Madras High Court
Commissioner Of Income-Tax vs G.S. Ganesan on 22 March, 1995
Equivalent citations: [1995]215ITR334(MAD)
JUDGMENT
1. In an application by the Revenue under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred to this court the following two questions :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the sum of Rs. 15,000 being the capital gain arising on the sale of the property by the assessee's wife included in the assessment of the assessee under section 64 of the Act ?
2. Whether the Appellate Tribunal's view that the quantum of capital gains and exemption under section 53 should first be determined in the hands of the done (wife) and only such capital gains chargeable in the hands of the done alone should be clubbed in the hands of the assessee (husband) under section 64(1)(iv) of the Income-tax Act is correct and sustainable in law ?"
2. The facts giving rise to the above are stated by the Tribunal as follows :
"The reference application relates to the assessment year 1977-78. The assessee settled his property at 20, Sankarapuram, Mylapore, in favour of his wife, Smt. Saraswathi, as donee, under the settlement deed dated April 2, 1969, showing the market value of the property at Rs. 10,000. On January 6, 1977, Smt. Saraswathi gifted half of her share in the property to her daughter, Kum. Kalpagam, by settlement deed of the same date showing the market value of the gifted half share of the property at Rs. 15,000. On February 10, 1977, Smt. Saraswathi and Kum. Kalpagam together sold the entire property to Shri K. Kalyanakrishnan for Rs. 40,000."
3. In making the assessment the Income-tax Officer computed the capital gain at Rs. 15,000 and rejected the assessee's claim for exemption under section 53 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), on the ground that once the capital gain is ascertained as defined under section 2(24)(vi) of the Act, it is assessable under section 64(1)(iv) and the provision of section 53 has to be applied only with reference to the assessee himself. He found that the assessee had another property, the value of which exceeded Rs. 50,000. Accordingly, he declined to entertain the assessee's plea for exemption. The assessee appealed. The Appellate Assistant Commissioner agreed with the Income-tax Officer's view. The assessee appealed to the Tribunal. The Tribunal has found as follows :
"In the present case, the capital gains accrue to the donee who is the owner of the property. The quantum of capital gains and the exemption if any has to be determined for the donee under the relevant provisions of the Act including section 53. It is only the chargeable capital gain arising to the donee which is thus determined which can be included in the assessment of the assessee husband under section 64. In the present case, since the sale value of the property owned by Smt. Saraswathi was less than Rs. 25,000, the capital gain cannot be included in the assessee's assessment. The ratio of the Madras High Court's decision in R. Ganesan v. CIT [1965] 58 ITR 411, would support this view. We cannot agree with the Revenue "that the proviso to section 53 has to be applied against the assessee on the ground that he himself owned property worth more than Rs. 50,000. In the above view we are taking, the question of quantum of capital gain is left open. The assessee's appeal is accordingly allowed".
4. The judgment referred to by the Tribunal, R. Ganesan v. CIT [1965] 58 ITR 411 (Mad), was one delivered in a case arising under the Indian Income-tax Act, 1922, and the question for determination before the court was whether any part of the income from the house property could be included in the hands of the assessee, and if so, what part ? The assessee, a prominent film artiste, had in the accounting year relevant to the assessment order, constructed a house at a cost of Rs. 1,25,000 in the name of his wife. It was found as a fact in the assessment proceedings that the assessee had given a sum of Rs. 75,000 to his wife for the purpose of this construction. The Income-tax Officer had taken the view that since that was a transfer of an asset to the wife and that transfer was not for adequate consideration, the proportionate income from the property should be included in the income of the assessee. The Appellate Assistant Commissioner, however, directed the deletion of that part of the income from the house from the total income of the assessee and accepted the contention of the assessee that he had only advanced for the purpose of construction and that could not be considered as a transfer of an asset. The Tribunal, however, found as a question of fact that the assessee did transfer a sum of Rs. 75,000 to his wife without any adequate consideration and that this sum was utilised for the construction of the house. The Tribunal took the view that even if it was only money that was transferred, it could still be brought within the scope of section 16(3) of the 1922 Act. The relevant part of section 16 of the 1922 Act which concerned the court in the said case was as follows (at page 413) :
"16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included ... so much of the income of a wife ... of such individual as arises directly or indirectly -
(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."
