Gujarat High Court
Commissioner Of Income-Tax vs Mohmadmiya A. Topiwala on 6 March, 1993
Equivalent citations: [1994]207ITR711(GUJ)
JUDGMENT G.T. Nanavati, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following four questions to this court under section 256(1) of the Income-tax Act, 1961 :
"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that no intimate connection between the transfers in question can be said to be established and that hence assets in question cannot be said to have been received by the assessee's wife on indirect transfer from her husband and, consequently, the income arising from transfer of portions of the assets in question cannot be included in the computation of the assessee's income ?
(2) Whether the transfer of one-third share of the land at Paldi made in favour of the assessee's wife could be said to be an indirect transfer made by her husband himself ?
(3) Whether one-third share of the land at Paldi received by the assessee's wife. Hafsabanu, as gift from the assessee's brother, Abdullabhai, was an asset indirectly transferred to her by her husband assessee ?
(4) Whether the Tribunal was right in law in holding that the assessee's brother, Abdullabhai, and Abdullabhai's two sons being two different legal persons all competent to contract or sui juris, the gift which went to the benefit of his two sons could not be said to benefit Abdullabhai so as to give rise to motive on the part of Abdullabhai to part with his properties in favour of the assessee's wife ?"
2. These four questions arise in respect of the assessment years 1968-69 and 1969-70. There were two assessment proceedings in relation to these assessment years. Therefore, the Tribunal ought to have made two separate references. As the Tribunal has not done so, we direct the office to register two separate references treating ITR No. 302 of 1978 as reference arising out of assessment proceedings relating to the assessment year 1968-69 and Income-tax Reference No. 302A of 1978 as reference in respect of the assessment proceedings in relation to the assessment year 1969-70.
3. The assessee gifted his one-third share in the land situated at Paldi, Ahmedabad, to his brother's sons on March 25, 1966. On the same day, the assessee's brother transferred his one-third share belonging to him in the said land to the assessee's wife. The Income-tax Officer held that the two transfers were so interconnected as to form part of the same transaction and were adopted as a device to get out of the provisions of section 64(1)(iii) of the Act. He, therefore, treated his as a case where the assessee had indirectly transferred his asset to his wife and, therefore, included the capital gains arising out of the sale of the land by his wife in the total income of the assessee. The appeal filed to the Appellate Assistant Commissioner failed. Therefore, the assessee preferred an appeal to the Tribunal. The Tribunal dismissed the appeal. Subsequently, a miscellaneous application was filed before the Tribunal and it was brought to the notice of the Tribunal that it had proceeded on a wrong basis that the two sons of the assessee's brother were minors on the date of the gift. In fact, they were major. The Tribunal corrected the mistake and reversed its earlier finding as regards includibility of the income in question in the total income of the assessee. Thereafter the Department moved a miscellaneous application stating that while granting the application filed by the assessee, the Tribunal had not considered whether transfer of one-third share in the land made in favour of the assessee's wife can be said to be an indirect transfer made by the assessee to her. The Tribunal considered this question and held that the gift which was made to the two sons of Abdullabhai did not confer any benefit on Abdullabhai so as to give rise to motive on his part to part with the property in favour of the assessee's wife and, therefore, there was no intimate connection between the two transfers. Therefore, the income arising from the transfer made by the assessee's brother in favour of the assessee's wife and the subsequent capital gains arising as a result of sale of the said property cannot be treated as income of the assessee. Thus, the appeal filed by the assessee came to be allowed.
4. The Department then moved the Tribunal for referring the above-stated four questions to this court.
5. The facts stated above are not in dispute. What was transferred by the assessee to his brother's sons was one-third share in the land situated at Paldi, Ahmedabad. The two gifts or transfers were of equal value. Both the gifts were made on the same day, i.e., on March 25, 1966. There was no special occasion for making gifts. On the basis of these facts, the Tribunal was required to decide whether there was intimate connection between the two transfers so as to make them part of the same transaction and a device to get out of the provisions of section 64(1)(iii) of the Act. The contention which was raised before the Tribunal was that, unless both the transferors had the same motive of getting out of the provisions of section 64(1)(iii), the transfers made by them cannot be covered by the provisions of section 64(1)(iii) of the Act. The Tribunal appears to have accepted this contention as can be seen from the following observations made by it in paragraph 9 of its order :
As against his, it has to be noticed that the assessee's brother, Abdullabhai and Abdullabhai's two sons being different legal persons all competent to contract or sui juris, the gift which went to the benefit of his two sons could not be said to benefit Abdullabhai so as to give rise to a motive on the part of Abdullabhai to part with his property in favour of the assessee's wife. It may be noted that the parties being Muslims there was even no scope of the property received by the sons of Abdullabhai being on some later stage thrown into the common stock of the family so as to indirectly benefit their father."
