1970 (1) TMI 2 - HC - Income Tax

Whether dividends on shares of the Miraj State Bank Ltd. transferred by the assessee to his sister and his material uncle in the first instance and subsequently transferred by them to the assessee s minor sons could be included in the assessee s total income u/s 16(3)(a)(iv)- Held, no

Summary

Issues Involved:
1. Adequacy of consideration under section 16(3)(a)(iii) of the Indian Income-tax Act, 1922.
2. Inclusion of income from assets transferred to a wife under section 16(3)(a)(iii).
3. Inclusion of income from assets transferred to minor children under section 16(3)(a)(iv).

Detailed Analysis:

1. Adequacy of Consideration under Section 16(3)(a)(iii):
The primary issue was whether the sale of immovable property by the assessee to his wife for Rs. 1,00,000 constituted "adequate consideration" under section 16(3)(a)(iii). The court noted that the property was valued at Rs. 1,50,000 by the assessee's consulting engineer as of April 1, 1957, and the assessee had spent Rs. 1,40,000 on its development in 1952. Despite arguments from the assessee's counsel, Mr. Palkhivala, that "adequate consideration" does not equate to "market price" and that the transaction was genuine, the court held that Rs. 1,00,000 was not adequate consideration for a property valued at Rs. 1,50,000. The court emphasized that adequacy of consideration is a matter of fact to be determined by the authority based on evidence.

2. Inclusion of Income from Assets Transferred to Wife:
The court examined whether the income from the property sold to the wife should be included in the assessee's income. The Tribunal had held that only 1/3rd of the income should be included, as 2/3rds of the consideration was deemed adequate. The court agreed with this view, stating that section 16(3)(a)(iii) only requires the inclusion of income to the extent that the consideration is inadequate. Therefore, the Tribunal's decision to include only 1/3rd of the income was upheld, rejecting the revenue's argument that the entire income should be included.

3. Inclusion of Income from Assets Transferred to Minor Children:
The court also addressed the issue of whether the dividend income from shares initially gifted by the assessee to his sister and maternal uncle, and subsequently gifted by them to the assessee's minor sons, should be included in the assessee's income under section 16(3)(a)(iv). The Tribunal had found no evidence of a scheme or arrangement between the assessee and the initial donees to transfer the shares to the minor sons. The court upheld this finding, noting the four-month gap between the initial and subsequent gifts and the lack of any record suggesting a pre-arranged plan. The court emphasized that the burden of proof was on the revenue to show that the transfers were interconnected and part of a scheme to avoid tax, which it failed to do.

Conclusion:
1. The court affirmed that the consideration for the property sold to the wife was inadequate.
2. It affirmed that only 1/3rd of the income from the property should be included in the assessee's income.
3. It held that the dividend income from the shares gifted to the minor sons could not be included in the assessee's income, as there was no evidence of a scheme to avoid tax.

Final Orders:
1. Affirmative.
2. Affirmative.
3. Negative.

The parties agreed that there would be no order as to costs.