1966 (11) TMI 14 - HC - Income Tax

Lease of certain quarries in favour of his wife in perpetuity for a consideration of an annual royalty - income from the quarries - includible in the assessment of the assessee under the provisions of s. 16(3)(a)(iii)

Summary

Issues Involved:
1. Inclusion of income from quarries in the assessee's assessment under Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922.
2. Adequacy of consideration for the transfer of quarries.
3. Validity and enforceability of a pre-nuptial agreement.
4. Double assessment concerns.

Detailed Analysis:

1. Inclusion of Income from Quarries in the Assessee's Assessment:
The primary legal question was whether the income of Rs. 20,360 from the quarries leased to the assessee's wife should be included in the assessee's income under Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922. The court examined the lease deed and its terms, including the royalty payment of Rs. 4,000 per annum. The Tribunal had previously determined that the lease in perpetuity amounted to a transfer of assets, and the income from these assets should be included in the assessee's income.

2. Adequacy of Consideration:
The court scrutinized whether the consideration for the transfer of the quarries was adequate. The lease deed mentioned a royalty of Rs. 4,000 per annum. The Tribunal found this amount inadequate compared to the income generated from the quarries, which was Rs. 20,360 in the relevant year and Rs. 58,436 in the succeeding year. The court upheld this finding, emphasizing that "adequate consideration" excludes mere love and affection and must be substantial and measurable.

3. Validity and Enforceability of a Pre-Nuptial Agreement:
The assessee claimed an earlier agreement promised to transfer the quarries and pay Rs. 500 monthly to his wife as part of a pre-nuptial arrangement. However, this agreement was not mentioned in the registered lease deed, and no substantial evidence was provided to prove its existence. The court found that the letters produced did not constitute an enforceable contract and were merely expressions of intent. The court also noted that even if such an agreement existed, it would not necessarily be considered adequate consideration under Section 16(3)(a)(iii).

4. Double Assessment Concerns:
The assessee argued that including the income from the quarries in his assessment, while also considering the royalty payment, would result in double assessment. The court referred to a Supreme Court decision, emphasizing that appropriate adjustments should be made to avoid double taxation. The court expressed confidence that the income-tax authorities would ensure such adjustments, provided the royalty payment was not already accounted for in the wife's income assessment.

Conclusion:
The court concluded that the income from the quarries leased to the assessee's wife should indeed be included in the assessee's income under Section 16(3)(a)(iii) of the Act. The consideration of Rs. 4,000 per annum was deemed inadequate, and no enforceable pre-nuptial agreement was proven. The court also addressed the double assessment concern, ensuring that appropriate adjustments would be made to avoid such an outcome. The question referred was answered in the affirmative, and costs were awarded against the assessee.