5. The court expressed its view in these words (at page 413) :
"This provision accordingly requires that where any asset has been transferred to the wife in such circumstances as indicated and the wife derives an income from that asset, that income shall be included in the total income of the assessee. The findings of fact here are that the sum of Rs. 75,000 was in fact transferred by the assessee to his wife and that with this sum, the house was constructed. That the transfer was not for adequate consideration or in connection with an agreement to live apart is also not denied. If so much is established, then if any income is derived by the wife from the asset so transferred, it has under law to be included in the total income of the assessee."
6. The court rejected the contention on behalf of the assessee that the wife who was the owner of the property herself lived in the house and if at all she had derived any income it was only notional income that can be said to have been received by the wife when she personally occupied the house in question. Saying (at page 414) :
"It is difficult to follow the line of reasoning adopted. As has been found by the Department, it was not the case of the assessee that there was no transfer of any amount at all or that the title to the property, that is, the house, which is in the wife's name, is benami for the assessee himself. The sum which the assessee gave to his wife represented an asset which he had transferred to her. The question, however, is whether any income arose to the wife from the assets so transferred. The asset transferred has taken the shape of house property. The contention that we are to examine is whether section 16(3) requires that the income arising from the property should be an income in the shape of money. It is true that because the wife resides in the house, she is not in actual receipt of any income represented by rents or the like. But would it be true to say that no income at all arises to her from the property in question ? We are unable to say that the expression 'income, as arises directly or indirectly' cannot include the benefits arising from the enjoyment of the property. The use of the expression 'indirectly' is broad enough to take in an income which is not received in specie but represents such advantages as the enjoyment of the property might secure, the value of which advantages could be translated in terms of money. On the section as it is worded, we are unable to agree with Mr. Seshadri that where the wife resides in the house property and does not receive any rents from the property, it is only notional income that can be said to arise and that such notional income is not within the scope of section 16(3)."
7. The court also took notice of the provisions under section 9 of the Act which dealt with the tax payable by the assessee under the head "Income from the property" and observed (at page 415) :
"Broadly stated, the tax is payable on the bona fide annual value of the property. Section 9(2) provides that the annual value of a property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. The proviso to this section deals with cases where the property is in the occupation of the owner for the purposes of his own residence and it lays down that in such a case the annual value as determined shall be reduced in a particular manner and the reduced amount shall be taken to be the income from the property for the purposes of tax. Mr. Seshadri urges that section 9(2) itself creates a fiction when it says that the annual value of any property shall be 'deemed' to be a particular sum, and if it is only a deemed income within the meaning of section 9, that cannot be brought within the scope of section 16(3). We are unable to accept the contention of learned counsel that it is only a deemed income and not a real income that is contemplated by section 9(2) of the first proviso thereto. Section 9(1), which defines the taxable income in respect of property, lays down that the tax shall be payable in the case of all properties in respect of the bona fide annual value of the property of which he is the owner. The property and its ownership are the only two criteria that are taken into consideration, and what is brought to tax is the annual value of the property. It is the presumption of the taxing enactment that every property is capable of yielding income, and the law lays it down that it is the annual value of the property that shall be the amount upon which tax is to be levied. What section 9(2) endeavours to lay down is only the determination of the annual value of the property. In the wording employed 'annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year', the 'deeming' is only for the purpose of the computation. The section does not lay it down that the income itself is a deemed income. As we observed the ownership of property carries with it the enjoyment of the property; and the measure of that enjoyment is the measure of the income derivable from the property, and it is the quantification of that measure of income that is contemplated by section 9(2) of the Act. We do not agree with learned counsel that it is not a real income that is contemplated by section 9(2)."
8. How far the above-mentioned case is of any help in the instant proceeding will depend upon how the provisions of the 1961 Act compare with the provisions of the 1922 Act. Learned counsel for the Revenue has brought to our notice a catena of decisions which appear to proceed to answer questions which are somewhat different from the question with which we are concerned. The income from the house property is made chargeable under section 22 of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property". Section 23 provides how the annual value of property consisting of any building or land appurtenant thereto shall be determined; section 24 provides for deductions from income from house property; section 25, for amounts not deductible from income from house property; section 26, how the income from property owned by co-owners shall be computed and section 27 contains definition of "owner of house property" for the purpose of sections 22 to 26. Clause (i) of this section provides as follows :
"For the purposes of sections 22 to 26 - (i) an individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred."
