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TMI Blog1995 (3) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... ws : " The reference application relates to the assessment year 1977-78. The assessee settled his property at 20, Sankarapuram, Mylapore, in favour of his wife, Smt. Saraswathi, as donee, under the settlement deed dated April 2, 1969, showing the market value of the property at Rs. 10,000. On January 6, 1977, Smt. Saraswathi gifted half of her share in the property to her daughter, Kum. Kalpagam, by settlement deed of the same date showing the market value of the gifted half share of the property at Rs. 15,000. On February 10, 1977, Smt. Saraswathi and Kum. Kalpagam together sold the entire property to Shri K. Kalyanakrishnan for Rs. 40,000. " In making the assessment the Income-tax Officer computed the capital gain at Rs. 15,000 and rejected the assessee's claim for exemption under section 53 of the Income-tax Act, 1961 (hereinafter referred to as " the Act "), on the ground that once the capital gain is ascertained as defined under section 2(24)(vi) of the Act, it is assessable under section 64(1)(iv) and the provision of section 53 has to be applied only with reference to the assessee himself. He found that the assessee had another property, the value of which exceeded Rs. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for the purpose of construction and that could not be considered as a transfer of an asset. The Tribunal, however, found as a question of fact that the assessee did transfer a sum of Rs. 75,000 to his wife without any adequate consideration and that this sum was utilised for the construction of the house. The Tribunal took the view that even if it was only money that was transferred, it could still be brought within the scope of section 16(3) of the 1922 Act. The relevant part of section 16 of the 1922 Act which concerned the court in the said case was as follows (at page 413) : " 16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included . . . so much of the income of a wife . . . . of such individual as arises directly or indirectly-- (iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart. " The court expressed its view in these words (at page 413) : " This provision accordingly requires that where any asset has been transferred to the wife in such circumstances as indicated and the wife derives an incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s only notional income that can be said to arise and that such notional income is not within the scope of section 16(3). " The court also took notice of the provisions under section 9 of the Act which dealt with the tax payable by the assessee under the head " Income from the property " and observed (at page 415) : " Broadly stated, the tax is payable on the bona fide annual value of the property. Section 9(2) provides that the annual value of a property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. The proviso to this section deals with cases where the property is in the occupation of the owner for the purposes of his own residence and it lays down that in such a case the annual value as determined shall be reduced in a particular manner and the reduced amount shall be taken to be the income from the property for the purposes of tax. Mr. Seshadri urges that section 9(2) itself creates a fiction when it says that the annual value of any property shall be 'deemed' to be a particular sum, and if it is only a deemed income within the meaning of section 9, that cannot be brought within the scope of section 16(3). We are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nual value of property consisting of any building or land appurtenant thereto shall be determined ; section 24 provides for deductions from income from house property ; section 25, for amounts not deductible from income from house property ; section 26, how the income from property owned by co-owners shall be computed and section 27 contains definition of " owner of house property " for the purpose of sections 22 to 26. Clause (i) of this section provides as follows : " For the purposes of sections 22 to 26--(i) an individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred. " For the purposes, thus, of the charge under section 22 of the Act, the individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, shall be deemed to be the owner of the house property so transferred. Sub-section (1) of section 64 of the Act provides for inclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect of sections 3 and 21 and the inter-relation between them. Section 3 was the charging section and it levied the charge of wealth-tax on the net wealth of the assessee on the relevant valuation date. 'Net wealth' was defined in section 2(m) to mean 'the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date is in excess of the aggregate value of all the debts owed by the assessee on the valuation date'. It was clear from this definition that any property, wherever located, 'belonging to' the assessee on the relevant valuation date would be includible in the net wealth of the assessee assessable to wealth-tax. An argument was advanced on behalf of the trustees that assets held by a trustee in trust for others could not be said to be assets 'belonging to' the trustee so as to be included in his net wealth. The assets so held were not the trustee's property in any real sense. They were the property of the beneficiaries and the beneficiaries were the true owners. The trustee could not, therefore, be assessed to wealth-tax in respect of the trust properties under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 provided that in respect of the trust properties held by a trustee, wealth-tax could be levied upon him in the like manner and to the same extent as it would be leviable on the beneficiary for whose benefit the trust properties were held. This provision could apply only where the trust properties