ivil Appeal No 575 NT of 1975
From the Judgment and Order dated the 2441973 of the Calcutta High Court in Income Tax Reference No 202 of 1969
B Ahuja and Ms A Subhashini for the Appellant
KP Bhatnagar SP Mittal and BP Maheshwari for the Respondent
The Judgment of the Court was delivered by PATHAK CJ
This appeal by special leave is directed against the judgment of the High Court at Calcutta answering the following question in favour of the assessee and against the Revenue Whether on the facts and in the circum stances of the case the share of profit of the assessee s wife was includable in the total income of the assessee under section 641iii of the Income Tax Act 1961 739 The assessee was assessed in the status of an individual for the assessement year 1962 63 corresponding to the previ ous year 26 March 1961 to 13 April 1962
At the material time the assessee was a partner in a firm Messrs Ramesh and Co with a share of eight annas therein
The balance was shared by three other partners the assessee s father Kunjilal Agarwala the assessee s brother Hariram Agarwala and a stranger Jagdish Prasad
On 10 November 1960 and on 28 November 1960 the assessee made two gifts of Rs21000 and Rs30000 respectively to his wife Kaushalya Devi from his account in the firm
On 28 November 1960 he made anoth er gift of Rs 11000 to his mother Chili Bai from that account
It may be observed that Chili Bai received another gift of Rs20000 from her husband Kunjilal effected by similarly drawing from his account with the firm
The assessee s wife Kaushalya Devi as well as his mother Chili Bai became partners with three other persons in a newly constituted firm Messrs Kunjilal Hariram  Co The three other partners were the assessee s grand father Moharilal Agarwala the assessee s brother Hariram Agarwala and the stranger Jagdish Prasad Gup
The Partnership Deed dated 10 November 1960 provided that the business was to commence from 12 November 1960
The preamble to the deed stated Whereas the partner of the Fifth Part who has extensive experience and outstanding talent of organisation in Jagree and Grains Trade but little finance requested the partners of the First four Parts to enter into co partnership with him on contributing the necessary finance to carry on business in Jagree and Grains and also act as Commission Agents in Jagree Grains and allied commodities to which request they acceded Clause 4 of the Partnership Deed stipulated That the partners of the First Four Parts shall initially contribute Rs25000 each to be put in within six months from the commence ment of the partnership
The said contribu tions augmented by further deposits and prof its or depleted by withdrawals and tosses shall carry interest at the rate of 6 per annum
The amount if any standing to the credit of the partner of the Fifth Part shall carry interest at the same rate 740 On 12 November 1960 Kaushalya Devi contributed Rs21000 as capital which came out of the gift made by the assessee on 10 November 1960
She also contributed Rs30000 as capital which amount came out of the gift made on 28 November 1960
In the course of assessment proceedings for the assess ment year 1962 63 in respect of the assessee the Income Tax Officer included the profits of the assessee s wife from the firm Messrs Kunjilal Hariram  Co under section 641iii of the Income Tax Act 1961
An appeal by the assessee was dismissed by the Appellate Assistant Commissioner of Income Tax who observed that the wife would not have become a partner of the firm unless she had contributed capital and as the capital was provided by the husband the inclusion of the wife s share of income in the assessment of the assessee was justified
In second appeal it was conceded by the assessee before the Income Tax Appellate Tribunal that the interest received by the assessee s wife on her capital contribution to the firm was includible in the total income of the assessee but it was contended that the balance of the share of profit was not so includable as the assessee s wife had become a part ner in the firm in her own right and it was immaterial that the capital invested by her had been provided as a gift by the assessee
The Appellate Tribunal found that the admis sion of the assessee s wife as partner in the firm was solely on account of her contribution of capital to the firm that the assets in the form of cash were transferred directly by the assessee to his wife otherwise than for adequate consideration and that the income must be said to have arisen indirectly from the assets transferred
The second appeal was dismissed
At the instance of the assessee the question of law set forth earlier was referred to the High Court at Calcutta for its opinion
The High Court has taken the view that the share of profits arose to the assessee s wife primarily because the partnership made a profit and although it had connection with the gift it did not arise as a result of the gift that the income arose from the share of profits only because the other partners agreed to take the assessee s wife as partner and was allowed to contribute to the partnership firm that the admission of the assessee s wife to the partnership was not in consequence of the gift and that therefore upon all those circumstances the connection between the income of the share of profits and the gifts by the assessee to his wife was too remote to be included within the provisions of section 641iii of the Income Tax Act
741 S641iii of the Income Tax Act 1961 as it stood at the relevant time provides 641 In computing the total income of any individual there shall be included all such income as arises directly or indirectly i xx xx xx ii xx xx xx iii subject to the provisions of cl
i of section 27 to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connec tion with an agreement to live apart
 The income may arise directly or indirectly but there must be a proximate connection between the accrual of the income and the assets transferred by the assessee
In Commissioner of Income tax West Bengal 111 vs Prem Bhai Parekh and Others this Court held that the income of minor sons who had invested capital in the firm out of moneys gifted to them by their father the assessee could not be included in the assessment of the assessee
