1967 (8) TMI 11 - HC - Income Tax

Whether the Tribunal was right in holding that the provisions of section 16(3)(a)(iii) and 16(3)(b) of the IT Act, 1922, were not applicable in regard to the transfer shares by the assessee to his mother and brother s wife, and in deleting the dividend income in respect of the said shares from the assessee s taxable income - Held, no

Summary

Issues Involved:
1. Applicability of Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922.
2. Applicability of Section 16(3)(b) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Applicability of Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922:
The primary issue was whether the dividend income from 10,000 shares transferred by the assessee to his mother and brother's wife should be included in the assessee's taxable income under Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922. The Income-tax Officer included the dividend income in the assessee's hands, observing that the transfers constituted an "indirect transfer of assets" to the wife, thus attracting the provisions of Section 16(3)(a)(iii). The Appellate Assistant Commissioner and the Appellate Tribunal, however, excluded the dividend income from the assessee's taxable income, relying on the Madras High Court decision in C. M. Kothari v. Commissioner of Income-tax.

The revenue argued that the decision in C. M. Kothari's case was reversed by the Supreme Court, and thus the Tribunal erred in relying on it. The Supreme Court in Commissioner of Income-tax v. C.M. Kothari held that indirect transfers, even through a chain of transactions, fall within the ambit of Section 16(3)(a)(iii). The court observed that the transactions in the instant case were designed to circumvent the provisions of Section 16(3) by transferring shares indirectly to the wives. The court concluded that the circumstances indicated a scheme to avoid the mischief of Section 16(3), and thus, the provisions of Section 16(3)(a)(iii) were applicable.

2. Applicability of Section 16(3)(b) of the Indian Income-tax Act, 1922:
The revenue also contended that Section 16(3)(b) was applicable, arguing that the transactions amounted to assets transferred otherwise than for adequate consideration to a person for the benefit of the assessee's wife. The court, however, found that Section 16(3)(b) did not come into play in this case. Section 16(3)(b) contemplates direct transfers and does not cover indirect transfers. Additionally, the transactions did not create any trust or quasi-trust, which is a scenario Section 16(3)(b) typically addresses. Therefore, the court held that Section 16(3)(b) was not applicable.

Conclusion:
The court answered the question referred to it in the negative and against the assessee, holding that the provisions of Section 16(3)(a)(iii) were applicable to the transfer of 10,000 shares and the dividend income from these shares should be included in the assessee's taxable income. However, the court held that Section 16(3)(b) did not apply to the facts of the case. Consequently, no order as to costs was made.