Gujarat High Court
Commissioner Of Income-Tax vs Mehmoodmian A. Topiwala on 30 December, 1993
Equivalent citations: [1995]213ITR615(GUJ)
Author: J.M. Panchal
Bench: J.M. Panchal, M.B. Shah
JUDGMENT J.M. Panchal, J.
1. The following two question of law have been referred to his court for opinion by the Tribunal, Ahmedabad Bench 'B', under section 256 of the Income-tax Act, 1961 ("the Act") :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that as the assessee had made gifts to his major nephews the gifts made by the assessee's brother to his wife would not come within the mischief of section 64 of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in confirming the order of the Appellate Assistant Commissioner deleting the addition of Rs. 7,195 as income of the assessee under section 64 of the Income-tax Act, 1961 ?"
2. Facts : The assessee, i.e., Mehmoodmian A. Topiwala, is being assessed in the status of an individual. This reference relates to the assessment year 1974-75. Three brothers, i.e., (1) Shri Abdullahmian A. Topiwala, (2) Shri Mohmmed Husein A. Topiwala, and (3) Shri Mehmoodmian A. Topiwala, were joint owners of a land admeasuring 7,629 sq. yards situated at Paldi in Ahmedabad.
3. The assessee gifted his one-third share in the land situated at Paldi, Ahmedabad, to the two sons of Shri Abdullahmian A. Topiwala on March 25, 1966. On the same day, the assessee's brother, i.e., Shri Abdullahmian A. Topiwala, transferred his one-third share belonging to him in the said land to the assessee's wife, Hafsabanu. The assessee's wife sold the land received by her as a gift from the assessee's elder brother. The sale of the land resulted in capital gains of Rs. 23,830 for the assessment year 1968-69 and Rs. 44,300 of the assessment year 1969-70. The amounts received by the wife of the assessee were invested by her with the assessee. The assessee had paid interest of Rs. 2,860 and Rs. 7,195 to his wife. While working out the income of the assessee for the assessment year 1974-75, the income-tax Officer added the aforesaid two amount in the income of the assessee in view of the provisions of section 64 of the Act.
4. Feeling aggrieved, the assessee preferred and appeal before the Appellate Assistant Commissioner. The Appellant Assistant Commissioner noted that the Income-tax Officer had not given any reason for applying the provisions of section 64 while adding Rs. 2,860 to the income of the assessee. The appellants Assistant Commissioner referred to the past record and presumed that this interest might have been paid on Rs. 15,000 which Hafsabanu had received by cheque from the assessee's brother. He further found that the amount was not transferred by the assessee to his wife but was gifted by the assessee's brother and, hence, section 64 had no application. In that view of the matter, the Appellate Assistant Commissioner deleted the addition of Rs. 2,860.
5. Relying on the decisions rendered in the case of the assessee in Income-tax Appeals Nos. 68 of 1977-78 and 39/(Ahd.) of 1976-77 for the assessment years 1968-69 and 1969-70, respectively, the Appellate Assistant Commissioner further held that the provisions of section 64 were not applicable to the facts of the present case and therefore, the Income-tax Officer was not justified in adding the amount of Rs. 7,195 to the income of the assessee. In view of the said conclusions, the Appellate Assistant Commissioner allowed the appeal filed by the assessee.
6. Feeling aggrieved, the Revenue preferred an appeal before the Tribunal. The Tribunal confirmed the order of the Appellate Assistant Commissioner and dismissed the appeal filed by the Revenue.
7. Thereupon, the Revenue moved an application requiring the Tribunal to refer the questions of law said to arise out of the order passed in Income-tax Appeal No. 1360/(Ahd.) of 1979 for the opinion of the High Court. The Tribunal agreed that two questions of law arose for the opinion of the High Court out of the said order and has, therefore, referred the above-quoted two questions for the opinion of the court.