9. For the purposes, thus, of the charge under section 22 of the Act, the individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, shall be deemed to be the owner of the house property so transferred. Sub-section (1) of section 64 of the Act provides for inclusion in the total income of any individual of such income as arises directly or indirectly to the spouse of such individual, besides certain other cases including the one not falling under clause (i) of this sub-section, that is, the income directly or indirectly arising from the membership of the spouse in a firm carrying on a business in which such individual is a partner, from an estate transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart. This clause is worded as follows :
"Subject to the provisions of clause (i) of section 27, in a case not falling under clause (i) of this sub-section, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart."
10. Any provision "subject to another provision" is understood to incorporate the other provision and to exclude matters which fall under the said provision or to expand and provide for matters in addition to what is found in the said provision. A provision subject to the other provisions of the Act or any other law needs a combined reading of such provisions. The Supreme Court considered an argument in respect of the field of operation of sections 161 and 164 of the Act in the case of CIT v. Kamalini Khatau . The argument put forth in the said case was that section 161 dealt generally with the taxation of all representative assessees including trustees, whereas section 164 was a special provision applicable to discretionary trusts and was a complete code which laid down not only the mode and manner of taxation but also prescribed the basis and extent of the charge of tax. Therefore, section 164 excluded the application of section 161 wherever it became applicable on account of the existence of the circumstances therein mentioned. While answering the above, the Supreme Court referred to its earlier judgment in CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555 and found as follows (at page 115) :
"The question that was considered was whether assessment could be made on the trustees under section 3 apart from and without reference to section 21. The answer was seen to depend upon the true meaning and effect of sections 3 and 21 and the inter-relation between them. Section 3 was the charging section and it levied the charge of wealth-tax on the net wealth of the assessee on the relevant valuation date. 'Net wealth' was defined in section 2(m) to mean 'the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date is in excess of the aggregate value of all the debts owed by the assessee on the valuation date'. It was clear from this definition that any property, wherever located, 'belonging to' the assessee on the relevant valuation date would be includible in the net wealth of the assessee assessable to wealth-tax. An argument was advanced on behalf of the trustees that assets held by a trustee in trust for others could not be said to be assets 'belonging to' the trustee so as to be included in his net wealth. The assets so held were not the trustee's property in any real sense. They were the property of the beneficiaries and the beneficiaries were the true owners. The trustee could not, therefore, be assessed to wealth-tax in respect of the trust properties under section 3. It was for this reason, went the argument, that special provision had to be made in section 21 for assessing the trustee and hence assessment of the trustee could only be made in accordance with such special provision. Prima facie, this court observed, there seemed to be force in the argument but it was not thought necessary to express any final opinion since there was an alternative argument advanced on behalf of the assessee which left no room for doubt. For this purpose, it was assumed that the trustee of a trust could be assessable in respect of the trust properties under section 3 even in the absence of section 21. But section 3 imposed the charge of wealth-tax subject to the other provisions of the Act and these other provisions included section 21. Section 3 was, therefore, made expressly subject to section 21 and had to yield to that section in so far as the latter made special provision for the assessment of a trustee of a trust. Section 21 was mandatory in its terms. It was clear on a combined reading of sections 3 and 21 that whenever assessment was made on a trustee, it had to be made in accordance with the provisions of section 21. Every case of assessment on a trustee would necessarily fall under section 21 and he could not be assessed apart from and without reference to that section. To take a contrary view, giving option to the Revenue to assess the trustee under section 3 without following the provisions of section 21, would be to refuse to give effect to the words 'subject to the other provisions of this Act in section 3', to ignore the maxim 'generalia specialibus non derogant' and to deny mandatory force and effect to the provisions of section 21. The court noted that in C. R. Nagappa's case , the observations of Chagla C. J. quoted above had been approved and the court went to the state that the same consideration must apply in the interpretation of section 161(2). It had, therefore, to be held uncontrovertible that whenever a trustee was sought to be assessed that assessment had to be made in accordance with section 21. It had also to be noted that the assessment which was to be made on a trustee under section 21 was an assessment in a representative capacity. It was really the beneficiaries who were sought to be assessed in respect of their interest in the trust properties through the trustees. Section 21 provided that in respect of the trust properties held by a trustee, wealth-tax could be levied upon him in the like manner and to the same extent as it would be leviable on the beneficiary for whose benefit the trust properties were held. This provision could apply only where the trust properties were held by the trustee for the benefit of a single beneficiary or, where there were more beneficiaries than one, the individual shares of the beneficiaries in the trust properties were determinate and known. Where such was the case, wealth-tax could be levied on the trustee in respect of the interest of any particular beneficiary under the trust properties in the same manner and to the same extent as it would be leviable upon the beneficiary and in respect of such interest in the trust properties, the trustee would be assessed in a representative capacity as representing the beneficiary. This did not mean that the Revenue could not make a direct assessment on the beneficiary in respect of the interest in the trust properties which belonged to him. The beneficiary would always be assessable in respect of his interest in the trust properties, since such interest belonged to him and the right of the Revenue to make direct assessment on him in respect of such interest stood unimpaired by the provisions enabling assessment to be made on the trustee in a representative capacity. Sub-section (2) made this clear. What was important to note was that in either case what was taxed was the interest of the beneficiary in the trust properties. Where the beneficiaries were more than one and their shares were indeterminate or unknown, the trustees would be assessable in respect of their total interest in the trust properties. Obviously, in such a case, it was not possible to make direct assessment on the beneficiaries in respect of their interest in the trust properties, because their shares were indeterminate or unknown and that is why it was provided that the assessment could be made on the trustee as if the beneficiaries for whose benefit the trust properties were held were an individual. The beneficial interest was treated as if it belonged to one individual beneficiary and assessment was made on the trustee in the same manner and to the same extent as it would be made on such fictional beneficiary. In this case too it was the beneficial interest which was assessed to wealth-tax in the hands of the trustee."
