" amounts to consideration within the meaning of this sub-section, such could not, in my view, amount to adequate consideration. Mr. Das has contended that the words "adequate consideration" Mr. Das has contended that the words "adequate consideration" used in this sub-section mean nothing more than good consideration. If there is good consideration, the courts are not usually concerned with its adequacy. The adequacy of consideration is a matter for the parties. All that the law concerns itself with is whether there is good and legal consideration. Adequacy of consideration may be material when a court is considering whether a transfer has been made voluntarily and with a full understanding of its effect. Inadequacy of consideration may, in circumstances, suggest fraud, coercion, mistake and such like. Once, however, a Court is satisfied that a person has entered into a agreement freely and with full knowledge of its purport and effect, then such agreement will be held valid if it is supported by consideration whether such is regarded by the Court as adequate or not. In short, the law draws a clear distinction between good consideration and adequate consideration. A transaction may well be valid, though the consideration in the view of an independent tribunal might be wholly inadequate. Even assuming, therefore, that natural love and affection might amount to good consideration, which in my view, it does not, that would not be sufficient. The wifes income will only be assessed in her hands if it arises from assets transferred for adequate consideration, that is consideration which is sufficient of reasonable having regard to the value of what is transferred. It must be equal or nearly equal in magnitude or extent to what has been transferred. If natural love and affection is held to be adequate consideration then the sub-section becomes, to all intents and purposes, a dead letter. In fact, it could never apply to income from assets which were the subject matter of any gift by a loving husband to his wife and could only apply to rare cases where a husband actually sells or transfers property to his wife for some material return which in value or extent was far less than the value of the property transferred. To hold that this sub-section has no application to out and out gifts but only to transactions, such as sales at a very low or nominal price, would be to give the sub-section a meaning which could never have been intended by the legislature. In my judgment, transfers by a husband to his wife of assets otherwise than for adequate consideration, cover all transfers in the nature of gifts or transfers made purely on the ground of natural love and affection. That being so, the Income-tax authorities were right in holding that Section 16(3) applied to this case.
For the reasons which I have given, I would answer the question in these terms : Section 16(3)(a)(iii), Indian Income-tax Act, 1922, applies to income from assets transferred by a husband to a wife otherwise than for adequate consideration, though such transfers were made before the sub-section came into force, and that the income of Rs. 15,622 in this case was rightly included in computing the total income of the assessee.
The assessee must pay the costs of the proceeding which I would assess at five gold mohurs. The sum of one hundred rupees in deposit will be retained by the Income-tax authorities.
FAZI ALI, J. - I agree.
MANOHAR LALL, J. - For the assessment year 1937-38 the assessee has been assessed on the income of his previous year ending March 31, 1937 by including as a part of his income another income which used to be assessed in the previous year in the name of his wife Shrimati Abhaya Sundari Debi. In consequence of the amendment of the Income-tax Act by Act IV of 1937 the Income-tax Officer investigated the matter in order to find out whether that portion of the income of the wife which he sought to add to the income of the assessee for the purpose of computing his total income in the assessment year was "from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration". The assessee admitted before the Income-tax Officer that the bulk of the investment in his wifes name producing the income in question were from "the money of his earnings". The Assistant Commissioner, as stated in his order dated February 14, 1938, in paragraphs 8 and 10 also held that although the income earned by the wife was derived from deposits, interest on securities and house properties "but as it was admitted that the necessary fund to secure the sources was originally supplied by the assessee out of his own savings, they had to be aggregated for a joint assessment under Section 16(3) of the Income-tax Act". The Commissioner of Income-tax by order dated the September 10, 1938, when dealing with the combines application of the assessee under Section 33 and 66(2) of the Act set aside determining the status of the assessee. The Assistant Commissioner accordingly re-heard the appeal and came to the conclusion that the assessee was rightly assessed with the status individual. It appears to have been argued before the Assistant Commissioner that the assets were transferred to the wife in this case for natural love and affection and the transfers were not bogus. But the Assistant Commissioner overruled this contention and held that "As the assessee does not contend that he made any transfer for legal consideration his wifes income cannot escape the operation of Section 16(3)(a)(iii)", the Commissioner of Income-tax was again moved to make a reference under Section 66(2) on the question whether the income of the wife to the extent of Rs. 15,622 has been rightly included by the Income-tax Officer in computing the total income of the petitioner within the meaning of Section 16(3)(a)(iii) of the Indian Income-tax Act of 1922. But the Commissioner refused to make a reference because he held that the income in question "accrued or arose from assets belonging to the petitioner but transferred to his wife some years before the passing of the amended sub-section". The Commissioner also found that apart from love or affection the wife had not given any valuable consideration for the transfer of the assets by the assessee and therefore, the transfer was not for adequate consideration within the meaning of the amended section.