8. Opinion : The questions whether the on-third share of the land at Paldi received by the assessee's wife, Hafsabanu, as gift from the assessee's brother, Abdullahmian, was an asset indirectly transferred to her by her husband-assessee is concluded by the decision of this court in the case of this very assessee, CIT v. Mohmadmiya A. Topiwala [1994] 207 ITR 711 (Guj). The Division bench of this court comprising G. T. Nanavati J. (as he then was) and Y. B. Bhatt J., has held that the transfer of one-third share in the land made by the assessee's brother in favour of the assessee's wife was indirectly a transfer by the assessee as contemplated by section 64(1)(iii) because the assessee had transferred the land to his brother's sons and the said brother, in his turn, had transferred his one-third share in the same land to the wire of the assessee in order to get out of the legal liability.
9. In view of the above decision between the same parties, we are of the opinion, that, on the effects and in the circumstances of the case, the Tribunal was not right in law in holding that as the assessee had made fits to his major nephews, the gift made by the assessee's brother to his wife would not come within the mischief of section 64.
10. However, Mr. R. D. Pathak, learned counsel for the assessee, vehemently submitted that in the abovementioned reported case, the Tribunal had recorded a finding of fact which was not accepted by the court in reference made under section 256(1) though the said finding was not challenged by the Revenue as a perverse finding and, therefore, the judgment rendered by this court between the parties being without jurisdiction, the same should not be referred to and relied upon by this court while answering question No. 1 referred to this court. It was submitted that in a reference made under section 256(1), the court cannot disturb or go behind a finding of fact given by the Tribunal unless a specific question necessary to challenge a finding of fact has been referred to the court and, thus, the reported decision between the parties having been rendered against the well-settled principles of law, it was without jurisdiction and the same should not be treated as a binding precedent by this court in the present reference. In support of his submission, learned counsel placed reliance on the decision rendered by the Supreme Court in the cases of CIT v. Greaves Cotton and Co. Ltd. [1968] 68 ITR 200 and I.C.I. (India) P. Ltd. v. CIT [1972] 83 ITR 710.
11. We state that the contention raised by learned counsel for the assessee is without substance because in this reference we have no jurisdiction to sit in appeal against the order passed by the court in the previous reference of the very assessee. In that reference the court has appreciated the contention raised by the assessee, particularly with regard to jurisdiction and has negatived it. The relevant paragraph which deals with the contention of jurisdiction raised by learned counsel for the assessee in the case of Mohmadmiya A. Topiwala [1994] 207 ITR 711 decided by this court between the same parties is as under (at page 716) :
"The Tribunal has proceeded on the basis that, in this case, there was no intimate connection between the two transfers. It was, therefore, submitted by learned counsel for the assessee that this being a finding of fact, it is required to be accepted by this court and, in a reference made under section 256(1) of the Act, no different view can be taken by this court. As pointed out by us, this finding has been recorded by the Tribunal after applying a wrong test. Therefore, it cannot be regarded as pure finding of fact. Moreover, a question challenging this finding is referred by the Tribunal to this court for its opinion. The question is whether the said finding is correct or not for the reasons stated by the Tribunal. Whenever an inference is required to be drawn on the basis of facts found and in doing so, some principle for appreciation of evidence or provision of law is to be applied, them it cannot be side that it remains a finding of fact only. It becomes a mixed question of law and fact and that is how question No. 1 has been referred to this court. It was not the contention of learned counsel for the assessee that question No. 1 was wrongly referred to this court. He did concede that question No. 1 is a question of law as contemplated by section 256(1)."
