1978 (8) TMI 20 - HC - Income Tax

Issues Involved:
1. Applicability of Section 16(3)(a)(iii) and (iv) of the Indian Income-tax Act, 1922, to the gifts of shares.
2. Determination of whether the gifts constituted cross-transfers or mutual transactions.
3. Interpretation of indirect transfers under Section 16(3).
4. Burden of proof on the revenue to establish the interconnection of transactions.

Detailed Analysis:

1. Applicability of Section 16(3)(a)(iii) and (iv) of the Indian Income-tax Act, 1922:
The primary issue was whether the gifts of shares made by the petitioner fell under the purview of Section 16(3)(a)(iii) and (iv) of the Indian Income-tax Act, 1922. The assessee made gifts of shares of Ashok Construction Co. Pvt. Ltd. to the wife and minor children of his business associates, while his associates reciprocated by gifting shares of Modern Construction Co. Pvt. Ltd. to the assessee's wife and children.

2. Determination of Whether the Gifts Constituted Cross-Transfers or Mutual Transactions:
The Income Tax Officer (ITO) concluded that the two sets of gifts constituted a single transaction of cross gifts, thereby attracting the provisions of Section 16(3)(a)(iii) and (iv). The Tribunal upheld this view, noting that the gifts were made in a manner suggesting mutual interconnection, even though there was a time interval and discrepancies in the amounts and donees.

3. Interpretation of Indirect Transfers Under Section 16(3):
The court referred to the Supreme Court's decision in CIT v. C. M. Kothari [1963] 49 ITR (SC) 107, which clarified that the term "indirectly" in Section 16(3) encompasses a chain of transfers. The court emphasized that the statutory provisions are designed to prevent tax evasion through circuitous transfers and that the reality or unreality of the transaction is immaterial. The key consideration is whether the transfers are part of the same transaction adopted to avoid the application of the section.

4. Burden of Proof on the Revenue to Establish the Interconnection of Transactions:
The court discussed the burden of proof required by the revenue to establish that the transactions were interconnected. It referred to the Bombay High Court's decision in H. N. Patwardhan v. CIT [1970] 76 ITR 279 (Bom), which required the revenue to provide definite evidence of an agreement or scheme for the ultimate transfer to the minor children. However, the court found this approach to be in conflict with the principles laid down by the Supreme Court, which do not require such stringent proof. The proper inference can be drawn from the facts found, and the statutory provisions should be applied if the pattern of transactions suggests a scheme to convey assets indirectly.

Conclusion:
The court concluded that the gifts of shares of Ashok were made in consideration or expectation of the earlier gifts of shares of Modern, constituting cross-transfers. Therefore, the provisions of Section 16(3)(a)(iii) and (iv) were applicable. The question was reframed to reflect this conclusion and answered in the affirmative, in favor of the revenue. The assessee was ordered to pay the costs of the reference to the Commissioner.

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