1971 (7) TMI 24 - HC - Income Tax

Assessee who was holding shares in company renunciated the fresh issue in favor of minor child - Whether renunciation of the right to apply for shares amounted to transfer of an asset held that it amounts to transfer within the meaning of section 16(3) (a) (iv) of Indian Income-tax Act, 1922 and section 64 of Income-tax Act, 1961 - whether 75% of the dividend income could be included in the total income of the assessee Held, yes

Issues Involved
1. Whether renunciation of the 'right' to apply for shares amounted to transfer of an asset.
2. Whether 75% of the dividend income could be included in the total income of the assessees under section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, and section 64 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis

1. Renunciation of the 'Right' to Apply for Shares as Transfer of an Asset
The primary issue was whether the renunciation of the right to apply for shares by the assessees in favor of their minor daughters constituted a transfer of an asset. The assessees argued that the right to apply for shares was distinct from the shares themselves and that renunciation did not equate to a transfer, as it involved only one party.

However, the court held that the argument was not well-founded. It was determined that there were indeed two parties involved: the assessee and the minor daughter. The act of renunciation by the assessee in favor of his minor daughter, who then applied for and received the shares, constituted a transfer of the right to acquire the new shares. The court emphasized that renunciation is a method of effectuating the transfer in favor of another person and has the same effect as an actual transfer. Therefore, it was concluded that renunciation amounted to a transfer of an asset.

2. Inclusion of 75% of Dividend Income in Total Income of Assessees
The second issue was whether 75% of the dividend income received by the minor daughters from the shares acquired through renunciation should be included in the total income of the assessees under section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, and section 64 of the Income-tax Act, 1961. The assessees contended that the dividends were earned due to the investment made by the minor daughters and not by virtue of the renunciation.

The court, however, upheld the Tribunal's decision that the renunciation of the right to acquire shares led to the minor daughters earning the dividends. The Tribunal had found that the market value of each share was Rs. 40, while the minor daughters acquired them for Rs. 10 per share, indicating that the renunciation was responsible for the minors earning the dividends. Hence, the revenue was justified in bringing to tax 75% of the dividend income in the hands of the assessees under the aforementioned sections.

The court also addressed several related arguments and case laws cited by the assessees. It distinguished the present case from other cases such as Commissioner of Income-tax v. Keshavlal Lallubhai Patel and Commissioner of Income-tax v. Prem Bhai Parekh, emphasizing that there was a direct and proximate connection between the renunciation and the transfer of shares, which led to the income earned by the minors. The court also dismissed the argument about depreciation in the value of old shares, as no material evidence was provided to support this claim.

Conclusion
The court concluded that the renunciation of the right to apply for shares amounted to a transfer of an asset. Consequently, 75% of the dividend income received by the minor daughters from these shares was includable in the total income of the assessees under section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, and section 64 of the Income-tax Act, 1961. Both questions were answered in the affirmative, in favor of the revenue and against the assessees. The Commissioner was also awarded costs assessed at Rs. 300.

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