11. The Supreme Court finally pronounced after a combined reading of sections 160 to 166 of the Act as follows (at page 119) :
"The liability of a trustee of a discretionary trust to be assessed to tax in respect of its income and to recovery thereof is created by section 161 and it also states that he is not liable to such assessment under any other provisions of the Act. Section 164 sets out only how such tax shall be charged when the income is not distributed and when the income is distributed.
It does appear, therefore, that section 164 cannot be read as being a code in itself applicable to the taxation of the income of a discretionary trust. Consequently, it cannot be held that the beneficiary of a discretionary trust, even if he has received its income in the accounting year, cannot be taxed thereon because section 164 does not provide for such contingency. The principal contention raised by Mr. Salve on behalf of the assessee must, accordingly, be rejected."
12. Section 53 of the Act reads as follows :
"Notwithstanding anything contained in section 45, where a capital gain arises from the transfer of one or more capital assets, being buildings or lands appurtenant thereto, income of which is chargeable under the head 'income from house property', and the full aggregate value of the consideration for which the transfer is made does not exceed twenty-five thousand rupees, the capital gain shall not be included in the total income of the assessee :
Provided that this section shall not apply in any case where the aggregate of the fair market values of all capital assets, being buildings or lands appurtenant thereto the income of which is chargeable under the head 'Income from house property' owned by the assessee immediately before the transfer aforesaid is made, exceeds the sum of rupees fifty thousand."
13. It is significant to note that this section speaks of a capital gain from the transfer of one or more capital assets being buildings or lands appurtenant thereto the income of which is chargeable under the head "Income from house property". The income chargeable under the head "Income from house property" obviously is the income for which the assessee has the liability. Reference to section 45 clearly brings into it a charge upon any profits or gains arising from the transfer of a capital asset effected in the previous year, save as otherwise provided in sections 53, 54, 54B, 54D and 54E. Section 45 does not give any clue to the question who is the person liable to the charge. Mention, however, of section 53 in section 45 excludes any profits or gains arising from the transfer of a capital asset of which the full aggregate value of the consideration does not exceed Rs. 25,000. As in section 45 so in section 53, there is no mention of the owner, that is, the transferor or transferee. In the proviso, however, the words "owned by the assessee immediately before the transfer aforesaid is made" are found. Section 53 speaks of the transfer of one or more capital assets being buildings or lands appurtenant thereto and the capital gain from the transfer of such capital assets and inclusion of the capital gain in the total income of the assessee. The charge under section 45, thus, is created only on his capital gain not falling under section 53. The difficulty, however, is created by the proviso which creates an exception in the case of an assessee who is owning capital assets being buildings or land appurtenant thereto, the income from which is chargeable under the head "Income from house property" owned by the assessee immediately before the transfer is made and the aggregate of the fair market value of all such capital assets, of which the assessee is the owner, exceeds the sum of Rs. 50,000. Section 27 of the Act, we have seen, defines "owner of the house property" for the purposes of sections 22 to 26 of the Act only. However, capital assets being buildings or lands appurtenant thereto are chargeable under the head "Income from house property" under section 22 of the Act. The proviso, it appears, stipulates the income chargeable under the head "Income from house property" such capital assets of which the assessee is the owner and section 27 of the Act makes an individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, a deemed owner of the same, that is, the house property so transferred. The proviso to section 53 cannot be limited to capital assets being buildings or lands appurtenant thereto, of which the assessee is the actual owner so as not to include the house property of which he is a deemed owner. Subject to the provisions of clause (i) of section 27, section 64(1)(iv), thus, provides that the individual who has transferred his capital assets, directly or indirectly to the spouse otherwise than for adequate consideration or in connection with an agreement to live apart, shall have the liability to pay the tax upon the income from such property irrespective of the validity or otherwise of the transfer of the property and the vesting of title to the property in the transferee, as he is the deemed owner of the house property so transferred.