The question, therefore, for decision is whether a transfer by the husband of his assets for love and affection to the wife is a transfer for adequate consideration.
Mr. P. R. Das, who appeared for the assessee, argued that the words adequate consideration should be held to be synonymous with legal consideration. He submitted that when the legislature has deliberately used the word adequate, which has a plain dictionary meaning of sufficient, recourse is not permissible to the provisions of the Indian Contract Act which define consideration and deal with the adequacy or inadequacy of consideration within the meaning of the statute.
In my opinion this argument is not sound. The legislature by the Amending Act, IV of 1937, is itself considering the income derived from transfers which can only be made as a result of a valid contract. The legislature is not attempting to strike at the transfers but is out to tax income derived from such transfers (which are valid in law) provided the income is derived from the assets transferred to the wife for which she has not paid adequate consideration.
What then is the meaning of the words "adequate consideration" ? In the Imperial dictionary of the words "adequate" is stated to mean equal, proportionate, exactly correspondent, fully sufficient.
In the case of Curlewis v. Clark (1849) 18 L. J. Ex 144, the Court was dealing with the validity of the plea taken by the defendant that the plaintiff agreed to take a paper, capable, by the insertion of a drawer, of being made into a negotiable instrument, as a satisfaction for pounds 64.4S. 6d. if the bill should be paid at maturity, if not, then the defendant should be liable to the payment of pounds 10. Pollock. C. B., and the other learned Barons held that this plea was good. Parke, B., made these observations after narrating the facts which I have stated above : "The question is whether that affords a good answer. I think it does. It is a different question whether the plaintiff may or may not have made a bad bargain; at all events, he takes something which is capable of being made of value. If a good consideration exists, the Court cannot enter into the question of the adequacy of the value."
In the case of Tennent v. Tennents 1 (1870) 2 Scotch and Divorce A. C. 6, the following quotation is taken from the speech of Lord Westbury ,At page 9 : "But the transaction having been clearly a real one, it is impugned by the Appellant on the ground that he parted with the valuable property for a most inadequate consideration. My Lords, it is true that there is an equity which may be founded upon gross inadequacy of consideration. But it can only be where the inadequacy is such as to involve the conclusion that the party either did not understand what he was about or was the victim of some imposition. It is impossible to say that the inadequacy of consideration in this case amounts to anything like proof to warrant either of those conclusions." Lord Chancellor, Lord Hatherly, Lord Chelmsford and Lord Colonsy came to the same conclusion.
In the case of Administrator-General of Bengal v. Juggeswar Roy 2 (1877) 3 Cal. 192, Sir Montague Smith in delivering the judgment of their Lordships of the Judicial Committee relied upon the above quoted observations of Lord Westbury. The case arose out of a suit institutes by Robert John Jackon (on whose death the Administrator-General of Bengal was substituted on the record as plaintiff) to set aside conveyances executed by Mr. Jackson on the ground that he was a minor at the time of the execution and that he was fraudulently included to part with his property, without fully understanding the nature of the transaction and for an inadequate price. Their Lordships were unable to come to the conclusion that the evidence of inadequacy of price was such as to lead them to the conclusion that the plaintiff did not know what he was about or was the victim of some imposition, or that the son at the relevant dates was altogether in the position of a minor without any one to advise him. At page 197 Sir Montague Smith made these observations : "Independently, however, of this consideration, it cannot, their Lordships think, be said that the purchase money was so grossly inadequate that its inadequacy amounts to proof of an imposition upon the plaintiff" :
In the case of Coles v. Trecothick 1 (1804) 9 Ves. Junior 234, at p. 246, Lord Chancellor Elden held with regard to the facts of the facts of the case before him that inadequacy of price was out of the question and made these important observations at page 246 : "Inadequacy of price does not depend upon a person giving pretium affections, from any peculiar motive, beyond what any other man would give, the reasonable price. But, further, unless the inadequacy of price is such as shocks the conscience, and amounts in itself to conclusive and decisive evidence of fraud in the transaction, it is not itself a sufficient ground for refusing a specific performance : (Western v. Russell, 3 Ves. & Bea. 187, and the notes 193; and 8 Ves, 137). How upon these circumstances is there such inadequacy of price as to cut down the bargain, or authorise the court not to complete it ?"