6. The Tribunal no doubt referred to the decision of the Supreme Court in CIT v. C. M. Kothari [1963] 49 ITR 107 and the test laid down by the Supreme court for the purpose of deciding whether a transfer of this type can be regarded as an indirect transfer of assets by the assessee to one of the persons mentioned in section 64(1). The Tribunal having found as a matter of fact that the gifts were made on the same day and were of equal value and there was no special occasion for making the gifts surprisingly came to the conclusion that there was no intimate connection between the two by the application of a wrong test, viz., that as a result of this transaction, Abdullabhai did not stand to gain. Whether Abdullabhai received any benefit or not was not the test for the purpose of deciding whether the two transfers were interconnected or not. Both the transfers were made on the same day and they were of equal value. In the absence of any reason or explanation in that behalf, the only inference that could have been legitimately drawn was that the said transfers were effected as a device to evade the provisions of section 64(1)(iii). The Tribunal, in our opinion, wrongly assumed that, before the transfer can be said to be interconnected so as to form the same transaction, it was necessary to establish that both the transferors stood to gain as a result of the said transaction. In our opinion, the Tribunal committed an error of law by applying a wrong test for the purpose of deciding whether the assessee can be said to have made an indirect transfer in favour of his wife. What section 64(1)(iii) provides is that, in computing the total income of any individual, there shall be included all such income as arises directly or indirectly subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse of such individual otherwise than for adequate consideration or in connection with an agreement to live apart. A similar provision in the 1922 Act was interpreted by the Supreme Court in C. M. Kothari's case [1963] 49 ITR (SC) 107. In that case, the Supreme Court held that, for the purpose of section 16(3)(iii), it was not necessary that the same assets belonging to the husband should have reached the wife. The assets might, in the course of being transferred, be changed deliberately into assets of a like value of another person. The Supreme Court also held that a chain of transfers was comprehended by the word "indirectly" in section 16(3)(iii). The Supreme Court further held that, if two transfers were interconnected and were parts of the same transaction in such a way that they could be said to have been adopted as a device to avoid the implications of section 16(3)(iii), the case would fall within the section even though one was not consideration for the other in the technical sense. Interpreting the word "indirectly", the Supreme Court further held that a chain of transfers, if not comprehended by the word "indirectly", would easily defeat the object of the law which is to tax the income of the wife in the hands of the husband, if the income of the wife arises to her from assets transferred by the husband. Therefore, the correct test which has to be applied in the case of such cross-transfers is whether they are inter-connected or not, and if they are so interconnected, whether they are parts of the same transaction and were effected in such a way that they can be said to have been adopted as a device to evade the implications of section 64(1)(iii).
7. 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 a 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, then it cannot be said 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).
8. In order to decide whether the two transfers were interconnected or not, what was required to be seen was when and the manner in which the transfers took place. As pointed out above, what the assessee and his brother did was to transfer their one-third share in the same piece of land situated at Paldi in Ahmedabad. It was of equal value and there was no special reason for effecting such transfers. The transfers were made on the same day. Thus, there was intimate connection between the two even though the assessee's brother, Abdullabhai, did not directly benefit as a result of the said transfer. Absence of any benefit may suggest that there was no intention to defeat the provisions of law. But it is difficult to appreciate how it can have any bearing on the question as to whether the two transfers which were made on the same day were interconnected or not. It is obvious that if the assessee had transferred his one-third share in the land to his wife directly, then the income in the hands of the wife in respect of that property would have been treated as income of the assessee himself. In order to get out of this legal liability, the assessee transferred the land to his brother's sons and the said brother, in his turn, transferred his one-third shares in the same land to the wife of the assessee. The said two transfers were not only interconnected but they were parts of the same transaction. The assessee can certainly be said to have adopted this device with a view to escape from the provisions of section 64(1)(iii) of the Act. Therefore, we cannot take any other view except that transfer of one-third share in the land made by the assessee in favour of his wife was indirectly a transfer as contemplated by section 64(1)(iii). Therefore, questions Nos. 2 and 3 will have to be answered in the affirmative, that is, in favour of the Revenue and against the assessee. Question No. 1 is answered in the negative, that is, in favour of the Revenue and against the assessee. Question No. 4 need not be answered in view of the discussion in the judgment as regards questions Nos. 1, 2 and 3. Reference is disposed of accordingly. No order as to costs.