14. There is another way of approach. An individual who shall be liable to pay tax upon the income from house property so transferred by him/her to his/her spouse, the income from house property which is taxable under section 22 and which is computed as prescribed under sections 23 to 26, is obviously not the capital gain, for which separate provision has been made under section 45 of the Act. Any profits or gains from a capital asset are chargeable to income-tax and are deemed to be the income of the previous year in which the transfer took place which evidently is not includible in the annual value of property, which is determined as the sum for which the property might reasonably be expected to let from year to year or where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to above, the amount so received or receivable. (see section 23 of the Act). Capital gain achieved by the method of the transfer of the house property to the spouse and thereafter to another through her, may escape the net of the tax, if the individual who transferred to the spouse is not the person who has received the income by way of capital gain, but is the spouse, the transferee. This can be illustrated by taking the case of an individual who has substantial capital assets chargeable to tax under the head "Income from house property". The aggregate of the fair market value of all the capital assets owned by him/her, exceeds many times the sum of Rs. 50,000. He/she picks up one such asset, the value of which is more than Rs. 25,000 and transfers to his/her spouse for an inadequate consideration and not in connection with an agreement to live apart. The transferee-spouse transfers in his/her turn the said property for consideration and there is capital gain not exceeding Rs. 25,000, the individual who originally transferred for inadequate consideration and not in connection with an agreement to live apart, repeats one after the other such transfers. Each time the benefit of section 53 of the Act is availed of on the ground that the only capital asset which the transferee-spouse possessed was transferred by him/her for consideration, but the gain was not more than Rs. 25,000. Section 64(1)(iv) is intended to take care of such evasions of tax. In computing the total income subject,to the provisions of clause (1) of section 27, the assets transferred directly or indirectly to the spouse otherwise for adequate consideration or in connection with an agreement to live apart, is included and deemed ownership of the assessee is acknowledged. The Tribunal has proceeded, in our opinion, on a misreading of the judgment of this court in R. Ganesan's case [1965] 58 ITR 411. The provision of law with which the court was concerned had no such claim as sections 22 to 27, 45, 53 and 64 of the Act have in connection with a house property which is taxable to income. It will be a wrong to the cause of the Revenue, if, for the income from the house property, the transferor-spouse is held liable and he is deemed to be the owner of the house property so transferred and in the case of capital gain, the ownership is recognised in favour of the transferee-spouse.
15. We find support for our view in a judgment of this court in the case of S. M. A. Siddique v. CIT [1984] 148 ITR 307. The assessee in the said case had borrowed money on interest and with the aid of the borrowed money purchased items of house property in the names of his wife and his minor children intending those acquisitions to be for their absolute benefit. He made a claim that in the computation of income, all the assets transferred to his wife and minor children for their absolute benefit with his income for the purposes of income-tax, the interest paid by him on the money borrowed for the purchase of house properties was admissible deduction. The court this time got the opportunity to take notice of R. Ganesan's case [1965] 58 ITR 411 (Mad) and the principles upheld by the Supreme Court in CIT v. Maharaj Kumar Singh [1973] 89 ITR 1 and pointed out (at page 312) :
"We may reconcile the above two passages by saying that the court had in those passages fairly anticipated the two new provisions which have been enacted in the present Income-tax Act, 1961. As we earlier mentioned, one is section 27(i) which deems the property income of the transferee under section 64(1)(iv) and (v) to be the property income of the transferor for the purposes of computation. The other is section 64(1)(iv) and (v) which on the language of these very clauses is expressly made subject to the provisions of section 27(i)."