12. In view of the aforesaid binding decision between the parties, we hold that the contention raised by learned counsel for the assessee is without any substance. Still, however, we would deal with the contention raised by learned counsel for the assessee. In the case of Greaves Cotton and Co. Ltd. [1968] 68 ITR 200, the Supreme Court has held that it is well-established that the High Court is not a court of appeal in a reference under section 66 of the Indian Income-tax Act, 1922, and it is not open to the High Court in such a reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Tribunal. It has been further held therein that the High Court should confine itself to the facts as found by the Tribunal and to answers the question of law referred to it in the context of those facts. The Supreme Court has ruled that a finding of fact may be defective in law, if these is no evidence to support it or if the finding is unreasonable or perverse, but it is not open to the assessee to challenge such a finding of fact unless he has applied for a reference of the specific question under section 66(1) and it is for the party who applies for a reference to challenge those findings of fact first by expressly raising the question about the validity of the findings of fact and if he has failed to do so, he is not entitled to urge before the High Court that the findings of the Tribunal are vitiated for any reasons. In the case of I.C.I. (India) P. Ltd. [1972] 83 ITR 710, the Supreme Court has held that while the finding of the Tribunal on the facts is final, its decision as to the legal effect of the finding is a question of law. It has been further held that a finding on a question of fact is open to attack as erroneous in law when there is no evidence to support it or if it is perverse. However, when the finding is one of fact, the fact that it is an inference from other basis facts will not alter its character as one of fact.
13. We are in respectful agreement with the principle laid down by the Supreme Court in the abovementioned decisions. However, we are of the opinion that the principle laid down in the said decisions is not applicable to the facts of the present case. The basic facts recorded by the Tribunal were that the assessee had gifted his one-third share in the land situated at Paldi, Ahmedabad, to his brother's sons on March 25, 1966, and on the same day, the assessee's brother had transferred his one-third share belonging to him in the said land to the assessee's wife. In the earlier reference which was between the same parties this court rendered decision after accepting the facts found by the Tribunal, namely that the assessee gifted one-third share in the land situated at Paldi to his brother's sons on March 25, 1966, and, on the same day, the assessee's brother transferred the one-third share belonging to him in the said land to the assessee's wife. The abovereferred two findings were not interfered with in any manner by this court while rendering opinion in the said reference. However, in that case, the court has noted that the finding recorded by the Tribunal to the effect that there was no intimate connection between the two transfers was and inference having no basis at all. the court took into consideration the fact that what the assessee and his brother did was to transfer their one-third share in the same piece of land situated at Paldi, Ahmedabad, and it was of equal value and there was no special reason for effecting said transfers. The court has also noted that the transfers were made on the same day and, in such circumstances, the court interfered with the legal inference drawn by the Tribunal and came to the conclusion that there was intimate connection between the two transfers even though the assessee's brother, Abdullahmian, did not directly benefit as a result of the said transfer.
14. It may be noted that in the case of G. Venkataswami Naidu and Co. v. CIT [1959] 35 ITR 594, the Supreme Court has held that if the finding of fact is based on an inference drawn from the primary evidentiary facts proved in the case, its correctness or validity is open to challenge in reference proceedings within the narrow limits. It has been further held therein that it is open to the parties to challenge a conclusion of fact drawn by the Tribunal on the ground that it is not supported by any legal evidence or that the impugned conclusion drawn from the relevant facts is not rationally possible and if such a plea is established the court has to consider whether the conclusion in question is not perverse and should not, therefor, be set aside. the said principle has been followed by the Supreme Court in its decision rendered in the case of CIT v. Rajasthan Mines Ltd. [1970] 78 ITR 45.
15. As was noted in there earlier reference, the finding to the effect that there was no intimate connection between the two transfers was recorded by the Tribunal after applying a wrong test. Moreover a question challenging the said finding was also referred by the Tribunal for the opinion of the High Court. The High Court therein found that a wrong principle of law was applied to the bias facts proved and in such circumstances, the High Court interfered with the said finding. For the above-mentioned reasons we are of the opinion that the decision rendered by this court, which is now in Mohmadmiya A. Topiwala's case [1994] 207 ITR 711 cannot be considered to be without jurisdiction and the same has all it binding force. It may be noted that the judgment and, therefore, the conclusion reached therein cannot be ignored. Having regard to the decision rendered by this court in the reference between the same parties question No. 1 referred to us is answered in the negative i.e., in favour of the Revenue and against the assessee.
