1977 (7) TMI 10 - HC - Wealth-tax

Summary

Issues Involved:
1. Whether the 400 shares of 'Colour Chem Ltd.' transferred to the assessee's wife were exempt under Section 5(1)(xx) read with Section 4(1)(a)(i) of the Wealth-tax Act, 1957.

Issue-wise Detailed Analysis:

1. Exemption under Section 5(1)(xx) and Interpretation of "Held by the Assessee":

The primary issue in this case was whether the 400 shares of 'Colour Chem Ltd.' transferred to the assessee's wife were exempt under Section 5(1)(xx) read with Section 4(1)(a)(i) of the Wealth-tax Act, 1957. The facts of the case were straightforward: the assessee transferred 400 shares to his wife on September 23, 1959, and these shares were recorded in her name in the company's share register. The Wealth-tax Officer (WTO) contended that the exemption under Section 5(1)(xx) was only available if the shares were held in the assessee's name as on the valuation dates. Since the shares were in the wife's name, the WTO included their value in the assessee's net wealth.

The Appellate Assistant Commissioner (AAC) and the Tribunal, however, took a different view. They argued that the legal fiction created by Section 4(1)(a)(i) of the Act, which treats assets transferred to the wife as belonging to the assessee, should be carried to its logical conclusion. Consequently, the shares should be considered as "held by the assessee" for the purpose of exemption under Section 5(1)(xx).

2. Revenue's Argument:

The revenue, represented by Mr. Joshi, argued that the legal fiction created under Section 4(1)(a)(i) should not be extended beyond its legitimate field. He contended that the expression "held by the assessee" in Section 5(1)(xx) must mean shares standing in the name of the assessee in the company's register. He relied on the Gujarat High Court's decision in CWT v. Harshad Rambhai Patel [1964] 54 ITR 740, which distinguished between "belonging to" and "held by the assessee." According to Mr. Joshi, the shares standing in the wife's name could not be excluded from the assessee's net wealth.

3. Assessee's Argument:

Mr. Jagtiani, representing the assessee, argued that the legal fiction under Section 4(1)(a)(i) should be carried to its logical conclusion without extending it beyond its legitimate field. He contended that the expression "held by the assessee" should mean "belonging to" or "owned by" the assessee, and not necessarily standing in the assessee's name in the company's register. He cited the Madras High Court's decision in S. Naganathan v. CWT [1975] 101 ITR 287, which supported this interpretation.

4. Court's Analysis and Conclusion:

The court examined the relevant provisions of the Wealth-tax Act, including Sections 2(m), 3, 4(1)(a)(i), and 5(1)(xx). It noted that the legal fiction created by Section 4(1)(a)(i) was intended to prevent tax evasion by treating transferred assets as belonging to the transferor for wealth computation purposes. The court rejected Mr. Joshi's narrow interpretation of "held by the assessee," stating that the dictionary meaning of "hold" includes "possess" or "be the owner of," and not merely "standing in the name of."

The court emphasized that the legal fiction must be given full effect, as articulated by Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council [1952] AC 109 (HL). It held that the legal fiction created by Section 4(1)(a)(i) must be carried to its logical conclusion, allowing the assessee to claim the exemption under Section 5(1)(xx).

5. Support from Madras High Court Decision:

The court found support in the Madras High Court's decision in S. Naganathan v. CWT [1975] 101 ITR 287, which held that the exemption under Section 5(1)(iv) was available to the transferor even when the property was transferred to the wife. The court agreed that Parliament did not intend to place the transferor in a worse position than if the transfer had not occurred.

6. Amendments by Finance Act, 1975:

Mr. Joshi pointed out that the Finance Act, 1975, amended Sections 4 and 5 to explicitly allow exemptions for transferred assets. However, the court held that these amendments did not imply that the pre-amendment position was different. The court stated that the amendments were made by abundant caution and did not change the interpretation of the law as it stood before.

Conclusion:

The court concluded that the Tribunal was correct in holding that the 400 shares transferred to the assessee's wife were exempt under Section 5(1)(xx) read with Section 4(1)(a)(i) of the Wealth-tax Act, 1957. The question was answered in the negative, in favor of the assessee, and the revenue was directed to pay the costs of the reference.