1978 (12) TMI 105 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 64(1)(iv) of the IT Act.
2. Indirect transfer of assets.
3. Admission of minors to the benefits of partnership.
4. Validity of cross-transfers.
5. Proximity between transfer of assets and income.

Issue-Wise Detailed Analysis:

1. Applicability of Section 64(1)(iv) of the IT Act:
The primary issue was whether the provisions of Section 64(1)(iv) of the IT Act were applicable to the case. The Income Tax Officer (ITO) argued that the assessee had foregone a part of her right to share in the profits of M/s. Chandrika Products in favor of minors, and this constituted an indirect transfer of assets, attracting Section 64(1)(iv). The Appellate Assistant Commissioner (AAC) disagreed, stating there was no direct or indirect transfer of assets to the minors.

2. Indirect Transfer of Assets:
The Department's counsel pointed out that the provisions of Section 64 were applicable not only in the case of direct transfers but also for a series of complex transactions constituting an indirect transfer. The counsel argued that the three partnership firms were created on the same day, and the major partners arranged matters so that a portion of the share of their profits went to the minor children of partners in other firms. This arrangement was seen as an indirect transfer of assets.

3. Admission of Minors to the Benefits of Partnership:
The assessee's counsel argued that admitting minors to the benefits of a partnership does not constitute a transfer of assets. The minors were admitted to the benefits of partnership as a working arrangement, and there was no element of cross-transfer or transfer, whether direct or indirect. The counsel emphasized that the two essential ingredients for the application of Section 64(1)(iv) are a transfer of assets and a resultant flow of income to the minor, neither of which were present in this case.

4. Validity of Cross-Transfers:
The Department cited several cases to support their argument, including CIT vs. C.M. Kothari and V. Amirtham Ammal vs. CIT, which dealt with cross-gifts and cross-transfers. However, the Tribunal found that in the present case, there was no actual transfer of assets from the assessee to the minors. The partnerships were newly constituted, and the share of profit was determined for the first time. There was no factual basis to assume that the assessee had surrendered a share of profit she was entitled to.

5. Proximity Between Transfer of Assets and Income:
The Tribunal referred to CIT vs. Prem Bhai Parikh, where the Supreme Court held that the connection between the transfer of assets and the income must be proximate. In the present case, the income arose to the minors by virtue of their admission to the benefits of the partnership firms, with no close proximity to any assets transferred directly or indirectly to them.

Conclusion:
The Tribunal concluded that there were no transfers of assets from the assessee to the minors, either directly or indirectly. Consequently, the provisions of Section 64(1)(iv) were not applicable. The appeals were dismissed, and no interference was called for with the orders of the AAC.