16. Placing reliance on the decision rendered by the Supreme Court in the case of CIT v. Prem Bhai Parekh [1970] 77 ITR 27 and CIT v. Prahladrai Agarwala [1989] 177 ITR 398, Mr. R. D. Pathak, learned counsel for the assessee, submitted that there is no proximate connection between the income accruing to the spouse so the assessee and the transfer and to the amount of interest earned by the wife of the assessee should not have been included in the income of the assessee.
17. We may point out that Prem Bhai Parekh's case [1970] 77 ITR 27 (SC), a principle of proximate connection came to be laid down by the Supreme Court on the peculiar facts of that case. There the assessee who was a partner in a firm having seven annas share retired from the firm on July 1, 1954. Thereafter, he gifted Rs. 75,000 to each of his four sons, three of whom were minors. There was a reconstitution of the firm with effect from July 2, 1954, whereby the major son became a partner and the major sons were admitted to the benefits of partnership in the firm. The question was whether the income arising to the minor by virtue of their admission to the benefits of partnership in the firm could be included in the total income of the assessee under section 16(3)(a)(iv) a provision similar to section 16(3)(a)(iii). The Tribunal found that the capital invested by the minors in the firm came from the fits made in their favour by their father, the assessee. The Supreme Court, while overruling the contention of the Revenue, came to the conclusion that the connection between the fits made by the assessee and the income of the minors from the firm was a remote one and that it could not be said that the income arose directly or indirectly from the assets transferred. The Supreme Court, therefore, held that the income that arose to the three minor sons of the assessee by virtue of their admission to the benefits of partnership in the firm could not be included in the total incomes of the assessee. It appears that the main reason why the Supreme Court so held in the said case was that even though the minors received the gifts from their fathers on July 1, 1954, their admission to the benefits of the partnership on its reconstitution on July 2, 1954, depended on the volition and consent of the partners of the firm and did not flow merely from any right exercisable by the minors. That was why the income accruing to the minors on admission to the benefits of the partnership was held to be remote and having no proximate connection with the transfer of cash by their father to them. The income in the said case accrued neither directly nor indirectly inasmuch as such accrual of income depended upon the volition, consent or discretion of the partners of the firm either to admit those minors to the benefits of the partnership or not. It is in that context that the test of proximate or remote connection was laid down by the Supreme Court in the said decision. This is clear from the following observations of the said judgment (at page 30) :
"The connection between the fits 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 is true that they were admitted to the benefits of the partnership because of the 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) created an artificial income. That section must receive strict construction as observed by this court in CIT v. Keshavlal Lallubhai Patel [1965] 55 ITR 637 (SC). In our judgment before an income can be held to come within the ambit of section 16(3), it must be proved to have arisen - directly or indirectly - from a transfer of assets made by the assessee in favour of his wife or minor children. The connection between the transfer of assets and the income must be proximate. The income in question must arise as a result of the transfer and not in some manner connected with it."
18. We may also point out that the aforesaid decision in CIT v. Prem Bhai Parekh [1970] 77 ITR 27 (SC) was distinguished by the Supreme court in Smt. Mohini Thapar v. CIT [1972] 83 ITR 208. In the case of Smt. Mohini Thapar [1972] 83 ITR 208 (SC), the late Karam Chand Thapar had made certain cash gifts to his wife, Smt. Mohini Thapar. From our of those gifts, she purchased certain shares and the balance amount she invested. The shares earned dividends and the investments yielded interest. The interest realised and the dividends earned were included in the income of Karam Chand Thapar for the purpose of assessment. The assessee objected to the inclusion of that amount in his income. The question was whether the Department was entitled to include the dividends and interest in question in computing the taxable income of the assessee. The Income-tax Officer held that they were liable to be included in the income of the assessee. That decision was upheld by the Appellate Assistant Commissioner. On a reference, the Calcutta High Court confirmed the view taken by the Tribunal. The Supreme Court referred to the decision rendered by it in the case of Prem Bhai Parekh [1970] 77 ITR 27 (SC). On the facts of the case, the Supreme Court found that the income had a proximate connection with the transfer of the assets made by the assessee and, therefore, held that the ratio laid down in the case of Prem Bhai Parekh [1970] 77 ITR 27 (SC), was not applicable to the facts of the said case. In other words, the Supreme Court held in Smt. Mohini Thapar's case [1972] 83 ITR 208 that the transfer to assets made by the assessee to his wife was a direct transfer and that the income arising out of the deposits and shares purchased by her was an "indirect income" and that such income had a proximate connection with the transfer of the assets.
