1995 (10) TMI 3 - SC - Income Tax

Minor son purchased property form cash gift received from father-assessee - that property sold later when son was minor - whether, on the facts and in the circumstances of the case, the capital gain of Rs. 58,000 was assessable in the hands of the assessee in terms of section 64(1)(iv) of the Income-tax Act, 1961 - Held, yes

Summary

Issues Involved:
1. Applicability of Section 64(1)(iv) of the Income-tax Act, 1961.
2. Interpretation of "income arising directly or indirectly" from transferred assets.
3. Relevance and application of precedents: Prem Bhai Parekh's case and Sevantilal Maneklal Sheth's case.

Issue-wise Detailed Analysis:

1. Applicability of Section 64(1)(iv) of the Income-tax Act, 1961:

The core issue in this case was whether the capital gain of Rs. 58,000 from the sale of a house property, purchased with a cash gift of Rs. 90,000 made by the assessee to her minor son, should be included in the assessee's income under Section 64(1)(iv) of the Income-tax Act, 1961. The relevant provision states that in computing the total income of an individual, any income arising directly or indirectly to a minor child from assets transferred directly or indirectly to the minor child by such individual otherwise than for adequate consideration must be included.

2. Interpretation of "income arising directly or indirectly" from transferred assets:

The court examined whether the capital gain from the sale of the house property, purchased with the gifted amount, fell within the ambit of "income arising directly or indirectly" from the transferred asset. The court noted that the definition of "income" under Section 2(24) includes "capital gains." Therefore, the capital gain from the sale of the house property was deemed to be a type of income that arose from the asset initially transferred by the assessee to her minor son.

3. Relevance and application of precedents:

The High Court had relied on the precedent set in Prem Bhai Parekh's case, where it was held that the income of minors from a partnership firm, where the minors were admitted to the benefits of partnership due to a cash gift from their father, did not arise directly or indirectly from the transferred asset. However, the Supreme Court distinguished this case from the present one, emphasizing that in Prem Bhai Parekh's case, the income arose from the partnership business and not directly from the transferred asset.

The Supreme Court found the facts of Sevantilal Maneklal Sheth's case more analogous, where it was held that there is no logical distinction between income arising from the asset transferred and income arising from the sale of the asset. The court reiterated that the profits or gains from the sale of an asset arise from the asset itself, and thus, the capital gain in the present case should be included in the assessee's income.

Conclusion:

The Supreme Court concluded that the High Court had misunderstood the ratio of Prem Bhai Parekh's case and that the facts of Sevantilal Maneklal Sheth's case were more applicable. The court clarified that the "proximity" referred to in Prem Bhai Parekh's case was not about the time lag but about the direct connection between the transferred asset and the income in question. Therefore, the appeal was allowed, and the judgment of the High Court was set aside. The question referred under Section 256 was answered in the affirmative, in favor of the Revenue and against the assessee.