The Court observed Before any income of a minor child can be brought within the scope of section 163a iv it must be established that the said income arose directly or indirectly from assets transferred directly or indirectly by his father
There is no dispute that the assessee had transferred to each of his minor sons a sum of Rs75000
It may also be that the amount contributed by those minors as their share in the firm came from those amounts
But the question still remains wheth er it can be said that the income with which we are concerned in this case arises directly or indirectly from the assets transferred by the assessee to those minors
The connection between the gifts mentioned earlier and the income in question is a remote one
The income of the minors arose as a result of their admission to the benefits of the partnership
It is true that they were admitted to the 742 benefits of the partnership because of the contribution made by them
But there is no nexus between the transfer of the assets and the income in question
It cannot be said that income arose directly or indirectly from the transferor the assets referred to earlier
Section 163 of the Act created an artificial income
That section must receive strict construction as observed by this court in Commissioner of Income tax vs Keshavlal Lal lubhai Patel In our judgment before an income can be held to come within the ambit of section 163 it must be proved to have arisen directly or indirectly from a transfer of assets made by the assessee in favour of his wife or minor children
The connection between the transfer of assets and the income must be proximate
The income in question must arise as a result of the transfer and not in some manner con nected with it
 It seems to us that the observations of this Court in that case fully cover the case before us
There is no doubt that the wife became a partner because of the capital contributed by her in the firm but as observed by the High Court in the judgment under appeal it was upon agreement by the remaining partners that she became a member of the partner ship
The mere contribution of the capital by the wife into the firm would not automatically have entitled her to part nership in the firm
The partnership was based on agreement and it is the event of agreement between the partners that brought the assessee s wife into the firm as partner
Learned counsel for the Revenue relies on Commissioner of Income tax Bangalore vs JH Gotla  Commissioner of Income tax Assam Tripurn and Manipur vs Jwalaprasad Agarwala  VD Dhanwatey vs Commissioner of Income tax Madhya Pradesh Nagpur and Bhandara and Smt
Mohini Thapar vs Com missioner of  Income tax Central Calcutta and Others but we are not satisfied that those cases are of assistance to the Revenue
Reliance was placed on Potti Veerayya Sresty vs Commissioner of Income Tax AP where the Andhra Pradesh High Court upheld the inclusion of the wife s income from cloth business carried on by her into which cloth business she had invest ed a portion of the assets transferred by the assessee
It is sufficient to observe that the cloth business was her own business and as the High Court pointed out there was no necessity to depend upon the agreement of others
It is on that basis that the High Court distinguished Prem Bhai Parekh s case supra
743 We are of the view that the High Court is right in answering
the  question referred to it in the negative in favour of the assessee and against the Revenue
In the result the appeal fails and is dismissed with costs
RSS Appeal dismissed


Summary:
The appellant Company a manufacturer of superfine cement preferred a claim for refund of duty on price of packing material of the product paid by it during July 4 1974 to March 1 1974 on the ground that duty on packing charges on superfine cement was not leviable
But the claim was rejected by the Assistant Collector of Central Excise the Appellate Collector and also the Appellate Tribunal on the ground of limitation under Rule 11 of the Central Excise Rules 1944 since the duty was not paid under protest
The Tribunal also held that the letter dated July 11 1974 in which the appellant had stated that the duty was not levi able on packing charges and if the department felt it was leviable they had no option but to suggest the rates fixed by Government from quarter to quarter as packing charges was not a protest to save the period of limitation pre scribed in Rule 11
In the appeal before this Court on behalf of the Compa ny it was submitted that a similar claim was allowed by the Central Government in the case of Birla Cement Works and that the Trade Notice dated 29101979 by the Collectorate clearly stated that the cost of packing was not liable to be included in the assessable value
While conceding that there was no particular form of protest it was contended on behalf of the department that if the payments were held as made under protest by treating the letter as a protest then the period of limitation under Rule 11 of the Central Excise Rules 1944 would not be applicable but the Trade Notice of 2011979 could not be 716 given retrospective effect and therefore the matter had to be remitted to the Tribunal for disposal on other questions
Allowing the appeal HELD The letter of the appellant clearly shows that all possible contentions which could be raised against the levy of duty on the value of packing material were raised and that the appellant was not accepting the liability without protest
Therefore the letter was in the nature of protest
That being the position the question of limitation does not arise for the refund of the duty
i718 H Giving the benefit without any Trade Notice in a similar case the Central Government held in their revisional order that as superfine cement was capable of being sold without packing like grey portland cement the cost of packing for superfine cement should not be added to the assessable value
The authorities ought to have therefore extended this view to all similar cases
719A D In these circumstances the appellant is entitled to refund of the duty paid by it
719F