Bombay High Court
Commissioner Of Income-Tax vs Abhay L. Khatau on 25 October, 1985
Equivalent citations: (1986)88BOMLR146, (1986)51CTR(BOM)36, [1986]162ITR648(BOM), [1986]24TAXMAN217(BOM)
JUDGMENT Bharucha, J.
1. We are concerned in these references under section 256(1) of the Income-tax Act, 1961, with the assessment years 1965-66 and 1966-67. The assessee, an individual, had transferred certain shares to his wife. In his assessment order, the Income-tax Officer brought to tax the sums of Rs. 11,700 for the assessment year 1965-66 and Rs. 16,003 for the assessment year 1966-67, received as dividend on these shares, applying section 64(iii) of the Income-tax Act, 1961. The Income-tax Officer observed that the assessee was entitled to rebate under section 85 of the said Act upon, inter alia, the said dividends, and assessed the assessee's income accordingly.
2. The Commissioner of Income-tax issued to the assessee a notice to show cause why the Income-tax Officer should not be directed to withdraw the rebate under section 85 of the Income-tax Act, 1961, on the basis that could not be considered to be dividends in his hands. After hearing the assessee, the Commissioner of Income-tax concluded that the requirements of section 85 had not been fulfilled and directed the Income-tax Officer to withdraw the rebate allowed to the assessee under section 85 on the said dividends.
3. The assessee appealed to the Income-tax Appellate Tribunal. The Tribunal held that the relief under section 85 of the Income-tax Act, 1961. had been properly given by the Income-tax Officer on the said dividends and that the Commissioner of Income-tax had acted erroneously in directing its withdrawal.
4. Arising out of the order of the Tribunal, the following question is raised at the instance of the Revenue :
"Whether, on the facts and in the circumstances of the case, the assessee was eligible for the relief under section 85 of the Act on the income from dividends assessed in his hands under section 64(iii) of the Act for the assessment years 1965-66 and 1966-67 ?"
5. Mr. Jetly, learned counsel for the Revenue, submitted that two conditions were required to be fulfilled under section 85 of the Income-tax Act, 1961, before rebate could be granted. One was that the assessee should be the owner of the asset and the second was that the income should be income in his hands. In the instant case, in Mr. Jetly's submission, these shares belonged to the assessee's wife, so that the first condition was not fulfilled. Further, the said dividends could not be said to be income in the assessee's hands, so that the second condition was also not fulfilled.
6. Section 64(iii) of the Income-tax Act, 1961 requires that in computing the total income of an individual, there shall be included all such income as arises to the spouse of such individual from assets transferred to the spouse by such individual otherwise than for adequate consideration. The relevant portion of section 85 of the said Act which deals with dividends from a new industrial undertaking or hotel business or ship reads thus :
"Subject to any rules that may be made by the Board in this behalf, income-tax shall not be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him by an industrial undertaking or a hotel or a ship to which section 84 applies as isjattributable to that part of the profits or gains on which income-tax is not payable under section 84."
7. It is apparent that section 64(iii) of the Income-tax Act, 1961, was intended to prevent the evasion of tax by an individual by the transfer of assets to his spouse. Income from such assets was under section 64(iii) intended to be treated as the income of the individual. The assets that were transferred, consequently, were to be treated as if they had not been transferred and the individual remained the owner thereof. For the purpose of the Act, therefore, the shares that were transferred by the assessee to his wife were to be treated as belonging to the assessee and the income me by way of dividends thereon was to be treated as the income of the assessee. It is difficult to see how, in the circumstances, it can be held that the conditions of section 85 of the said Act were not met. In our view, the assessee must be granted relief under section 85 in respect of the said dividends and the Tribunal was right in so holding.
8. We find support for the view that we have taken in a judgment delivered by the Supreme Court on August 29, 1985 (in Civil Appeals Nos. 1596 to 1598 of 1973) CIT v. J. H. Gotla . The question in that case was whether the income of the wife and minor children of the assessee from a partnership in which the wife was partner and the minor children had been admitted to its benefits, which partnership was carried on with assets transferred by the assessee, could be set off against any loss brought forward by the assessee in respect of a business carried on by the assessee. It was held that the profit or loss from a business carried on by him for the purpose of carrying forward and setting off of his loss.
9. We find that the Madras High Court has in CIT v. P. N. Ramaswamy ([1984] 146 ITR 627) also taken a similar view. It held that a wife's dividend income had to be treated as the income of the assessee where section 64(iii) of the Income-tax act, 1961, applied. By the virtue thereof, income of the assessee and such deemed income of the assessee had to be clubbed together in arriving at his total income and deductions to be made in computing the assessee's total income were available exclusively to the assessee and not to the assessee's wife.
10. Having regard to the above discussion, we answer the question in the affirmative and in favour of the assessee.
11. No order as to costs.