1965 (3) TMI 90 - HC - Income Tax

Summary

Issues Involved:
1. Transfer of asset to wife and applicability of Section 16(3) of the Income Tax Act.
2. Determination of "real" vs. "notional" income.
3. Application of Section 9 of the Income Tax Act regarding income from property.
4. Extent of income includible in the assessee's total income.

Detailed Analysis:

1. Transfer of Asset to Wife and Applicability of Section 16(3):
The primary issue was whether the sum of Rs. 75,000 given by the assessee to his wife for constructing a house constitutes a transfer of an asset under Section 16(3) of the Income Tax Act. The Tribunal found as a fact that this amount was indeed transferred without adequate consideration and was used for constructing the house. Section 16(3) mandates that any income derived by the wife from such transferred assets should be included in the assessee's total income. The contention that merely advancing funds does not amount to a transfer was rejected, affirming that the sum given for construction qualifies as a transferred asset.

2. Determination of "Real" vs. "Notional" Income:
The assessee argued that no real income was derived from the property since his wife resided in the house, and only "real" income, not "notional" income, should be taxed under Section 16(3). The court referred to the precedent set in Commissioner of Income-tax v. Sir Homi Mehta's Executors, emphasizing that income for tax purposes should be real and not merely notional. However, the court concluded that the benefits derived from the enjoyment of the property, such as residing in it, could be considered as income. The term "income, as arises directly or indirectly" was interpreted broadly to include such benefits, thus rejecting the argument that only actual monetary income could be taxed.

3. Application of Section 9 Regarding Income from Property:
Section 9 of the Act was examined to determine how income from property should be computed. The section stipulates that the annual value of a property is the sum for which it might reasonably be expected to let from year to year. The court clarified that this "deemed" annual value is not an artificial income but a statutory presumption of the income derived from property ownership. The argument that Section 9 creates a fictional income was dismissed, affirming that the annual value represents real income for tax purposes.

4. Extent of Income Includible in the Assessee's Total Income:
The final issue was the extent of the income from the property that could be included in the assessee's total income. The court referred to the first proviso to Section 9(2), which limits the taxable income from a property occupied by the owner for residence to either half the annual value or Rs. 1,800, whichever is less, and further limits it to 10% of the owner's total income if it exceeds this threshold. The court concluded that this reduced amount, as determined by Section 9(2) and its proviso, should be the measure of income included under Section 16(3). This ensures that the income assessed aligns with statutory provisions for determining property income.

Conclusion:
The court held that the income from the house property is includible in the assessee's total income, but its measure must comply with the first proviso to Section 9(2) of the Act. The departmental authorities were directed to determine the amount accordingly. The assessee partially succeeded, and no order as to costs was made.