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TMI Blog1973 (4) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... t : " Whether, on the facts and in the circumstances of the case, the share of the profit of assessee's wife was includible in the total income of the assessee under section 64(iii) of the Income-tax Act, 1961 ? " The assessee is an individual. The reference arises in respect of the assessment year 1962-63 for which the accounting year is 2018 R.N. corresponding to the period 26th March, 1961, to 13th April, 1962. The assessee had been and at the material time also was a partner in a firm called M/s. Ramesh Co. In this firm the assessee had 8 annas share and the balance was shared by three other partners, Kunjilal, assessee's father, Hariram, assessee's brother, and one Jagdish Prosad, a stranger. From his account with the said firm the assessee made two gifts to his wife, Kaushalya Debi, Rs. 21,000 on 10th November, 1960, and Rs. 30,000 on the 28th November, 1960. The assessee also made a gift of Rs. 11,000 to his mother, Smt. Chilli Bai, on 28th November, 1960, by similarly drawing from his account with the firm. Smt. Chilli Bai also received another gift of Rs. 20,000 from her husband, the said Kunjilal, which was also made by him similarly drawing from his account with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal that the interest received by the assessee's wife in respect of the capital contribution to the firm of M/s. Kunjilal Hariram Co. was to be included in the total income of the assessee as it had been earlier conceded before the Appellate Assistant Commissioner. It was, however, contended before the Tribunal that the balance of the share of the profit of the assessee's wife was not to be included on the ground that the assessee's wife had become the partner of the firm in her own right and the fact that the capital with which she became the partner had been provided as a gift by the assessee did not matter. The Tribunal came to the conclusion that the share of the profit was to be included under section 64. The Tribunal came to a finding that, in the instant case, the assessee's wife was admitted to the partnership because of contributing capital to the firm as a pre-condition to the admission. In those circumstances the Tribunal was of the opinion that the profit arising to the wife from the said partnership should be included in the assessee's income under section 64(iii) of the Income-tax Act, 1961. The Tribunal further accepted the argument made on behalf of the revenue t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it arising indirectly from the assets transferred " came up for consideration before the Supreme Court in the case of Commissioner of Income-tax v. Prem Bhai Parekh. There the assessee who was a partner in a firm having 7 annas share therein retired from the firm on 1st July, 1954. Thereafter, he gifted Rs. 75,000 to each of his four sons, three of whom were minors. There was a reconstitution of the firm with effect from 2nd July, 1954, whereby the major son became a partner and the minor sons were admitted to the benefit of partnership in the firm. The question that came up for consideration before the Supreme Court was whether the income arising to the minors by virtue of their admission to the benefits of partnership in the firm could be included in the total income of the assessee under section 16(3)(a)(iv) of the Indian Income-tax Act, 1922. The Supreme Court found that the connection between the gifts made by the assessee and the income of the minors from the firm was a remote one and it could not be said that the income arose directly or indirectly from the transfer of the assets. The income arising to the three minor sons of the assessee by virtue of their admission to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benefits of the firm because they had agreed to contribute to the capital, but even then the Supreme Court was of the opinion that the profits arose not because of the gifts, but because of their participation and admission to the firm which was dependent upon the agreement of the other parties. The aforesaid decision of the Supreme Court was distinguished by the Andhra Pradesh High Court in the case of Potti Veerayya Sresty v. Commissioner of Income-tax. There, the Andhra Pradesh High Court observed that the Supreme Court in the aforesaid case of Commissioner of Income-tax v. Prem Bhai Parekh came to the conclusion that the profits that the minor had derived from the partnership firm for his share was not in consequence of his investing the assets transferred to him by his father, but on account of the fact that the other partners had agreed to admit him to the benefits of a partnership. It was observed by the Andhra Pradesh High Court that, on those facts, the Supreme Court had held that there was no nexus between income earned and the asset transferred. In the case before the Andhra Pradesh High Court the wife had invested assets in a business of her own and earned an income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation. Counsel for the revenue sought support from the aforesaid observation for contending that the Supreme Court had doubted the observations in the case of Commissioner of Income-tax v. Prem Bhai Parekh and invited us to construe the expression " indirectly " to include the share of profits earned by the assessee's wife from the partnership firm as coming within the mischief of the provisions of the section. It is true that the section speaks of income arising both directly or indirectly. Therefore, the expression " indirectly " must receive proper construction and should be given meaning. But the expression " indirectly " should not be construed to include consequences or income which have too remote a connection with the assets transferred. In the instant case, as in the case of Commissioner of Income-tax v. Prem Bhai Parekh, the share of profits arose primarily because the partnership made a profit and though that had connection with the gift it did not arise as a result of the gift ; secondly, the income arose from the share of profits only because other partners had agreed to take the assessee's wife as a partner and had allowed her to contribute to the partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X
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