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1994 DIGILAW 391 (ORI)

GURU CHARAN SINGH v. COMMISSIONER OF INCOME TAX

1994-12-22

G.B.PATNAIK, P.C.NAIK

body1994
JUDGMENT : G.B. Patnaik, J. - On an application being filed u/s 256(1) of the income tax Act, 1961 ('the Act') the Tribunal has referred the following questions for the opinion of this Court: "(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of clause (iv) of section 64(1) were attracted to the facts of the case by virtue of Explanation (3) to section 64(1) of the income tax Act, 1961? (ii) Whether, on the facts and in the circumstances of the case, the alleged transfer having been made in January 1974, the provisions of the amended sub-section (1) of section 64, operative from 1-4-1976, along with Explanation (3) to the said sub-section was applicable to the facts of the case?" The assessee, an individual, has been assessed by the ITO for the assessment year 1982-83 u/s 143(3) of the Act. The Commissioner while examining the records found that the assessee's wife was a partner of the partnership firm and had invested a sum of Rs. 5,000 as her capital which was a gift to her by her husband, the assessee. Accordingly, the income accrued to the assessee's wife from the partnership firm was to be clubbed with the income of the assessee. After a show-cause notice was issued to the assessee, the assessee appeared and the Commissioner came to the conclusion that Explanation 3 to section 64 of the Act was sufficient to hold that the income of the assessee's wife from the partnership firm had to be included with the income of the assessee. He ultimately directed the ITO to re-do the assessment after clubbing the proportionate income as envisaged under the law. The assessee then approached the Tribunal and the Tribunal re-affirmed the decision of the Commissioner on a finding that it was the sum of Rs. 5,000 which had been gifted to the assessee's wife by the assessee without adequate consideration that had been invested by the wife which generated income and such income had to be included in the total income of the assessee in accordance with Explanation 3 to sub-section (1) of section 64. The assessee then moved the Tribunal u/s 256(1) and the Tribunal has, accordingly, formulated two questions. 2. The assessee then moved the Tribunal u/s 256(1) and the Tribunal has, accordingly, formulated two questions. 2. The learned counsel for the assessee argues with force that the proximate cause of making of profit in the partnership business is not the gift which the assessee had made in favour of his wife and until that is established, the income of the assessee's wife from the partnership firm cannot be included with the income of the assessee. The learned counsel relies upon the decision of the Supreme Court in Commissioner of Income Tax, West Bengal, Calcutta Vs. Prem Bhai Parekh and Others, as well as the decision of the Supreme Court in CIT v. Prahaladrai Agarwala AIR 1990 SC 270 . 3. The learned standing counsel appearing for the revenue, on the other hand, contends that in view of Explanation 3 which was inserted by the Taxation Laws (Amendment) Act, 1975, the decision of the Supreme Court in Prem Bhai Parekh 's case (supra) is of no assistance to the assessee. In Prem Bhai Parekh's case (supra) their Lordships of the Supreme Court were considering the provisions of section 16(3) of the Indian income tax Act, 1922 which is in pari materia with section 64. Their Lordships of the Supreme Court held that since section 16(3) created an artificial income, this section must receive strict construction. It was further held that before an income could 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. 4. In Prahaladrai Agarwala's case (supra) their Lordships considered section 64(1)(iii). In that case also, the assessee had gifted away some money to his wife and the wife invested that amount in a partnership business and the question for consideration was whether the income, which the wife got from the partnership business, can be clubbed with the income of the assessee's husband u/s 64(1)(iii). Their Lordships of the Supreme Court reiterated the earlier view of the Court in Prem Bhai Parekh's case (supra) and held: "... Their Lordships of the Supreme Court reiterated the earlier view of the Court in Prem Bhai Parekh's case (supra) and held: "... There is no doubt that the wife became a partner because of the capital contributed by her in the firm, but, as observed by the High Court, in the judgment under appeal, it was upon agreement by the remaining partners that she became a member of the partnership. The mere contribution of the capital by the wife into the firm would not automatically have entitled her to partnership in the firm. The partnership was based on agreement, and it is the event of agreement between the partners that brought the assessee's wife into the firm as partner...." (p. 273) Ultimately their Lordships held that the High Court was right in answering the question in favour of the assessee and against the revenue. It is to be noticed that Explanation 3 to section 64, though had come into the statute book since 1-4-1976 had not been pressed into service obviously because the investment had been made prior to the explanation being inserted into the statute book. Mr. Ray, the learned standing counsel, appearing for the revenue, however, contended that section 64 like that of sections 60 to 63 of the Act was designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce liability to tax by means of a settlement or disposal of property in such a way that, while the income is no longer received by him/her in law, he/she retains certain powers over, or interest in, the property or the income. It is aimed at foiling this attempt to reduce the incidence of tax by transferring assets to spouse or minor child or getting the minor child admitted to the benefits of a firm or taking the spouse as a partner. The scope of section 64, as originally introduced in 1961, was wider than section 16(3) which was being considered by the Supreme Court in Prem Bhai Parekh's case (supra) and the said scope has been further widened with amendments made subsequently and the Explanation being inserted there into. The scope of section 64, as originally introduced in 1961, was wider than section 16(3) which was being considered by the Supreme Court in Prem Bhai Parekh's case (supra) and the said scope has been further widened with amendments made subsequently and the Explanation being inserted there into. Explanation 3 which was inserted by the Taxation Laws (Amendment) Act, 1975 and was given effect to with effect from 1-4-1976 was to the following effect: " Explanation 3 - For the purposes of clauses (iv) and (v), where the assets transferred directly or indirectly by an individual to his spouse or minor child are invested by the spouse or minor child in any business, that part of the income arising out of the business to the spouse or minor child in any previous year, which bears the same proportion to the income of the spouse or minor child from the business as the value of the assets aforesaid as on the first day of the previous year bears to the total investment in the business by the spouse or the minor child as on the said day, shall be included in the total income of individual in that previous year." The gift of Rs. 5,000 by the assessee in favour of his wife was in the year 1974, much prior to the insertion of Explanation 3 which came into force with effect from 1-4-1976. There is nothing in section 64 or the Explanation which was inserted by the Taxation Laws (Amendment) Act, 1975 to indicate that it was retrospective in nature and, therefore, the said Explanation cannot be considered for deciding the clubbing of income in respect of investment made prior to the amendment coming into force. In the aforesaid premises, we answer the question No. 1 to the effect that on the facts and in the circumstances of the case the Tribunal was not justified in holding that the provisions of clause (iv) of section 64(1) were attracted to the facts of the case by virtue of Explanation 3 to section 64(1). We answer the second question by holding that the alleged transfer having been made in January 1974, the provisions of the amended sub-section (1) of section 64 along with the Explanation 3 which became operative from 1-4-1976 are not applicable to the facts of the case. We answer the second question by holding that the alleged transfer having been made in January 1974, the provisions of the amended sub-section (1) of section 64 along with the Explanation 3 which became operative from 1-4-1976 are not applicable to the facts of the case. Both the questions are, accordingly, answered in favour of the assessee and against the revenue. The reference application is disposed of accordingly. P.C. Naik, J. I agree.