It seems to me from a consideration of these high authorities that the Courts have always held that adequacy of consideration means something different from good consideration. A transaction such as a transfer by one person to another will be held to be good even though the consideration for it is not equal to the real value of the property, although the Courts will consider whether the consideration is not adequate or grossly inadequate but only in order to decide whether the transfer was not imposed upon. (See for instance the illustration to Section 25 of the Indian Contract Act (IX of 1872), which deals with agreements which are valid if they are without any consideration unless they come within the stated exceptions). Explanation 2 is instructive. It says : "An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate, but the inadequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given". Illustration (g) is equally instructive. "A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his consent to the agreement was freely given. This inadequacy of the consideration is a fact which the court should take into account in considering whether or not As consent was freely given".
An interesting illustration more apposite to the present enquiry is afforded by the case of Hitendra Singh v. Maharaja of Darbhanga 2 (1928) 55 I.A. 197; 7 Pat. 500. In that case the husband governed by the Mithila School of Hindu Law transferred his property by making a hiba-bilewaz (gift for consideration) in favour of his wife; the property so conveyed was immovable property together with all zamindary rights and was of the value of at least Rs. 1,88,963. The wife paid Rs. 41,532 only and was granted the right to hold this property from generation to generation. One of the questions which at once arose for decision was whether the transfer by the husband to the wife under this document was a bona fide and not a nominal or illusory transaction. Their Lordships of the Judicial Committee held that : "Their Lordships have no doubt that it was not a gift pure and simple. Upon the findings of fact arrived by the Courts in India the transfer was for consideration. The consideration was not illusory; it was substantial. Under the Mehomendan law a transfer by way of hiba-bil-ewaz is treated as a sale and not as a gift. The limitation upon alienation imposed by the Mithila Law in the case of gift by husband to wife, applies exclusively to pure and simple gifts, and not gift for consideration such as in the present case (at pages 204 and 205)". This case affords an illustration of the proposition which I have endeavoured to establish above that a transfer by the husband to the wife may be held to be valid if it is for consideration although the consideration is wholly inadequate.
The Civil Courts are familiar with the question of the inadequacy of sale price fetched at auction sales held under the Code of Civil Procedure while dealing with applications under Order 21, Rule 90. Many sales are confirmed even though the price fetched is wholly inadequate if the applicant has been unable to satisfy the other requirements of law.
For these reasons I agree that the answer to this question should be as suggested by the Commissioner.
It was then argued that the provisions of Section 16(3)(a)(iii) are not retrospective. But Section 5 of the Amending Act, IV of 1937, has made it clear that the amendment made in the Indian Income-tax Act by this provision "shall not have effect in respect of any income chargeable to Income-tax for any year ending before the 1st day of April 1937". This provision is very clear, Mr. Mazumdar who followed Mr. Das drew attention to the provisions of Section 44D(8) and submitted that where the legislature wanted to bring into taxation the assets transferred before or after an amendment they have specifically said so. The obvious answer is afforded by sub-clause (1) by which alone the income from such transfers are to be deemed to be the income of the transferors. In the case under consideration before us the income remains the income of the wife but has to be added to the income of the husband unlike the cases contemplated by Section 44D and I have shown above that the Amending Act does not hit at any transaction at all-all previous transactions continue to maintain their validity. I would, therefore, hold that the provisions of Section 16(3) (a)(iii) inserted by Section 2 of the Amending Act, IV of 1937, can not be applied in respect of any income chargeable to income-tax for any year ending before April 1, 1937, the assessment in question here is for the year subsequent to this date.
As the assessee has failed in both his contentions, I agree that he should pay the costs of the Commissioner as proposed by my Lord the Chief Justice.
Reference answered accordingly.