1980 (9) TMI 70 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 9(2) of the Kerala Agricultural Income-tax Act.
2. Whether the income from the estate purchased at Vellayur is assessable under Section 9(2) of the Act.
3. Proportionate assessment of income based on the original investment of Rs. 28,000.

Detailed Analysis:

Issue 1: Applicability of Section 9(2) of the Kerala Agricultural Income-tax Act
The Tribunal had to determine whether Section 9(2) of the Kerala Agricultural Income-tax Act (the Act) was applicable to the facts of the case. The respondent-assessee had purchased a rubber estate in Nilambur in the name of his minor son for Rs. 28,000. This estate was later sold for Rs. 95,000, and the proceeds were used to purchase another estate in Vellayur for Rs. 89,800. The income from the Vellayur estate was included in the assessee's taxable income under Section 9(2). The court held that Section 9(2)(a)(iv) of the Act, which includes the agricultural income of a minor child arising directly or indirectly from assets transferred by the individual, was applicable. The Supreme Court's interpretation in Balaji v. ITO [1961] 43 ITR 393 was referenced, emphasizing the prevention of tax evasion.

Issue 2: Assessability of Income from the Vellayur Estate
The Tribunal had to decide whether the income from the Vellayur estate, purchased with the proceeds from the Nilambur estate, was assessable under Section 9(2). The assessee argued that only Rs. 28,000 was transferred to the minor, and thus, the income from the Vellayur estate should not be taxed in his hands. However, the court rejected this contention, stating that the original asset (Nilambur estate) was directly transferred to the minor. The proceeds from its sale, used to purchase the Vellayur estate, retained the character of an asset transferred by the assessee. The court cited the Supreme Court's decision in CIT v. Prem Bhai Parekh [1970] 77 ITR 27, which established that the income must have a proximate connection with the transferred asset to attract Section 9(2)(a)(iv).

Issue 3: Proportionate Assessment Based on Original Investment
The Tribunal examined whether only the proportionate income on the original investment of Rs. 28,000 should be assessed under Section 9(2). The court found that the entire income from the Vellayur estate was assessable. The Bombay High Court's decision in Seventilal Maneklal Sheth v. CIT [1965] 57 ITR 45 was discussed, where it was held that the entire sale proceeds of an asset transferred to a spouse (or minor child) retained the character of the original asset. The Supreme Court's affirmation in Seventilal Maneklal Sheth v. CIT [1968] 68 ITR 503 further solidified that the gain from the sale of an asset, when reinvested, continues to be regarded as arising from the original transferred asset.

Conclusion:
The court concluded that the provisions of Section 9(2)(a)(iv) were fully applicable. The income derived from the estate purchased in Vellayur was liable to be included in the taxable income of the assessee. All three questions were answered in the affirmative, against the assessee and in favor of the department. The judgment was to be forwarded to the Tribunal as required by law.