were held by the trustee for the benefit of a single beneficiary or, where there were more beneficiaries than one, the individual shares of the beneficiaries in the trust properties were determinate and known. Where such was the case, wealth-tax could be levied on the trustee in respect of the interest of any particular beneficiary under the trust properties in the same manner and to the same extent as it would be leviable upon the beneficiary and in respect of such interest in the trust properties, the trustee would be assessed in a representative capacity as representing the beneficiary. This did not mean that the Revenue could not make a direct assessment on the beneficiary in respect of the interest in the trust properties which belonged to him. The beneficiary would always be assessable in respect of his interest in the trust properties, since such interest belonged to him and the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or lands appurtenant thereto, income of which is chargeable under the head 'income from house property', and the full aggregate value of the consideration for which the transfer is made does not exceed twenty-five thousand rupees, the capital gain shall not be included in the total income of the assessee : Provided that this section shall not apply in any case where the aggregate of the fair market values of all capital assets, being buildings or lands appurtenant thereto the income of which is chargeable under the head 'Income from house property' owned by the assessee immediately before the transfer aforesaid is made, exceeds the sum of rupees fifty thousand." It is significant to note that this section speaks of a capital gain from the transfer of one or more capital assets being buildings or lands appurtenant thereto the income of which is chargeable under the head "Income from house property". The income chargeable under the head "Income from house property" obviously is the income for which the assessee has the liability. Reference to section 45 clearly brings into it a charge upon any profits or gains arising from the transfer of a capital asset effected in the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 64(1)(iv), thus, provides that the individual who has transferred his capital assets, directly or indirectly to the spouse otherwise than for adequate consideration or in connection with an agreement to live apart, shall have the liability to pay the tax upon the income from such property irrespective of the validity or otherwise of the transfer of the property and the vesting of title to the property in the transferee, as he is the deemed owner of the house property so transferred. There is another way of approach. An individual who shall be liable to pay tax upon the income from house property so transferred by him/her to his/her spouse, the income from house property which is taxable under section 22 and which is computed as prescribed under sections 23 to 26, is obviously not the capital gain, for which separate provision has been made under section 45 of the Act. Any profits or gains from a capital asset are chargeable to income-tax and are deemed to be the income of the previous year in which the transfer took place which evidently is not includible in the annual value of property, which is determined as the sum for which the property might reasonably be expected to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the owner of the house property so transferred and in the case of capital gain, the ownership is recognised in favour of the transferee-spouse. We find support for our view in a judgment of this court in the case of S. M. A. Siddique v. CIT [1984] 148 ITR 307. The assessee in the said case had borrowed money on interest and with the aid of the borrowed money purchased items of house property in the names of his wife and his minor children intending those acquisitions to be for their absolute benefit. He made a claim that in the computation of income, all the assets transferred to his wife and minor children for their absolute benefit with his income for the purposes of income-tax, the interest paid by him on the money borrowed for the purchase of house properties was admissible deduction. The court this time got the opportunity to take notice of R. Ganesan's case [1965] 58 ITR 411 (Mad) and the principles upheld by the Supreme Court in CIT v. Maharaj Kumar Kamal Singh [1973] 89 ITR 1 and pointed out : " We may reconcile the above two passages by saying that the court had in those passages fairly anticipated the two new provisions which have been enacted in the present Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er at all was made in favour of his wife and minor children. It would also equate the position of the Revenue to the proverbial horse which would open its mouth for horse-feed but not for the bridle. In our judgment, the whole rationale behind section 64(1)(iv) and (v) and comparable provisions in the earlier Indian Income-tax Act, 1922, is to act as an anti-tax avoidance measure. The intention obviously was that an individual assessee ought not to be allowed to create separate subjects of charge to income-tax with the attendant consequences of taxation at lower average rates, by the simple expedient of transferring assets to his wife and minor children. The provisions enacted by the Legislature are intended to neutralise the tax effect of avoidance transactions. They were, by no means, meant to put the assessee concerned in a much worse position than they would have been if they had not adopted those avoidance measures. A Bench of this court, while considering similar provisions in section 4(1)(a) of the Wealth-tax Act, 1957, referred to this aspect as an important factor in statutory construction : vide S. Naganathan v. CWT [1975] 101 ITR 287 (Mad). They observed with reference t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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