16. Reading the various provisions and section 64 and section 27(i), the court has observed (at page 314) :
"On a combined application of all these provisions, we think the conclusion is inescapable that the transferor and the transferee under section 64 are interchangeable expressions where appropriate provisions occur elsewhere in the Act and call for due application. It may be that section 27(i), in terms, does not say that the borrowing by the assessee shall be deemed to be the borrowing by the wife or minor child to whom the assessee transfers the assets. But the fiction in section 27(i) which makes the transferor continue to be the owner of the assets transferred, itself comprehends the conception that the borrowing by the assessee must be regarded and given effect so that the computation of the income from the house property transferred by the assessee to his wife or minor child is arrived at precisely, in the same manner and to the same extent as it would be if the assessee had not transferred the property at all to the wife or minor children. On no other terms can the words 'subject to the provisions of clause (i) of section 27' in section 64(1)(iv) and (v) be given effect to. If, instead of borrowing money and purchasing house property for his wife and minor children, the assessee had utilised the borrowed funds for purchasing the house properties for his own benefit, there can hardly be any doubt about the deductibility of the interest on borrowed capital in the computation of income from house property as part of the assessee's total income. The Department's contention is that while the factum of transfer of the assets by the assessee to his wife and minor children should be ignored for assessment purposes and the income must be included in the assessee's total income, the same has got to be looked at differently, when it comes to a question of deduction. This way of approach really would find the assessee in a much worse position with a transfer of the assets than what it would have been if no transfer at all was made in favour of his wife and minor children. It would also equate the position of the Revenue to the proverbial horse which would open its mouth for horse-feed but not for the bridle. In our judgment, the whole rationale behind section 64(1)(iv) and (v) and comparable provisions in the earlier Indian Income-tax Act, 1922, is to act as an anti-tax avoidance measure. The intention obviously was that an individual assessee ought not to be allowed to create separate subjects of charge to income-tax with the attendant consequences of taxation at lower average rates, by the simple expedient of transferring assets to his wife and minor children. The provisions enacted by the Legislature are intended to neutralise the tax effect of avoidance transactions. They were, by no means, meant to put the assessee concerned in a much worse position than they would have been if they had not adopted those avoidance measures. A Bench of this court, while considering similar provisions in section 4(1)(a) of the Wealth-tax Act, 1957, referred to this aspect as an important factor in statutory construction : vide S. Naganathan v. CWT . They observed with reference to section 4 of the Wealth-tax Act, 1957, as follows (at page, 290) :
'Section 4 is thus intended only to prevent any evasion or avoidance of tax by resorting to transfers and taking the properties out of the provisions of the Act. If the intended purpose of section 4(1) is to be achieved, the transferor shall not be allowed to be in a better position than what he would have been if he had not resorted to such a fraudulent transfer ... But we are not persuaded to hold that by this provision Parliament intended that the transferor should be put under a worse position or shall be subjected to more liability than that he would have been if the transfer had not taken place ... Unless there is clear indication in the provisions of the Act itself, we cannot assume that Parliament intended to, impose more onerous obligation on the assessee than he would have been but for the transfer.' These observations were prompted by a refusal by the wealth-tax authorities in that case to grant an exemption under section 5(1)(iv) of the Wealth-tax Act to a residential house property for the simple reason that the property in question in that case had been transferred by the assessee to his wife, without consideration, and it was included in the total wealth of the assessee only by virtue of the provisions of section 4(1)(a). In the course of the judgment, the court discountenanced the idea that granting the exemption under section 5(1)(iv) to the assessee in that case would amount to extending the statutory fiction for various other purposes in addition to the one for which it was created. It was, on the contrary, observed that the court was not extending the fiction beyond the purpose for which it was created by the statute.
The principle of this decision was followed in a later decision of this court in V. Vaidyasubramaniam v. CWT [1977] 108 ITR 538.
For the reasons stated above, we must answer the question of law referred to us by holding that the assessee was entitled to a deduction of the interest on the money borrowed by him, in the computation of the income from house properties in the names of the assessee's wife and minor children, for purposes of inclusion in his total income under section 64(1)(iv) and (v), section 24(1)(vi) and section 27(i) of the Act."
17. We are of the view, thus, that the quantum of capital gain and the exemption, if any, has to be determined for the donor/transferor under the relevant provisions of the Act including section 53, if the property was transferred to the spouse and it was chargeable under the head "Income from house property". It will be so for the purposes of section 45 read with sections 53 and 64(1)(iv) of the Act. In view of the above, both the questions referred to us have to be answered against the assessee and in favour of the Revenue and are accordingly answered. There will be no order as to costs.