1963 (3) TMI 46 - SC - Income Tax

Whether income arising to Mrs. C. M. Kothari and Mrs. D. C. Kothari from the property arose indirectly out of the assets transferred indirectly by their husbands so as to attract the provisions of section 16(3)(a)(iii)? Held that - Appeal allowed. An intimate connection between the two transactions, which were prima facie separate, is thus clearly established and they attract the words of the section, namely, transferred directly or indirectly to the wife . The High Court was in error in ignoring these pertinent matters. The High Court also overlooked the fact that the purchase of the house at first was intended to be in the names of the three partners of the firm. It is difficult to see why the ladies were named as the vendees if they did not have sufficient funds of their own. They could only buy the property if someone gave them the money. It is reasonable to infer from the facts that before the respective husbands paid the amounts, they looked up the law and found that the income of the property would still be regarded as their own income if they transferred any assets to their wives.

Summary

Issues:
Interpretation of section 16(3)(a)(iii) of the Indian Income-tax Act regarding income arising indirectly from assets transferred by husbands to wives.

Detailed Analysis:
The case involved a firm of stockbrokers where the partners, including husbands and wives, purchased a property. The wives paid for their share using funds indirectly transferred by their husbands. The income from the property was assessed as the husbands' income by the Income-tax Officer, alleging indirect transfer of assets to wives. The Tribunal confirmed this finding, leading to an appeal before the Supreme Court.

The main issue was the applicability of section 16(3)(a)(iii) of the Income-tax Act, which includes income arising indirectly from assets transferred by husbands to wives for assessment. The Court emphasized that the section covers not only direct but also indirect transfers, preventing circumvention of tax liability. The Court rejected the argument that assets must directly reach the wife from the husband, stating that deliberate substitution of assets can still fall under indirect transfer.

Furthermore, the Court addressed the contention that each transfer in a chain must have consideration. It clarified that inter-connected transfers without technical consideration can still be considered part of a single transaction to evade tax implications. In this case, the Court found an intimate connection between the transfers made by the son to the mother and by the father-in-law to the daughter-in-law, indicating a scheme to avoid tax liability.

The Court highlighted suspicious circumstances, such as the timing of gifts coinciding with property transactions and discrepancies in payments among the parties, supporting the conclusion of indirect transfers. It criticized the High Court for overlooking these crucial points and inferred that the husbands orchestrated the transfers to retain control over the property income, contrary to the law's intent.

Ultimately, the Supreme Court allowed the appeals, vacated the High Court's decision, and ruled in favor of the Commissioner of Income-tax. The Court held that the transactions constituted indirect transfers falling under section 16(3)(a)(iii), affirming the tax assessment of the wives' income as that of their husbands. The respondent was ordered to bear the costs of the appeals and the High Court proceedings.

In conclusion, the judgment clarified the interpretation of the Income-tax Act regarding indirect transfers of assets between spouses to prevent tax evasion schemes, emphasizing the need to consider the substance of transactions rather than their form.