1967 (11) TMI 5 - SC - Income Tax

Capital gains derived by the sale of the asset by the wife to whom the assets were transferred - income derived directly or indirectly from asset transferred includible in the income of husband - - Assessee s appeal is dismissed

Summary

Issues:
1. Inclusion of capital gain from the sale of transferred shares in the total income of the transferor under section 16(3)(a)(iii) of the Income-tax Act.
2. Proper inclusion of interest earned on sale proceeds deposited with a third party in the total income of the transferor under section 16(3)(a)(iii) of the Income-tax Act.

Analysis:
The case involved an appeal regarding the inclusion of capital gain and interest earned by the wife of the assessee on shares transferred to her in the total income of the transferor under section 16(3)(a)(iii) of the Income-tax Act. The assessee had gifted shares to his wife, who later sold them, resulting in a capital gain. The Income-tax Officer included this gain in the total income of the assessee, along with the interest earned on the sale proceeds deposited with a partnership firm involving the assessee. The Appellate Assistant Commissioner and the Appellate Tribunal upheld the inclusion of both the capital gain and the interest in the total income of the assessee.

The High Court was approached with specific questions of law regarding the proper inclusion of these amounts in the total income of the assessee. The High Court answered in favor of the department regarding the capital gain from the sale of shares, stating that it should be included in the total income of the transferor under section 16(3)(a)(iii) of the Income-tax Act. However, the High Court ruled in favor of the assessee regarding the interest earned on the sale proceeds, stating that only the portion attributable to the monetary value of the shares at the time of the gift should be included in the total income of the transferor.

The High Court's decision was based on the interpretation of section 16(3)(a)(iii) and the definition of "income" under the Income-tax Act. The court clarified that capital gains are included in the scope of income under the Act, and there is no distinction between income from the asset and income from the sale of the asset. The court emphasized that the purpose of the provision is to prevent tax avoidance and reduce tax incidence by transferring assets to family members.

In conclusion, the High Court's decision to include the capital gain from the sale of shares in the total income of the transferor was upheld, while the inclusion of interest earned on the sale proceeds was limited to the portion attributable to the value of the shares at the time of the gift. The appeal was dismissed, affirming the High Court's judgment.