9911796707
TMI Blog1982 (11) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... eek, some events happened in this partnership firm, the tax implications of which are the main concern of this group of income-tax references. Between January I and January 5 of that year, a number of entries were passed in the capital accounts of the partners, apparently on the joint instructions of the partners. It would be difficult to explain those entries otherwise than as the product of a consensual decision-making by the partners sitting together, having regard to the nature of the entries made in the books, the proximity of the entries to each other and the precise amount involved under each of the entries. The upshot of all these account entries was that the minor children of seven partners and the respective wives of two other partners obtained gratuitously sums of Rs. 10,000 each, which were immediately credited in their respective names in the books of the partnership. On the basis of these credits, which were regarded as deposits effected by the transferees concerned, the partnership firm paid interest to the minor children and the wives, respectively, which accrued on the principal sums of Rs. 10,000 each. How these transfer entries look from an overall perspective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made only to facilitate the father or the husband of the recipient, as the case may be, to make a similar gift to the minor child or the wife of another partner. On these findings and observations, the ITO applied the provisions of s. 64 of the I.T. Act, 1961, holding that the interest income derived from the deposit of Rs. 10,000 in the case of each minor child of a partner or in the case of the wife of a partner has got to be clubbed in the total income of the respective partner concerned, being the parent, or the husband, as the case may be. We may observe that, while in the case of all but two partners, this was the general pattern of the assessments pursued by the ITO for applying the provisions of s. 64 of the Act, an exception was made in the case of two partners, viz., Govardhan Chetty and Venugopal Chetty. These two partners claimed to represent their respective joint families in the partnership and hence their share of profits from the partnership was being assessed every year as the income of their respective joint families. In the context of these facts and the mode of treatment of the share income of these two partners, the ITO was disposed to hold that the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifts. The Tribunal, however, observed that in regard to the gifts of Rs. 10,000 each by the two partners, viz., Govardhan and Venugopal, the gifts should be regarded as invalid considering that they owed their position as partners in the firm by virtue of their being members of the joint families and by virtue of bringing into the partnership the funds of their respective families. The Tribunal held that the gift by Govardhan to the wife of another partner, and also the gift by Venugopal to the minor son of another partner must be held to be void gifts since the funds gifted in either case must be regarded as gifts of joint family funds. Having found that these two gifts of Rs. 10,000 each were void gifts, amidst the rest of the gifts, which were valid gifts, the Tribunal held that the provisions of s. 64 of the Act cannot be pressed into service, for the purpose of clubbing in the hands of transferor partners, the income derived by their respective minor children and wives. The Tribunal apparently accepted the position that the transfer entries made in the partnership accounts at the instance of the partners represented cross-gifts, if considered from the point of view of their in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As to how facts of this kind have to be looked at in the context of s. 64 of the Act, we have the leading decision of the Supreme Court in CIT v. Kothari [1963] 49 ITR 107 (SC). That was a case where two contemporaneous gifts of near equal sums of money were so arranged that one of them was by the son to the mother and the other by the father-in-law to the daughter-in-law. The question before the Supreme Court was whether, in the events that happened, the provisions of s. 16(3)(a)(iii) of the Indian I.T. Act, 1922, can be invoked on the ground that the transfers in question were indirect transfers of assets held by the father and the son, respectively. When the matter was before this court on reference, the learned judges who heard the case considered the transfers to be cross transfers both by the father and by the son, and on that point, the learned judges had no two opinions. But they took the view that cross-transfers by themselves, with the only additional fact that they were virtually simultaneous, could not mean that each transfer constituted the consideration for the other or that the transactions were mutual transfers in every respect. The learned judges further observe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly the same extent from assets transferred to him by the husband." In yet another passage, the learned judges observed (p.111): " It is reasonable to infer from the facts that before the respective husbands paid the amounts, they looked up the law and found that the income of the property would still be regarded as their own income if they transferred any assets to their wives. They hit upon the expedient that the son should transfer assets to his mother, and the father-in-law to the daughter-in-law, obviously failing to appreciate that the word indirectly is meant to cover such tricks." With respect, the Supreme Court's exposition of the law as well as the exposure of the fact-patterns in that case cannot be bettered either in language or in treatment. Making only minimal verbal amendments, the observations in Kothari's case [1963] 49 ITR 107 (SC), can be adopted as our own and be made to fit in with the facts of the present case to perfection. Mr. Janakiraman, learned counsel who argued the case for the assessees, submitted that the ruling in Kothari's case [1963] 49 ITR 107 (SC), cannot be applied to the facts of the present case. We do not agree. In Kothari's case [1963] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. Learned counsel stressed in argument the idea that, where a transfer is held to be void or invalid, there is no transfer at all in the eye of the law. If there is no transfer in this sense, learned counsel added, the necessary link is absent in that regard, to bring about a perfect circle of cross-transfers. We have considered the submissions of the assessees' learned counsel, but we do not feel persuaded to hold that the circumstances pointed out by him in any way call for the application of a principle different from that applied in Kothari's case [1963] 49 ITR 107 (SC). The whole approach of the Supreme Court to a provision of this kind shows that the section did not demand that transfers, in order to be indirect, or a chain of transfers in order to fall within the mischief of s. 64, must in every case be a perfect, unbroken, circle of cross-transfers of identical amounts effected simultaneously. What has been stressed by the Supreme Court is that, if on an overall impression of the facts, it appears that the transfers of assets for inadequate consideration are all inter-connected and serve as a circuitous method, or device, to evade the implications of s. 64 of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case, whichever way we go about the facts, we land on a number of equivalent gifts of Rs. 10,000, each to the wife or minor child of each partner, and find, at the same time, on the same landing ground, as it were, each partner being out of pocket by Rs. 10,000 without a quid pro quo. What are we to make of these transactions when judged from their total effect ? The answer is, we only have to ignore the utter unnaturalness of the transactions to arrive at the result. The expression " directly or indirectly " occurring in the section only emphasise the need to clear our minds of cant and artificialities. Look at the way the gifts were made. Not only were they made to other people's children, but some of them were made to other people's Wives. In any place, excepting in a tax court, gifts to other people's wives, even if they are wives of co-partners, would raise a host of questions and not a few eye-brows, excepting when there is an understanding nod, " Ah, it is all for purposes of income-tax". The ITO saw the facts with a layman's eyes, which was the correct way to look, at them. The Tribunal for their part, however, got involved in the convolutions of the Mitakshara law of gif ..... X X X X Extracts X X X X X X X X Extracts X X X X
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