19. In the case of Prahladrai Agarwala [1989] 177 ITR 398 (SC), the respondent had made to gifts of money to his wife in November, 1960, and another gift to his mother. They became partners in a firm in which the other partners were the respondent's grandfather, his brother and a stranger. The wife contributed both the amounts of the fits as capital to the firm. The question was whether the share of profits of the wife in the firm for the assessment year 1962-63 could be included in the total income of the respondent under section 64(1)(iii) of the Act. The Tribunal held that the share of profits could be included in the respondent's total income; but, on a reference, the Calcutta High court held that the share of the profits arose to the respondent's wife primarily because the firm made a profits and although it had connection with the gifts, it did not arise as a result of the gift. The High Court further held that the admission of the respondent's wife to the firm was not in consequence of the gifts, and, therefore, the connection between the share of profits and the gifts by the respondent to his wife were too remote to be included within the provision of section 64(1)(iii). On appeal, the Supreme Court has, while confirming the decision of the High Court, held that there had to be a proximate connection between the accrual of income and the assets transferred. The Supreme Court further held that, no doubt, the wife because a partner because of the capita contributed by there in the firm, but it was upon agreement by the remaining partners that she became a member of the partnership, and the meres contribution of the capital by the wife would not automatically have entitled her to partnership in the firm. In the ultimate conclusion, the Supreme Court has held that the share of the profits of the wife could not be included in the respondent's total income under section 64(1)(iii). To our mind, it is apparent that the main reason why their Lordships of the Supreme Court so held in Prahladrai Agarwala's case [1989] 177 ITR 398 (SC) was that, upon an agreement by the remaining partners, the wife became a member of the partnership and the mere contribution of capita by the wife did not automatically entitle her to partnership of the firm. As the partnership was based on agreement and it was the even to agreement between the partners that brought the respondent's wife into partnership as a partner, it was held therein that the share of profits of the wife could not be included in the respondent's total income under section 64(1)(iii). The income in the said case accrued neither directly nor indirectly inasmuch as such accrual of income depended upon the volition or discretion of the partners of the firm to admit the respondent's wife into the partnership as a partner. It is in that sense that the test of proximate or remote connection has been laid down by the Supreme Court in the said case. In our view, the principles laid down in the said case would not apply to the facts of the present case at all inasmuch as, as noted earlier, after the sale of the land, which was gifted to her by the assessee's elder brother, the wife of the assessee had invested that amount received as consideration with the assessee and the assessee was paying interest to his wife on the amount invested by her. Here, we are dealing with income which has a proximate connection with the transfer of the asset made by the assessee. On a plain reading of section 64(1)(iii), it is evident that the income arising to the wife has to be included in the total income of her husband, if the following conditions are fulfilled :
(i) There must be a transfer of assets by the assessee to his wife;
(ii) The transfer in favour of the wife by the assessee must be otherwise than for adequate consideration; and
(iii) The income in question should have arisen or accrued to the wife directly or indirectly from the assets transferred to her by her husband.
20. In our view, all the conditions mentioned in section 64(1)(iii) stand satisfied on the facts of the present case and, therefore, the Income-tax Officer was justified in adding the amounts of Rs. 2,860 and Rs. 7,195 to the income of the assessee while working out the assessee's income for the assessment year 1974-75. We are of the opinion that, on the facts and in the circumstances of the case, the Tribunal was not right in law in confirming the order of the Appellate Assistant Commissioner deleting the addition of Rs. 7,195 as income of the assessee under section 64. Question No. 2 referred to use is answered in the negative, i.e., in favour of the revenue and against the assessee.
21. The reference stands of accordingly with no order as to costs.